The U.S. Supreme Court Makes Effort to Provide Recourse Against Patent Trolls

by Wilson Elser
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There is traction for patent owners in the battle against patent trolls – another term for non-practicing entities (NPEs). As Congress continues to attempt to pass legislation to aid patent owners, the U.S. Supreme Court provided some hope on April 29, 2014, when it delivered its opinions in the Octane Fitness, LLC. v. ICON Health & Fitness, Inc and Highmark Inc. v. Allcare Health Management Systems, Inc. matters. The issue before the Court focused on the attorney fee-shifting provision of 35 U.S.C. §285, which in pertinent part reads: “the court in exceptional cases may award reasonable attorney fees to the prevailing party.”

Background
The parties to the Octane matter are manufacturers of exercise equipment. ICON owns the rights to U.S. Patent No. 6,019,710 (’710 patent), which discloses an elliptical exercise machine that allows for adjustments to fit the individual stride paths of users. Octane also manufactures exercise equipment, including elliptical machines known as the Q45 and Q47. Although ICON claimed to be a major manufacturer of exercise equipment, it never commercially sold the exercise machine as disclosed in the ’710 patent.

In 2011, ICON sued Octane in District Court for the District of Minnesota, claiming that Octane was infringing on ICON’s ’710 patent. The District Court granted summary judgment in favor of Octane, concluding that Octane’s Q45 and Q47 machines did not infringe ICON’s ’710 patent. Octane then moved to recover attorneys’ fees under §285 of the Patent Act; however, the District Court denied Octane’s request. The District Court determined that Octane failed to show that ICON’s claim was either objectively baseless or that ICON brought the suit in subjective bad faith. Octane appealed the District Court’s denial of attorneys’ fees. The Federal Circuit Court affirmed the District Court’s decision. The Supreme Court reversed the ruling, holding that “an ‘exceptional’ case is simply one that 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.” The Court emphasized that district courts may determine whether a case is exceptional in their discretion, considering the totality of the circumstances.

In the Highmark matter, Allcare Health Management System, Inc., the owner of U.S. Patent No. 5,301,105 (’105 patent), which covers “utilization review” in “managed health care systems,” was litigating the enforceability of the patent and a patent infringement claim against Highmark Inc., a health insurance company. After both parties filed motions for summary judgment, the District Court for the Northern District of Texas found that Highmark did not infringe the patent. Highmark then moved for recovery of its fees under §285. The District Court granted the application, reasoning that Allcare engaged in a pattern of “vexatious” and “deceitful” conduct throughout the litigation. The District Court found “Allcare pursued this suit as part of a bigger plan to identify companies potentially infringing its patent under the guise of an informational survey, and then to force those companies to purchase a license of the ’105 patent under threat of litigation.” The District Court further found that Allcare pursued infringement claims against Highmark well after such claims were determined to be without merit by its experts and asserted defenses that were known to be frivolous.

The Federal Circuit affirmed in part and reversed in part, finding that none of Allcare’s conduct warranted an award of fees under the litigation-misconduct prong of the analysis set forth in Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., the seminal case that gave rise to the award of fees where there is material inappropriate conduct by a litigant or the claims are both “brought in subjective bad faith” and “objectively baseless.” The Supreme Court, however, rejected the Federal Circuit Court’s opinion and found that its “opinion in Octane Fitness, LLC v. ICON Health & Fitness, Inc., rejects the Brooks Furniture framework as unduly rigid and inconsistent with the text of §285,” and instead holds “that the word ‘exceptional’ in §285 should be interpreted in accordance with its ordinary meaning.” The Supreme Court explained 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” and it instructs that “district courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.” The Supreme Court therefore remanded the case for a determination by the Federal Circuit Court as to whether there was an abuse of discretion in determining that the case was “exceptional” under §285.

Consequences
The Octane and Highmark cases were closely watched because of the potential impact on the so-called “patent troll.” Over the past few years, businesses were concerned about the increasing number of patent troll lawsuits and the cost of litigating them. Patent trolls do not usually sell products or services, but instead generate revenue through licensing or enforcing patents purchased from existing companies or entities that no longer exist. A U.S. Government Accountability Office report estimates that patent trolls “brought about a fifth of all patent lawsuits” between 2007 and 2011. Another study found that more than 5,000 firms were named as defendants in patent troll lawsuits in 2011, costing them more than $29 billion out of pocket.

Being fully aware of how problematic patent trolls have become, Congress is actively pushing new legislation to provide additional safeguards for patent owners. The holdings of Octane and Highmark are considered a positive step for businesses in the hopes they will deter patent trolls from filing frivolous lawsuits. The Supreme Court decisions make it easier for district courts to shift the fees of the non-prevailing party for lawsuits brought in bad faith or conducted in an abusive manner.

Furthering the efforts to curtail patent trolls, Congress is seeking to pass the Innovation Act. In the event that the Innovation Act is passed by the Senate, these rules will take effect retroactively on April 24, 2014. The Innovation Act requires the party suing for patent infringement to explain exactly how the alleged “infringer” is infringing on their patent. While the House of Representatives passed a bill in support of the Act, and President Obama has indicated his support, action awaits in the Senate. In the interim, in anticipation of the new legislation, non-practicing entities filed 184 complaints for patent infringement on April 23, 2014. Going forward, with the Supreme Court’s rulings in Octane and Highmark, in addition to a potentially more stringent threshold to maintain a lawsuit, patent trolls may be required to pay the attorneys’ fees to prevailing parties in “exceptional cases.”

 

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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