"Standing Out" -- A Closer Look at the "Exceptional Case" Standard Articulated in Octane Fitness

by McDonnell Boehnen Hulbert & Berghoff LLP
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Supreme Court Building #2As we reported earlier today, the Supreme Court issued opinions in the Octane Fitness, LLC v. ICON Health & Fitness, Inc. (Supreme Court docket number 12-1184) and Highmark Inc. v. Allcare Health Mgmt. Sys., Inc. (Supreme Court docket number 12-1163) cases.  The statute at issue in these cases was 35 U.S.C. § 285, which provides that a "court in exceptional cases may award reasonable attorney fees to the prevailing party."  The Federal Circuit had previously established that exceptional cases were either based on litigation-related misconduct or if the litigation was both (1) brought in subjective bad faith and (2) objectively baseless."  See Brooks Furniture Mfg. v. Dutailier, Inc., 393 F.3d 1378 (Fed. Cir. 2005).  The Supreme Court found this test to be "overly rigid."  First, the litigation-related misconduct identified by the Federal Circuit, such as willful infringement, fraud, or inequitable conduct, and conduct that violates Fed. R. Civ. P. 11, are all otherwise, independently sanctionable.  The Court did not think this was an appropriate benchmark.  Instead, the opinion clarified that even if a party's unreasonable conduct is not necessarily independently sanctionable, it can still give rise to a finding of an "exceptional" case.  Moreover, the Court believed that either subjective bad faith or an objectively baseless suit could be sufficient to find a case "exceptional," without requiring both.  Finally, the test established by the Federal Circuit in Brooks Furniture rendered § 285 superfluous.  This is because of the "long recognized [] common-law exception to the general 'American Rule' against fee-shifting."  In other words, district courts already had an inherent power to shift fees in the cases that would satisfy the Brooks Furniture test.

It was not overly surprising that the Supreme Court discarded the Federal Circuit standard from 2005.  Indeed, as the opinion noted in one of the only footnotes unanimously agreed to by the Court, even Chief Judge Rader recently criticized the Brooks Furniture case, complaining that the court "'should have remained true to its original reading of §285.'"  Octane, slip op. at 4-5, FN 4 (citing Kilopass Tech. Inc. v. Sidense Corp. No. 2013-1193, 2013 WL 6800885, at *14 (Fed. Cir. Dec. 26, 2013) (Rader, C.J., concurring)).  What wasn't clear was what the new standard for an "exceptional" case would be.  In fact, during oral arguments, several choices were bandied about, ranging from "frivolousness," to "objectively baseless," to "gross injustice," to "objectively reasonable," to "just let the District Court decide."  Justice Scalia even had problems with the term meritless, noting that "every time you win [a] summary judgment motion, that's a determination that the claim is without merit."  Instead, the Court resorted to dictionary definitions of the word "exceptional" to arrive at the new standard -- "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."  Octane, slip op. at 7-8.  But what does it mean to "stand out"?  Does this mean that there is some normative aspect to the test?  After all, this case has garnered a lot of attention because of the implications for so-called "patent-troll" litigation tactics.  In fact, if the statistics of some of the anti-troll organizations are to be believed, "troll" litigations make up the majority of court filings.  If this is so, do these cases truly stand out?  Even the much smaller number of suits brought by patent assertion entities, 19%, identified by the GAO hardly makes these cases the antithesis of "run-of-the mill" litigation anymore.

Nevertheless, the new standard provides two types of situations that might make a case "stand out."  First, the court can look to the "substantial strength" of a party's position, either legally or factually.  This begs the question whether the assertion of a (presumed valid) issued patent can ever result in an exceptional case finding.  Obviously, a patent holder could overreach by asserting its patent against an accused infringer whose activities objectively do not fall within the claim scope.  But if the infringement count would satisfy Rule 11, would the assertion of a questionable, but still valid patent, ever "stand out?"  Moreover, if the accused infringer does not file invalidity counterclaims, would they still be subject to this prong of the standard.  In other words, if they had an objectively weak position in denying allegations in an Answer or asserting affirmative defenses, could a defendant be subject to fee shifting for refusing to settle?  Finally, is there a temporal character to this prong?  For example, is this standard to be considered only at the pleading stage, or can an adverse ruling turn a party's position "substantially weak," such that the suit (or defense) should not be maintained?

This brings up the second situation -- when cases are litigated in an unreasonable manner.  Presumably such nefarious actions can turn even the strongest cases "exceptional."  But where will the line be drawn?  If a party's attorney is overzealously advocating for his or her client, when do such actions cross the line?  Certainly seeking discovery is essential to establish one's case, but reports of discovery abuse are rampant.  Or would engaging in extensive motion practice potentially subject a party to fee-shifting?  Would refusing to settle be considered litigating in an unreasonable manner?  And, again, such actions (no matter how reprehensible) must "stand-out" before making the case exceptional.

This leaves a lot of question for the trial courts to sort out when asked for an award of fees by the prevailing party.  Looking at the Octane case itself might be instructive, as that case was vacated and remanded for further proceeding consistent with the opinion.  In its briefing to the Court, Octane appeared to tap into the public sentiment regarding "trolls" by devoting an entire section of its brief to the public policies related to curbing abusive patent litigation.  Nevertheless, even 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."  Even though ICON asserted a patent against Octane (which is presumed valid) which ICON did not practice, ICON was otherwise an operating company.  Nevertheless, there would appear to be nothing in the articulated standard that would inherently subject a non-practicing entity to fee shifting.  There were some questionable internal correspondence in this case, such as ICON's Vice President of Global Sales, who 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.'"  The Supreme Court, however, noted that the District Court found these to be stray comments by employees with no real connection to the suit.  ICON did receive an unfavorable claim construction ruling, apparently destroying its literal infringement argument.  But instead of conceding, ICON pursued a doctrine of equivalents theory (which it presumably had a right to do).  As the Federal Circuit reported the record, the only thing that potentially could have made this case "stand out" was that the big company was going after a smaller competitor.  But a patent holder should have the right to assert its intellectual property rights, regardless of the size of the accused infringer.  It will be interesting to see the outcome of this case, and the other cases that will apply the new standard, to just see how it gets applied.

One final aspect of the opinion that is worth noting is that the Supreme Court altered the evidentiary burden related to fee-shifting to patent holders.  The Federal Circuit had articulated that because patents are presumed valid, an alleged infringer would be required to establish an exceptional case by clear and convincing evidence.  However, the Supreme Court disagreed, finding that § 285 imposed no evidentiary burden, much less a heightened one.  This should alleviate the perceived inequities experienced by accused infringers, who appeared to have a harder time successfully requesting attorney fees than their patent-holding counterparts.

Octane Fitness, LLC v. ICON Health & Fitness, Inc. (2014)
Opinion by Justice Stotomayor

Highmark Inc. v. Allcare Health Mgmt. Sys., Inc. (2014)
Opinion by Justice Sotomayor

 

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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