Patent Litigation Fee-Shifting
The Corporate Counselor
Supreme Court Opens the Door
In April, the Supreme Court reshaped the patent litigation landscape with its Octane Fitness, LLC v. Icon Health & Fitness and Highmark, Inc v. Allcare Health Management System, Inc., rulings. The statute at issue in both rulings was 35 U.S.C. § 285, which provides that a “court in exceptional cases may award reasonable attorney fees to the prevailing party.” The clear implication is that litigants in patent infringement litigation now have a greater opportunity to recover their attorneys’ fees and expenses from adverse parties. These rulings serve as a warning to patent litigants to carefully consider their strategy before initiating continuing litigation under some circumstances.
Fee-Shifting in Patent Litigation
Under 35 U.S.C. § 285, in exceptional cases a district court may award reasonable attorneys’ fees to the prevailing party. Although § 285 appears to give district courts broad latitude to award fees in patent litigation, the Federal Circuit Court of Appeals had previously established that exceptional cases were either based on litigation-related misconduct or if the litigation was both “(1) brought in subjective bad faith and (2) objectively baseless.” Brooks Furniture Mfg. v. Dutailier, Inc., 393 F.3d 1378 (Fed. Cir. 2005).
Under this stringent standard, parties often were unable to satisfy the Federal Circuit’s two-pronged test and therefore could not recover their attorneys’ fees. Successful litigants’ frustration has only grown in recent years, given the rise of “patent troll” (or non-practicing entity) litigation that many businesses view as baseless. Targets of patent trolls would often defend themselves against claims of infringement that were eventually defeated, but were unable to recover any fees as the Brooks Furniture standard set such a high bar for recovery. In the recent rulings, the Supreme Court has sent a clear sign to both defendants and plaintiffs in patent litigation suits that they must now proceed with caution.
The Octane Fitness Ruling
ICON Health & Fitness (ICON) owned U.S. Patent No. 6,019,710 relating to elliptical machines with adjustable stride length. ICON sued a competitor, Octane Fitness, alleging infringement of the ICON patent. The district court granted Octane Fitness’s motion for summary judgment of non-infringement. Octane Fitness subsequently moved for award of attorneys’ fees under § 285, which was denied because Octane Fitness failed to demonstrate by clear and convincing evidence that the suit was brought in “subjective bad faith” and was “objectively baseless.”
The Federal Circuit affirmed, and declined to find that Octane Fitness established an exceptional case under § 285 by clear and convincing evidence. See 496 Fed. Appx. 57 (Fed. Cir. 2012). In the appeal, Octane Fitness sought to lower the standard for exceptionality to “objectively unreasonable,” which the Federal Circuit refused and found no reason to revisit the settled “objectively baseless” standard under § 285.
In its reversal, the Supreme Court first determined that the Federal Circuit’s traditional exceptional case framework as set forth in Brooks Furniture is inconsistent with the statutory text of § 285. The court recognized that the Patent Act does not define “exceptional” and thus should be construed in accordance with its ordinary meaning. It found 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.” Thus, “District Courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.” The court noted that such discretion is also awarded district courts under the Copyright Act. See 17 U.S.C. § 505.
The court then determined that the Federal Circuit’s exceptional case framework was inflexibly imposed onto § 285, which is inherently flexible. As to litigation misconduct, the court elaborated that “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.” The opinion also stated that “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.” The court held that the Brooks Furniture framework “is so demanding that it would appear to render § 285 largely superfluous.” It explained that common law has long allowed fee-shifting when a party acts in willful disobedience of a court order, or acts in bad faith, wantonly, with the intent to annoy or harass, or for oppressive reasons. As such, the court noted that it had previously declined to construe fee-shifting provisions narrowly to avoid rendering such provisions superfluous.
Finally, in a last blow to Brooks Furniture, the court rejected the Federal Circuit’s requirement that litigants establish their entitlement to fees under § 285 by clear and convincing evidence, noting that other fee-shifting statutes did not impose such a requirement. The court found it imposes no specific evidentiary burden, much less a high one such as clear and convincing evidence. Rather, § 285 “demands a simple discretionary inquiry.”
The Highmark Ruling
Allcare Health Management Systems, Inc. (Allcare) owns a patent relating to a method of data entry and management useful in healthcare. Allcare notified Highmark, Inc. (Highmark) that it believed the latter infringed Allcare’s patent. Highmark subsequently filed for declaratory judgment of non-infringement. Allcare counterclaimed, alleging infringement. The district court granted Highmark summary judgment of non-infringement and Highmark moved for attorneys’ fees for exceptional case under § 285, which fees were awarded by the district court.
The Federal Circuit affirmed the district court’s finding of exceptional case for one patent claim at issue, but reversed the exceptional case finding for a second patent claim at issue. Because the framework for exceptional case is a question of both law and fact, the Federal Circuit reviewed the exceptional case determinations de novo, and did not afford deference to the district court’s findings.
In a unanimous decision, the Supreme Court held that “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.” The court went on and explained that its precedent holds that decisions on matters of discretion are reviewable for abuse of discretion. The ruling noted that “although questions of law may in some cases be relevant to the § 285 inquiry, that inquiry generally is, at heart, ‘rooted in factual determinations.’”
The new world of fee-shifting in patent litigation is striking and full of uncertainty. The new standard set forth by the Supreme Court now allows for many situations that might make a case stand, out thereby allowing a prevailing party to recover its attorneys’ fees. Essentially, the court took a bright-line test and smudged the line, allowing for a more subjective analysis by district courts. The district court can look to the substantial strength of a party’s position, either legally or factually. So, one question the district courts must now determine is whether the assertion of an issued patent can ever result in an exceptional case finding. Obviously, a patent-holder could overreach by asserting its patent against an accused infringer whose activities objectively do not fall within the claim scope and thereby run afoul of Rule 11 of the Rules of Civil Procedure. But if the complaint for infringement satisfies Rule 11, would the assertion of a questionable, but still valid patent, ever stand out? Most likely, yes, but the district courts will have to flesh out this matter. Moreover, what if the accused infringer does not file invalidity counterclaims? Would they still be subject to this prong of the standard? In other words, if they had an objectively weak position in denying allegations in an answer or asserting affirmative defenses, could an accused infringer be subject to fee-shifting for refusing to settle? Finally, is the standard to be considered only at the pleading stage, or can an adverse ruling turn a party’s position substantially weak, such that the suit or defense should not be maintained? For example, could a party’s position be so weakened after an unfavorable claim construction that the suit or defense should not be maintained?
With respect to litigating in an unreasonable manner, presumably such unprofessional actions can turn even the strongest cases exceptional. But where is the line between unprofessional conduct and zealous representation of a client? If an attorney is overzealously advocating for a client, when do such actions cross the line? Certainly, discovery is essential to establish one’s case, but discovery abuse is often perceived to be commonplace. Would engaging in extensive and unwarranted motion practice potentially subject a party to fee-shifting? Would refusing to settle, especially in light of a detrimental ruling or determination, be considered litigating in an unreasonable manner? And again, such actions (no matter how unprofessional) must stand out before making the case exceptional.
While there are many unanswered questions, it does appear that the new standards set in Octane Fitness and Highmark are allowing prevailing litigants greater opportunities to recover their attorneys’ fees. For example, three recent district court decisions decided afterOctane Fitness have all found that the cases were exceptional and awarded fees to the prevailing party. See, e.g., Classen Immunotherapies, Inc. v. Biogen IDEC, 2014 WL 2069653 (D. Md. May 14, 2014) (finding infringement claims objectively baseless as the accussed infringer early litigation provided sworn discovery responses indicating that it did not manufacture, develop or sell the allegedly infringing products); Home Gambling Network, Inc. v. Piche, 2014 WL 2170600 (D. Nev. May 22, 2014) (finding a case exceptional where it became clear during the course of litigation that the alleged infringer’s conduct occurred outside of the United States, there was significant prosecution history estoppel that precluded the patent holder’s claims of infringement and that the patent holder had impermissibly broadened the physical and temporal scope of the patent grant via patent misuse); Lumen View Tech., LLC v. FINDTHEBEST.COM, Inc., 2014 WL 2440867 (S.D.N.Y. May 30, 2014) (finding a case exceptional after claim construction, and admonishing the patent holder for failing to conduct any pre-suit investigation).
In light of these decisions, both plaintiffs and defendants in patent litigation should consider: 1) conducting a full pre-suit investigation concerning the facts supporting or negating infringement; 2) carefully reviewing any new fact discovered during discovery that either supports or negates infringement; and 3) the impact on their respective cases of key rulings by the district court (such as claim construction). Failure by either party to consider these issues may result in an adversary being awarded fees.
Republished with permission. This article first appeared in The Corporate Counselor, published by Law Journal Newsletters, in July 2014.