Federal Circuit Affirms That 'Exceptional Case' Fee Awards Do Not Cover IPR Costs

WASHINGTON — The U.S. Court of Appeals for the Federal Circuit (CAFC) in a ruling this week reiterated that a provision allowing for the recovery of attorney fees in “exceptional” patent infringement cases does not extend to costs incurred during parallel administrative proceedings at the Patent Trial and Appeal Board (PTAB). The precedential decision, issued Monday in Extremity Medical, LLC v. Nextremity Solutions, Inc., affirmed a lower court's split ruling. The district court had awarded Nextremity its attorney fees for the court litigation but denied its request to also be reimbursed for legal costs from a related inter partes review (IPR), a process used to challenge a patent's validity before the U.S. Patent and Trademark Office (USPTO). For small and mid-sized businesses, this ruling underscores the significant financial risks of patent litigation, even when defending against claims that are ultimately found to be meritless. The decision solidifies that IPRs, while a powerful defensive tool, represent a distinct and non-recoverable expense category. The case stems from an infringement lawsuit filed by Extremity Medical against its competitor, Nextremity Solutions. In response, Nextremity fought the allegations in federal district court while simultaneously launching an IPR proceeding to challenge the validity of Extremity Medical’s patent. Nextremity was successful in both forums: the PTAB invalidated the patent claims, and the district court subsequently found the lawsuit to be an “exceptional case” under 35 U.S.C. § 285, entitling Nextremity to recover its litigation-related attorney fees. However, the district court drew a line, refusing to include the fees Nextremity spent on the successful IPR. The CAFC, in an opinion authored by Judge Lourie, agreed, reinforcing the legal wall between judicial court proceedings and administrative PTAB proceedings. The court’s reasoning hinges on a strict interpretation of the statute, which allows a “court” to award fees in “exceptional cases” but makes no mention of administrative agency actions. The concept of an “exceptional case” was clarified by the Supreme Court in its 2014 Octane Fitness decision. The court moved away from a rigid two-part test, establishing a more holistic standard. A case can be deemed exceptional if it “stands out from others with respect to the substantive strength of a party’s litigating position... or the unreasonable manner in which the case was litigated.” This can include cases brought in bad faith or those involving inequitable conduct in securing the patent, though such findings do not automatically mandate an exceptional case determination. In our experience, the costs of patent defense can be crippling for emerging and mid-sized companies, even when the infringement claims are baseless. This CAFC decision is a stark reminder that a legal 'win' does not always translate to a full financial recovery. While the ability to recoup district court fees in an exceptional case is a vital tool against meritless lawsuits, the inability to also recover substantial IPR costs leaves a significant financial gap. Businesses must now budget for IPRs as a distinct, sunk cost, which can alter the calculus of whether to fight or settle a patent dispute. This is a classic financial risk management challenge, requiring careful capital allocation and contingency planning. We help clients navigate these high-stakes scenarios by building robust financial models that account for complex legal risks. For guidance on structuring your business to withstand such pressures, contact C&S Finance Group LLC at csfinancegroup.com. IPRs have become a common strategic tool for companies accused of patent infringement since their introduction in 2012. They offer a faster and often less expensive path to invalidating a patent compared to a full-blown court battle. However, the process is still costly, often running into six figures. Defendants frequently pursue both district court defense and IPRs simultaneously, creating a two-front war that strains legal budgets. The CAFC’s ruling in Extremity Medical highlights the complex relationship between the two forums. This separation is seen in other areas of patent law as well. For instance, in Kroy IP Holdings v. Groupon, the court addressed whether a patent owner is blocked, or collaterally estopped, from asserting certain patent claims in court after other claims from the same patent were invalidated in an IPR. The court noted the different standards and burdens of proof between the PTAB and district courts as a key reason why legal doctrines do not always transfer seamlessly from one venue to the other. This legal landscape forces companies into difficult strategic decisions. Pursuing an IPR can be the most effective way to neutralize a patent threat, but it comes with its own risks, such as estoppel provisions under 35 U.S.C. § 315(e), which can prevent a petitioner from raising certain invalidity arguments in a later court case. The knowledge that IPR costs are non-recoverable, even in the face of egregious litigation conduct by the opposing party, adds another layer of financial calculation to these strategic decisions. Ultimately, this decision reinforces the need for proactive intellectual property strategy and careful budgeting for potential legal challenges. The clear message from the Federal Circuit is that while the courts and the PTAB handle related subject matter, they are governed by distinct statutory frameworks, and businesses must plan their legal and financial strategies accordingly. Going forward, companies involved in patent disputes must continue to weigh the strategic benefits of an IPR against its non-recoverable costs. This ruling solidifies the financial separation between the two proceedings, a factor that will likely influence litigation and settlement strategies, particularly for smaller entities with more constrained legal budgets who must now account for IPRs as a separate and definite out-of-pocket expense.