United States: Hot Topics In Trademark Law 2015 Series: How The Supreme Court's Octane Fitness Decision Addressing "Exceptional Cases" In The Patent Context Is Affecting Lanham Act "Exceptional Cases"

Last Updated: December 31 2015
Article by Kevin O'Shea

Note: This blog post is part of a series that reviews and discusses a number of significant trademark-related decisions handed down in 2015, including two from the U.S. Supreme Court and several from the U.S. Court of Appeals for the Federal Circuit and other Circuit Courts. Going forward, these rulings will impact how parties protect their trademark assets, including in particular the strategies that parties will need to employ to maximize their likelihood of success in litigation. To follow the entire blog series, click here.

Both the Lanham Act and the Patent Act allow an award of attorneys' fees to a prevailing party in an "exceptional case." See 15 U.S.C. 1117(a) (i.e., Lanham Act Section 35(a)); 35 U.S.C. 285. The "exceptional case" provision is identical in the two statutes; indeed, Congress referenced the patent "exceptional case" statute when it enacted the trademark "exceptional case" statute. Id.; See S.Rep. No. 93-1400, at 2 (1974), reprinted in 1974 U.S.C.C.A.N. 7132, 7133. Therefore, it is natural that courts have relied on patent-related "exceptional case" jurisprudence to construe the identical Lanham Act statute, particularly in determining when a case is "exceptional," thereby warranting an award of attorneys' fees. Id.; Fair Wind Sailing, Inc. v. Dempster, 764 F.3d 303, 314-15 (3d Cir. 2014) (noting that the court has "'look[ed] to the interpretation of the patent statute for guidance' in interpreting § 35(a)" of the Lanham Act, 15 U.S.C. 1117(a) (citations omitted)). The landscape of "exceptional cases" in patent litigation changed dramatically in 2014, and this change has begun making its way into trademark litigation. We anticipate that this will continue, and that all Circuits will adopt for trademark litigation the broader definition of when a case is "exceptional" that now controls in patent litigation.

The Supreme Court significantly broadened the meaning of an "exceptional case" in the patent context in 2014. See Octane Fitness, LLC v ICON Health & Fitness, Inc., 134 S.Ct. 1749 (2014). In Octane Fitness, the Court rejected the Federal Circuit's rigid two-part analysis for determining whether a case is "exceptional" for purposes of the Patent Act. Id. at 1755. Instead, the Court relied on the plain and ordinary meaning of "exceptional," including dictionary definitions and concluded:

[A]n '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.

Id. at 1756. Thus, the Court recognized that district courts are in the best position to determine whether a case is "exceptional" based on the district court's experience with similar cases.1 In that regard, the Court identified as relevant a nonexclusive list of factors that it had previously provided in the context of determining whether to award attorneys' fees under a similar provision of the Copyright Act. The list includes "frivolousness, motivation [in bringing and continuing the suit], 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." Id. at 1756 n.6 (quoting Fogerty v. Fantasy, Inc., 510 U.S. 517, 534 n.19 (1994)).

In practice, this standard has played out in the patent litigation context as "district courts know it when they see it" – i.e., district courts know when a case should not have been filed because of substantive problems, or an argument should have been dropped, or the case dismissed entirely, once it was rendered untenable by a ruling (e.g., a claim construction ruling) or discovery of information that undermined the argument or case. Moreover, since Octane Fitness, the Federal Circuit has consistently allowed district courts great latitude, rarely reversing a district court's decision as to whether or not a case was "exceptional." Accordingly, Octane Fitness is often cited as one of the reasons that the number of patent litigation cases, and particularly "patent troll" litigation, has dropped steadily in 2015.

On the Lanham Act side, numerous district courts and at least two Circuit Courts have explicitly recognized that Octane Fitness's holding as to the meaning of "exceptional" applies equally in the trademark context. For example, in Fair Wind Sailing v. Dempster, 764 F.3d 303 (3d cir. 2014), the Third Circuit addressed the first case to come before it after Octane Fitness in which Lanham Act Section 35(a) was an issue. Previously, the Third Circuit had required a finding that the losing party had engaged in culpable conduct such as bad faith, fraud, malice, or intentional infringement. Id. at 314 (quoting Green V. Fornario, 486 F.3d 100, 103 (3d Cir. 2007)). Overruling more than two decades of caselaw, the Third Circuit "import[ed] Octane Fitness's definition of 'exceptionality' into [its] interpretation of § 35(a) of the Lanham Act." Id. at 315. Going forward, "a district court may find a case 'exceptional,' and therefore award fees to the prevailing party, when (a) there is an unusual discrepancy in the merits of the positions taken by the parties or (b) the losing party has litigated the case in an 'unreasonable manner.'" Id. The court continued, "[i]mportantly, that discretion [to decide exceptionality] is not cabined by a threshold requirement that the losing party acted culpably. The losing party's blameworthiness may well play a role in a district court's analysis of the 'exceptionality' of a case, but Octane Fitness has eliminated the first step in our two-step test for awarding fees under § 35(a) of the Lanham Act." Id. The court remanded the case so that the district court, "[w]ith its unparalleled knowledge of the litigation and the parties" could assess exceptionality in the first instance. Id.

Similarly, the Fourth Circuit recently rejected years of caselaw in which it had "defined the 'exceptional' case for purposes of § 1117(a) 'as one in which the defendant's conduct was malicious, fraudulent, willful or deliberate in nature.'" Georgia-Pacific Consumer Prods. LP v. von Drehle Corp., 781 F.3d 710, 719 (4th Cir. 2015) (quoting Retail Servs., Inc. v. Freebies Publ'g, 364 F.3d 535, 550 (4th Cir. 2004)). In that context, "willful" did not mean merely that the defendant's actions were volitional but, rather, that the defendant acted with the intent to infringe the plaintiff's trademark. Id. Thus, the Fourth Circuit's test for exceptionality in a Lanham Act case was particularly stringent before Octane Fitness. Recognizing that the exceptional case provision in the Lanham Act is identical to the corresponding provision in the Patent Act, the court held that there was "no reason not to apply the Octane Fitness standard when considering the award of attorneys fees under § 1117(a)." Id. at 721 (citing Fair Wind Sailing, 764 F.3d at 314-15). In addition to the factors set forth in Fair Wind Sailing, supra, the Georgia-Pacific court noted that after Octane Fitness, a Lanham Act case could be found exceptional when "there is otherwise 'the need in particular circumstances to advance considerations of compensation and deterrence.'" Id. (quoting Octane Fitness, 134 S.Ct. at 1756 n.6). Like the Fair Wind Sailing court, the Georgia-Pacific court remanded the case to the district court to consider exceptionality in view of the new standard set out by Octane Fitness. See also Slep-Tone Entm't Corp. v. Karaoke Kandy Store, Inc., 782 F.3d 313, 317-18 (6th Cir. 2015) (remanding exceptional case issue with directions to "assess the applicability of Octane Fitness before determining whether it is necessary to reassess if this case qualifies as extraordinary under § 1117(a).").

While not all of the Circuit Courts have had an opportunity to consider the exceptionality of a Lanham Act case under Section 35(a) since the Supreme Court issued Octane Fitness, it is notable that the two Circuit Courts that have done so, as well as all district courts that have done so, have recognized the applicability of the Octane Fitness holding in the context of Section 35(a). There is no basis for believing that every Circuit will not apply the Octane Fitness standard to determine whether a Lanham Act case is exceptional, warranting an award of the prevailing party's attorneys' fees. Accordingly, it is now significantly easier, particularly in the Fourth Circuit and other Circuits where exceptionality was traditionally determined pursuant to a strict scheme, for a prevailing party to convince a district court that a case is exceptional, and practitioners need to analyze their arguments and tactics, both at the outset of a case and as the case progresses, through the lens of Octane Fitness. Simply put, the new standard is "we know it when we see it" and practitioners need to be careful out there.

Footnote

1 In a companion to Octane Fitness, the Supreme Court held that a district court's determination of exceptionality, or lack thereof, in the patent context is subject only to the deferential abuse of discretion standard on appeal. See Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S.Ct. 1744 (2014). The same standard will apply to a district court's determination of whether a case is exceptional under the Lanham Act's "exceptional case" provision.

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