On April 29, 2014, the Supreme Court handed down decisions in two companion cases that relaxed the “exceptional” case standard under the fee-shifting provision of the Patent Act (35 U.S.C. § 285). In Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-1184 (2014) and Highmark Inc. v. Allcare Health Management System, Inc., No. 12-1163 (2014), the Court adopted a lower, more discretionary standard for determining whether a case is “exceptional.” In Octane Fitness, the Court empowered the district court to determine that a case is “exceptional” if it 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 district court can, therefore, determine whether a case is exceptional on a case-by-case basis given the totality of circumstances. Relatedly, in Highmark the Court held that the district court’s § 285 determination should be reviewed under a deferential abuse-of-discretion standard. While these decisions are likely to be viewed as a victory for the defense bar, particularly those who have complained of abusive patent litigation from some non-practicing entities (NPEs), the decision may have broader implications for both patentees and accused infringers, resulting in more focused advocacy and less over-reaching. Also, both decisions will resonate loudly on Capitol Hill, where loser-pays fee-shifting is a central, albeit controversial provision in several patent reform bills, including H.R. 3309 that passed the House in December, and S. 1013 and S. 1612 now being debated in the Senate.
In reaching its unanimous decision in Octane Fitness, the Court relied on the statutory text of § 285 and further observed that under prior precedent following the creation of the Federal Circuit in 1982, district courts were instructed to consider the totality of circumstances in making fee shifting determinations under § 285. However, in its 2005 Brooks Furniture decision, the Federal Circuit abandoned “that holistic, equitable approach in favor of a more rigid and mechanical formulation.” Under Brooks Furniture’s two-part test, courts instead had to consider whether the litigation: (1) was brought in subjective bad faith; and (2) was objectively baseless. Further, per Brooks Furniture, the underlying improper conduct and the characterization of the case as exceptional had to be established by clear and convincing evidence.
In reversing the Federal Circuit and overturning the Brooks Furniture test, the Court first examined the text of § 285, which it found put only one constraint on the district court’s discretion, namely a finding that the case was “exceptional.” While the Patent Act does not define “exceptional,” the Court looked to its ordinary meaning: “[i]n 1952, when Congress used the word in § 285 (and today, for that matter),” as “out of the ordinary course,” “unusual,” or “rare” in concluding that an exceptional case “is simply one that that stands out from others with respect to the substantive strength of a party’s litigating position (considering the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”
The Court articulated four reasons for finding that the Federal Circuit’s formulation was overly rigid.
In this case, Highmark (appellant) sought reversal of the Federal Circuit’s decision that “objectively baseless” is a question of law subject to de novo review. Following the reasoning in Octane Fitness, the Court in Highmark held that an appellate court (the Federal Circuit) should apply an abuse-of-discretion standard in reviewing all aspects of a district court’s § 285 determinations. While the Court acknowledged that questions of law may in some cases be relevant to the § 285 inquiry, it found that the “inquiry generally is, at heart, ‘rooted in factual determinations’” based on “the totality of the circumstances.” The Court noted that “the text of the statute ‘emphasizes the fact that the determination is for the district court,’ which ‘suggests some deference to the district court upon appeal.’”
Potentially Broad Implications for Both Parties
Although some predict that the pair of decisions will give companies an effective weapon against NPEs, the cases may have broader implications for both plaintiffs and defendants for at least three reasons.
Implications for Pending Patent Reform Legislation
With Congress back in session this week, the Octane and Highmark decisions might blunt some of the urgency for sweeping patent reform legislation on Capitol Hill. Permitting more regular awards of attorneys’ fees to prevailing parties has been seen by some as a way to deter abusive litigation. Indeed, loser-pays fee-shifting is a centerpiece of several bills, including H.R. 3309 which passed the House in December, as well as S. 1013 and S. 1612 now being debated in the Senate. On the other hand, opponents of more frequent fee-shifting have pointed to Octane and Highmark to show that the courts are addressing the issue of litigation abuse themselves, without the need for sweeping legislation. If, indeed, these decisions are seen to fix the problem, then Congress might decide to drop fee-shifting from the bills, which would greatly increase the likelihood that a narrower bill—focused on transparency, demand letters and customer stays—becomes law. Alternatively, if advocates of patent reform insist the Supreme Court did not go far enough to deter frivolous suits, we could see more gridlock—at least until the midterm elections in November.