The Software IP Report

Litigation Misconduct Gives Rise to Exceptional Patent Case

Litigation misconduct, even without a showing of objective baselessness or bad faith, was enough to justify a finding of an exceptional case, and an award of attorneys’ fees under 35 U.S.C. § 285. Monolithic Power Systems, Inc. v. O2 Micro International, Ltd., No. 2012-1221 (Fed. Cir. Aug. 13, 2013).

The parties in this litigation had been involved in various lawsuits concerning O2 Micro’s assertion of its patents for roughly a decade. The district court found, and the Federal Circuit agreed, that O2 Micro had demonstrated a pattern of forcing its adversaries to spend considerable time and money defending infringement claims, and then agreeing to covenants not to sue and dismissals of the claims.

The district court and the Federal Circuit were also both offended by O2 Micro’s attempts to circumvent invalidating prior art by presenting what turned out to be false evidence concerning an invention’s conception date. Moreover, after a date stamp on a schematic drawing supposedly showing conception was shown to have been manually created, O2 Micro compounded its error by supplementing interrogatory responses moving to strike an expert’s report, and moving for summary adjudication to establish the conception date, rather than simply addressing the false evidence.

The present case began as a declaratory judgment action filed by MPS; O2 Micro subsequently filed an ITC proceeding against MPS and its customers, and also added one of MPS’s customers to the federal court action. The district court refused to stay the case in favor of the ITC proceeding. However, the district court ordered, with the parties’ agreement, that discovery in the ITC proceeding would apply in the federal court action.

The district court appointed a technical expert, who in June, 2010, found that all claims of O2 Micro’s only remaining patent in the case “were invalid, and either not infringed or likely not infringed.” O2 Micro waited until MPS and its customer had filed pretrial submissions.  Then, only four days after the court’s expert’s report, MPS granted covenants not to sue on the patent-in-suit, and moved to dismiss the lawsuit, which the district court did with prejudice.

The district court subsequently granted MPS’s and its customer’s motion for fees, costs, and sanctions under Section 285 and Federal Rules of Civil Procedure 54(d) and 37(c)(2). The district court was persuaded by O2 Micro’s pattern of vexatious litigation, in which it would sue “MPS customers, prompting MPS to file declaratory judgment actions,” and then grant a covenant not to sue after significant litigation had occurred. Further, the district court was influenced by O2 Micro’s “litigation misconduct and unprofessional behavior” concerning the date of the inventor’s schematic.

In awarding fees and costs, the district court included expenses related to the ITC investigation. The district court found that O2 Micro’s misconduct was pervasive, and moreover that fees and costs incurred in the ITC case were recoverable here because of the “dual use purpose” of the discovery. The total fee award from which O2 Micro appealed was a $8.4 million.

The Federal Circuit began by explaining that the standard for finding an exceptional case did not require findings concerning “’bad faith’ in bringing an ‘objectively baseless’ litigation.” Instead, a finding of litigation misconduct or unprofessional behavior was enough. Findings of bad faith and objectively baseless litigation are required “only absent litigation misconduct or misconduct in securing the patent.”

Here, the Federal Circuit agreed that O2 Micro had engaged in litigation misconduct. The court rejected O2 Micro’s argument “that its defeat of summary judgment of noninfringement constitutes evidence sufficient to overcome any argument that its assertion of infringement was objectively baseless or made in bad faith.” As explained above, litigation misconduct alone was enough to support a finding of an exceptional case.

Moreover, “the district court’s findings of an overall vexatious litigation strategy and numerous instances of litigation misconduct are sufficient to support an exceptional case determination.” The district court had overseen over a decade of litigation between the parties, and “witnessed several instances in which O2 Micro sued MPS customers in order to prompt MPS to file declaratory judgment actions.” Then, the district court saw O2 Micro withdraw its claims and grant covenants not to sue “after substantial litigation had taken place.” That was O2 Micro’s modus operandi in the present case.

The Federal Circuit also disagreed with O2 Micro’s argument “that it was an abuse of discretion for the district court to award fees that are not traceable solely to O2 Micro’s ‘exceptional’ behavior in the litigation.” While the Federal Circuit found that O2 Micro had not waived this “but for” argument by failing to previously raise it, the court found that even if “an exceptional case finding based on litigation misconduct ‘usually does not support a full award of attorneys fees,’” in this case, “the extent of O2 Micro’s misconduct was anything but limited.” Its abusive, vexatious litigation strategy “was pervasive enough to infect the entire litigation.” Likewise, “under the unique circumstances,” the “award of ITC-related expenses is also not an abuse of discretion, especially in view of the discovery’s application in the district court in the parties agreement to its dual use.”