Supreme Court Agrees to Hear Two Cases on Attorneys' Fees in Patent Cases

    4 October 2013

    On October 1, the U.S. Supreme Court granted writs of certiorari and agreed to hear two patent infringement cases regarding the award of attorneys’ fees to prevailing parties. The Court’s rulings could result in more fee awards being made, thus deterring the filing of infringement claims.

    Under the “American Rule”, each party to a lawsuit typically pays its own attorneys’ fees and expenses. There are exceptions, however. For example, a party that brings a frivolous suit without a good faith basis in law or fact can be sanctioned, including an award of the other party’s attorneys’ fees, under Federal Rule of Civil Procedure 11. The U.S. patent statute also allows a court to award attorneys’ fees to the winning party in “exceptional cases.” 35 U.S.C. § 285. Once it is determined that the party seeking fees is a prevailing party, determining whether to award attorneys’ fees under § 285 is a two-step process. First, a prevailing party must establish by clear and convincing evidence that the case is “exceptional.” Second, if the case is deemed exceptional, a court must determine whether an award of attorneys’ fees is appropriate and, if so, the amount of the award.

    For the first prong of the test, a case brought by a patent holder can be deemed “exceptional” when there is clear and convincing evidence that the claim was a frivolous claim or there was inequitable conduct before the Patent and Trademark Office or misconduct during litigation. Absent inequitable conduct or litigation misconduct, sanctions may be imposed against the patent owner for bringing a frivolous claim only if the litigation is objectively baseless and in subjective bad faith. Because of this high standard, most cases are not found to be exceptional and no fees are awarded. 

    In Octane Fitness, LLC v. ICON Health & Fitness, Inc., (No. 12-1184), the alleged infringer asked the Supreme Court to review what it called the “rigid and exclusive” test that the Federal Circuit uses to determine whether a case is “exceptional” under the statute. In that case, the District Court construed the claims of a patent drawn to elliptical exercise machines. It then granted defendant Octane’s summary judgment motion that its products did not infringe plaintiff Icon’s patent. Octane then sought to have the case declared exceptional as a frivolous case and requested payment of its attorneys’ fees. The District Court applied the Federal Circuit’s “objectively baseless” and “subjective bad faith” tests and denied the motion. ICON appealed the grant of summary judgment and Octane cross-appealed on the fees issue. Octane’s argument sought a lower standard for exceptionality – “objectively unreasonable”. The Federal Circuit rejected the argument, holding that “we have reviewed the record and conclude that the court did not err in denying Octane’s motion to find the case exceptional. We have no reason to revisit the settled standard for exceptionality.

    Octane filed a petition for certiorari and phrased the issue for review by the Supreme Court as:

    Whether the Federal Circuit’s promulgation of a rigid and exclusive two-part test for determining whether a case is “exceptional” under 35 U.S.C. § 285 improperly appropriates a district court’s discretionary authority to award attorney fees to prevailing accused infringers in contravention of statutory intent and this Court’s precedent, thereby raising the standard for accused infringers (but not patentees) to recoup fees and encouraging patent plaintiffs to bring spurious patent cases to cause competitive harm or coerce unwarranted settlements from defendants.

    In recent years, the Supreme Court has rejected rulings of the Federal Circuit that applied bright line rules in patent law in favor of more flexibility. Examples include cases such as International Co. v. Teleflex Inc., 550 U.S. 398 (2007) (adopting a more flexible approach to providing reasons for determining a patent invalid for obviousness); eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006) (successful plaintiffs in patent infringement suits were no longer automatically entitled to a permanent injunction, but must meet a four-factor test for obtaining an injunction); Festo Corp. v Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722 (2002) (rejected Federal Circuit decision that any amendment to a patent application that narrowed a patent claim created an absolute bar to equivalents for the particular claim limitation that was narrowed by the amendment).Octane Fitness appears to be another case in line with this theme.

    The second patent case before the Supreme Court deals with the standard of review for reviewing District Court decisions on fee awards on appeal. In Highmark Inc. v. Allcare Health Management Sys. (No. 121163), the petition for a writ of certiorari relates to whether, on appeal, the Federal Circuit should give any deference to the District Court’s decision on whether to award fees. In that case, the District Court found the case exceptional because it concluded that Allcare had pursued frivolous infringement claims against Highmark, asserted meritless legal positions during the course of the litigation, shifted its claim construction positions, and made misrepresentations in connection with a motion to transfer venue. The Federal Circuit affirmed-in-part and reversed-in-part. In doing so, it reiterated a 2012 decision holding that “the threshold objective prong . . . is a question of law based on underlying mixed questions of law and fact and is subject to de novo review.” Judge Mayer dissented on the ground that “[t]he court errs when it says that no deference is owed to a district court’s finding that the infringement claims asserted by a litigant at trial were objectively unreasonable. Highmark’s petition for rehearing by the entire Federal Circuit was denied.

    In its certiorari petition, Highmark contended that the Federal Circuit erred in holding that a District Court's objective baselessness determination is reviewed "without deference" and that the review standard for exceptional case findings in patent cases that squarely at odds with the highly deferential review adopted by the Supreme Court and other Circuit Courts in other areas of law. Thus, the issue before the Supreme Court will be whether a District Court’s exceptional case finding under § 285, based on a judgment that a suit is objectively baseless, is entitled to deference.

    The Supreme Court’s decisions on these cases could significantly affect patent litigation. If the Court ultimately rules to expand the standard for the availability of attorneys’ fees award, it could reduce the number of cases would be filed by so-called “non-practicing entities” (or “NPEs”), particularly those where NPEs file infringement cases against a large number of defendants hoping for quick settlements. Knowing that they could obtain attorneys’ fees may encourage accused infringer’s to fight infringement allegations on grounds of non-infringement, invalidity or enforceability rather than to settle with the plaintiff for a modest amount.