United States: Supreme Court Decision Alert - April 29, 2014

Keywords: Patent Act, attorney's fees, Clean Air Act, good neighbour provision, air pollution

Patent Act—Attorney's Fees for Exceptional Cases

Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-1184, and Highmark Inc. v. Allcare Health Management System, No. 12-1163 (described in the October 1, 2013, Docket Report)

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 issued two unanimous opinions that describe the circumstances in which fees may be awarded under § 285 and clarify the standard of review to be applied when a fee determination is challenged on appeal. In Octane Fitness, LLC v. Icon Health & Fitness, Inc., the Court held that § 285 represents a "statutory grant of discretion to district courts" that provides "no precise rule or formula for" determining when fees should be awarded. Octane, slip op. 7-8. And in Highmark Inc. v. Allcare Health Management System, the Court held that "an appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district court's [fee] determination" under § 285. Highmark, slip op. 5.

The Court's decisions are of interest to all businesses potentially involved in patent litigation—particularly those businesses that either actively pursue infringement litigation or are the targets of questionable infringement actions.

Octane. The petitioner in Octane successfully defended against a suit alleging that its product infringed the respondent's patent, but the district court denied Octane's request for attorney's fees. In doing so, the district court applied Federal Circuit precedent holding that, "'absent misconduct in conduct of the litigation or securing the patent,'" fees may be awarded only if the party seeking fees provided "'clear and convincing evidence'" to show both that "'the litigation is brought in subjective bad faith'" and that "'the litigation is objectively baseless.'" Octane slip op. 4-5 (quoting Brooks Furniture Mfg., Inc. v. Dutailier Int'l, Inc., 393 F.3d 1378, 1381-82 (Fed. Cir. 2005)). The Federal Circuit affirmed, rejecting the argument that its test for awarding fees was "'overly restrictive.'" Octane slip op. 6 (quoting Icon Health & Fitness, Inc. v. Octane Fitness, LLC, 496 F. App'x 57, 65 (Fed. Cir. 2012)).

In a unanimous opinion by Justice Sotomayor, the Supreme Court reversed. The Court held that the "text" of § 285 is "patently clear" and gives the district court "discretion to award attorney's fees" in any "'exceptional' case." Octane slip op. 7. Because "exceptional" simply means "uncommon," the Court held that district courts may award fees in any case "that stands out from others with respect to the substantive strength of a party's litigating position ... or the unreasonable manner in which the case was litigated." Octane slip op. 7-8. The Court rejected the Federal Circuit's test as "superimpos[ing] an inflexible framework onto statutory text that is inherently flexible" and as "so demanding that it would appear to render" the statutory text "largely superfluous." Octane slip op. 8, 11. The Court similarly "reject[ed] the Federal Circuit's requirement that patent litigants establish their entitlement to fees under § 285 by clear and convincing evidence," holding that "nothing in § 285 justifies such a high standard of proof." Octane, slip op. 11 (internal quotation marks omitted).

Highmark. The petitioner in Highmark also sought attorney's fees after successfully defending against an infringement claim. 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 "reversed in part" after applying de novo review to the question whether the "litigation [was] objectively baseless." Highmark slip op. 2-3 (internal quotation marks omitted).

The Supreme Court reversed in another unanimous opinion by Justice Sotomayor. The Court noted that "decisions on matters of discretion are reviewable" on appeal only for "abuse of discretion." Highmark slip op. 4 (internal quotation marks omitted). Relying both on its holding in Octane that "the determination whether a case is 'exceptional' under § 285 is a matter of discretion" and on the view that fee determinations are "rooted in factual determinations," the Court held that the abuse-of-discretion standard governs "all aspects of a district court's § 285 determination." Highmark slip op. 5 (internal quotation marks omitted).

Clean Air Act—Validity of Cross-State Air Pollution Rule

EPA v. EME Homer City Generation, L.P., No. 12-1182 (previously discussed in the June 24, 2013, Docket Report)

The Good Neighbor Provision of the Clean Air Act provides that, when necessary to assure compliance with certain air-quality standards, States must take measures to prevent in-state sources of air pollution from "contribut[ing] significantly" to air pollution in "any other State." 42 U.S.C. § 7410(a)(2)(D)(i). Pursuant to its authority to administer the provision, EPA promulgated the Cross-State Air Pollution Rule (commonly known as the Transport Rule), which establishes a comprehensive scheme for determining when and to what extent emissions from sources within one State impermissibly contribute to air pollution in neighboring States. When States are out of compliance, the Rule allows EPA to issue a federal compliance plan without input from the States themselves; and it permits EPA to require reductions in emissions based on their cost-effectiveness rather than insisting on proportional reductions. Today, in EPA v. EME Homer City Generation, No. 12-1182, the Supreme Court upheld the Transport Rule.

Following EPA's promulgation of the Transport Rule, a coalition of public and private interests petitioned the D.C. Circuit for review. The court of appeals invalidated the rule, holding that EPA must give States an opportunity to correct noncompliance before issuing a federal compliance plan, and that, in issuing federal plans, EPA may not consider cost instead of physically proportionate contribution to pollution.

The Supreme Court reversed in a 6-2 decision, upholding the Transport Rule. (Justice Alito took no part in the consideration or decision of the case.) According to Justice Ginsburg, writing for the majority, the plain text of the statute does not require EPA to give states a "reasonable" period of time to issue new plans for compliance after determining the States' responsibilities under the Transport Rule. EPA did not abuse its discretion when it declined to provide States with a grace period to submit plans after EPA issued their emissions budgets, as it had done under past rules.

What is more, the Court explained, the Good Neighbor Provision does not clearly identify how responsibility should be allocated among different upwind States for a downwind State's excess pollution; that is, it does not necessarily require EPA to allocate responsibility for emissions in a manner proportionate to each State's contribution. Thus, the Court explained, EPA had the authority to select among reasonable options, and EPA's cost-based approach was a rational choice. In reaching that conclusion, the Court acknowledged that some States may be compelled to reduce more emissions than necessary to ensure that affected downwind States are in compliance with air-quality standards; and that some upwind States may be required to reduce their emissions to such an extent that they are no longer covered by the Transport Rule at all. But such results are unlikely, in the Court's view, and, if anything, would provide a basis for individual States to bring as-applied challenges to the Transport Rule.

Justice Scalia, joined by Justice Thomas, dissented. Describing the Clean Air Act as a "federalism-focused regulatory strategy," the dissent explained that air-pollution prevention was intended to be primarily the responsibility of local states and governments. Under the Transport Rule upheld by the Court today, Justice Scalia worried that States now have "los[t] their regulatory primacy." Dissent at 16. Justice Scalia also would have held that States must be held responsible for emissions in proportion to the size of their contribution, not according to a cost-benefit analysis. The proportionality approach, he explained, was both required by the plain text of the statute and, contrary to the majority's suggestion, not impossible to implement.

Because the rule implementing the Clean Air Act may require some emissions sources to adopt pollution-control measures within certain cost limits, the decision is likely to have significant implications for power plants and other major sources of air pollution.

Originally published April 29, 2014.

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