United States: Supreme Court Establishes "Totality Of The Circumstances" Framework For Determining Whether Attorney's Fees Should Be Shifted In Patent Cases

Also Holds That Review of Such Determinations Is for Abuse of Discretion

In a pair of companion cases decided on April 29, 2014, the U.S. Supreme Court provided key guidance on several significant issues concerning the award of attorney's fees under the Patent Act's fee-shifting provision, 35 U.S.C. § 285. That statutory provision authorizes a district court "in exceptional cases" to "award reasonable attorney fees to the prevailing party."

In Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. __ (2014), the Supreme Court clarified the framework under which district courts decide whether a case is "exceptional" enough to warrant fee-shifting. The Court rejected as "unduly rigid" and "inflexible" a nine-year-old framework created by the U.S. Court of Appeals for the Federal Circuit, slip op. at 7–8, and instead instructed that an exceptional-case analysis should be based on "the totality of the circumstances," Id. at 8. The Court also established that the burden of proving exceptionality was a "preponderance of the evidence" standard, rather than the "clear and convincing" standard employed by the Federal Circuit. Id. at 11–12.

In the related Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 572 U.S. __ (2014), decision, the Supreme Court further held that, once a district court makes a determination under § 285, "all aspects" of that determination are reviewed on appeal under an abuse-of-discretion standard. Slip Op. at 5. Both opinions and their potential implications are explored in more detail in this Alert.

The Octane Fitness Opinion – A "Totality of the Circumstances" Framework

Since 2005, the governing framework for "exceptional case" determinations in patent cases had been the one established by the Federal Circuit in Brooks Furniture Mfg., Inc. v. Dutailier Int'l, Inc., 393 F. 3d 1378 (2005). Specifically, under Brooks Furniture, fee-shifting was justified only (1) "when there has been some material inappropriate conduct" or (2) when the litigation is both "brought in subjective bad faith" and "objectively baseless." Id. at 1381. Moreover, the litigant seeking fee-shifting had to operate under a clear-and-convincing standard. Id. at 1382.

In Octane Fitness, the Supreme Court set aside that framework, finding that it is "unduly rigid" and "impermissibly encumbers the statutory grant of discretion to district courts." Id. at 7. The Supreme Court observed that the Federal Circuit's "formulation superimposes an inflexible framework onto statutory text that is inherently flexible." Id. at 8. Moreover, the Supreme Court expressed concern that requiring clear-and-convincing evidence—rather than the conventional preponderance of the evidence—made an exceptional-case showing "so demanding that it would appear to render §285 largely superfluous." Id. at 11. According to the Court, the language of §285 does not justify "such a high standard of proof." Instead, "[s]ection 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one." Id.

In place of the rigid Brooks Furniture formula, the Supreme Court rooted its framework in the plain language of § 285 and its use of the word "exceptional": That provision, according to the Court, "imposes one and only one constraint on district courts' discretion to award attorney's fees in patent litigation: The power is reserved for 'exceptional' cases." Id. at 7. "Exceptional" is to carry the ordinary meaning of the word—"'uncommon,' 'rare,' or 'not ordinary.'" Id. Based on this rationale, the Supreme Court clarified that "an 'exceptional' case is simply one that stands out from others with respect to the substantive strength of a party's litigation position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated." Id. at 7–8. The determination of whether a case is "exceptional" under this definition is to be conducted by district courts "in the case-by-case exercise of their discretion, considering the totality of the circumstances." Id. at 8.

The Highmark Opinion – Abuse-of-Discretion Review on Appeal

In the companion Highmark opinion, the Supreme Court considered the appropriate standard for review of a § 285 determination on appeal—plenary de novo review or abuse of discretion. The Supreme Court held that abuse of discretion was the appropriate standard: "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." Highmark, slip op. at 4. According to the Court, an abuse-of-discretion standard is proper because of the traditional discretion afforded to district courts and because those courts are in a better position to know whether a case is exceptional, having been involved with it for a long period of time. Id. Moreover, fee-shifting decisions under § 285 are highly fact-bound and thus "not susceptible to 'useful generalization' of the sort that de novo review provides." Id.

Potential Implications

The Supreme Court's new guidance on the framework for § 285 fee-shifting appears to provide patent litigants with more opportunity and freedom in seeking attorney's fees, especially in cases against eager patent assertion entities; in cases where infringement arguments are tenuous at best; and in cases where the patents are weak yet still continue to be pressed.

The Court's flexible, totality-of-the-circumstances framework is likely to provide district courts with more room to penalize parties who push thin and implausible claims and who become unduly aggressive in discovery and motion practice at various stages of a patent case. In short, the Supreme Court's two decisions may provide litigators and parties with another key tool and leverage point in the high-stakes world of patent litigation.

If you have any questions about this Alert, please contact Anthony J. Fitzpatrick, Carolyn A. Alenci, any member of the Intellectual Property Litigation Practice Group or the attorney in the firm with whom you are regularly in contact.

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