Yesterday, describing the Federal Circuit's two-part test as "unduly rigid" and "impermissibly encumber[ing] the statutory grant of discretion to district courts," Justice Sonia Sotomayor delivered a pair of unanimous U.S. Supreme Court decisions liberalizing the standards for awards of attorney fees in patent cases. In the first case, Octane Fitness, LLC v. Icon Health & Fitness, Inc., __ U.S. __, No. 12-1184 (April 29, 2014), the Court held that the Federal Circuit's existing framework for "exceptional case" fee awards was so "demanding" and inconsistent with the text of 35 U.S.C. § 285 as to render the statute "superfluous." The Court therefore overruled that authority and significantly expanded the situations in which district courts may award such fees. In the second case, Highmark Inc. v. Allcare Health Management System, Inc., __ U.S. __, No. 12-1163 (April 29, 2014), the Court held, based on Octane, that because § 285 fee awards are the product of the district judge's discretion, they are reviewed only for abuse of discretion on appeal.
Brooks Furniture Test Rejected
In Octane, the Supreme Court overturned the Federal Circuit's earlier decision in Brooks Furniture Manufacturing, Inc. v. Dutailier International, Inc., 393 F.3d 1378 (Fed. Cir. 2005). In Brooks Furniture, the Federal Circuit had defined an "exceptional case" for purposes of 35 U.S.C. § 285 as one that either involves "material inappropriate conduct" or is both "objectively baseless" and "brought in subjective bad faith." Under Brooks Furniture, a party was also required to establish the "exceptional" nature of a case by clear and convincing evidence. The Supreme Court ruled that all three standards are incorrect.
The Court found that, with Brooks Furniture and its progeny, the Federal Circuit had abandoned an earlier "holistic, equitable approach [for finding an exceptional case] in favor of a more rigid and mechanical formulation." It based this conclusion on a review of the legislative history of § 285 and its predecessor, regional circuit decisions from before the Federal Circuit was established, and Federal Circuit decisions predating Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc. 508 U.S. 49 (1993). The Court further found that the Federal Circuit's Brooks Furniture standard "superimposes an inflexible framework onto statutory text that is inherently flexible." It thus found the standard to be too restrictive, in part because district courts already possess inherent power to award fees in cases involving misconduct or bad faith. In addition, the Court rejected Brooks Furniture's requirement of "clear and convincing evidence" because it has never interpreted comparable fee-shifting statutes to require such a burden of proof, the language of § 285 imposes no specific evidentiary burden, and patent law issues are generally decided on a preponderance of the evidence.
The New Test for Fee Awards
In place of the Brooks Furniture standard, the Court held in Octane that "an 'exceptional' case is simply one that stands out from others with respect to the substantive strength of a party's litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated." The Court further stated, "District courts may determine whether a case is 'exceptional' in the case-by-case exercise of their discretion, considering the totality of the circumstances."
Finding comparable its earlier decision in the context of the Copyright Act (Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994)), the Court stated that "there is no precise rule or formula for making these determinations, but instead equitable discretion should be exercised in light of the considerations we have identified." The Court noted that nonexclusive factors in the copyright context include "frivolousness, motivation, objective unreasonableness (both in the factual and legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence." More specific guidance was not given.
In contrasting the standard announced in Octane with the overly rigid Brooks Furniture framework, the Court has made clear that conduct justifying fees under § 285 need not be independently sanctionable and that a case presenting either subjective bad faith or meritless claims "may sufficiently set itself apart from mine-run cases to warrant a fee award."
Change in Standard of Review
In a five-page opinion in Highmark—remarkably brief, particularly considering the volume of party and amici briefing—the Supreme Court held that all aspects of a district court's "exceptional case" determination under § 285 should be reviewed for abuse of discretion. The Court therefore vacated the decision below, which had reviewed at least portions of the district court's exceptional-case determination "de novo" and "without deference."
The Highmark opinion reiterates the Court's holding from Octane that determining whether a case is "exceptional" under § 285 is a matter of discretion. Accordingly, following its precedent in prior cases involving similar determinations, the exceptional-case determination is to be reviewed only for abuse of discretion. Paraphrasing a prior decision, the Court offered several reasons for its ruling: the statute "suggests some deference to the district court upon appeal," a district court is better positioned to decide if a case is "exceptional" because it lives with the case over a prolonged period of time, and the issue is not susceptible to the generalization of de novo review and is likely to benefit from the experience that an abuse-of-discretion rule will permit to develop. Finally, the Court noted that "[a]lthough questions of law may in some cases be relevant to the § 285 inquiry, that inquiry generally is, at heart, 'rooted in factual determinations.'"
The Octane and Highmark decisions likely will have an immediate impact on pending patent litigation by making the prospect of receiving attorney fees more readily available to a party prevailing in a "not run-of-the-mill" case. If you desire more information about the implications of the Supreme Court's rulings, please contact the authors or your Orrick relationship partner.