Wednesday, February 26, 2014

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.

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