United States: Supreme Court Docket Report - October 1, 2013

Keywords: patent act, attorney's fees, Federal Insurance Contributions Act, Medicaid Providers

Today, the Supreme Court granted certiorari in five cases of interest to the business community:


Patent Act - Attorney's Fees for Exceptional Cases

The Patent Act allows courts to "award reasonable attorney fees to the prevailing party" in "exceptional cases." 35 U.S.C. § 285. Today, the Supreme Court granted certiorari in two separate cases - Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-1184, and Highmark Inc. v. Allcare Health Management System, No. 12-1163 - to clarify when such awards are appropriate and when they should be upheld. Octane concerns the proper test for determining whether an infringement claim is "exceptional," while Highmark involves the standard of review applied by the Federal Circuit to a district court's ruling on exceptionality.

Because the Court's resolution of these cases is likely to clarify the circumstances under which fees may be awarded to defendants in meritless lawsuits for patent infringement, the two decisions together may prove significant for all businesses potentially involved in patent litigation - particularly for those that aggressively pursue infringement litigation or are the targets of questionable infringement actions.

Octane. The petitioner in Octane successfully defended against a suit alleging that its elliptical machines infringed the respondent's patent. The district court denied Octane's request for attorney's fees. The court applied Federal Circuit precedent holding that, absent any misconduct in the prosecution or litigation of the infringement claim, a case qualifies as "exceptional" only if it was both "brought in subjective bad faith" and "objectively baseless." Icon Health & Fitness, Inc. v. Octane Fitness, LLC, 2011 WL 3900975, at *1 (D. Minn. Sept. 6, 2011). The district court held that Octane had not satisfied either prong of that test.

On appeal, Octane argued both that it had shown the case to be exceptional and that the Federal Circuit should discard the subjective prong of the exceptionality test. The Federal Circuit rejected both arguments and affirmed the district court, expressly declining to "revisit [its] settled standard for exceptionality." Icon Health & Fitness, Inc. v. Octane Fitness, LLC, 496 F. App'x 57, 65 (Fed. Cir. 2012). Octane's petition for certiorari argued that the Federal Circuit's test is unduly stringent and fails to deter meritless infringement suits.

Highmark. The petitioner in Highmark sought attorney's fees after defending against a claim that it had infringed a health-care patent. The district court concluded that the case was exceptional, both because two of the infringement claims were baseless and because of litigation misconduct.

A divided panel of the Federal Circuit affirmed in part and reversed in part. The panel majority applied a recent Federal Circuit precedent holding that de novo review, rather than review under the deferential clear-error standard, applied to a district court's conclusion that an infringement action was objectively baseless. See Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 687 F.3d 1300, 1309 (Fed. Cir. 2012). Using the de novo standard, the majority concluded that only one of the infringement claims at issue was frivolous and that the "alleged litigation misconduct" did not render the case exceptional. Id. at 1316. It remanded the case to the district court for a determination of "the amount of attorneys' fees apportionable to" that claim. Id. at 1058. The dissenting judge argued that the deferential clear-error standard of review should apply to all aspects of an exceptionality determination and that the district court's decision should be affirmed under that standard. Id. at 1319 (Mayer, J., dissenting).

The Federal Circuit then denied rehearing en banc. See Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 701 F.3d 1351 (Fed. Cir. 2012) (per curiam). Five judges dissented, arguing that applying a de novo standard of review to determinations that a suit was objectively baseless "is squarely at odds with the highly deferential review adopted by every [other federal court of appeals] and the Supreme Court" when reviewing awards of either sanctions for misconduct or attorney's fees under other statutes. Id. at 1357 (Moore, J., dissenting).

Absent extensions, amicus briefs in support of the petitioners in both Octane and Highmark will be due on November 22, 2013, and amicus briefs in support of the respondents will be due on December 23, 2013.


Federal Insurance Contributions Act - Tax Consequences of Severance Payments Upon Involuntary Termination

Today, the Supreme Court granted certiorari in United States v. Quality Stores, Inc., No. 12-1408, to resolve a split between the Sixth Circuit and the Federal Circuit on whether severance payments made to an employee upon the employee's involuntary separation qualify as "wages" under the Federal Insurance Contributions Act. Because the Court's resolution of this issue is likely to clarify for employers the tax consequences of severance payments made to employees who are laid off as a result of reductions in force or similar events, it should be of interest to the entire business community.

FICA imposes taxes on both employers and employees. These taxes are used to fund Social Security and Medicare benefits. The taxes are on "wages" paid by an employer or received by an employee "with respect to employment." 26 U.S.C. §§ 3101(a) and (b), 3111(a) and (b). With certain exceptions, "wages" are defined as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash." Id. § 3121(a).

In 2001, Respondent Quality Stores filed for bankruptcy and began to wind down its operations. Before and after filing for bankruptcy, Quality Stores established severance plans under which executives and employees were guaranteed severance payments should their jobs be eliminated. Upon terminating all of its employees, Quality Stores made approximately $1 million in severance payments.

Quality Stores withheld and paid taxes on the severance payments, but it later sued for a refund, arguing that the payments were not "wages" and therefore were not subject to FICA. Quality Stores argued that the severance payments were "supplemental unemployment compensation benefits," which are defined under 26 U.S.C. § 3402(o) as "amounts which are paid to an employee . . . because of an employee's involuntary separation from employment . . . resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions . . . ." Quality Stores argued that supplemental-unemployment-compensation benefits are not wages as defined in FICA, and therefore are not subject to FICA.

The Bankruptcy Court and Sixth Circuit agreed with Quality Stores and ordered a refund. Their decision conflicts with a decision of the Federal Circuit, which held in CSX Corp. v. United States, 518 F.3d 1328, 1345 (Fed. Cir. 2008), that supplemental-unemployment-compensation benefits are taxable under FICA.

Absent extensions, amicus briefs in support of the petitioner will be due on November 22, 2013, and amicus briefs in support of the respondent will be due on December 23, 2013.


First Amendment - Compelled Association - Medicaid Providers

The First Amendment, as incorporated by the Fourteenth Amendment, guarantees freedom of association and prohibits States from abridging "the right of the people . . . to petition the Government for a redress of grievances." U.S. Const. amend. I. The State of Illinois has established programs, funded under Medicaid, to provide in-home services for individuals in need of long-term care who might otherwise face institutionalization. These programs subsidize the costs of personal assistants to help with in-home care. They also require the personal assistants to accept an exclusive representative to petition the State regarding reimbursement rates for the care that they provide - in other words, the State requires them to negotiate through a union. Today, the Supreme Court granted certiorari in Harris v. Quinn, No. 11-681, to decide whether Illinois's requirements of compelled association violate the personal assistants' First Amendment rights.

The case involves two groups of petitioners: personal assistants who provide in-home services under Illinois's "Rehabilitation Program," and personal assistants who provide in-home services under the State's "Disabilities Program." Personal assistants in the Rehabilitation Program are unionized and are required to pay union dues; personal assistants in the Disabilities Program have voted not to unionize but could vote to unionize in the future. Some personal assistants filed a putative class action against Illinois, the union representing personal assistants in the Rehabilitation Program, and the two unions that had sought to represent the personal assistants in the Disabilities Program, claiming that the State and the unions were violating or threatening to violate their First Amendments rights.

The district court granted the defendants' motion to dismiss, and the Seventh Circuit affirmed. The court of appeals held that the personal assistants in the Rehabilitation Program are state employees and that requiring them to provide financial support to their union is permissible. The court of appeals also held that the personal assistants in the Disabilities Program do not have any claims that are ripe for judicial review because no union currently represents them and they are not required to pay union dues.

The issues in this case are important to businesses and labor unions that are involved in providing care under Medicaid. Many States require collectivization of personal-home-care providers, and many more might do so if the Supreme Court upholds Illinois's programs. The personal assistants here also argue that the issues in this case may allow States to require collectivization of physicians, nurses, hospitals, and nursing homes.

Barring extensions, amicus briefs in support of the petitioners are due on November 22, 2013, and amicus briefs in support of the respondents are due on December 23, 2013.


Copyright Act - Infringement - Laches

Today, the Supreme Court granted certiorari in Petrella v. Metro-Goldwyn-Mayer, Inc., No. 12-1315, to resolve a circuit split concerning the availability of the laches defense in copyright-infringement cases. The Court's decision on this issue will be important to businesses and individuals in the media and entertainment industries.

The federal Copyright Act contains a statute of limitations barring civil actions commenced more than three years after the claim accrued. 17 U.S.C. § 507(b). This limitations period applies separately to each act of infringement, even if prior acts of infringement began before the three-year period. The equitable defense of laches, however, may bar claims when a plaintiff's unreasonable delay in commencing a lawsuit causes prejudice to the defendant. The courts of appeals have split over the availability of laches as a defense to copyright-infringement claims, particularly when the defendant's allegedly infringing conduct had been going on for more than three years before the plaintiff filed suit.

In Petrella, the plaintiff sued MGM and other defendants for copyright infringement related to the defendants' sale and distribution of the 1980 movie Raging Bull, which was allegedly based on works written by the plaintiff's deceased father (who also allegedly participated in the production of the film). The plaintiff had been aware of her potential claims against the defendants since 1991, but she did not file suit until 2009. In recognition of the statute of limitations, she sought damages solely for infringements occurring during the three years before she filed suit; she also sought prospective injunctive relief. The district court granted summary judgment in favor of the defendants, holding that laches barred all the claims because the plaintiff's delay in commencing the action was unreasonable and had prejudiced the defendants. The Ninth Circuit affirmed, holding that the plaintiff's 18-year delay was unreasonable and that the defendants, who spent millions of dollars marketing and distributing the film, had suffered expectations-based prejudice.

In a concurring opinion, Judge Fletcher recognized "a severe circuit split on the availability of a laches defense in copyright cases." In particular, while laches may bar all relief in copyright claims filed in the Ninth Circuit, the defense is completely unavailable in copyright actions in the Fourth Circuit. Lyons P'ship, L.P. v. Morris Costumes, Inc., 243 F.3d 789, 797-98 (4th Cir. 2001). Other circuits apply laches to copyright claims only in the most "extraordinary" or "compelling" circumstances (see Peter Letterese & Assocs., Inc. v. World Inst. of Scientology Enters., Int'l, 533 F.3d 1287, 1320 (11th Cir. 2008); Chirco v. Crosswinds Cmtys., Inc., 474 F.3d 227, 233 (6th Cir. 2007)), or to bar only certain types of relief (see New Era Publ'ns Int'l v. Henry Holt & Co., 873 F.2d 576, 584-85 (2d Cir. 1989)).

Recognizing the split of authority, the Supreme Court granted certiorari today on the question "whether the nonstatutory defense of laches is available without restriction to bar all remedies for civil copyright claims filed within the three-year limitations period prescribed by Congress."

Absent extensions, amicus briefs in support of the petitioner will be due on November 22, 2013, and amicus briefs in support of the respondents will be due on December 23, 2013.

Originally published October 2013

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