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(photo courtesy of Imagerymajestic and freedigitalphotos.net)

(photo courtesy of Imagerymajestic and freedigitalphotos.net)

     Patent litigation is enormously expensive. That’s one reason why “fee-shifting” is such an important concept in patent cases.  In theory at least, fee-shifting helps protect defendants from a predatory (or “vexatious” in legalese) plaintiff hell-bent on putting its- often smaller and newer-  competitor out of business by using a lawsuit as its weapon of choice.

     To over-simplify somewhat, fee-shifting awards the defendant its legal fees and costs in a case where it is deemed to be the “prevailing party” and where the plaintiff’s litigation conduct is found to be “exceptionable” (see Section 285 of the Patent Act). Getting the Court to deem a case ‘exceptionable is tough, though. Really tough.  The law dictates that the party seeking fees must establish (by a ‘clear and convincing’ standard) that the case is “exceptional”.

     So, what does “exceptional” mean?  That’s the million-dollar question and millions have likely been spent litigating around that question. Monolithic Power Systems, Inc. (“MPS”) (Nasdaq: MPWR) is one company that successfully jumped this hurdle, at least with respect to the trial court (an appeal, filed in October 2012, is currently pending).

     MPS describes itself as  “a leading fabless manufacturer of high-performance analog and mixed-signal semiconductors.”  Way back in 2001, MPS’ nemesis, 02 Micro International (“02 Micro”) began a long  saga of patent litigation against MPS. While the litigation evolved over the years, the current litigation revolves around 02 Micro’s ‘382 patent (U.S. Patent No. 7,417,382) for a “high-efficiency adaptive DC/AC converter.”  02 Micro filed suit against MPS in multiple venues, including the International Trade Commission (“ITC”) and the U.S. District Court for the Northern District of California.

     In June 2010, the ITC found that MPS’ products did not infringe 02 Micro’s ‘382 patent. 02 Micro then dismissed its infringement claims pending with the U.S. District Court.  Since 02 Micro had dismissed those claims unilaterally, the Court ordered it to pay MPS its costs (over $300k).  However, that was just the tip of the proverbial iceberg for 02 Micro. The Court found that 02 Micro had been a “vexatious” litigant due to, among other things, its litigation strategy. In particular, the Court found that 02 Micro employed a strategy of filing suit against MPS and its customers and then dismissing the cases after MPS had spent significant money and time on the litigation. This strategy, the Court reasoned, allowed 02 Micro to damage MPS while it avoided letting the litigation proceed to the point of addressing the patent’s validity. The Court also found that 02 Micro had filed baseless motions and that it had mishandled errors regarding its claimed invention date.  In light of 02 Micro’s conduct, the Court awarded MPS over $9 million in attorneys’ fees and costs.

     02 Micro filed its appeal in October 2012 and the Court of Appeals for the Federal Circuit heard oral argument in the case in May 2013. One of 02 Micro’s arguments is that MPS isn’t entitled to the full fee award because it incurred some of its attorneys’ fees in the overlapping ITC proceedings. 02 Micro’s stance is that MPS should have moved in the ITC for fees incurred in that tribunal. Obviously, MPS disagrees.

     While 02 Micro has the unenviable position of being the “bad guy”, it does still have some arrows in its quiver.  While it is a civil rights case, not a patent case, 02 Micro’s best argument involves the Supreme Court’s 2011 decision in Fox v. Vice (131 S. Ct. 2205).  Fox holds that parties may only recover fees that would not have been incurred but-for the alleged frivolous legal claims. In oral argument, however, MPS’ attorneys pointed out that the Fox case involved frivolous and non-frivolous claims within the same case, not parallel litigation. MPS’ attorneys also discussed public policy issues, such as whether reversing would be a windfall to misbehaving plaintiffs and undermine the deterrent effect of the Patent Act’s fee-shifting provisions.

   How will this all turn out? Will MPS get to collect on its $9 million plus fee award? We’ll  have to wait and see. The Court of Appeals for the Federal Circuit should issue a decision sometime before the end of the year.