Initial Impressions on the U.S. Supreme Court's Fee-Shifting Decisions in Octane Fitness and Highmark

As I mentioned earlier this morning, the U.S. Supreme Court reversed the Federal Circuit in a pair of cases, Octane Fitness, LLC v. Icon Health & Fitness, Inc., and Highmark Inc. v. Allcare Health Management System, Inc., involving the interpretation of section 285 of the U.S. Patent Act, which states that "[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party."  Justice Sotomayor wrote the opinions in both cases, and both are unanimous--with the minor exception that Justice Scalia did not join in footnotes 1-3 of Octane Fitness, which discuss the legislative history of section 285 and its predecessor statute.  (Justice Scalia is not a fan of resorting to the legislative history of statutes.)  As Justice Sotomayor states in her opinion in Octane Fitness, the Federal Circuit in Brooks Furniture Mfg., Inc. v. Dutailier Int'l, Inc. had

held that a case is “exceptional” under § 285 only “when there has been some material inappropriate conduct related to the matter in litigation, such as willful infringement, fraud or inequitable conduct in procuring the patent,misconduct during litigation, vexatious or unjustified litigation, conduct that violates Fed. R. Civ. P. 11, or like infractions.” Id., at 1381. “Absent misconduct in conduct of the litigation or in securing the patent,” the Federal Circuit continued, fees “may be imposed against the patentee only if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.”

In Octane Fitness, the Court reverses this standard for determining when a case is "exceptional," and in Highmark it holds that appellate review of an exceptional case determination should be reviewed for abuse of discretion.  

More precisely, Octane Fitness holds the following:

1.  Section 285 "imposes one and only one constraint on district courts’ discretion to award attorney’s fees in patent litigation: The power is reserved for 'exceptional' cases" (p.7).  In accordance with the ordinary meaning of the word "exceptional," 

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. District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances. As in the comparable context of the Copyright Act, “‘[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.’” Fogerty v. Fantasy, Inc., 510 U. S. 517, 534 (1994). 

2.  In this light, the Brooks Furniture approach was "overly rigid" and "inflexible."  The first category of cases in which Brooks Furniture permitted fee awards "appears to extend largely to independently sanctionable misconduct," but under the correct standard "a district court may award fees in the rare case in which a party’s unreasonable conduct—while not necessarily independently sanctionable—is nonetheless so 'exceptional' as to justify an award of fees" (p.9).  The second category is also too rigid, because "a case presenting either subjective bad faith or exceptionally meritless claims may sufficiently set itself apart from mine-run cases to warrant a fee award," citing a Lanham (Trademark) Act case for the proposition that "[s]omething less than 'bad faith' . . . suffices to mark a case as 'exceptional'".

3.  The Federal Circuit drew the objective/subjective baselessness standard from the Supreme Court's decision in Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., which was a case in which a plaintiff alleged that the defendant had violated the antitrust laws by attempting to monopolize by engaging in "sham" copyright litigation.  Under the Noerr-Pennington doctrine, a person generally is immune from antitrust liability for petitioning the government, but in the context of sham litigation the immunity is lost if the litigation is both objectively and subjectively baseless.  In Octane Fitness, however, the Court sees no reason to "import" this standard into section 285.  (An aside--it's interesting that the opinion characterizes Noerr-Pennington as rooted in the First Amendment, because there has been some debate among the courts and commentators as to whether it is rooted in the constitutional right to petition the government or in the antitrust statute itself.)  

4.  The Court also notes that the common-law exception to the American rule that each party bears its own attorneys' fees applies in cases of egregious misconduct, and that interpreting section 285 in similar fashion would render it "largely superfluous" (pp. 10-11).

5.  Finally, the Court rejects the Federal Circuit's rule that entitlement to attorneys' fees must be established by clear and convincing evidence.  Rather, the normal "preponderance of the evidence" standard applies.

In Highmark, the Court holds that "an appellate court should review all aspects of a district court's § 285 determination for abuse of discretion."  It notes, however, in a footnote that "[t]he abuse-of-discretion standard does not preclude an appellate court’s correction of a district court’s legal or factual error . . . ."

Possible implications to ponder:

1.  Will the theme of greater deference to district court decisions carry over into the realm of claim construction?  The Court recently granted cert. in another patent case, Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc.  in which the question presented is "Whether a district court's factual finding in support of its construction of a patent claim term may be reviewed de novo, as the Federal Circuit requires (and as the panel explicitly did in this case), or only for clear error, as Rule 52(a) requires."  The case will be argued in the fall.

2.  I wonder if the Federal Circuit's current standard for evaluating when infringement is "willful," and therefore potentially supportive of an award of enhanced damages, also may need to be revisited.   See Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., 682 F.3d 1003, 1007 (Fed. Cir. 2012) (stating that “the ultimate legal question of whether a reasonable person would have considered there to be a high likelihood of infringement of a valid patent should always be decided as a matter of law by the judge”), cert. denied, 133 S. Ct. 932 (2013); In re Seagate Tech., LLC, 497 F.3d 1360, 1371 (Fed. Cir. 2007) (en banc) (holding that for an infringement to be “willful” it must be both objectively and subjectively reckless, and that “to establish willful infringement, a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. . . . If this threshold objective standard is satisfied, the patentee must also demonstrate that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer.”).

3.  Presumably the impact of Octane Fitness will be an increase in attorney fee awards in patent cases, which many people believe would be desirable for reining in litigation by patent trolls.  (For a recent empirical study of fee awards, see Saurabh Vishnubhakat's article, which I blogged about here.) It's also interesting to speculate whether these two cases will have an effect on the pending patent reform bills.  The version passed by the U.S. House of Representatives last fall would require courts to award fees if the patentee’s position was not “reasonably justified.”  See my post here.

4.  As in other contexts, the Court has eschewed bright lines in favor of a more flexible approach.  This has its advantages but also some disadvantages, particularly to the extent that it makes awards of fees less predictable.  It isn't likely, though, that we will discard the American Rule in favor of a straight loser-pays rule as have many other countries, at least not anytime soon.  On another tangent, I wonder if this flexibility theme will carry over into the question of software patents at issue in Alice v. CLS Bank?

5.  Finally, it's interesting that the Court cites both copyright and trademark cases in support of its holding in Octane Fitness, suggesting that at some level the Court views all three bodies of law as roughly parallel.