How much due process should be afforded a patent-plaintiff before a sanction of attorneys' fees based on an exceptional case finding?  At a minimum, the merits of the infringement allegation should be considered if the basis for exceptionality is inadequate pre-filing investigation based on the merits of the infringement allegation.  At a minimum, such analysis should be more than referencing a defendant's noninfringement argument.

In addressing this issue, the Federal Circuit, in Thermolife Int'l LLC v. GNC Corp., held that merely because a plaintiff is (1) a non-practicing entity (2) that asserts one or more expired patents against multiple defendants, (3) producing many early-stage settlements of low or modest amount, is not on its own a factor supporting an exceptional case finding.[1]  However, an exceptional case finding based on inadequate pre-filing investigation is supported by a district court's factual findings that a plaintiff's infringement claims lack merit.[2] 

To understand the rationale of the decision it is instructive to consider the facts of the case.  In 2013, Thermolife filed 81 cases asserting various claims from four patents, three of which were expired.[3]  The 81 cases were consolidated for pretrial purposes.[4] In January of 2014, the district court construed several terms in the asserted claims.[5]  On July 29, 2015, the  defendants moved for summary judgment of invalidity.[6]  From August 1 to August 8, 2016, the district court held a bench trial on invalidity and held that all asserted claims of all four patents were invalid for anticipation or obviousness.[7]

The defendants moved for attorneys' fees under 35 U.S.C. § 285 relying on two arguments.  The first argument was that plaintiffs had not performed an adequate pre-filing investigation.[8] The district court found “strong evidence that had Plaintiffs conducted any reasonable pre-filing investigation, they would have been on notice that at least some of the products in this litigation could not have infringed.”[9]  In making this finding, the district court analyzed plaintiff's infringement allegations and the evidence put forward by the parties on infringement, even though there was no infringement trial or other finding from the case on infringement.[10]  The Federal Circuit approved the district court's consideration of this issue as supporting exceptionality.  However, the Federal Circuit disapproved of the district court's consideration of the defendants' second argument in supporting its exceptional case finding, namely, that plaintiff's “pattern of action [] is indeed one that strongly suggests Plaintiffs brought suit against many defendants without carefully reviewing their claims as a calculated risk that might yield nuisance-value settlements.”[11]

The Federal Circuit has been clear that “there is no minimum damages requirement to file a patent infringement case,” and “[a]sserting seemingly low damages against multiple defendants—or settling with defendants for less than the cost of litigation—does not necessarily make a case ‘exceptional' under § 285.”[12] The Federal Circuit has explained that a patent plaintiff is able to make patent litigation more affordable by distributing common costs over many suits, thus making each suit worthwhile on lower terms.[13]  Moreover, as for settlement amounts, a low figure might simply reflect the small size of an individual defendant's potential liability. Indeed, the figure may result from what the Supreme Court has recognized as the normal, legitimate settlement calculus, which includes consideration of litigation costs: specified as “a prediction of the amount of liability, discounted by its probability, plus the transaction costs of further litigation.”[14]  Further, the patent statute does not restrict enforceable patent rights to those who practice the patent, to the exclusion of research institutions and their exclusive licensees engaged to perform needed enforcement activities in which the inventors, or research institutions, may lack expertise or experience.[15] 

The Federal Circuits findings are not remarkable because it is the strength of the infringement allegations that should be a primary consideration, whether the infringement allegation are brought with “surmise and suspicion,” the Park-In Theatres' approved analysis by the Supreme Court in Octane Fitness.[16] Thus, to respect due process and other procedural rights, when the basis for an exceptional case finding is asserted as inadequate pre-filing investigation based on the merits of the infringement allegation, the merit of the infringement allegation should be considered by the district court even if not previously litigated.[17] Such consideration should provide for a meaningful review on appeal and therefore should include factual findings.  Absent such findings by the district court, an exceptional case finding based on inadequate pre-filing investigation of the infringement allegation does not respect due process and other procedural rights.

Further, as a second take-away from Thermolife, it is improper for a district court to support an exceptional case finding on evidence that a non-practicing entity files multiple patent infringement lawsuits and settles those lawsuits for what is categorized by a defendant as ‘less than the cost of defense.' Such evidence does not support a finding of exceptionality.