Supreme Court Relaxes "Exceptional" Case Standard in Pair of Fee-Shifting Patent Cases

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. 

Octane Fitness

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.

• First, limiting fee awards to only those category of cases where the ligation misconduct rises to the level of “independently sanctionable conduct” or where the litigation was brought both in subjective bad faith and was objective baseless, was too inflexible. Instead, under the Court’s articulated standard, the district court could award fees in the rare case where a party’s unreasonable conduct (while not rising to the level of independently sanctionable) was nonetheless so exceptional so as to justify an award of fees.
• Second, the Court deemed the second category of cases under Brooks Furniture as likewise too restrictive, since either scenario—subjective bad faith on the one hand or exceptionally meritless claims on the other hand—may sufficiently set itself apart to warrant a fee award.
• Third, the Court found the Brooks Furniture test so narrow and demanding as to render § 285 largely superfluous. In particular, the Court noted its history of declining to construe fee-shifting provisions narrowly such that they became superfluous in light of the district court’s long recognized inherent power to award attorneys’ fees.
• Finally, the Court rejected the Federal Circuit’s requirement of a heightened “clear and convincing” evidentiary burden, stating that “Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.”

Highmark

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.

• First, neither decision addressed NPEs. The Court declined certain amici’s invitation to directly address the so-called NPE problem.
• Second, the Court articulated a single standard for § 285. Because § 285 is available to both prevailing patentees and accused infringers, both parties will be subject to the more relaxed standard. Although § 285 has been historically used most frequently by successful patentee plaintiffs to seek attorneys’ fees, for example in cases where there was willful infringement, Octane and Highmark dealt with prevailing accused infringers (defendants) who sought fees from unsuccessful plaintiffs.
• Lastly, these cases may have potentially broader implications for how litigants going forward will advocate their respective positions and conduct themselves over the course of the case. The lower, more discretionary standard allows the district court to consider conduct during the course of litigation that otherwise might not be sanctionable under the district court’s inherent power or under Rule 11—including assertion of claims, defenses sought, claim construction positions, and discovery tactics that may be viewed as having questionable merit.

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.