U.S. Supreme Court Justice Sonia Sotomayor.
U.S. Supreme Court Justice Sonia Sotomayor. (Diego M. Radzinschi / NLJ)

WASHINGTON — A unanimous U.S. Supreme Court, in a warning shot to those who bring frivolous patent infringement suits, on Tuesday eased the standard for awarding attorney fees in patent cases.

In two separate decisions, the justices rejected the approach of the U.S. Court of Appeals for the Federal Circuit which, they held, was “unduly rigid” and restrictive of the discretion granted to district courts.

For the most part, Silicon Valley patent litigators sounded cheered by the rulings, while noting there is no guarantee how frequently district judges will use their new discretion.

The Patent Act contains a fee-shifting provision authorizing district courts to award attorney fees to prevailing parties in “exceptional cases.” The Federal Circuit in a 2005 decision had defined an “exceptional case” as either involving “material inappropriate conduct” or both “objectively baseless” and “brought in subjective bad faith.”

The appellate court also required parties to establish the exceptional nature of a case by clear and convincing evidence.

In Octane Fitness v. Icon Health & Fitness, Justice Sonia Sotomayor, writing for the court, said because the Patent Act does not define “exceptional,” it should be construed according to the word’s ordinary meaning. In 1952, when Congress used the word in the fee-shifting provision—Section 285—”exceptional” meant “uncommon,” “rare” or “not ordinary,” and those meanings are similar to how dictionaries define the word.

“We hold, then, 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,” Sotomayor wrote.

District courts, in a case-by-case exercise of their discretion, may determine when a case is “exceptional” considering the totality of the circumstances, she said.

Fee shifting in patent cases has been receiving attention recently from lawmakers, as well as judges, as a possible ingredient in a legislative patent reform package.

Some of the nation’s largest technology and manufacturing companies weighed in on the subject at the Supreme Court as amici curiae, arguing that easing the standard would discourage abusive litigation.

“Patent trolls in particular, who often rely on the expense of litigation rather than the merits of their allegations to coerce settlements, will increasingly find themselves on the wrong end of attorney fee awards,” said Ropes & Gray partner James Batchelder, responding to Tuesday’s rulings.

Other Valley lawyers were more guarded in their enthusiasm.

“The bar to fee shifting is definitely lower—with the rejection of the clear and convincing evidence standard the cherry on top,” said Weil, Gotshal & Manages partner Edward Reines. But, he added, “venues that traditionally pride themselves on opening their doors for plaintiffs to have their day in court may not be so quick to employ their discretion to shift fees. That could make patent hot spots even more attractive.”

McDermott Will & Emery partner Yar Chaikovsky said he expects most district court judges to continue to award fees “cautiously” when a case warrants. “The United States is not a loser pays system and the Supreme Court decision does not change that,” he said.

Still, the Supreme Court rulings together hand a good deal more discretion to district judges, and also call for the Federal Circuit to afford those determinations more deference.

The Federal Circuit’s standard “superimposes an inflexible framework onto statutory text that is inherently flexible,” Sotomayor wrote in Octane Fitness. In one category, it appears to cover cases of independently sanctionable conduct, such as willful infringement or fraud.

“But sanctionable conduct is not the appropriate benchmark,” she wrote. “Under the standard announced today, a district court may award fees in the 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 in another category of cases, the appellate court’s standard is too rigid, requiring “both that the litigation is objectively baseless and that the plaintiff brought it in subjective bad faith,” she said. “But 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.”

The high court also held the Federal Circuit’s clear-and-convincing-evidence standard of proof for a fee award was not justified by the text of the fee-shifting provision. Patent infringement litigation, Sotomayor wrote, has always been governed by a preponderance-of-the-evidence standard.

Icon had sued Octane, alleging its elliptical machines infringed several of Icon’s patents on its exercise machines. Octane won a summary judgment motion and moved for attorney fees. But the district court, applying the Federal Circuit’s standard, denied fees, saying Octane could show neither Icon’s claim was objectively baseless nor Icon had brought it in subjective bad faith.

In the second case, Highmark v. Allcare Health Management System, Sotomayor, again writing for the court, rejected the Federal Circuit’s application of de novo review to a district court’s determination of an exceptional case.

“For reasons we explain in Octane, the determination whether a case is ‘exceptional’ under § 285 is a matter of discretion,” she wrote. “And as in our prior cases involving similar determinations, the exceptional-case determination is to be reviewed only for abuse of discretion.”

Highmark, a health insurance company, had sued Allcare seeking a declaratory judgment that Allcare’s patent covering utilization review in managed health-care systems was invalid and unenforceable. Allcare counterclaimed for patent infringement. The district court ruled in favor of Highmark, which then moved for fees. The court awarded more than $4.6 million in fees and more than $500,000 in expenses. The Federal Circuit, applying de novo review, reversed the exceptional-case determination.

Reed Smith partner Cindy Kernick, who has represented Highmark since the case’s inception in 2002 and coauthored the Supreme Court briefs, said, “The Supreme Court’s decisions today, in both Highmark and Octane, show an understanding of the respect that rightly should be afforded to district judges in patent cases. These opinions will work together to make patentees, especially Patent Acquisition Entities, stop to think about the true merits of infringement claims before they are asserted.”

Greg Tamkin of Dorsey & Whitney said Octane “continues to show that the Supreme Court is taking steps to limit questionable patent cases. Allowing a greater threat of fees is another tool to prevent arguably frivolous patent cases. As a practical matter, there will likely be more fee motions and fee decisions. In the past, showing that the case was brought in subjective bad faith was difficult. Looking at the case as a whole will often make the award of fees more likely.”

Tamkin said the shift away from the tougher clear-and-convincing-evidence standard “may be most telling that the Supreme Court is sending a message about frivolous patent infringement cases.”

Senior writer Scott Graham contributed to this report.

Contact the reporter at mcoyle@alm.com.