Yesterday, describing the Federal Circuit's two-part test as
"unduly rigid" and "impermissibly encumber[ing] the
statutory grant of discretion to district courts," Justice
Sonia Sotomayor delivered a pair of unanimous U.S. Supreme Court
decisions liberalizing the standards for awards of attorney fees in
patent cases. In the first case, Octane Fitness, LLC v. Icon
Health & Fitness, Inc., __ U.S. __, No. 12-1184 (April 29,
2014), the Court held that the Federal Circuit's existing
framework for "exceptional case" fee awards was so
"demanding" and inconsistent with the text of 35 U.S.C.
§ 285 as to render the statute "superfluous."
The Court therefore overruled that authority and significantly
expanded the situations in which district courts may award such
fees. In the second case, Highmark Inc. v. Allcare Health
Management System, Inc., __ U.S. __, No. 12-1163 (April 29,
2014), the Court held, based on Octane, that because
§ 285 fee awards are the product of the district
judge's discretion, they are reviewed only for abuse of
discretion on appeal.
Brooks Furniture Test Rejected
In Octane, the Supreme Court overturned the Federal
Circuit's earlier decision in Brooks Furniture
Manufacturing, Inc. v. Dutailier International, Inc., 393 F.3d
1378 (Fed. Cir. 2005). In Brooks Furniture, the
Federal Circuit had defined an "exceptional case" for
purposes of 35 U.S.C. § 285 as one that either involves
"material inappropriate conduct" or is both
"objectively baseless" and "brought in subjective
bad faith." Under Brooks Furniture, a party was also
required to establish the "exceptional" nature of a case
by clear and convincing evidence. The Supreme Court ruled
that all three standards are incorrect.
The Court found that, with Brooks Furniture and its
progeny, the Federal Circuit had abandoned an earlier
"holistic, equitable approach [for finding an exceptional
case] in favor of a more rigid and mechanical formulation."
It based this conclusion on a review of the legislative
history of § 285 and its predecessor, regional circuit
decisions from before the Federal Circuit was established, and
Federal Circuit decisions predating Professional Real Estate
Investors, Inc. v. Columbia Pictures Industries, Inc. 508 U.S.
49 (1993). The Court further found that the Federal
Circuit's Brooks Furniture standard "superimposes an
inflexible framework onto statutory text that is inherently
flexible." It thus found the standard to be too
restrictive, in part because district courts already possess
inherent power to award fees in cases involving misconduct or bad
faith. In addition, the Court rejected Brooks
Furniture's requirement of "clear and convincing
evidence" because it has never interpreted comparable
fee-shifting statutes to require such a burden of proof, the
language of § 285 imposes no specific evidentiary burden, and
patent law issues are generally decided on a preponderance of the
evidence.
The New Test for Fee Awards
In place of the Brooks Furniture standard, the Court
held in Octane 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." The Court further stated, "District
courts may determine whether a case is 'exceptional' in the
case-by-case exercise of their discretion, considering the totality
of the circumstances."
Finding comparable its earlier decision in the context of the
Copyright Act (Fogerty v. Fantasy, Inc., 510 U.S. 517
(1994)), the Court stated that "there is no precise rule or
formula for making these determinations, but instead equitable
discretion should be exercised in light of the considerations we
have identified." The Court noted that nonexclusive
factors in the copyright context include "frivolousness,
motivation, objective unreasonableness (both in the factual and
legal components of the case) and the need in particular
circumstances to advance considerations of compensation and
deterrence." More specific guidance was not given.
In contrasting the standard announced in Octane with the
overly rigid Brooks Furniture framework, the Court has
made clear that conduct justifying fees under § 285 need not
be independently sanctionable and that a case presenting either
subjective bad faith or meritless claims "may sufficiently set
itself apart from mine-run cases to warrant a fee
award."
Change in Standard of Review
In a five-page opinion in Highmark—remarkably
brief, particularly considering the volume of party and amici
briefing—the Supreme Court held that all aspects of a
district court's "exceptional case" determination
under § 285 should be reviewed for abuse of discretion.
The Court therefore vacated the decision below, which had reviewed
at least portions of the district court's exceptional-case
determination "de novo" and "without
deference."
The Highmark opinion reiterates the Court's holding
from Octane that determining whether a case is
"exceptional" under § 285 is a matter of
discretion. Accordingly, following its precedent in prior
cases involving similar determinations, the exceptional-case
determination is to be reviewed only for abuse of discretion.
Paraphrasing a prior decision, the Court offered several reasons
for its ruling: the statute "suggests some deference to
the district court upon appeal," a district court is better
positioned to decide if a case is "exceptional" because
it lives with the case over a prolonged period of time, and the
issue is not susceptible to the generalization of de novo review
and is likely to benefit from the experience that an
abuse-of-discretion rule will permit to develop. Finally, the
Court noted that "[a]lthough questions of law may in some
cases be relevant to the § 285 inquiry, that inquiry
generally is, at heart, 'rooted in factual
determinations.'"
Implications
The Octane and Highmark decisions likely
will have an immediate impact on pending patent litigation by
making the prospect of receiving attorney fees more readily
available to a party prevailing in a "not
run-of-the-mill" case.
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