Attorneys’ Fees in Patent Cases

Octane Fitness, LLC v. Icon Health & Fitness, Inc., ___ U.S. ___ (2014), and Highmark Inc. v. Allcare Health Mgmt. System, Inc., ___ U.S. ___ (2014).  New Jersey is a hotbed of patent and other intellectual property litigation, in part due to the significant presence of pharmaceutical companies in New Jersey.  As a result, two opinions of the Supreme Court that were issued this week are particularly important in our State.  The two opinions, both by Justice Sotomayor for a unanimous Court, clarify and alter the standard for awards of attorneys’ fees under the Patent Act’s fee-shifting provision, 35 U.S.C. §285.

The fee-shifting provision states that “the court in exceptional cases may award reasonable attorney fees to the prevailing party.”  A 2005 decision of the Federal Circuit, which has exclusive jurisdiction over patent appeals, ruled that cases are “exceptional” in only two circumstances: (1) “when there has been some material inappropriate conduct,” or (2) when a case is both “brought in subjective bad faith” and “objectively baseless.”  Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005).  Brooks also required “clear and convincing evidence” in order to justify a fee award.  Id. at 1381.  Subsequent Federal Circuit cases elaborated on those standards but did not materially change them.

In Octane, the district court applied the Brooks test and denied fees.  The Federal Circuit affirmed.  In Highmark, the district court awarded fees, but the Federal Circuit reversed that ruling in part.  The Supreme Court granted review in both cases and concluded that the Brooks principles are inconsistent with the text of the Patent Act.

The main opinion was Octane.  After recounting the history of the Patent Act’s fee-shifting provision, Justice Sotomayor observed that since the statute does not define “exceptional,” that term is to be construed “in accordance with [its] ordinary meaning.”  An “exceptional” case, she ruled, “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 are to apply this test on a case-by-case basis, using their “equitable discretion.”  This “inherently flexible” scheme was what the statute contemplated. 

The Brooks criteria, in contrast, were “overly rigid.” The first prong “appears to extend largely to independently sanctionable conduct.”  But the use of the term “exceptional” in the Patent Act’s fee-shifting section contemplates that fees can be awarded “in the rare case” where a party’s conduct, though not sanctionable, “is nonetheless so ‘exceptional’ as to justify an award of fees.”  The contrary view would have rendered section 285 “largely superfluous,” since sanctionable conduct is already subject to fees under sanctions regimes.  The second Brooks prong too was excessively restrictive, in that it required both subjective bad faith and objective baselessness.  Justice Sotomayor explained 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, Justice Sotomayor rejected the use of the “clear and convincing” standard in Brooks.  Nothing in section 285 called for that standard, the “preponderance of the evidence” test applies to comparable fee-shifting statutes, and the preponderance standard also governs patent cases generally.  That test will now apply to fee applications under the Patent Act.  The decision in Octane was thus reversed and remanded for further proceedings.

In Highmark, Justice Sotomayor applied Octane and ruled that “an appellate court should review all aspects of a district court’s §285 determination for abuse of discretion.”  That ruling followed from the conclusion in Octane that district courts are to apply “equitable discretion” in the first instance.  A district judge, who “lives with the case over a prolonged period of time” is in a better position to decide the “multifarious and novel” question of whether that particular case is “exceptional.”  Thus, the more deferential “abuse of discretion” standard of review is to be applied, though that does not preclude “correction of a district court’s legal or factual error,” since [a] district court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence.”  Since the Federal Circuit in Highmark had not applied the abuse of discretion standard, that case too was reversed and remanded for further proceedings.