Supreme Court Raises Risk of Attorney Fees Awards in Patent Litigation

The Supreme Court of the United States decided two cases on April 29 that make it easier for a successful patent litigant to win an attorney fees award against the loser. In Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-1184, 572 U.S. ___ (2014), the Court dramatically lowered both the standard for winning an attorney fees award and the burden of proof required to meet that standard. In Highmark Inc. v. Allcare Health Management Systems, Inc., No. 12-1163, the Court significantly insulated the trial judge’s decision to award attorney fees by limiting appellate review of all aspects of the award for “abuse of discretion” only. While Congress continues to work toward legislative solutions to what many feel is a “broken” U.S. patent litigation system riddled with abusive “patent troll litigation,” the dual impacts of Octane and Highmark could possibly alter the patent litigation landscape to such an extent that legislation might not be necessary.

Discretionary Attorney Fees Awards in Exceptional Cases

Section 285 of the Patent Act has stated, since 1952, that “the court in exceptional cases may award reasonable attorney fees to the prevailing party.” The statute seems simple and contains neither any special definition of “exceptional” nor any specific limitations on the trial court’s discretion, and until the mid-2000s, whether a case was exceptional was decided by the trial judge considering “the totality of the circumstances.” However, the U.S. Court of Appeals for the Federal Circuit, which decides appeals of all patents cases nationwide, judicially created new limitations in 2005 when it ruled that a case was “exceptional” only in two limited circumstances: (1) “when there has been some material inappropriate conduct,” or (2) when the litigation is both “brought in subjective bad faith” and”objectively baseless.”[1] In subsequent cases, the Federal Circuit further restricted “exceptional case” attorney fee awards by holding that litigation is objectively baseless only if it is “so unreasonable that no reasonable litigant could believe it would succeed,” and that litigation is brought in subjective bad faith only if the plaintiff “actually know[s]” that it is objectively baseless.[2] Moreover, the Federal Circuit also ruled in Brooks Furniture that there because was a presumption that a plaintiff has asserted patent infringement “in good faith[,] … the underlying improper conduct and the characterization of the case as exceptional must be established by clear and convincing evidence.”

How often did a successful defendant find clear and convincing evidence that the losing plaintiff had actual knowledge that his case was objectively baseless before it was filed? Almost never, it turned out – and as one would expect. The combined effect of these Federal Circuit decisions was the practical elimination of attorney fee awards in favor of successful defendants in all but the most egregiously extraordinary situations, of which there were precious few. So long as the plaintiff and her attorneys obeyed the rules just enough to avoid committing independently sanctionable offenses, the losing plaintiff was essentially insulated from the risk of paying the successful defendant’s attorney fees. This “heads I win, tails you lose” situation has formed a major part of the Non-Practicing Entity (a/k/a “Patent Troll”) business model for nearly ten years.

Leveling the Playing Field

The Supreme Court has now eliminated the judicially created limitations on exceptional case determinations set by the Federal Circuit in Brooks Furniture and its progeny. “The framework established by the Federal Circuit in Brooks Furniture is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to the district courts.”[3] The Court explained that exceptional means exceptional, and nothing more. 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,” to be determined by district courts in a case-by-case basis exercise of discretion, considering the totality of circumstances.[4]

The Federal Circuit’s Brooks Furniture requirements were properly understood and recognized by the Supreme Court as having rendered the fee-shifting provision of the Patent Act “largely superfluous,” contrary to the general principle that courts should avoid statutory interpretations that render acts of Congress superfluous.

Finally, the Supreme Court rejected the Federal Circuit’s requirement for clear and convincing evidence that a case is exceptional: “Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.” Instead, the Court noted that the preponderance of the evidence standard should apply because it “allows both parties to ‘share the risk of error in roughly equal fashion.'”[5] Clearly, from 2005 until Octane Fitness, the parties did not share the risk of error in roughly equal fashion, an imbalance that is now corrected.

The Octane Fitness decision was issued simultaneously with the Highmark decision, without which its significance might have been debatable. Because the Supreme Court held in Octane Fitness that the exceptional case determination is to be decided in the district court’s discretion, and because Supreme Court precedent has long held that “matters of discretion” are traditionally reviewable only for “abuse” of that discretion, so must the exceptional case determination be reviewable by the Federal Circuit only for abuse of discretion – a highly deferential standard of appellate review. In a very brief decision, the Court held that all aspects of the determination, not merely the conclusion, are subject to only such limited, deferential review on appeal.[6]

What Does It Mean for Patent Litigants?

First and foremost, the Octane Fitness and Highmark decisions restore substantial power and control over patent litigation to district court judges who oversee every aspect of the cases, from the pleading to discovery to motions to trial phase. For nearly ten years, trial judges have been shackled in their ability to use the attorney fee shifting “exceptional case” statute as a tool to control patent litigation, but not anymore. Also, trial judges will likely be more inclined to invest scarce resources when considering “exceptional case” motions, knowing that their decisions will receive substantial deference on appeal, and not be subjected to de novo review by appellate judges who never experienced, first hand, any of the litigation events that might have given rise to the attorney fees award.

While these Supreme Court decisions apply to plaintiffs and defendants alike, they are more likely to affect the behavior of Non-Practicing Entities (NPEs), also referred to variously as “Patent Trolls,” Patent Assertion Entities, Patent Licensing Companies, etc. Two pillars of the NPE business model are (1) the typical absence of any significant expense for the NPE’s own responses to the defendant’s discovery requests (interrogatories, document (including Electronically Stored Data) requests, etc.), because the patent-in-suit has been separated from the actual brick-and-mortar business (if any) which did the R&D that resulted in the patented technology;[7] and (2) the near-complete absence of risk of an adverse “exceptional case” attorney fees award. In essence, the NPE business model has, until now, been nearly risk-free, with contingent fee lawyers willing to take on that nearly non-existent risk in order to benefit from its disproportionately high rewards.

A significant risk of suffering an adverse attorney fees award may alter the risk-reward calculus of the NPE business model, however, so long as some solution to the additional problem (from the perspective of patent infringement defendants) of judgment-proof NPEs is addressed and resolved. While reasonable minds differ on whether substantive legislation raising the standards of pleading patent infringement allegations is necessary, and theOctane Fitness and Highmark decisions probably counsel against the necessity of such legislation currently being considered by Congress, there is no doubt that someone must be held financially accountable as well as legally accountable when an NPE suffers an “exceptional case” adverse attorney fees award under Section 285 of the Patent Act. This can be done either by judicial action such as, for example, holding lawyers jointly and severally liable for Section 285 awards against their clients, or through legislation aimed at identifying the real party in interest who stands to gain financially from the patent infringement litigation, and binding that party to the outcome, whether good or bad. Without this further adjustment to the U.S. patent litigation system, it may turn out that the Supreme Court’s well-intentioned Octane Fitness and Highmark decisions have little practical impact on the NPE business model.

[1] Brooks Furniture Mfg., Inc. v. Dutailer Int’l, Inc., 393 F.3d 1378 (Fed. Cir. 2005).
[2] iLOR, LLC v. Google, Inc., 631 F.3d 1372 (Fed. Cir. 2011).
[3] Octane Fitness, 572 U.S. at ___.
[5]Id., citing Herman & MacLean v. Huddleston, 459 U.S. 375, 390 (1983).
[6] Highmark, 572 U.S. at ___. The Supreme Court noted that the Federal Circuit had denied rehearing en banc, over the dissent of five circuit judges who criticized the de novo standard of review (i.e., no deference to the district judge’s determination) as an impermissible invasion of the province of the district court.
[7] The absence of discovery expenses for the NPE stands in sharp contrast to the extraordinary discovery response expenses incurred by the typical company targeted by the NPE. A common NPE litigation tactic is to send the extensive list of discovery demands that will be made later in the case to the targeted company at the very outset of the matter, in the context of the letter seeking licensing negotiations and merely as a bargaining tool.