Court lowers the threshold for “exceptional” cases.
On April 29, in Octane Fitness, LLC v. Icon Health & Fitness, Inc., the U.S. Supreme Court rejected the U.S. Court of Appeals for the Federal Circuit’s existing standard for determining whether a patent case is “exceptional” for purposes of awarding attorney fees under 35 U.S.C. § 285. Relying on the “ordinary meaning” of the word “exceptional,” the Court held 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 directed lower courts to apply this flexible standard “in the case-by-case exercise of their discretion, considering the totality of the circumstances.”
By way of background, under 35 U.S.C. § 285, the prevailing party in a patent case is allowed to recover its attorney fees only in “exceptional” cases. In 2005, the Federal Circuit set the standard for determining which cases qualify as “exceptional” when the defendant is the prevailing party. In particular, the Federal Circuit held that a case may be deemed exceptional only “when there has been some material inappropriate conduct” or when the litigation is “brought in subjective bad faith” and is “objectively baseless.” That standard was criticized by some as overly restrictive, and, due in part to that criticism, several patent reform bills currently pending in Congress include provisions intended to make it easier for prevailing defendants to recover their fees.
The landscape shifted, however, when the Supreme Court issued two opinions on April 29—Octane Fitness and Highmark Inc. v. Allcare Health Management System, Inc.—significantly changing the governing law on which cases qualify as “exceptional” under § 285. Although the new standard under § 285 is a significant development, it is important to note that the Court also struck down the requirement that “exceptional case” status be proven by clear and convincing evidence, establishing a preponderance of the evidence standard for such decisions going forward.
The opinion in Highmark is not as far-reaching as Octane Fitness, but it is still significant in its own right. The Federal Circuit formerly reviewed “exceptional case” findings under a de novo standard, which often resulted in the reversal of fee awards. In Highmark, the Court rejected that standard and now requires that “an appellate court should review all aspects of a district court’s §285 determination for abuse of discretion.”
These unanimous opinions continue the trend of the Supreme Court rejecting Federal Circuit standards that the Court appears to view as too restrictive and formalistic—a trend that does not seem likely to abate anytime soon.
The impact of these opinions on the growing momentum for patent reform in Congress remains to be seen. Some judges—most vocally, Chief Judge Randall R. Rader of the Federal Circuit—have expressed the view that the courts are better equipped to handle patent reform, and the Supreme Court’s opinions may signal to some in Congress that the courts are also willing and able to address these issues.
. No. 12-1184 (U.S. Apr. 29, 2014), available here.
. Id., slip op. at 7–8.
. See Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378 (Fed. Cir. 2005).
. No. 12-1163 (U.S. Apr. 29, 2014), available here.