Patent Trolls Beware: Supreme Court Strikes Down Federal Circuit in Twin Rulings on Attorney Fee Awards in Patent Litigation

by Davis Wright Tremaine LLP

On April 29, 2014, the U.S. Supreme Court announced its highly anticipated decisions in a pair of cases governing the award of attorney fees in patent infringement lawsuits. In the two cases, the Court tossed out the Federal Circuit’s standard for awarding fees for “exceptional cases,” holding that it was unduly rigid and mechanical and fundamentally inconsistent with the text of the governing statute.

In the first case, Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-1184, the Court considered the standard for finding a case “exceptional” under 35 U.S.C. Section 285. And in the second, Highmark, Inc. v. Allcare Health Management System, Inc., No. 12-1163, the Court considered the standard of appellate review to be applied to “exceptional” case determinations.

The Court’s twin rulings establish that Section 285 “exceptional” case determinations are flexible ones committed to the discretion of the district court, that need only be proven by a preponderance of the evidence and are to be reviewed using an abuse of discretion standard. The Court’s rulings should pave the way for more frequent awards of attorney fees to accused infringers, particularly in cases involving non-practicing entities, often referred to as “patent trolls.”

Since the standard is discretionary, it remains to be seen how vigorously it will be enforced by district courts. Moreover, the rulings are not without risks for patent infringement defendants as the lower standard for finding a case to be exceptional may also be found to apply to accused infringers.

Justice Sotomayor wrote for a unanimous Court in both cases.

Background: Octane Fitness
Octane Fitness followed from a district court’s denial of an accused infringer’s motion for an “exceptional” case determination. After obtaining summary judgment of noninfringement in the District of Minnesota, Octane Fitness, LLC moved—unsuccessfully—for a finding of exceptionality and for attorney fees under Section 285.

On appeal at the Federal Circuit, Octane argued that the prevailing standard for exceptionality—that a case both be “objectively baseless” and be “brought in subjective bad faith”—was overly restrictive, and should be replaced by a flexible standard permitting the use of “traditional equitable factors.” The Federal Circuit summarily rejected Octane’s overture, concluding that it “ha[d] no reason to revisit the settled standard for exceptionality.” The Supreme Court thereafter granted Octane’s petition for writ of certiorari.

Background: Highmark
In contrast to Octane Fitness, the district court in Highmark did find that case “exceptional” under Section 285, on the grounds that the patentee had, inter alia, pursued frivolous infringement claims and asserted meritless legal positions during the litigation. The court in the Northern District of Texas awarded attorney fees to the accused infringer, Highmark, Inc.

On appeal, the Federal Circuit affirmed in part and reversed in part. The Federal Circuit applied de novo review to the district court’s determination that the patentee’s claims were “objectively baseless” as a matter of law. The Circuit determined that only certain of the patentee’s claims were “objectively baseless,” so as to render the case “exceptional” only as to those claims, and remanded to the district court for an appropriate recalculation of attorney fees. Highmark sought certiorari on the question of whether the appropriate standard of review for “exceptional” case determinations should be abuse of discretion, rather than the de novo review applied by the Federal Circuit.

The Decisions
In Octane, the Court dispensed with the Federal Circuit’s “rigid and mechanical” test for exceptionality—clear and convincing demonstration of litigation misconduct or both objective baselessness and subjective bad faith—holding that the lower court’s “formulation superimposes an inflexible framework onto statutory text that is inherently flexible.” The Court held that “an ‘exceptional’ case is simply one that stands out from the 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. District courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.”

In so holding, the Court noted that a case presenting either subjective bad faith or exceptionally meritless claims “may sufficiently set itself apart from mine-run cases to warrant a fee award.” The Court went so far as to reject the Federal Circuit’s test for being “so demanding that it would appear to render § 285 superfluous.” Finally, the Court rejected the Federal Circuit’s requirement that exceptionality be proven by clear and convincing evidence. The Court held that “nothing in § 285 justifies such a high standard of proof.” Instead, it “demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.”

The Court’s companion decision in Highmark followed from its decision in Octane, with little additional analysis. The Court ruled that its “holding in Octane settles this case: Because § 285 commits the determination whether a case is ‘exceptional’ to the discretion of the district court, that decision is to be reviewed on appeal for abuse of discretion,” rather than the de novo standard the Federal Circuit had applied previously. The Court observed that a district court simply is “better positioned” to decide whether a given case is exceptional, because it lives with the case over a longer period of time.

Octane and Highmark: Takeaway
The main thrust of the Octane and Highmark decisions is that it should now be easier to obtain a ruling that a case is “exceptional” under section 285, and thereby obtain attorney fees in patent litigation. We fully expect Octane, in particular, to be relied on extensively by accused infringers in litigation against patent trolls. Such litigation is frequently characterized by the assertion of weak patents through dubious claims of infringement, but where settlement is cheaper to defendants than litigating to a resolution on the merits. Octane gives accused infringers a potentially powerful weapon against patent trolls, one which includes increased incentives to litigate the merits of tenuous infringement claims.

It would be a mistake, however, to view these cases as inherently one-sided in favor of accused infringers. The discretionary standard may not embolden district courts who are otherwise disinclined to award fees to successful patent infringement defendants to chart a new course. More significantly, the fact that Highmark commits the Section 285 determination squarely to the discretion of district courts means that patent infringement defendants may now be subject to the same lower standard, with less room for appellate oversight.

Implementation of the new standard and the overall impact it has on the number of prevailing defendants being awarded attorney’s fees will be played out in future decisions by the district courts and the Federal Circuit.

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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