Patent Litigation Fee Awards: Hourly-Based Lodestar Trumps AFAs

A lodestar is a star used to guide a ship's navigationNow that it is easier for prevailing parties in a patent litigation to recover attorney fees [see our previous post], how likely is that that fees paid under some form of non-hourly arrangement – for example flat fees, contingency, success fees  or some other alternative fee arrangement (AFA) – can be recovered?  The answer is that the court’s end-of-case determination of a reasonable hourly rate and fee, called the “lodestar,” trumps the amount paid under any AFA.

AFAs that exceed the lodestar likely cannot be recovered.  In Kilopass v Sidense (ND Cal), Judge Illston found that Kilopass engaged in litigation misconduct and made exceptionally meritless infringement claims, and, therefore, awarded Sidense attorney fees totaling $5.3 million.  (Kilopass has appealed.)

While the fees awarded to Sidense are significant, they appear to be less than half of the fees that Sidense actually paid its counsel under a contingency bonus arrangement.  Sidense’s fee arrangement called for Sidense to pay 50% of its lawyer’s hourly billing on a monthly basis, with the remaining 50% held back until the end of the case.  The payment of the holdback was tied to a performance based multiplier.  Since the court granted summary judgment in Sidense’s favor and dismissed all claims, Sidense’s counsel was entitled to the maximum multiplier of 2.5x, effectively requiring Sidense to pay 175% of its lawyers’ standard rates.  While the public record does not disclose the full amount of the contingency bonus, what can be inferred from the decision is that the fees paid by Sidense under the contingency arrangement exceeded $11 million (based on inferred standard rate fees of $6.5 million).

Over Kilopass’s objection, Judge Illston considered the contingency bonus in determining the lodestar, but it is unclear what effect this had on the lodestar other than possibly biasing the analysis by creating an upper fee range that made the $5 million award appear to be a reasonable compromise.  Judge Illston refused to set a lodestar rate or fee approximating the contingency bonus, stating:

However, Sidense has failed to provide evidence that the prevailing rates in the community for attorneys of similar ability and expertise are variable in nature, and linked to pre-specified litigation outcomes.  In the absence of such evidence, the Court will not award Sidense a fee approximating its “contingency bonus.”

2015 WL 1065883, at *12 (N.D. Cal. Mar. 11, 2015).

Furthermore, having set the lodestar at $5.3 million, Judge Illston refused to enhance the figure upward to account for the much greater contingency bonus paid by Sidense.

The fact that Sidense chose—or was forced to—to adopt a high-risk-high-return fee arrangement midway through the litigation is not a proper basis to make an enhancement to the lodestar.

Id. at *13.

The inability of Sidense to recover its contingency bonus reflects some fundamental differences between lodestar and AFA fees.  The AFA arrangement is forward looking and seeks to align the projected economic interests of client and counsel.  It rewards counsel for success and causes counsel to share in the risk of an adverse result.  The lodestar is a backward looking hindsight determination of “reasonable” time spent and hourly rates based on what occurred, favors administrative ease over accounting for unique (to a specific client) circumstances such as highly variable  AFAs, and bases the fee award on market or standard recovery rather than the prearranged allocation of risk and reward between client and counsel.

Sidense arguably is distinguished as part of a line of contingency cases in which courts have refused to tie fee awards to contingency awards for a variety of practical and policy reasons.  These contingency cases include, most notably, the Supreme Court’s refusal to enhance the lodestar to reflect a higher contingency fee amount in City of Burlington v. Dague, 505 U.S. 557, 567 (1992).  In contrast, Flat fees, are not tied to contingent outcomes, reasonably reflect prevailing practices in many markets for litigation services, and arguably avoid the practical and policy baggage of contingency-based AFAs.  Whether these arguments distinguishing the contingency bonus in Sidense, while compelling, might carry the day in a future case and allow recovery of flat fees that exceed the lodestar remains to be seen.

A possible exception to the lodestar trumping AFAs is where the AFA is lower than the lodestar.  As discussed at length in our prior post, NetApp, the prevailing party in the Delaware patent litigation Parallel Iron v NetApp, recovered attorneys’ fees of $550,000.  NetApp requested fees of $594,000 based upon the sum of flat fees of $480,000 and other, presumably hourly fees, of $114,000 incurred in bringing the motion for fees.  The court ultimately awarded fees of $594,000 multiplied by a fraction to adjust the fee downward from higher New York rates claimed by NetApp to lower Delaware rates deemed more appropriate by the court.  The parties ultimately submitted a stipulated order [April 15 2015 Order (550K Attn Fees)] reducing the award to $550,000.

Consistent with the lodestar methodology, NetApp submitted the hourly time records of its counsel.   These records demonstrated that NetApp’s counsels’ fees, if measured as the product of the hours worked multiplied by applicable hourly rates, exceeded the flat fees charged. The court found the total hours expended were reasonable.  Nonetheless, at NetApp’s request, the court reduced the award to the lower amount of flat fees paid by NetApp.

Defendant submitted detailed time records documenting the work counsel performed. (D.I.97, Exs.B, D). Defendant is not requesting fees for the total number of hours worked, only the amount paid under the fixed-fee arrangement. (D.I. 94 at p. 4). The Court finds that the hours claimed were reasonably expended. The Court will award fees for the number of hours billed, reduced to take into account the fixed-fee arrangement.

2015 WL 1387582, at *6 (D. Del. Mar. 25, 2015) (emphasis added).

NetApp did not request fees for the total time its counsel worked, so the court did not have to decide whether to lower an otherwise appropriate lodestar award to the flat fees actually paid.  NetApp apparently made the quite reasonable calculation that recovery of its flat fees was all that was necessary to make it whole, and that seeking the higher lodestar amount may have been perceived by the court as overreaching and consequently could have biased the court against awarding full recovery of all of the requested flat fees.  NetApp apparently, and again quite reasonably, used the higher lodestar fee to frame its flat fees as a reasonable compromise award.  (This presumed strategy was not entirely successful because the court reduced the requested fees to account for what the court believe were unduly high hourly rates claimed by NetApp – Why it was necessary to further reduce a lower-than-lodestar flat fee award to account for prevailing hourly rates in Delaware is not clear and seems unfair to NetApp to impose a double reduction of the award.)

NetApp’s presumed determination that it could not obtain the higher lodestar figure suggests that in future cases the lodestar amount will be reduced to reflect a lower flat fee paid by the client.

But why couldn’t NetApp and its counsel have sought recovery of the lodestar?  After the fact, it was apparent that NetApp’s counsel spent a reasonable number of hours, which, if compensated at prevailing, reasonable hourly rates, supported a higher fee than what was charged.  Awarding the higher amount allows NetApp to reimburse its counsel for having to spend more time than was apparently predicted at the outset and/or to award its counsel for sharing the risk inherent in litigation as well as providing budget certainty by committing to a fixed amount of fees.  Even if NetApp chose to pocket the additional monies recovered over what it actually paid, this is consistent with fee-shifting policy of not just making the prevailing party whole but also deterring litigation misconduct and meritless patent infringement claims.

It is unlikely that the prevailing party in a patent litigation will recover more than the lodestar, even where the lodestar figure is less than a bargained for AFA fee aligned with the economic interests of client and counsel.  While it might be possible to claim the lodestar if it is higher than an AFA fee, the more likely result, as occurred with NetApp, is that the lodestar will be reduced to the lower AFA fee paid by the prevailing party.

The prevailing sentiment, at least for now, is that lodestar-based awards trump AFA-based awards because hindsight regarding the reasonableness of time spent and hourly rates is 20-20 and it is far easier to administer a fee award based on metrics such as hours and rates rather on forward looking predictions of litigation costs and risk.