Supreme Court Preview -- Octane Fitness, LLC v. ICON Health & Fitness, Inc.

Supreme Court Building #1In less than two weeks, the Supreme Court will hear arguments in two cases involving the Attorney Fees provision of 35 U.S.C. § 285.  Both of these cases have garnered a lot of attention from the patent community, because many commentators have cited to this section as contributing to the so-called "patent troll" problem.  The statute provides for attorney fees in "exceptional" cases ("The court in exceptional cases may award reasonable attorney fees to the prevailing party"), but the Federal Circuit has held that a case is only exceptional when "both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless," absent misconduct in litigation or in securing the patent.  See Brooks Furniture Mfg. v. Dutailier, Inc., 393 F.3d 1378 (Fed. Cir. 2005).  Even Chief Judge Rader has spoken out about this fee-shifting provision, complaining that federal judges were not using § 285 with sufficient regularity to discourage "troll"-like behavior.  Randall R. Rader, Colleen V. Chien, and David Hricik, Op-Ed, Make Patent Trolls Pay in Court, N.Y. Times (June 4, 2013).  Perhaps it is not surprising that that he recently argued that the "court should return to the rule that a district court may shift fees when, based on the totality of the circumstances, it is necessary to prevent a gross injustice," thereby eliminating the need to parse evidence into subjective and objective categories.  The White House has called for reform to this provision last year, when it recommended that Congress establish legislation that permitted "more discretion in awarding fees to prevailing parties in patent cases," specifically by removing the "exceptional case" requirement.  Press Release, The White House, FACT SHEET: White House Task Force on High-Tech Patent Issues (June 4, 2013).  The House of Representatives took it a step further, making the shifting of attorney fees the default in patent cases in the newly passed Innovation Act, unless "the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances . . . make an award unjust."  Innovation Act § 3.  The pending Senate version has an even higher standard, requiring the conduct to be "substantially justified."  Patent Litigation Integrity Act of 201, S. 1612, 113th Cong. (2013).

It is with this contentious backdrop that the Supreme Court will hear these two cases.  The question presented in the first of these cases, Octane Fitness v. Icon Health and Fitness, was:

[W]hether the Federal Circuit's promulgation of a rigid and exclusive two-part test for determining whether a case is 'exceptional' under 35 U.S.C. § 285 improperly appropriates a district court's discretionary authority to award attorney fees to prevailing accused infringers in contravention of statutory intent and this Court's precedent, thereby raising the standard for accused infringers (but not patentees) to recoup fees and encouraging patent plaintiffs to bring spurious patent cases to cause competitive harm or coerce unwarranted settlement from defendants.

The second case, Highmark Inc. v. Allcare Management Sys., Inc., relates to whether the lower court's determination regarding attorney fees is entitled to deference, and will be detailed in a future post.  It would be surprising if the Supreme Court left the standard for awarding attorney fees articulated by the Federal Circuit unchanged.  Indeed, no amicus curiae came out in support of the respondent, ICON.  In fact, the limited number of amicus curiae briefs filed in support of neither party still advocated changing the standard because the current one is thought to be too difficult to meet.  However, even if the test for determining the award of fees is changed as expected, it is equally likely that the case will be remanded.

This case involves two companies that are in the exercise equipment industry, and specifically deals with elliptical machines.  According to the briefs of the parties, ICON had invented a specific linkage system that allowed the foot pedals to move in an elliptical path.  Both parties agreed that ICON never commercialized this invention, but they disagree why (Octane alleging that the idea did not work, while ICON claimed that it was because of the cost and other market conditions).  The invention was the subject of U.S. Patent No. 6,019,710 ("the '710 patent"), which issued in February 2000.  Octane was a much smaller competitor that licensed different technology to produce its Q45 and Q47 machines.  According to ICON, Octane was aware of the '710 patent and in addition to obtaining a non-infringement opinion of counsel directed to it, Octane purchased infringement insurance to protect itself.  According to Octane, however, ICON's Vice President of Global Sales stated in an e-mail that ICON was "'[n]ot only coming out with a great product to go after [Octane], but throwing a lawsuit on top of that,' and that I[CON] was asserting a defunct patent because it was 'just looking for royalties'" (emphasis in brief).

ICON brought the patent infringement lawsuit in 2008 in the United States District Court for the Central District of California, but the case was shortly thereafter transferred to the Minnesota district court.  According to ICON, Octane initially admitted that the accused product had a "stroke rail," one of the elements of the claim.  Nevertheless, months after the parties exchanged claim construction disclosures, Octane raised a dispute with respect to that term, and subsequently moved for summary judgment.  The court adopted Octane's proposed definition, and even though ICON continued to argue doctrine of equivalents, the court granted the summary judgment motion (which the Federal Circuit in a related opinion affirmed).  With regard to attorney fees, according to ICON, the lower court found that its case was neither objectively baseless nor brought in bad faith.  Octane's brief was silent on this point, with its main complaint being that the lower court used the Federal Circuit's two-part test.  The Federal Circuit affirmed, agreeing that this was not an exceptional case.  The Supreme Court granted certiorari.

In its appeal, Octane attempted to capitalize on the public sentiment regarding patent assertion entities, or "trolls," devoting an entire section of its brief to the public policies related to curbing abusive patent litigation.  Nevertheless, Octane admitted that "[t]his case does not involve a classic 'troll,' but does involve a larger competitor asserting a non-practiced patent against a smaller competitor in a troll-like manner."  Of course, ICON emphasized this potential deception in response.  Moreover, it pointed out that the Supreme Court should not succumb to public pressure, and called into question whether a patent troll crisis actually exists.

Octane argued that the plain language of the statute implies the grant of broad discretion on the part of the lower courts.  It looked to the use of two words in the statute, "may" and "exceptional."  Not even ICON challenged that the word "may" connotes discretion.  However, to support its position regarding "exceptional," Octane pointed to dictionary definitions of the word which suggest that it has an ordinary meaning of "uncommon" or "unusual."  This appears to be a fairly weak argument.  Even the Federal Circuit's two-prong test results in the awarding of fees in "uncommon" or "unusual" circumstances.  Moreover, as ICON pointed out, if the two words mean the same, it would render at least one of the superfluous, contrary to the cannons of statutory construction.

Somewhat stronger, Octane pointed out how the Federal Circuit's current test was inappropriately transplanted from the "sham" litigation exception to Noerr-Pennington antitrust immunity.  In Brooks, the appeals court adopted the standard as articulated in the Supreme Court's Prof'l Real Estate Investors v. Columbia Pictures Indus., 508 U.S. 49 (1993) ("PRE").  However, as Octane pointed out, PRE implicated the First Amendment freedoms, and therefore "even activity that is subjectively motivated by an improper anticompetitive purpose remains protected as long as there is an 'objectively reasonable' basis for the action."  PRE, 365 U.S. at 57.  Such concerns, according to Octane, are not present "in the context of objectionably weak patent suits or fee-shifting statutes in general."  ICON disagreed, however, pointing out that the ability to bring such suits is also "the exercise of constitutionally protected rights."

In the end, Octane advocated for, what it referred to as, the "equitable discretion" test.  This was defined as "broad discretion on [the part of] district courts to apply traditional equitable factors, guided by the purposes of patent, to determine whether to award fees to a prevailing accused infringer."  Problematic in this test, however, is that Octane also advocated for keeping the standard "party-neutral."  Not surprising, ICON argued to maintain the test as articulated by the Federal Circuit.  Therefore, if the Supreme Court does change the test for the award of attorney fees under 35 U.S.C. § 285, it will likely either adopt its own or incorporate one or more suggestions from the 14 amicus curie briefs that were filed.  We will highlight some of these proposals in a future post.  And, of course, we will report on the oral argument in a couple weeks and provide an analysis when the Court issues its opinion, which should occur before the end of June, 2014.

 

Topics:  Attorney's Fees, Octane Fitness v. ICON, Patent Litigation, Patent Trolls, Patents, SCOTUS

Published In: Civil Procedure Updates, Civil Remedies Updates, Intellectual Property Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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