Before Dyk, Taranto, and Chen. Appeal from the Central District of California.
Summary: when a litigant seeks fees for an exceptional case based on issues that were not fully adjudicated at the district court, the litigant’s fee motion must demonstrate not only that they would have succeeded, but also that the opposing party’s position was unreasonable.
Munchkin brought claims against Luv N’ Care (“LNC”) for trademark infringement and unfair competition. Munchkin later moved to amend the complaint to add (1) additional trademark claims; (2) trade dress claims; and (3) patent infringement claims. The district court granted the motion. Later, Munchkin dismissed its trademark, unfair competition, and trade dress claims with prejudice. LNC successfully petitioned for IPR of the asserted patent and the Federal Circuit summarily affirmed the PTAB’s determination of unpatentability. After that decision, Munchkin dismissed its patent infringement claims. LNC then sought fees for an exceptional case under 35 U.S.C. § 285 and 17 U.S.C. § 1117. The district court granted the fees motion, finding that Munchkin should have been aware of the substantive weakness in the patent’s validity and that the trademark and trade dress claims were substantively weak.
The Federal Circuit reversed. The Court noted that this case represented “an unusual basis for fees” because the “exceptional-case determination rests on an examination of issues … that were not fully litigated before the [district] court.” Though fees are potentially recoverable, in such situations district courts should provide “a fuller explanation of the court’s assessment of a litigant’s position.” Here, neither LNC nor the district court provided such a “detailed, fact-based analysis” and the record failed to show that Munchkin’s litigating positions were “wholly lacking in merit.”
On the patent infringement claims, the Federal Circuit noted that LNC’s invalidity arguments turned on claim construction. But, the district court’s claim construction order had adopted Munchkin’s construction, not LNC’s broader proposal. It was only at the PTAB, under a broadest reasonable construction standard, that LNC was successful. The district court also erred in ruling that Munchkin was unreasonable in maintaining the lawsuit after institution of the IPR based on general IPR success statistics. The Federal Circuit explained that such statistics “tell us nothing about the” strength of Munchkin’s positions. Any remaining analysis by the district court was “wholly conclusory and cannot support a determination of exceptionality” in these circumstances. Thus, the award of fees under § 285 was an abuse of discretion.
On the trademark and trade dress claims, the Federal Circuit ruled that the exceptional case finding was in conflict with the district court’s prior order allowing Munchkin to amend the complaint. Neither the district court nor LNC pointed to a single fact that the district court did not consider at the time it allowed Munchkin to amend the complaint. The fact Munchkin chose to dismiss its claims with prejudice likewise failed to establish that the case was exceptional because there were many reasons Munchkin could have decided to drop those claims. The district court’s analysis on the trade dress claims was likewise conclusory. Thus, it was also an abuse of discretion to award fees on the trademark and trade dress claims.