Two U.S. Supreme Court companion cases that issued on April 29, 2014 relaxed the standard for awarding attorney fees and restricted the Federal Circuit’s ability to reverse fee awards. In Octane Fitness, LLC v. ICON Health & Fitness, Inc. and Highmark Inc. v. Allcare Health Management System, Inc., the Supreme Court addressed the fee provisions of 35 U.S.C. § 285.  Section 285 simply provides: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”  35 U.S.C. § 285.

Justice Sotomayor authored the opinions adopted by a unanimous court.  Her opinions alter the law in at least three significant respects, holding:

(1)          the Federal Circuit previously construed the fees statute too narrowly—the Court held that an “exceptional” case is 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;
(2)          the Federal Circuit required parties seeking fees to overcome too high of a burden—the Court held that litigants need only show that a case is exceptional under a preponderance of the evidence standard under § 285, not by clear and convincing evidence; and
(3)       the Federal Circuit did not give adequate deference to district court fee awards on appeal—the Court held the determination whether a case is “exceptional” is discretionary, therefore the applicable standard of review on appeal is for abuse of discretion.

The result of all of these findings is that it will be a little easier for patent litigants to get fee awards—and when they do they will be less likely to be reversed on appeal. We expect the cases to impact resolution of fee shifting immediately, as the Federal Circuit has already applied Octane to vacate a district court’s denial of a motion for attorney fees in at least one instance.

I.              The Facts of Octane and Highmark

In the first case, ICON sued Octane alleging patent infringement. The district court granted Octane’s motion for summary judgment of noninfringement. However, the district court rejected Octane’s motion for attorney’s fees under § 285. The Federal Circuit affirmed both orders.

The second case also involved an accused infringer who sought fees after prevailing on the merits.  Highmark sought declaratory judgment of invalidity and noninfringement against Allcare, who counterclaimed for patent infringement. After Highmark and Allcare moved for summary judgment, the district court entered judgment that Highmark did not infringe Allcare’s patent claims. Highmark subsequently moved for attorney’s fees under § 285 and the district court granted Highmark’s motion, and found the case exceptional.

The Federal Circuit reviewed the district court’s determination de novo and reversed the fee award, finding that Allcare’s conduct did not give rise to an award of attorney’s fees. A sharply divided Federal Circuit denied rehearing en banc.

II.            The Status of the Law Before Octane and Highmark

Before the Supreme Court issued its decision, an “exceptional case” under Federal Circuit precedent was one that:

(1)          involved material inappropriate conduct, or
(2)          was both (a) objectively baseless and (b) brought in subjective bad faith.

Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381 (2005).  Moreover, the applicable standard of proof was clear and convincing evidence, a high burden to meet.  Id. at 1382.  Awards of attorney’s fees were reviewed on appeal de novo and without deference. Id. n.1; Highmark Inc. v. Allcare Health Management System, Inc., 687 F.3d 1300, 1309 (Fed. Cir. 2012).

III.           The Court’s Reasoning and Future Guidance

In Octane, the Court recited the history of fee awards in patent cases to show support for interpreting “exceptional” according to its ordinary meaning, which includes “uncommon,” “rare,” or “not ordinary.”  It found that the Brooks Furniture test was “unduly rigid and inconsistent with the text of § 285.”  Then the Court held that “exceptional” meant a case 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.

Whether a case “stands out from others” or litigation conduct was “unreasonable” is not subject to a clear litmus test.  To help district courts apply these standards, the Court suggested that district courts consider the totality of the circumstances and drew a comparison to the test under the Copyright Act.  Nonexclusive factors used in that determination include frivolousness, motivation, objective unreasonableness (factually and legally), and the need to advance considerations of compensation and deterrence.  Fogerty v. Fantasy, Inc., 510 U.S. 517, 534, n.19 (1994).

Under similar fee-shifting statutes, the Court noted that the burden of proof is not clear and convincing evidence but rather a preponderance of the evidence. Thus, the Court required a preponderance of the evidence standard of proof to establish that a case is “exceptional.”

In Highmark, the Court referred to Octane’s holding that the determination whether a case is exceptional is a discretionary decision.  Because a district court “lives with the case over a prolonged period of time,” the Court reasoned that district court is in a better position to decide fee awards.  Accordingly, the Court held that a fee award determination under § 285 must be reviewed under an abuse of discretion standard.

On their face, the two cases apply to any prevailing party—patent owner or accused infringer.  However, it is noteworthy that both cases involved accused infringers who won on the merits but were denied fees, one by the lower court and the other by the Federal Circuit.  In the past, accused infringers who won on the merits faced a steep uphill climb to get fees from the district court, and were vulnerable to reversal on appeal even after the award of fees.  In the face of these new rulings, the Court clarified that fee awards can serve a function of “compensation and deterrence,” presumably deterring patent owners from bringing weak cases and compensating those whom are unfairly accused of infringement for their defense costs. 

The decisions thus may be interpreted as a warning to patent owners against advancing weak cases, and as potential good news for accused infringers weary from continuing assault from “troll” cases.  Moreover, the decisions impart accused infringers with additional leverage in settlement discussions.  Although the full impact of these decisions remains to be seen, the Federal Circuit already relied on Octane to vacate a California court’s denial of an attorney fee request in Site Update Solutions, LLC v. Accor North America, Inc., et al, No. 2013-1458 (Fed. Cir. May 15, 2014).

Clearly, Octane and Allcare may impact litigant behavior in all aspects, including the decisions to instigate a lawsuit, to forward a particular claim construction, or to maintain a case in light of discoveries made throughout the progression of a case.

The views expressed are solely those of the author and not necessarily those of Merchant & Gould.