Patent Lawyers’ Liability for Fees Pending at Federal Circuit

The nation’s top patent court is grappling with an appeal seeking to levy attorneys’ fees against lawyers for a thinly capitalized plaintiff, a twist on the current fee-shifting law that could deter some of the country’s most prolific filers of infringement lawsuits.

The Patent Act’s attorneys’ current fee-shifting provision dates to 1952 and provides that in “exceptional cases” courts can award “reasonable” attorneys’ fees to the “prevailing party.” But traditionally those fees have been assessed against losing parties, not their attorneys. The defense bar has complained in recent years that patent assertion companies easily sidestep such fees by creating ‘judgment proof’ entities with no assets to serve as plaintiffs, allowing attorneys to file frivolous lawsuits with limited repercussions.

DISH Network LLC and Sirius Radio, the satellite TV and radio giants, are challenging that status quo. The two companies appealed to the Federal Circuit after winning cases in which Dragon Intellectual Property LLC alleged infringement of a single patent it had purchased for $30,000. DISH and Sirius said their victories, and the combined $3.3 million in damages, would be hollow unless the appellate court reverses the portion of the ruling that says they can only collect against Dragon, which they describe as a “judgment-proof shell” structured to avoid the fees award.

The legal question is a new one for the Federal Circuit, which has jurisdiction over all patent appeals, according to the three-judge panel who heard oral argument earlier this month. A ruling for the satellite companies would alter how patent fee disputes are litigated, and members of the panel said it would have major implications for patent lawyers and the courts that hear their cases.

A ruling in favor of DISH and Sirius “would be a game changer in a good way because it would weed out the weakest cases that should never have been filed,” said Betty Chen, a patent litigator at Desmarais LLP. She said broadening the fee-shifting provision in the way the companies are suggesting would be a shot across the bow for “the plaintiffs buying up bad patents and sending hundreds of demand letters or suing 20 companies, hoping that 19 will settle for 5-figure amounts.”

Making attorneys potentially liable for fees could have an effect on high-volume filers, who will have “something else to think about,” according to Kevin McNish, a patent litigator based in Maine, who does work for both patent owners and defendants. He added that “more sophisticated plaintiffs, who’ve had to work up their case, and secure litigation financing or insurance” already do due diligence work and wouldn’t necessarily be impacted..

But the three-judge Federal Circuit panel hearing the DISH and Sirius appeal may be reticent to change current fees structure, McNish said. That’s because it would create a “nightmare” process for assigning blame, as between a client and their attorney, which would require additional discovery and additional lawyers for cases already resolved on the merits, he said.

“If we patch that hole, the solution could be more expensive,” McNish said.

DISH Litigation

The dispute between DISH and Dragon IP is more than a decade old. Dragon was formed in 2012 by California patent attorney-turned math coach Kai Zhu. It bought a single patent for $30,000 that same year, hired Northern California patent lawyer Bob Freitas on a contingency basis, and began suing companies with digital video recorder products, including DISH and Sirius Radio, according to filings in the pending appeal.

Records from the patent application process clearly showed the patent was materially different from, and thus not infringed by, DVR products offered by DISH and Sirius, accorindg to a ruling from Judge Richard G. Andrews in late 2021 Andrews declared Dragon’s case “exceptionally weak,” justifying a monetary sanction. He awarded a combined $3.3 million to the two companies.

But Andrews’ ruling only allows the companies to collect the award from Dragon.

DISH and Sirius appealed, arguing in a joint appellate brief that Dragon is specifically organized to avoid “the known risks of an attorneys’ fees award.” They challenged Andrews’ conclusion that the Patent Act’s fee-shifting provision—Section 285—bars in all instances fee awards against non-party attorneys or law firms.

The fact that the legal question is coming to the Federal Circuit more than 70 years after the provision was last updated in the statute could be explained by the availability of other legal mechanisms applicable in all federal lawsuits to seek fees from an opposing counsel, according to Paul Gugliuzza, a law professor who studies patent litigation at Temple Law School.

But he said there’s also a practical reason: “reaching beyond the party to the attorneys to collect a Section 285 award would matter only in the case of a thinly capitalized party, to wit, a bottom-feeder type patent troll,” he said. “And that’s, by and large, a phenomenon of relatively recent vintage.”

Expanding Section 285 liability would be a net positive given that profusion of low-quality patent suits and the costs imposed on courts and companies targeted by such suits, Chen said.

She compared the potential change to efforts by Delaware federal Judge Colm F. Connolly to require litigation-funding information from civil litigants, including several plaintiffs affiliated with prolific patent monetization company, IP Edge LLC. Connolly’s new disclosure rules have warded off certain patent companies that file their lawsuits in bulk, she said. That has “elevated” the quality of cases in Connolly’s court, Chen said.

Connolly’s rules and subsequent investigation focused on IP Edge, a Houston patent monetization company run by a trio of patent lawyers. The company set up well over 100 limited liability companies, often with words like “Licensing” or “IP” in their names, that have filed thousands of lawsuits with the backing of at least one investment fund.

Zhu’s patent assertion companies operated on a much smaller scale by comparison. He told a DISH attorney at a November 2022 deposition that he founded Dragon, along with Panda IP LLC and Sycomare IP Holdings, in the early 2010s. He said he was motivated to form them because the patent litigation landscape at the time “was favoring the plaintiffs.”

Zhu said he did “pre-litigation study” for Dragon’s suits and prepped some documents it filed to support the infringement claims, but after the complaints were docketed, his lawyers “took over.” He also said his lawyers covered the costs of litigation: “Everything was paid by the law firm, even the filing fees and so on,” he said.

Federal Circuit Tea Leaves

Chief Judge Kimberly A. Moore, Circuit Judge Kara F. Stoll, and Judge Cathy Ann Bencivengo, a San Diego-based district court judge sitting by designation, heard oral argument in the case on Feb. 7. The judges peppered both sides with questions over how they should interpret Section 285.

“There’s an established presumption that when lawyers aren’t mentioned” in a statute, “lawyers aren’t in,” Freitas, Dragon IP’s lawyer, argued.

But Moore appeared dubious of the legal support for such a presumption, which Freitas said was set out in a Fourth Circuit opinion from 2009.

If there was a “preexisting presumption” described in a US Supreme Court opinion before 2009, “don’t you think the Fourth Circuit would’ve mentioned it as opposed to sort of creating this out of whole cloth on their own?” Moore asked. “I don’t think there is a presumption,” she said later.

Bencivengo seemed similarly wary of taking a position barring fees under Section 285 against lawyers in all instances. “You can never say, ‘Counsel’s behavior here made the case exceptional, so counsel should have some responsibility for the recovery of costs and fees?’” she asked.

Moore also expressed some skepticism with DISH over whether expanding Section 285 liability would be a modest, workable change or a major disruption.

It could be an “effin’ nightmare” for district courts, who would have to preside over collateral fee disputes, Moore said.

DISH’s attorney Lauren Dreyer, a partner at Baker Botts LLP, pushed back. Such disputes are rare, she said, as they axiomatically only come up in “extraordinary” cases. Moore seemed unconvinced.

“Every time you guys win, that’s what you claim,” she said.

Rozier Hardt McDonough PLLC represents Dragon. Hopkins & Carley and Freitas & Weinberg LLP represent Freitas and his firm.

DISH is represented by Baker Botts LLP. Sirius is represented by Kramer Levin Naftalis & Frankel LLP.

The case is Dragon Intellectual Prop. LLC v. DISH Network L.L.C., Fed. Cir., 22-1621.