The U.S. Supreme Court recently issued two unanimous opinions making it easier for companies that prevail in baseless patent infringement suits brought by so–called "patent trolls" to recover their attorney's fees. Octane Fitness, LLC v. Icon Health & Fitness, Inc., 2014 U.S. LEXIS 3107 (Apr. 29, 2014); Highmark, Inc. v. Allcare Health Mgmt. System, Inc., 2014 U.S. LEXIS 3106 (Apr. 29, 2014).
Patent trolls are non–practicing entities that do not produce an actual product and often own few assets other than patents. Instead, they make money by filing patent infringement suits against companies that provide products or services. They have been accused of legal extortion––coercing license fees from accused infringers who pay to avoid the enormous cost of patent litigation which can run to millions of dollars. Until recently, they had little to lose––it was unusual for even a successful litigant to recover its costs because the standard for awarding attorney's fees was almost impossible to meet. All that changed on Tuesday.
The Patent Act authorizes district courts to award attorney's fees to prevailing parties in exceptional cases. But the Federal Circuit, which hears patent appeals, adopted a standard that made it extremely difficult to get attorney's fees. The Federal Circuit interpreted the Act as allowing fee awards in only two circumstances: (1) when there was material inappropriate conduct or (2) when suit was both "brought in subjective bad faith" and "objectively baseless."
It also used a standard of review that made it hard to uphold an award of attorney's fees on appeal. Traditionally, decisions on questions of law are reviewable "de novo," and decisions on matters of discretion are reviewable for "abuse of discretion." Under a de novo standard, the appellate court can decide for itself whether fees are warranted, making it easy to reverse a district court's award. Under an abuse of discretion standard, attorney's fees awards are entitled to deference, making them difficult to overturn. The Federal Circuit used a "de novo" standard of review.
In Tuesday's rulings, the Supreme Court overruled the Federal Circuit on both points. It declared that an "exceptional" case justifying an award of attorney's fees was "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 also ruled that the decision of whether a case is "exceptional" is to be reviewed on appeal for abuse of discretion.
These holdings significantly change the dynamics of patent infringement litigation by (1) giving plaintiffs the risk of being liable for the defendants' fees and (2) giving defendants an incentive to defend, rather than settle, weak cases because they can recover their fees.
Applying a more lenient standard and requiring the Federal Circuit to give deference to awards of attorney's fees by district courts makes it more likely that those awards will be made and affirmed, thus dissuading frivolous suits and discouraging abusive patent litigation.
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