Supreme Court Reverses Federal Circuit On Exceptional Case Review, Merit Standards

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By Tony Dutra  

April 29 — The current standard for finding an “exceptional” patent case, under 35 U.S.C. §285, for purposes of awarding attorneys' fees to the winner, “is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts,” the Supreme Court ruled on April 29.

That decision overturns the U.S. Court of Appeals for the Federal Circuit's two-pronged test, requiring a showing of both objective baselessness and subjective bad faith. The high court gave the word “exceptional” its ordinary meaning and held “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 result is that district courts will make case-by-case decisions within their equitable discretion, parallel to the standard for awarding fees under the Copyright Act.

Stakeholders, however, told Bloomberg BNA that they did not expect a significant increase in either the expectation of victorious defendants in seeking awards, particularly when summary judgment was denied, or in district court judges exercising their new discretion.

In a separate opinion, the Supreme Court also ruled that the Federal Circuit should apply an abuse-of-discretion standard of review as to “all aspects of a district court's §285 determination,” including questions of law, which in this analysis are generally “rooted in factual determinations” (Highmark Inc. v. Allcare Health Mgmt. Sys., Inc.,U.S., No. 12-1163, 4/29/14).

It thus reversed the appeals court's current standard of de novo review.

The decisions mean that, for the second time in just a little over a year, the high court took from the Federal Circuit its case-specific review of certain elements of a patent litigation. In February 2013, the court essentially removed patent attorney malpractice cases to state courts, in Gunn v. Minton, 133 S. Ct. 1059, 2013 BL 43481, 105 U.S.P.Q.2d 1665 (2013).

The decisions also precede a planned markup in the Senate Judiciary Committee on patent litigation abuse legislation on May 1. A major sticking point in the Senate is whether to follow the House's lead in switching to a system where the default would be a “loser pays” system for patent infringement litigants.

The intent of the provision is to force so-called patent trolls to have more at stake before asserting questionable patents in court. But efforts to date to craft language that would only apply to trolls have failed, and legislators may believe that the Supreme Court's decisions here are sufficient.

Octane Challenged Exceptionality Standard

Section 285 reads: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”

The Federal Circuit's two-pronged test for finding a case “exceptional” was articulated in Brooks Furniture Mfg. Inc. v. Dutailier Int'l Inc., 393 F.3d 1378, 1381, 73 U.S.P.Q.2d 1457 (Fed. Cir. 2005).

In the first case at issue here, the appeals court affirmed in an unpublished opinion a lower court's refusal to award attorneys' fees to the alleged infringer. Icon Health & Fitness Inc. v. Octane Fitness LLC, 496 Fed. Appx. 57, 2012 BL 277788 (Fed. Cir. 2012). Octane Fitness LLC claimed to have spent over $2 million to defend a patent infringement charge, but the lower court said that Octane had not met the high hurdle of showing either objective baselessness or subjective bad faith by clear and convincing evidence. 2011 BL 228327 (D. Minn. 2011).

Totality of Circumstances Test

Justice Sonia M. Sotomayor wrote the 10-page opinion of the unanimous court—except that Justice Antonin Scalia did not join with respect to three footnotes related to statutory interpretation of a related change to the Patent Act in 1946.

“[A] case presenting either subjective bad faith or exceptionally meritless claims may sufficiently set itself apart from mine-run cases to warrant a fee award.”Supreme Court

The court said that district courts should now apply a “totality of the circumstances” test similar to the way 17 U.S.C. §505 of the Copyright Act was addressed in Fogerty v. Fantasy, 510 U.S. 517, 29 U.S.P.Q.2d 1881 (1994). In a footnote, it identified the non-exclusive list of factors from that case without explicitly saying they were the same factors that would apply in the patent context. The factors are “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.”

The court said that sanctions for litigation misconduct are covered by Fed. R. Civ. P. 11, so the extent to which the Federal Circuit has looked for that as a basis under Section 285 it is “not the appropriate benchmark.” On the other hand, the court said there may be a “rare case in which a party's unreasonable conduct—while not necessarily independently sanctionable—is nonetheless so ‘exceptional' as to justify an award of fees.”

And the court said it saw no reason that both prongs of the Federal Circuit's test would have to be satisfied, such that “a case presenting either subjective bad faith or exceptionally meritless claims may sufficiently set itself apart from mine-run cases to warrant a fee award.”

Finally, the court also rejected the clear-and-convincing evidence standard for showing an exceptional case, reducing it to a preponderance of the evidence.

Rudolph A. Telscher Jr. of Harness, Dickey & Pierce PLC, St. Louis, Mo., represented Octane. Carter G. Phillips of Sidley Austin LLP, Washington, D.C., represented Icon Health.

In an email, Telscher told Bloomberg BNA that the case will now return to district court for reconsideration of Octane's request under the new standard and lower burden of proof. He also cited “evidence that bears on the unordinary nature of Icon's case”—economic coercion and the value of Icon's patent—that the district court refused to consider earlier and should now consider.

Highmark Challenged No-Deference Standard

Highmark Inc. appealed the Federal Circuit's ruling that a district court's findings—leading to an award of sanctions of $5.3 million for frivolous litigation—were subject to appellate review without deference. Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 687 F.3d 1300, 2012 BL 198529, 104 U.S.P.Q.2d 1046 (Fed. Cir. 2012).

Five judges on the Federal Circuit dissented to the denial of en banc review. 701 F.3d 1351, 2012 BL 318020, 105 U.S.P.Q.2d 1049 (Fed. Cir. 2012).

Octane Settles Highmark Review Standard

“Our holding in Octane settles this case,” the court ruled in the seven-page unanimous opinion in Highmark, also written by Sotomayor. “Because §285 commits the determination whether a case is ‘exceptional' to the discretion of the district court, that decision is to be reviewed on appeal for abuse of discretion.”

“Because §285 commits the determination whether a case is ‘exceptional' to the discretion of the district court, that decision is to be reviewed on appeal for abuse of discretion.”Supreme Court

The case was thus remanded for the Federal Circuit to review Allcare's appeal of the $5.3 million award under the abuse-of-discretion standard.

In a footnote, the court said that the appeals court should determine that there was an abuse of discretion when the district court “based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence,” quoting Cooter & Gell v. Hartmarx Corp., 496 U. S. 384, 405 (1990).

Neal Kumar Katyal of Hogan Lovells US LLP, Washington, D.C., represented Highmark. Donald R. Dunner of Finnegan Henderson Farabow Garrett & Dunner LLP, Washington, D.C., represented Allcare.

Stakeholders: Still ‘A Hard Sell for Fees.'

Bloomberg BNA asked stakeholders if we will now see a shift where attorneys for victorious alleged patent infringers will routinely file motions for awards under Section 285.

Bryan H. Pandya of Wiley Rein LLP, Washington, said no. “An exceptional case is an exception to the norm, and the norm is still the American rule where each party pays its own legal fees,” he said. “If a case reaches trial, in most instances the case would seem to have enough merit to not be exceptional and not warrant attorneys' fees.”

“I would expect most prevailing defendants to not file for attorneys' fees in ordinary, hard fought cases,” Telscher said. “When they do, district court judges will have no difficulty denying the request.”

“Given most courts' reluctance to fee shift, I think that it will still be difficult to obtain fees in many cases that proceed to trial.”Jennifer E. Hoekel, Armstrong Teasdale

“Parties who win at trial but lost at summary judgment stage, with no litigation misconduct, will have a hard sell for fees,” according to Jennifer E. Hoekel of Armstrong Teasdale LLP, St. Louis. “Given most courts' reluctance to fee shift, I think that it will still be difficult to obtain fees in many cases that proceed to trial. And I think in cases where there is a judgment based on invalidity [for obviousness], fees may be difficult.”

“District court judges have rarely awarded fees,” Cynthia J. Rigsby, of Foley & Lardner, Milwaukee, said in agreement. But she did question what will happen going forward. “With additional power to do so under the new standard, and a more deferential standard of review, it will be interesting to see if there is any real change.”

When Would Federal Circuit Overturn Decisions?

Bloomberg BNA also asked for examples of when the Federal Circuit might rule that there was an abuse of discretion in granting an award.

“Claim construction is still an issue of law that is reviewed de novo,” Rigsby noted. “If a district court determines that a case is exceptional because a litigant persisted in an unreasonable and incorrect position on claim construction, and the Federal Circuit reversed the claim construction ruling, you could expect an abuse of discretion ruling as well.”

Pandya, who wrote a pro-Highmark amicus brief on behalf of the Blue Cross Blue Shield Association, agreed with that assessment and added, “Other legal issues could be misapplying standards for indirect or joint infringement. Even if those errors do not impact the ultimate winner of the case, such errors could make a close case seem not so close, or vice versa.”

Is Congressional Action Still Necessary?

“A more significant threat of fees may discourage patent trolls from bringing cases,” according to Gregory S. Tamkin of Dorsey & Whitney LLP, Denver, referring to the basis for legislation in Congress. “That being said, many of the trolls are small LLCs with no assets. So, it remains to be seen whether this step alone will deter those types of trolls.”

However, he added, “The shift away from [the clear-and-convincing evidence] standard may be most telling that the Supreme Court is sending a message about frivolous patent infringement cases.”

“Hopefully, it will curb baseless troll litigation, and it will even the playing field ever so slightly so that there is some skin in the game on behalf of the trolls and their lawyers,” Bijal V. Vakil of White & Case, Palo Alto, Calif., said.

Sona De of Ropes & Gray, New York, saw possible direct hints to Congress in the opinions.

“Some may speculate that the comments regarding ‘commercial strategy' in Octane and forcing a license ‘under threat of litigation' in Highmark may apply to cases by certain non-practicing entities,” she said. “These rulings, however, are not limited to any particular class of litigants. They apply across the board.”

In a statement to Bloomberg BNA, the American Intellectual Property Law Association said that the Supreme Court is, in fact, telling Congress that it should now back off.

“Today, the Supreme Court restored the law to its traditional standards that allow trial courts to manage the cases and lawyers that come before them,” AIPLA Executive Director Q. Todd Dickinson said. “The justices again demonstrate that the judiciary is fully capable of making necessary course corrections when needed to redress abuses of the system.”

He recalled that “the hottest button” in the early part of the debate leading up to the America Invents Act was the automatic issuance of an injunction in patent infringement cases, which the Supreme Court resolved in eBay Inc. v. MercExchange LLC, 547 U.S. 388, 78 U.S.P.Q.2d 1577 (2006).

“The injunction issue went away after eBay, and the Supreme Court is sending a message again: The same thing should happen here,” Dickinson said.

Another Message to Federal Circuit Coming?

Finally, Cynthia E. Kernick of Reed Smith LLP, Pittsburgh, asked whether the result here sets the stage for another Supreme Court statement on Federal Circuit standards.

Kernick asked “whether the Supreme Court is ready to tackle the standard of review on claim construction itself and set aside de novo review there, as well.”

The high court recently granted a cert petition and will hear next term a case challenging just that, in Teva Pharm. USA, Inc. v. Sandoz, Inc., No. 13-854 (U.S., review granted March 31, 2014). The petitioner's merits brief in that case is due May 15.


To contact the reporter on this story: Tony Dutra in Washington at adutra@bna.com

To contact the editor responsible for this story: Naresh Sritharan at nsritharan@bna.com

Octane text is available at http://pub.bna.com/ptcj/12-1184April29.pdf.

Highmark text is available at http://pub.bna.com/ptcj/12-1163April29.pdf.

Dunner and Dickinson are members of this journal's advisory board.