Today, the U.S. Supreme Court issued two opinions (Octane Fitness and Highmark) that create a more flexible, deferential standard for determining what constitutes an “exceptional” patent case in which a district court has discretion to award reasonable attorney’s fees to the prevailing party.  The Court rejected the Federal Circuit’s rigid test that required a clear and convincing burden of proof and adopted a more flexible, plain meaning approach to what makes a case “exceptional” as compared to run-of-the-mill cases under the lower preponderance of the evidence burden of proof.  The Court also rejected the Federal Circuit’s appellate de novo review of such awards, and adopted an abuse of discretion standard that is much more deferential to the district court’s fee-shifting ruling.

35 U.S.C. Section 285 governs attorney fee awards in patent cases, and provides as follows:  “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”

Historically, courts applied the Federal Circuit’s holding in Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc. for determining whether a case is “exceptional” thereby permitting a court to award attorney fees to the prevailing party.  Under Brooks Furniture, a case was “exceptional” if (1) the case involved “material inappropriate conduct” in the litigation or prosecuting the patent or (2) the case was both “objectively baseless” and “brought in subjective bad faith.”  Brooks Furniture also required that parties establish the “exceptional” nature of a case by “clear and convincing evidence.”

Octane Fitness:  The Supreme Court’s decision today in Octane Fitness, LLC v. ICON Health & Fitness, Inc. overruled Brooks Furniture.  The patent owner, ICON Health, manufactured exercise equipment and sued its competitor Octane Fitness alleging infringement of a patent directed to a certain type of elliptical exercise machine.  The district court granted Octane’s motion for summary judgment of no infringement.  Octane then moved for attorney’s fees under §285.  The district court denied Octane’s motion given the stringent Brooks Furniture standard, because Octane could not show either that ICON’s claim was objectively baseless or that ICON brought the claim in subjective bad faith.  As to objective baselessness, the district court rejected Octane’s argument that the judgment of non-infringement “should have been a foregone conclusion to anyone who visually inspected” Octane’s machines.  Although the court rejected ICON’s infringement arguments, they were neither “frivolous” nor “objectively baseless.”  The district court also found no subjective bad faith on ICON’s part, dismissing as insufficient both “the fact that [ICON] is a bigger company which never commercialized the [asserted] patent” and an e-mail exchange between two ICON sales executives, which Octane had offered as evidence that ICON had brought the infringement action “as a matter of commercial strategy.”

ICON appealed the judgment of non-infringement, and Octane cross-appealed the denial of attorney’s fees.  The Federal Circuit affirmed both orders.  In upholding the denial of attorney’s fees, the Federal Circuit rejected Octane’s argument that the district court had “applied an overly restrictive standard in refusing to find the case exceptional under §285.”  The Supreme Court granted certiorari and reversed.

The Court held that “[i]n 1952, when Congress used the word [‘exceptional’] in §285 (and today, for that matter), ‘[e]xceptional’ meant ‘uncommon,’ ‘rare,’ or ‘not ordinary.'”   “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.”  Under the new Octane Fitness standard,       “[d]istrict courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.”  Drawing support from the Copyright Act, the Court held that “[t]here 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.'”

According to the Court, the “Federal Circuit’s formulation [in Brooks Furniture] is overly rigid” because, under it, “a case is ‘exceptional’ only if a district court either finds litigation-related misconduct of an independently sanctionable magnitude or determines that the litigation was both ‘brought in subjective bad faith’ and ‘objectively baseless.'”  “This formulation superimposes an inflexible framework onto statutory text that is inherently flexible.”

Octane Fitness also overruled Brooks Furniture’s requirement that an “exceptional” case must be established by clear and convincing evidence.  “We have not interpreted comparable fee-shifting statutes to require proof of entitlement to fees by clear and convincing evidence” and “nothing in §285 justifies such a high standard of proof.”  Rather, “Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.”  “[P]atent-infringement litigation has always been governed by a preponderance of the evidence standard. . . and that is the standard generally applicable in civil actions, because it allows both parties to share the risk of error in roughly equal fashion.”

The Court reversed the Federal Circuit’s decision and remanded the case for further proceedings consistent with the Court’s holdings.

Highmark:  The Supreme Court’s decision in Highmark, Inc. v. Allcare Health Management System, Inc. concerned alleged infringer Highmark, a health insurance company, filing a declaratory judgment suit against patent owner Allcare alleging that Allcare’s patent directed to “utilization review” in “managed health care systems” was invalid, unenforceable and not infringed;  Allcare counterclaimed for patent infringement.  The district court granted summary judgment of non-infringement in favor of Highmark.

Highmark then moved for fees under §285.  The district court granted Highmark’s motion, reasoning that Allcare “had engaged in a pattern of ‘vexatious’ and ‘deceitful’ conduct throughout the litigation.”  Specifically, it found that Allcare had “pursued this suit as part of a bigger plan to identify companies potentially infringing the ‘105 patent under the guise of an informational survey, and then to force those companies to purchase a license of the ’105 patent under threat of litigation.”  The district court also “found that Allcare had ‘maintained infringement claims [against Highmark] well after such claims had been shown by its own experts to be without merit’ and had ‘asserted defenses it and its attorneys knew to be frivolous.'”  The district court fixed the award at $4,694,727.40 in attorney’s fees and $209,626.56 in expenses, in addition to $375,400.05 in expert fees.

The Federal Circuit affirmed in part and reversed in part.  It affirmed the district court’s exceptional-case determination with respect to the allegations that Highmark’s system infringed one claim of the ‘105 patent, but reversed the determination with respect to another patent claim in applying a de novo review of that determination.  The court held that because the question of whether litigation is “objectively baseless” under Brooks Furniture “‘is a question of law based on underlying mixed questions of law and fact,'” an objective-baselessness determination is reviewed on appeal “‘de novo‘” and “without deference.”  The Federal Circuit then determined that “Allcare’s argument” as to claim construction “was not ‘so unreasonable that no reasonable litigant could believe it would succeed.'”  The court further found that none of Allcare’s conduct warranted an award of fees under the Brooks Furniture litigation-misconduct prong.

The Supreme Court granted certiorari, vacated the Federal Circuit’s opinion, and remanded the case for further proceedings.  The Court began its analysis by citing its new Octane Fitness decision, which “rejects the Brooks Furniture framework as unduly rigid and inconsistent with the text of §285.”   Octane Fitness “instructs that ‘[d]istrict courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.'”  “Our holding in Octane settles this case: Because §285 commits the determination whether a case is ‘exceptional’ to the discretion of the district court, that decision is to be reviewed on appeal for abuse of discretion.”

Potential impact on pending patent legislation?:  As we previously reported, Congress is currently working on patent reform legislation targeted at reducing perceived negotiation and litigation abuses by non-practicing entities (what some call “patent trolls”).  Late last year, the House passed a bill that would, inter alia, require the losing party in patent cases to pay the prevailing party’s attorney’s fees unless the position and conduct of the non-prevailing party was reasonably justified in law and fact.  The Senate is currently debating a competing bill as well as compromise language that would insert similar fee-shifting language.  The Supreme Court’s two rulings today requiring a prevailing party to only show that a case is exceptional by a preponderance of the evidence and granting the district court broader discretion to rule which cases are indeed exceptional may impact the future of the fee-shifting provisions in the legislation under consideration.  Congress may consider tabling legislative fee-shifting provisions in favor of giving courts an opportunity to address patent litigation abuse under the new flexible and discretionary standard.