On April 29, 2014, the U.S. Supreme Court issued two unanimous opinions that softened the Federal Circuit’s high standard for awarding attorneys’ fees in patent cases. See Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-1184, 572 U.S. ___ (Apr. 29, 2014); Highmark Inc. v. Allcare Health Management System, Inc., No. 12-1163, 572 U.S. ___ (Apr. 29, 2014). The two Supreme Court rulings now allow District Courts to award attorneys’ fees in exceptional cases based upon the totality of the circumstances with reversal by the Federal Circuit on appeal being appropriate only where the District Court abused its discretion in awarding or denying fees.

Statutory Authority

Awarding attorneys’ fees in patent cases is authorized by 35 U.S.C. § 285: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.” This wording has been in place since 1952, which altered the previous wording from 1946 that did not explicitly include the “exceptional case” requirement that had often been grafted into the statute by courts.

The Federal Circuit Case Reversed By The Supreme Court

Since 2005, the Federal Circuit has applied the extremely high fee awarding standard that the court set forth in Brooks Furniture Mfg. v. Dutailer Int’l, Inc., 393 F. 3d 1378 (Fed. Cir. 2005). In Brooks Furniture, the Federal Circuit reviewed fee awards without deference to the District Court’s prior ruling and required either:

“[M]aterial inappropriate conduct related to the matter in litigation, such as willful infringement, fraud, or inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates Fed. R. Civ. P. 11, or like infractions.” Id. at 1381;

or

Both “(1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.” Id.

This standard remained in place for the last nine years, although occasionally the Federal Circuit itself suggested that the Brooks Furniture standard was not as onerous as some suggested and did not require a sanctioned party to have actual knowledge of the baselessness of its claim or defense. See Kilopass Technology, Inc. v. Sidense Corp., 738 F 3d. 1302 (Fed. Cir. 2013).

The New Totality of the Circumstances Standard

In Octane Fitness, the Supreme Court flatly rejected the Federal Circuit’s heightened standard by taking a page from patent claim construction opinions and holding that “exceptional” in 35 U.S.C. § 285 should be afforded its plain and ordinary meaning. No. 12-1184, 572 U.S. ___, slip op. at 7.

Justice Sotomayor wrote, “We hold, then, 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.” Id. at 7-8. Such determinations should be made on a “case-by-case exercise of [the District Courts’] discretion, considering the totality of the circumstances.” Id. at 8. Moreover, the Supreme Court clarified that a case may be found “exceptional” and, thus, justify an award of fees even if the case does not rise to the level of being sanctionable under other standards, such as Rule 11 of the Federal Rules of Civil Procedure. Finally, the Supreme Court also removed the Federal Circuit’s requirement for clear and convincing evidence of sanctionable behavior because other patent determinations are made using a preponderance of the evidence and “Section 285 demands a simple discretionary inquiry: it imposes no specific evidentiary burden.” Id. at 11.

The New Abuse of Discretion Reversal Standard

In a companion case to Octane Fitness, the Supreme Court ruled in Highmark that appeals of determinations of an exceptional case under 35 U.S.C. § 285 will be reviewed under an abuse of discretion standard and not entirely anew by the Federal Circuit. No. 12-1163, 572 U.S. ___, slip op. at 4. The Supreme Court noted that this new standard will still allow the Federal Circuit to reverse a fee determination based upon the District Court’s error of law or clearly erroneous assessment of the evidence. Id. at 4 n.2.

Take-Aways

The new Supreme Court standard for awarding fees in a patent case allows District Courts to more easily sanction parties that bring or maintain claims or defenses that are of little merit. Many commentators are quick to assume this ruling will have the most impact on patent enforcement entities (often called “patent trolls”), which are regularly accused of bringing near frivolous infringement lawsuits. In fact, perhaps in a nod to deterring patent trolls, the Supreme Court quoted positively one of its previous copyright cases as instructive to patent cases, noting that “advanc[ing] considerations of compensation and deterrence” are considerations for awarding fees. See Octane Fitness, LLC, No. 12-1184, 572 U.S. ___, slip op. at 8 n. 6 (citing Fogerty v. Fantasy, Inc., 410 U.S. 517 (1994)). However, this new lowered standard is likely to embolden all litigants, and especially defendants that believe they were wrongly accused.

Questions remain as to how the new standard will play out in litigation. For example, litigants that lose determinative claim construction arguments may be more likely to stop litigating a matter after the claim construction order for fear of a greater risk of a fee award. Alternatively, if a litigant decides not to stop litigating under such circumstances, it is unclear whether a fee award by the District Court would be upheld by the Federal Circuit if the Federal Circuit ruled that the underlying District Court claim construction was erroneous. These and many other issues will be explored as litigants learn each judge’s propensities under this new case-by-case standard.