Some Recent Scholarship on Patent Remedies

1.  Ted Sichelman's paper Purging Patent Law of 'Private Law' Remedies has now been published in 92 Texas Law Review 517 (2014), available here.  Here is the abstract:

In this Article, Professor Sichelman rejects the fundamental “private law” premise of patent law remedies that courts should always attempt to make the patentee “whole” in the event of infringement because the overarching aim of patent law is to promote innovation, not to remedy private wrongs.  Specifically, make-whole damages may thwart optimal innovation incentives when they concern small components of complex products involving high-switching costs, generate large consumer deadweight losses, result in substantial duplicated costs during the pre-invention R&D process, or create transaction costs far in excess of the value of the invention.  In other situations, a patentee should be made more than whole.  For example, inducing socially valuable innovations that do not command large profits in the private market—such as drugs for rare diseases and technologies for the disabled—may require more than make-whole compensation.
More generally, Professor Sichelman argues that the statutory remedies provisions of the Patent Act rest on a flawed foundation.  Instead of correcting for private wrongs inflicted on private parties, patent law remedies should be tailored simply to promote the types and levels of innovation that most benefit society, taking into account administrative and error costs.  As such, Professor Sichelman proposes that the patent system and its associated remedies should be viewed as part of a public regulatory regime designed to further societal goals rather than a private law system that protects individual interests.

The online companion to the Texas Law Review, called "Texas Law Review See Also," provides commentary on the paper by Dan Burk and by me.  An earlier draft of my commentary, which I blogged about here, is available here.

2.  The final version of my essay Reining in Patent Remedies:  Three (Increasingly Immodest) Proposals also is now out, in 30 Santa Clara Computer & High Technology Law Journal 1 (2013) (available here).  Here is the abstract:

This essay, which builds on my recent work on the law and economics of comparative patent remedies, presents three proposals relating to the enforcement of domestic patent rights. The first, which may be close to being adopted in the United States, is for the courts and the International Trade Commission (ITC) to adopt a general presumption, grounded in patent law and policy, that patent owners who have committed to license their standard essential patents (SEPs) on fair, reasonable, and nondiscriminatory terms are not entitled to permanent injunctions or exclusion orders, but rather only to a damages in the form of an ongoing royalty calculated on the basis of what a reasonable licensor and licensee would have agreed to prior to the adoption of the standard in question. Countries such as Germany that have addressed the issue of remedies for the infringement of SEPs within the context of competition law, while otherwise leaving in place an almost-automatic entitlement to permanent injunctive relief, have in my view taken the wrong tack.
Second, I argue that Congress should amend Patent Act Section 289, which permits design patent owners to recover the infringer’s profits, so as to require that such awards reflect only the profit derived from the use of the infringed design (and not the entire product of which the design is a part). Such apportionment is the norm in other countries (and in U.S. copyright and trademark law). By contrast, the archaic U.S. design patent rule threatens substantial overdeterrence and overcompensation, as reflected in the recent jury award in Apple v. Samsung.
My third suggestion—really more of a thought experiment inspired by Judge Posner’s opinion in Apple v. Motorola than a serious proposal for reform—is to consider whether it would be possible to eliminate the unique U.S. practice of trial by jury in a wide swath of U.S. patent cases by statutorily recasting awards of reasonable royalties as a form of equitable restitution rather than as compensation.

3.  A couple of student papers on patent remedies that I supervised have now been published as well.  One is Jaimeson Fedell's A Step in the Right Direction:  Patent Damages and the Elimination of the Entire Market Value Rule, 98 Minnesota Law Review 1143 (2014), available here.  The other is George David Kidd's Accuracy or Efficiency:  Has Grain Processing Made a Difference?, 15 Minnesota Journal of Law, Science & Technology 653 (2014).

4. Samuel Bray's paper The Myth of the Mild Declaratory Judgment has been published in volume 63 of the Duke Law Journal, available here.  I blogged about an earlier draft of this paper in November, here.  At that time, I described the paper as making some persuasive points about the relationship between declaratory judgments and injunctions, while also noting that I found a few of the things the author said about declaratory judgments involving patents questionable.  The final version of the paper responds to some of these latter points, and overall (as I said before) the paper is definitely worth a read.

5.  I'd also like to call attention to a blog I discovered only last week, Patent Damages.  The blog is maintained by Chris Marchese and Justin Barnes of Fish & Richardson, and the blog appears to concentrate on U.S. patent damages cases.  I've added it to my list "Other Blogs of Interest" in the left-hand column of this page, and will be consulting it regularly.

6.  As reported on IPKat, over at the Journal of Intellectual Property Law and Practice (JIPLP) Blog Darren Smyth has a write-up on the Patents Court (Eng. & Wales) decision on springboard injunctions in Smith & Nephew Plc v. Convatec Technologies Inc., [2013] EWHC 3955.  I blogged about this decision in January, here, noting among other things that the springboard injunction does not appear to be a viable option under U.S. law.

7.  Last but not least, I came across a few other interesting announcements recently.  One is for a book published in 2011, Robert Resis's Preliminary Relief in Patent Infringement Disputes.  The publisher is the Intellectual Property Law Section of the American Bar Association and the relevant information can be found here.  Another is for a book titled Criminal Enforcement of Intellectual Property: A Handbook of Contemporary Research (Christophe Geigner ed., Edward Elgar 2012); information available here.  In addition, I discovered a service called Docket Navigator that publishes U.S. patent litigation statistics; website here.  I noticed that this service reports 6,020 new U.S. district court patent cases in 2012, which is higher than the figure (5,189) reported by PriceWatershouseCooper in its report for 2013, available here.  There must be some differences in methodology; Docket Navigator states that "Transferred, consolidated, coordinated, or bifurcated actions may contribute to the number of cases counted."     

     

Judge Koh denies Apple a permanent injunction against Samsung

Last November in Apple, Inc. v. Samsung Elecs. Co., 735 F.3d 1352 (Fed. Cir. 2013), the court vacated the portion of Judge Lucy Koh's December 12, 2012 order (following the August 2012 jury verdict in Apple's favor) denying Apple a permanent injunction with respect to Samsung's infringement of three of Apple's utility patents.  (I blogged about the Federal Circuit decision here.)  This morning Judge Koh issued her decision on remand, once again denying Apple's request for an injunction.  You can download the opinion here.  Some points of interest:

On eBay factor 1 (irreparable harm), Judge Koh again concluded that Apple's evidence failed to establish a sufficient causal nexus between Samsung's infringement and the irreparable harm Apple has suffered as a result of competition from Samsung.  Although the Federal Circuit in its November 2013 ruling did not require proof that the infringed patents were the sole reason for consumer demand for Samsung products,  and instructed the court to consider the aggregate effect of the patented features on Samsung's sales, it was still incumbent upon Apple to 

"show some connection between the patented feature and demand for Samsung's products," such as by introducing "[(1)] evidence that a patented feature is one of several features that cause consumers to make their purchasing decisions . . . [;(2)] “evidence that the inclusion of a patented feature makes a product significantly more desirable . . . [; or (3)] “evidence that the absence of a patented feature would make a product significantly less desirable.”

(Opinion at 15-16, quoting 735 F.3d at 1364.)  In this regard, Judge Koh concluded that a conjoint analysis prepared by Apple's expert Dr. John Hauser did not prove the causal nexus, because (1) it "does not provide a way to directly compare consumers' willingness to pay for particular features to the overall value of the infringing devices"; (2) Dr. Hauser's results showed that "substantial portions" of the "price premiums" consumers were willing to pay were "attributable to features other than the patented features"; (3) "the survey appears to have failed to adequately account for noninfringing alternatives to the patented features"; and (4) the survey appeared to give "undue emphasis" to the patented features.  (For more on conjoint analysis, see this post.)  The court also reevaluated the evidence of ease of use and Samsung's copying, and didn't find that any of this evidence (even in combination with the Hauser analysis) sufficient to show a causal nexus.  Altogether, "the evidence shows that the three patented features may add to a device’s appeal, but Apple has not shown that these specific features are among several that “cause consumers to make their purchasing decisions” or otherwise drive consumer demand. Apple IV, 735 F.3d at 1364. Accordingly, Apple has not met its burden of proving the requisite causal nexus to establish irreparable harm" (opinion at 33).

On eBay factor 2 (inadequacy of legal remedies), the court reversed its earlier decision that monetary remedies would be adequate, on the grounds that "the evidence was ambiguous as to whether Apple offered Samsung a license to the '381 Patent," that damages would be difficult to quantify, and that "Apple's past licensing behavior demonstrates a reluctance to license the utility patents-in-suit to Samsung . . . ."  Nevertheless:

This conclusion, however, is ultimately of little help to Apple because the Court will not issue a permanent injunction based on irreparable harm that Samsung’s infringement did not cause, even if monetary remedies will not compensate Apple for that irreparable harm. To prevail on the inadequacy of legal remedies eBay factor, Apple needs to show that the irreparable harm established in the first eBay factor is not compensable through monetary remedies. . . .  Apple, in other words, cannot obtain a permanent injunction merely because Samsung’s lawful competition impacts Apple in a way that monetary damages cannot remedy.

(Opinion at 37.)  Although at first blush this conclusion might seem a bit odd, it is consistent with an idea that I and others have expressed, namely that irreparable harm and inadequacy of legal remedies are really one single factor.  Thus, if there is no causal nexus between the infringement and the harm Apple has suffered from competing with Samsung, it's probably correct to conclude that Apple cannot prove inadequacy of legal remedies either.   Whatever harm Apple will suffer and for which it is entitled to a remedy, monetary damages should suffice.  (Since Samsung has stopped selling the goods covered by the patent, however, see opinion p.14 n.8, I don't think there's any pressing need to hold a hearing on an ongoing royalty in this case, though I don't actually know what the parties or the court is planning to do on this issue.)

Finally, on eBay factors 3 and 4 (balance of hardships, public interest) the court reaffirmed that factor 3 was neutral on the facts of the case and that factor 4 slightly weighed in Samsung's favor. 

A few closing observations.  First, if Apple is motivated to appeal, I assume it will argue that Judge Koh is still applying to strict a reading of "causal nexus," and that there was sufficient evidence to infer "some connection" between Samsung's infringement and Apple's irreparable harm.  For now, however, I'm inclined to think that Apple's arguments will be less potent this time around, given the discretionary nature of the decision to award injunctive relief.  As the Federal Circuit stated in its November 2013 opinion:

“The decision to grant or deny permanent injunctive relief is an act of equitable discretion by the district court, reviewable on appeal for abuse of discretion.” eBay, 547 U.S. at 391, 126 S.Ct. 1837. “We may find an abuse of discretion on a showing that the court made a clear error of judgment in weighing relevant factors or exercised its discretion based upon an error of law or clearly erroneous factual findings.” Innogenetics, N.V. v. Abbott Labs., 512 F.3d 1363, 1379 (Fed.Cir.2008) (internal quotation marks omitted). “To the extent the court's decision is based upon an issue of law, we review that issue de novo.” Sanofi–Synthelabo v. Apotex, Inc., 470 F.3d 1368, 1374 (Fed.Cir.2006).

Second, although I am hardly an expert on conjoint analysis, I wonder if the problems Judge Koh identified in this case--in particular, the disconnect between consumer preferences for the patented features as revealed in the survey and the overall demand for the accused products incorporating those features--could ever be overcome in a manner sufficient to show causal nexus, given the relationship between demand and other factors such as price and the existence of competing products.  Third, and relatedly, if Judge Koh's analysis becomes widely accepted it may become very difficult, perhaps impossible, for the owners of patents that are incorporated into multi-patent products such as smartphones to obtain injunctive relief.  Perhaps that's taking things a bit too far, and certainly moves the U.S. farther out of step with practice in other countries.  As I've stated on many occasions, I think courts should (and U.S. courts now generally do) avoid granting injunctions when there is a substantial risk that doing so will create or exacerbate patent holdup; but over the past few years, I've begun to worry that we are now denying injunctions in a much broader class of cases than the relevant policy considerations would suggest is desirable. 

Professor Sarah Tran

I was saddened to hear this afternoon that Sarah Tran, a professor of patent law at Southern Methodist University in Dallas, Texas, died last week from complications of leukemia.  I had the pleasure of meeting Professor Tran at a patent remedies conference at the University of San Diego in 2012, and she later published a post about one of my articles on her blog, Written Description.  She was a very productive and inspiring young scholar, as you can see from her faculty webpage and from this article about her last year from Law360.  I understand that she leaves behind her husband and two children, and that there is a memorial fund for the children, accessible here.  Please join me in remembering Professor Tran.

U.S. Supreme Court Asked to Review Two Patent Damages Cases

1.  A cert. petition was filed yesterday in Rudolph Technologies v. Integrated Technology Corp.  I consulted on this matter and won't be addressing the merits here, but interested readers may access the petition here.  The questions presented are:

1. Whether issues of law impacting patent damages should be reviewed de novo—like all other issues of law—or whether they should be reviewed under the deferential substantial evidence standard.

2. Whether a patentee may obtain “lost profits” damages under a “two-supplier market” theory even when there are non-infringing alternatives. 

2.  As reported in Bloomberg BNA's Patent, Trademark & Copyright Law Daily last week, a cert. petition also was filed recently in Voda v. Medtronic, Inc., presenting the following two questions relevant to awards of enhanced damages and attorneys' fees:

1. Whether a jury's finding that a party's litigating position is illegitimate or incredible for purposes of finding willfulness is subject to de novo review; and

2. Whether a determination that a defendant's litigation position is illegitimate or incredible suffices for a patentee to establish an exceptional case in the absence of litigation misconduct?

The first question calls into dispute the Federal Circuit's holding that willfulness, a prerequisite for an award of enhanced damages, is a question of law (see my book p.144).  The second overlaps with the question presented in Octane Fitness, which I blogged about last week.  The petitioner requests that the Court hold the petition pending its decisions in Highmark and Octane Fitness, after which it should grant the petition, vacate, and remand.

Monday miscellany: New publications on FRAND

1.  Mark Lemley and Carl Shapiro's paper A Simple Approach to Setting Reasonable Royalties for Standard-Essential Patents, drafts of which have been available on ssrn for some time, is also now available in its final published form in volume 28 of the Berkeley Technology Law Journal, here.  Readers who follow FRAND matters closely are probably already familiar with the paper, but for those of you who are not here is the abstract:

A Standard Setting Organization (“SSO”) typically requires its members to license any standard-essential patents on fair, reasonable, and non-discriminatory (“FRAND”) terms. Unfortunately, numerous high-stakes disputes have recently broken out over just what these “FRAND commitments” mean and how and where to enforce them. We propose a simple, practical set of rules regarding patents that SSOs can adopt to achieve the goals of FRAND commitments far more efficiently with far less litigation. Under our proposed approach, if a standard-essential patent owner and an implementer of the standard cannot agree on licensing terms, the standard-essential patent owner is obligated to enter into binding baseball-style (or “final offer”) arbitration with any willing licensee to determine the royalty rate. This obligation may be conditioned on the implementer making a reciprocal FRAND commitment for any standard-essential patents it owns that read on the same standard. If the implementer is unwilling to enter into binding arbitration, the standard-essential patent owner’s FRAND commitment not to go to court to enforce its standard-essential patents against that party is discharged. We explain how our proposed FRAND regime would work in practice. Many of the disputes currently arising around FRAND commitments become moot under our approach. 

Jorge Contreras and David Newman also have written about the arbitration option, as I noted here.  Florian Mueller has been a notable critic of the Lemley-Shapiro proposal, see here.

2.  Danny Sokol's Antitrust Blog recently has publicized a few more new papers on FRAND.  I haven't yet read these myself.  The first, by Damien Geradin, is titled Moving Away from High-Level Theories:  A Market-Driven Analysis of FRAND in the Context of Standardization.  It is available here and is forthcoming in the (apparently now revived) Antitrust Bulletin.  Here is the abstract:

There is a large strand of legal and economic literature suggesting the FRAND regime is broken and that standardization is at risk given “hold-up and “royalty stacking” problems. A variety of proposals have been made to address these alleged problems, most of which seeking to decrease the bargaining power of essential patent holders to the benefit of standard implementers. The hold up and royalty stacking conjectures have been questioned by a number of authors essentially on the ground that these theories contained logical inconsistencies, but also that they were not based on sufficient empirical support to warrant policy reforms. Against this background, this paper explains why hold up and royalty stacking only occur in rare circumstances given the private solutions that are available to standard implementers to avoid paying license fees that are not FRAND or that would aggregate to a level that would render the implementation of the standard more difficult or even impossible. Given the dearth of empirical evidence over hold up and royalty stacking, this paper also looks at the evolution of the mobile communication sector in the past decade to see whether the alleged adverse consequences (in terms of harm to standard implementation, innovation and investment and the continuity of the standardization process) that would be created by hold up and royalty stacking can actually be observed. The available data suggests that the mobile communication device markets are healthy despite the fact that these markets have been said to be harmed by regular SEP-related abuses. Although it could be argued that these markets would be even healthier “but for” SEP abuses, the available data should give pause to those claiming that significant reforms should be made to the FRAND regime. In fact, the high degree of competition in the above markets and the presence of highly successful entrants that do not have a track record in the development of mobile communication technologies strongly suggest that the FRAND regime has largely worked in that it has stimulated the broad licensing of SEPs while maintaining a fair balance between the interests of SEP holders and standard implementers.

The second paper is by Urŝka Petrovčič and is titled Patent Hold-up and the Limits of Competition Law:  A Transatlantic Perspective, 50 Common Market Law Review 1363 (2013).  The abstract, which is available on ssrn (the full text of the paper is not), reads as follows:

The problem of patent hold-up is currently one of the most discussed antitrust topics in the European Union and in the United States. On both sides of the Atlantic, competition authorities addressed the opportunistic conduct of patent owners through the provisions of competition law. The reach such provisions have in addressing the patent owner’s opportunistic licensing practices remains however unclear. The present article brings some clarity to this picture by analyzing the applicability of the antitrust provisions to cases of patent hold up. The analysis shows that the provisions of the two jurisdictions have different scopes when addressing these cases. Whereas in the EU, the European Commission might be able to address a large specter of patent owners’ opportunistic licensing practices, most conducts would escape the liability under US antitrust law. The divergent outcomes are however not attributable to the application of different legal tests, or different views of the competition authorities. Rather the contrary. Competition authorities share the concerns on patent hold up, but are unable to reach similar outcomes because of the divergent prohibitions embodied in the antitrust provisions of the two jurisdictions. The analysis also shows that in neither of the systems does competition law provide a definitive solution to the problem of patent hold-up.

A third is by Mathias Dewatripont and Patrick Legros and is titled 'Essential' Patents, FRAND Royalties, and Technological Standards, 61 J. Indus. Econ. 913 (2013).  The abstract, which is available on ssrn, reads as follows:

Standard Setting Organizations have developed FRAND agreements in order to prevent firms from holding up other participants once a standard is created. We analyze here the consequences of such agreements - in particular the requirements of fairness and non‐discrimination - for the creation of technological standards that require the participation of existing patent holders. We abandon the usual assumption that patents bring known benefits to the industry or that their benefits are known to all parties. When royalty payments are increasing in one's patent portfolio, as is implicitly the case in FRAND agreements, private information about the quality of patents leads to a variety of distortions, in particular the incentives of firms to ‘pad’ by contributing patents that are ‘inessential’ for the given standard, a phenomenon that seems to be widespread. Several results emerge from the analysis: (i) the number of inessential patents co‐varies positively with the number of essential patents; (ii) there is over‐investment relative to the second‐best, that is when padding cannot be avoided and (iii) the threat of disputes reduces incentives to pad but at the cost of lower production of strong patents; (iv) mitigating this undesirable side‐effect calls for a simultaneous increase in the cost of padding, through a better filtering of patent applications.

Finally, Einer Elhauge has a paper titled Treating RAND Commitments Neutrally, available here.  The abstract:

This Article argues that the same legal standards should apply to RAND commitments whether they are made to standard-setting organizations or not. The arguments for concluding that RAND commitments should limit injunctive patent relief or trigger antitrust liability turn on whether the commitment reasonably induces lock-in that generates hold-up effects or market power when that commitment is breached. But RAND commitments can induce such lock-in effects when they are made outside of standard-setting organizations and do not always induce them when they are made to standard-setting organizations. Thus, any special legal rules for RAND commitments should turn on whether the commitments induced such lock-in, rather than on the institutional context. The arguments against using special legal rules for RAND commitments turn on the extent to which lock-in might fail to generate holdup problems, denying patent injunctions might generate reverse-holdup problems, and contract or promissory estoppel remedies might obviate the need for antirust liability. But those arguments likewise apply equally inside and outside of standard-setting organizations. Thus, however one resolves the arguments for and against applying special legal rules to RAND commitments, the resulting legal standards should be the same whether or not the commitment is made to a standard-setting organization.

3.  Relatedly, Foss Patents has coverage of (1) the Mannheim courts' February 28 decisions to dismiss IPCom's SEP claims against HTC and Apple (which included the $2.2 billion claim against Apple), see here, and (2) the Korea Fair Trade Commission's decision to clear Samsung of antitrust liability for pursuing injunctive relief for the infringement of FRAND-encumbered SEPs by Apple, see here.  The Essential Patent Blog also has coverage of the IPCom matter, see here, and of a February 26 jury verdict awarding a FRAND royalty of 0.19% in Realtek v. LSI, a case pending before Judge Whyte in the U.S. District Court for the Northern District of California, see here. Update:  Story in today's Wall Street Journal about the IPCom case is available here.

Some Upcoming Conferences of Note

Three upcoming conferences that readers might find interesting are as follows.

First, on April 4-5, the University of San Diego Law School will be hosting PatCon 4:  The Annual Patent Conference, billed as "the  largest annual conference for patent scholars in the world."  Among the speakers will be Andrew Byrnes (Chief of Staff, USPTO); U.S. District Judges Benitez, Gallo, and Sabraw; and a host of academics, including Dan Burk, John Duffy, Mark Lemley, Michael Meurer, David Schwartz, and many more.  I'll be speaking on day two during a session on remedies, as also will be Norman Siebrasse.  More information is available here.  

Second,  Law Seminars International is hosting an upcoming conference titled "Litigating Patent Damages: Strategic Issues for Proving and Refuting Damages Claims."  I'm not speaking at this one, but I did speak at one of these Law Seminars International conferences a few years ago and found the content (including but not limited to my own!) to be quite good.  Among the speakers at this upcoming conference with be Alan Cox, Roy Epstein, Christopher Marchese, Gregory Sidak, and U.S. Magistrate Judge Paul Singh Grewel.  The conference will be held in San Francisco on May 29-30.  Here's a link.

Third, the EPLaw Blog recently mentioned an upcoming International Symposium on Patent Litigation in Japan and Germany, to be held in Munich on October 2.  Here is a link.  Among the speakers are (from Japan) Judge Toshiaki Iimura and former Judge Ryoichi Mimura, and (from Germany) Judges Peter Meier-Beck, Klaus Grabinski, and Thomas Kühnen.  The conference will coincide with Oktoberfest.  I'd love to find a way to attend this one.

U.S. Supreme Court Hears Oral Argument on Awards of Attorneys' Fees in Patent Litigation

As I have mentioned previously, last fall the U.S. Supreme Court agreed to review two cases--Highmark Inc. v. Allcare Health Mgt. Sys., Docket No. 12-1163, and Octane Fitness, LLC v. Icon Health & Fitness, Inc., Docket No. 12-1184--addressing the topic of attorneys' fees awards in patent cases.  The question presented in Octane Fitness is "Does 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 appropriate 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?"  The question presented in Highmark is "Whether a district court's exceptional-case finding under 35 U.S.C. § 285, based on its judgment that a suit is objectively baseless, is entitled to deference." 

To put the matter in context, unlike many countries the U.S. does not routinely award the prevailing party some or all of its attorneys' fees.  Although there are some exceptions, the general rule (sometimes called the "American Rule") is that each side bears its own attorneys' fees.  In patent law in particular, the governing rule is set forth in section 285 of the Patent Act, which states "The court in exceptional cases may award reasonable attorney fees to the prevailing party."  The moving party must establish "exceptional circumstances" by clear and convincing evidence, and only a limited number of circumstances justify fee awards in patent cases, including  “inequitable conduct before the PTO; litigation misconduct; vexatious, unjustified, and otherwise bad faith litigation; a frivolous suit or willful infringement.”  Wedgetail, Ltd. v. Huddleston Deluxe, Inc., 576 F.3d 1302, 1304 (Fed. Cir. 2009).    Moreover, according to Federal Circuit precedent:

Absent misconduct in litigation or in securing the patent, a case may be found exceptional under § 285 only if (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless. . . .  Subjective bad faith by the offending party can be upheld on review if, despite the lack of an explicit finding by the district court, other findings of fact are compatible with, and only with, that view. . . . There exists a “presumption that the assertion of infringement of a duly granted patent is made in good faith.” . . .  Factual findings regarding subjective bad faith are reviewed for clear error. . . .  

To be objectively baseless, the patentee’s assertions—whether manifested in its infringement allegations or its claim construction positions—“must be such that no reasonable litigant could reasonably expect success on the merits.” . . .   As a question of law, this court reviews a district court’s determination of whether a party’s claim or defense in a patent case is objectively baseless without deference. . . .  

The Octane Fitness case will address what the appropriate standard is for determining that a case is "exceptional" (e.g., "objective baselessness" or something else).  The Highmark case will address whether the district court's determination that a case is exceptional is entitled to deference or is reviewed de novo on appeal.

Oral argument in these two cases was heard this morning (first Octane Fitness, then Highmark), and the transcripts can be downloaded here.  In Octane Fitness much of the argument centered around, as Justice Kennedy put it, "a search for adjectives."  Petitioner's counsel argued that the current standard of "objectively baseless" or "objectively meritless" effectively means that prevailing parties are awarded fees only when the litigation is frivolous--and that litigation is only rarely frivolous.  He suggested as an alternative "without substantial merit, unreasonably weak, or low likelihood of success." He also argued that litigation misconduct should be a relevant factor, and that when misconduct is present a case that might not qualify as "without substantial merit" could qualify as "exceptional."  Viewing this as a proposal for some sort of totality of circumstances test however, Justice Alito asked how (in particular) district court judges who don't hear many patent cases are supposed to know what is "exceptional," and suggested that this might be a reason for deferring to the Federal Circuit's expertise.  Justice Scalia also observed that "you really cannot answer the question of what adjectives should be attached to 'meritless'", because if the test is a totality of the circumstances test meritlessness "is only one factor and it doesn't have to be an absolute degree of meritlessness."  Chief Justice Roberts chimed in by asking whether the petitioner agreed with the Solicitor General's position that the standard should be "necessary to prevent gross injustice," and expressed surprise when counsel stated yes, because (to the Chief) "gross injustice sounds like a very tiny portion of cases, lower than meritless."  Justice Kagan then honed in on what factors in particular the petitioner believes would be relevant:

JUSTICE KAGAN: Mr. Telscher, could I just ask very quickly the factors that you would think a Court should consider. One is the degree to which the case is meritless. Another I presume is bad faith.  Another is litigation misconduct. Is there anything else or are those the three?

MR. TELSCHER: No, there's more. I think it's there's no exhaustive list and, for example, even in this case and in ParkIn Theaters where the Court said other equitable consideration. We believe it is a totality of the circumstances, anything that bears on the gross injustice and the uncommon nature of the case. So, for example, in this case the fact that Icon brought a patent that it, with all of its resources, couldn't commercialize, was indisputably worthless, to this day they've never made a product under this patent, that's a factor that bears on the equities of this case and the uncommon nature and is one that doesn't fall neatly within those categories.

The fact that our client licensed under a different patent that shows its linkage is another factor that shows that what they are asserting isn't reasonable. So I don't think there is a laundry list, but the categories that you identified are the big ones.

Assistant Solicitor General Roman Martinez was up next, and proposed the following framework:

Section 285 grants district courts discretionary authority to look at the totality of the circumstances and award fees when necessary to prevent gross injustice. Such awards can be proper in unusual cases where the losing party has committed bad faith or harassing conduct during the litigation or has advanced objectively unreasonable legal arguments, just as courts had held under the 1946 statute. The Court should restore this understanding of Section 285 and make four additional points that we think will clarify the inquiry for the District Courts:
First and most importantly, the Court should say that baselessness and bad faith do not both have to be present in a case in order to justify a fee award;
Second, the Court should the Court should say that District Courts can grant fees based on a combination of different factors even if no single factor would necessarily support the award on its own;
Third, the Court should say that an objectively unreasonable argument can trigger a fee award even if that argument is not so unreasonable that it's actually considered frivolous;
And fourth, the Court should say that clear and convincing evidence is not required.

Respondent's counsel argued that "objectively baseless" does not mean "zero merit," but rather lacking in probable cause.  He also argued that the decision to sue for patent infringement is not without risk, because it potentially puts the patent's validity in question or in appropriate circumstances might open the plaintiff up to a charge of inequitable conduct (intentionally failing to disclose material information during the course of patent prosecution), which if proven renders the patent unenforceable.  Counsel also argued that the question whether "clear and convincing" is the appropriate burden of proof is not properly subsumed within the question on which the Court granted certiorari.

Reading the tea leaves can be risky, but based on various justices' comments and questions I would guess the Court will reverse and adopt some sort of totality of the circumstances, equitable discretion standard in which the fact that the litigation was "objectively unreasonable" could by itself support an award of fees.  I'm not sure what they'll do, if anything, about the "clear and convincing evidence" issue.

As for Highmark, petitioner's counsel and Assistant Solicitor General Brian Fletcher both argued in support of an abuse of discretion standard of appellate review, citing (among other reasons) the "substantial expenditure of appellate resources" that a de novo standard entails.  They also acknowledged that the Court's resolution of Octane Fitness may go a long way to resolving the standard of appellate review question as well.  Respondent's counsel focused on the value of having a uniform body (the Federal Circuit) deciding questions of law, such as claim construction, that might be entailed in the question of whether the underlying litigation was "objectively baseless" (or whatever the standard turns out to be).  Justice Scalia pushed back on this issue, stating that as he understood the statute it confers discretion, and thus it is not "an area where Congress expected uniformity."

My guess here is that the Court will adopt some sort of abuse of discretion standard that takes into account, among other things, whether the district court correctly applied the law and whether it acted within proper boundaries in deciding whether the arguments a claimant made, though ultimately unsuccessful, where within the realm of reasonableness.

At the end of the day, it might be easier simply to award attorneys' fees to the prevailing party as a matter of course, and thus avoid all or most of these complex issues; but that would require legislative action and a sharp break with tradition, and I don't see that happening in this country any time soon.  Most likely we will have fee awards in a somewhat broader classes of cases, however, and that might have the beneficent effect of deterring some relatively meritless claims.  It also probably will mean that Congress won't need to amend section 285 in the context of its pending patent reform efforts.