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Patent trolls should pay legal costs more often, court says

WASHINGTON – Patent owners who lose infringement lawsuits should have to pay the winners’ legal fees more often, a U.S. appeals court said in adding its views to a debate before Congress and the Supreme Court.

The U.S. Court of Appeals for the Federal Circuit in Washington on Thursday ordered a judge to analyze if memory-cell maker Kilopass Technology Inc. should pay legal fees incurred by closely held competitor Sidense Corp.

It said the court must consider “whether Kilopass acted in bad faith in light of the totality of the circumstances” even if there’s no specific evidence of wrongdoing, Circuit Judge Kathleen O’Malley wrote.

The Federal Circuit, which handles all U.S. patent appeals, has been grappling with how to crack down on owners who demand royalties on patents that may not be infringed or valid. The Supreme Court in October accepted two cases on the issue and Congress is considering proposed legislation that would require losers in patent cases to pay the winner’s fees.

The issue of legal fees is part of a broader debate over a rise in patent suits by businesses whose sole mission is to extract royalty revenue. Those entities, dubbed “patent trolls” by critics, filed 19 percent of all patent lawsuits from 2007 to 2011, according to the Government Accountability Office. A White House report said more than 100,000 companies were threatened last year with infringement claims.

“Too many patent owners are bringing claims that are meritless and then settling for a nuisance value with the expectation their claims would never be tested,” said Edward Reines, a lawyer with Weil, Gotshal & Manges LLP in Redwood Shores, California, who also teaches at Stanford Law School. “The intrepid defendant who fights and wins ends up not being compensated for their fees.”

The U.S. Patent Act says fees can be awarded “in exceptional cases,” though they are rarely granted. O’Malley, writing for a three-judge panel, rejected a request by Sidense to lower the standard of proof needed to make its argument. While Sidense’s argument “is not a frivolous one,” it’s beyond the power of a three-judge panel to make that decision, she said.

Chief Judge Randall Rader, in a concurring opinion, said the Federal Circuit should go even further. He said a 2005 decision from the court unfairly restricted district judges’ authority to impose fees only if the case was objectively baseless.

“This court should return to the rule that a district court may shift fees when, based on the totality of the circumstances, it is necessary to prevent a gross injustice,” he wrote.

Closely held Kilopass, based in Santa Clara, Calif., pursued its infringement complaint despite legal advice that Sidense had redesigned its memory cells and made conflicting legal arguments in court, according to the opinion. Still, the trial judge said there wasn’t enough to show the company acted in bad faith. Ontario-based Sidense appealed.

Trial judges may remain leery of ordering patent owners to pay fees, Reines said. A year ago, a different three-judge Federal Circuit panel ordered a judge in Texas to impose fees on a patent owner who made arguments that “no objectively reasonable litigation” would make. The judge took no immediate action and last month ordered the two sides to submit written arguments on the issue.

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