Last week, the Supreme Court issued its decisions in Octane Fitness, LLC v. Icon Health & Fitness, Inc. and Highmark, Inc. v. Allcare Health Management Systems, Inc. The question before the Court in the former case was the correct standard for an “exceptional case” under which a court may award attorneys’ fees and costs to the prevailing party. In the latter case, the question was the correct standard of review on appeal.
As I discussed previously, section 285 of the Patent Act permits a trial court to award attorneys’ fees to the prevailing party in “exceptional” cases. What exactly constitutes an exceptional case?
The Federal Circuit had set a rather high standard for fee shifting under this provision. That court held that a case is exceptional only in the circumstances where either (1) there has been some material inappropriate conduct, such as litigation misconduct or inequitable conduct at the PTO, or (2) the litigation has been brought in subjective bad faith and the allegations are objectively baseless. These are indeed high standards to meet.
Now, the Supreme Court has stepped into the fray by unanimously holding that the Federal Circuit’s standard for when a case is “exceptional” is too high.
We hold, then, 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. 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 held that the Federal Circuit’s standard is so high that it makes § 285 largely superfluous. Finally, the Court rejected the Federal Circuit’s requirement that the party seeking fees must prove its entitlement to them by clear and convincing evidence.
Octane Fitness largely foreshadowed the outcome in Highmark. The determination of when a patent case is “exceptional” appears to be largely fact specific, rather than a matter of law. Unfortunately, when dealing with appeals, the Federal Circuit often misses this distinction, preferring that it review most anything de novo, i.e., without regard to the factual determinations by the district court.
A unanimous Supreme Court also reversed the Federal Circuit in this case. The district court determination of whether a case is “exceptional” should be reviewed by the Federal Circuit for abuse of discretion. This is a standard that gives more deference to the trial court. This means that the appellate court cannot simply substitute its own opinion for that of the district court. Instead, the appellate court may review the determination of the district court only when there is an error of law or a clear error of the facts. Otherwise, the determination is within the discretion of the district court. That makes sense given that the district court judge actually reviewed the evidence and observed the actions by the parties and witnesses at trial.
Patent Trolls. We’ve talked about them a fair amount. Many have argued that fee shifting is the way to deter spurious lawsuits brought by such entities. Several members of Congress seem to agree.
At least partially in response to the Federal Circuit’s restrictive interpretation of § 285, the House of Representatives passed the Innovation Act that seeks to change patent litigation in the US to a loser pays system in nearly all cases. The Innovation Act would amend § 285 to state that a court “shall award” attorneys’ fees and expenses to the prevailing party unless the losing party’s position was “reasonably justified” or other special circumstances would make an award unjust.
The Supreme Court seems to have cleaned up this mess. The discretionary standard seems better than an absolute standard. These cases are not always cut and dry; sometimes they are close. The proposed statutory revisions might have a chilling affect on parties in bringing legitimate cases. Under the Supreme Court’s opinions, district courts can still use their discretion to sanction parties that bring bad cases.