Supreme Court Clears Way For District Courts To Award Attorney Fees In More Patent Cases

Octane Fitness LLC v. ICON Health & Fitness, Inc., No. 12-1184 (U.S. April 29, 2014).

Highmark, Inc. v Allcare Health Management System, Inc., No. 12-1163 (U.S. April 29, 2014).

In two unanimous decisions, the U.S. Supreme Court repudiated a 2005 decision by the U.S. Court of Appeals for the Federal Circuit that restricted awards of attorneys fees to a prevailing party under 35 U.S.C. § 285. Calling the Federal Circuit’s requirements “unduly rigid,” the Court ruled that district court judges have broad discretion to award fees in cases that, based on the totality of the circumstances, “stand[] out from other [cases] with respect to the substantive strength of a party’s litigating position (considering both the governing law and the cases of the case) or the unreasonable manner in which the case was litigation.” In addition, the Court ruled that district court determinations under §285 are subject to review only for abuse of discretion.

The Octane and Highmark opinions give district courts more flexibility in deviating from the “American rule” governing attorneys fees in patent cases. In light of current Congressional interest in instituting a “loser pays” system in patent cases through amendments to the Patent Act, the decisions may give the courts some breathing room to attempt to combat the PAE epidemic through a more hands-on approach to case administration, rather than being subjected to statutory fixes imposed by Congress.

Background:

The Patent Act, like many U.S. statutes, provides an express exception to the general rule in American litigation that each party pays its own attorneys fees, regardless of the outcome. Section 285 of the Act states simply that, “The court in exceptional cases may award reasonable attorney fees to the prevailing party.” Prior to 2005, courts including the Federal Circuit interpreted this provision as authorizing attorneys fee award in cases which, in the district court’s discretion, were exceptional under the circumstances.

In 2005, however, the Federal Circuit imposed a more exacting standard for attorney fee awards. Brooks Furniture Mfg, Inc. v. Dutailer Int’l, Inc., 393 F.3d 1378 (2005). In Brooks, the CAFC ruled that attorney fee awards were only available in two situations. First, a case was exceptional “when there has been some material 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.” 393 F.3d at 1381. If those situations were lacking, then fees could be imposed where two conditions were present: :"both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.” Id. In addition, Brooks held that a finding of exceptionality must be supported by clear and convincing evidence.

Octane Fitness:

In the first case decided, Octane Fitness, the Supreme Court held that the Brooks standard was too restrictive. Associate Justice Sotomayor noted that “exceptional” was a fairly general term, meaning “unusual,” “uncommon,” “rare,” and “not ordinary.” As a result, the Court concluded that there is no single, precise formulation for determining whether a case is “exceptional.” Instead, “exceptional” simply means that: 

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. District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances. As in the comparable context of the Copyright Act, there is no precise rule or formula for making these determinations, but instead equitable discretion should be exercised in light of the considerations we have identified. 

Slip op. at 7-8 (Citation, quote and footnote omitted). The Court ruled that the Brooks standard was too rigid for several reasons. First it largely required independently sanctionable conduct, which rendered § 285 superfluous. Second, the second part of the test required both objectively baseless claims and subjective bad faith, although either one alone should be enough to justify and attorney fee award. Finally, the Court ruled that in light of the broad discretion afforded district courts in evaluating requests for fees, the evidence need not attain the level of clear and convincing proof. The Court noted that, “Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.” Slip op. at 11.

Highmark:

In the second case decided the Court addressed the appropriate standard of review for district court awards under § 285. In Highmark, the Federal Circuit applied de novo review, declining to extend deference to the district court’s decision. In another opinion written by Sotomayor, the Supreme Court made short work of that position: 

For reasons we explain in Octane, the determination whether a case is “exceptional” under §285 is a matter of discretion. And as in our prior cases involving similar determinations, the exceptional-case determination is to be reviewed only for abuse of discretion. 

Slip op. at 4. Copies of both decisions are available HERE.