IP Update, Vol. 12, No. 2

Editor: Marc S. Weiner, Esq.

Octane Fitness and Highmark: The Supreme Court Strikes Down the Federal Circuit’s “Rigid” Test For Attorney’s Fees Under Section 285

The U.S. Supreme Court handed down a pair of decisions on April 29, 2014, on the issue of when a case is exceptional under Section 285 of the Patent Act: Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-1184 and Highmark, Inc. v. Allcare Health Mgmt Sys. Inc., No. 12-1163. In short, the cases lower the standards for awarding a prevailing party attorney’s fees under Section 285, and afford district court judges with greater discretion in awarding attorney’s fees.

• Background

In U.S. courts, the law presumes that the litigants will bear their own costs and attorney’s fees, absent some provision in the law that would shift costs. One such cost-shifting provision under this “American rule” is Section 285 of the Patent Act, which provides that a district court in a patent case “in exceptional cases may award reasonable attorney fees to the prevailing party.”

The framework district courts use to evaluate whether a case is “exceptional” was stated in Cybor Corp. v. Fas Techs.:

The determination of whether a case is exceptional and, thus, eligible for an award of attorney fees under § 285 is a two-step process. First, the district court must determine whether a case is exceptional, a factual determination reviewed for clear error. After determining that a case is exceptional, the district court must determine whether attorney fees are appropriate, a determination that we review for an abuse of discretion.

138 F.3d 1448, 1460 (Fed. Cir. 1998) (internal citations omitted).

The Federal Circuit has long-enumerated a non-exhaustive list of “the types of conduct which can form a basis for finding a case exceptional,” which include “willful infringement, inequitable conduct before the P.T.O., misconduct during litigation, vexatious or unjustified litigation, and frivolous suit.” Beckman Instruments, Inc. v. LKB Produkter AB, 892 F.2d 1547, 1551 (Fed. Cir. 1989). However, the Federal Circuit ruled in Brooks Furniture Mfg. v. Dutailier Int’l, Inc., “[a]bsent misconduct in conduct of the litigation or in securing the patent, sanctions 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.” 393 F.3d 1378, 1381 (Fed. Cir. 2005).

When the Highmark case was before the Federal Circuit, the court held that the second, objective prong “is a question of law based on underlying mixed questions of law and fact and is subject to de novo review” and the Federal Circuit would “review the court’s determination of objective reasonableness without deference since it is a question of law.” Highmark, Inc. v. Allcare Health Mgmt. Sys., 687 F.3d 1300, 1309 (Fed. Cir. 2012) (internal citations omitted). Accordingly, determinations of an exceptionable case under Section 285 were found under the Brooks Furniture test resulted in the Federal Circuit reviewing the award of attorney’s fees under Section 285 de novo.

• Octane Fitness

In Octane Fitness, the Supreme Court found that the Federal Circuit’s test for determining whether a case was exceptional was “unduly rigid.” Slip Op. at 7. The Supreme Court stated that requiring proof of both “subjective bad faith” and “objectively baseless” conduct to be too restrictive, and that proof of either could be sufficient in finding a case exceptional. Slip Op. at 9.

Additionally, as the Supreme Court noted, many of the enumerated list of exceptional conduct listed in Beckman Instruments is independently sanctionable, such as misconduct under Federal Rule of Civil Procedure 11 or the court’s inherent power to punish litigations who act in bad faith. Slip Op. at 8-9, 11. To require proof of misconduct to be conterminous with proof of an exceptional case under Section 285 would render Section 285 “superfluous.” Slip Op. at 11. Under the standard announced in Octane Fitness, 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. Slip Op. at 9. The Supreme Court concluded 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.” Slip Op. at 7-8.

Finally, the Supreme Court found there was no basis for the Federal Circuit to require “clear and convincing” proof of a showing of exceptional conduct. Slip Op. at 11.

• Highmark

In the Highmark case, the Supreme Court stated that the Federal Circuit must afford deference to the district court’s decision whether to award attorney’s fees. Slip Op. at 4. As the Supreme Court delineated, matters that are “questions of law” are “re­viewable de novo,” while matters that are decisions on “matters of discretion” are “reviewable for ‘abuse of discretion.’” Id. Borrowing on the reasoning from the Octane Fitness decision, the Supreme Court emphasized “exceptional” conduct is determined on a case-by-case basis based on a totality of the circumstances, where the district court is “better positioned” to decide whether a case is exceptional. Slip Op. at 4, 5.

• Analysis

The Supreme Court’s decisions in Octane Fitness and Highmark are consistent with the Supreme Court’s other recent landmark decisions interpreting the Patent Act. The Supreme Court’s holding that the Federal Circuit’s adoption and use of a test found to be “unduly rigid” resonate with earlier decisions on patent eligible subject matter in Bilski v. Kappos, 561 U.S. 593 (2010) and obviousness in KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398 (2007). Despite the professed desire of having the Federal Circuit provide uniformity and consistency to patent law, the Supreme Court keeps insisting that many decisions in patent law are not amenable to simple rules.

The Supreme Court appears to indicate that an “exceptional case” under Section 285 must have some level of “exceptionalness” that is less than what is required for a showing of misconduct under Federal Rule of Civil Procedure 11, but something more than what would be expected from a “routine” patent litigation. The Federal Circuit’s finding that “[d]efeat of a litigation position, even on summary judgment, does not warrant an automatic finding that the suit was objectively baseless” still stands as good law when assessing the merits of the losing party’s positions. Aspex Eyewear, Inc. v. Clariti Eyewear, Inc., 605 F.3d 1305, 1315 (Fed. Cir. 2010).

The Octane Fitness and Highmark decisions will likely invite more contentious battles over motions for attorney’s fees under Section 285. As the totality of the circumstances provides the test for an exceptional case, prevailing parties may seek review of any and all actions by the losing party that occurred before or during the pendency of the litigation to find something that “stands out” from the norms of litigation. But courts should be cautious not to overly apply hindsight to the actions of the parties during the uncertainty that unfolds during a normal litigation, as there is much ambiguity that was likely the cause of the litigation in the first place. It will be crucial for district court judges to maintain a balance between litigants attempting to fairly defend its rights in courts against those who use and abuse the process to its own end.

Summary provided by Michael B. Marion