Last week, the U.S. Supreme Court issued two opinions that could make fee-shifting more common in patent cases.
The general rule in American courts is that each party pays its own legal fees. This rule is intended to ensure a plaintiff isn’t deterred from bringing an otherwise meritorious claim by the risk of having to pay the defendant’s fees if it doesn’t succeed.
But by the same token, the rule enables plaintiffs to intentionally bring a weak claim to extract a nuisance settlement. The defendant, knowing that even if it wins it may still have to spend a small fortune on lawyers, has an incentive to settle early if it’s for less than the likely fees. And the plaintiff has little downside from filing such a weak-but-not-quite-frivolous suit, especially if it has a contingency fee arrangement.
Recognizing this potential abuse of the “American rule,” the patent laws provide a safety valve in 35 U.S.C. § 285, which says “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.”
This general statutory text wisely leaves the task of identifying which cases warrant fee-shifting to the courts. But it also creates some interpretive problems: how do courts determine whether a case is “exceptional”? What burden of proof should they use? And what deference, if any, should appellate courts give to a trial judge’s decision regarding whether to award fees?
The Supreme Court answered those questions in its recent decisions in Octane Fitness LLC v. ICON Health & Fitness Inc. and Highmark Inc. v. Allcare Health Management System Inc. The Supreme Court intervened because the Federal Circuit, which is the only intermediate appellate court that decides patent cases, had adopted a standard for finding a case “exceptional” that was too rigid, and a burden of proof that was too high.
In particular, the Federal Circuit’s 2005 decision in Brooks Furniture Mfg. Inc. v. Dutailier Int’l Inc. had confined fee-shifting under Section 285 to two types of cases: cases involving material misconduct during litigation or in obtaining the patent and “objectively baseless” litigation brought in “subjectively bad faith.” Brooks Furniture further required proof by clear and convincing evidence that a case was exceptional. Compounding the problem, the Federal Circuit’s 2012 decision in Highmark held that it would give no deference to a district court’s “objectively baseless” determination and instead would conduct a de novo review.
The Supreme Court’s decision in Octane returned the fee-shifting analysis back to a flexible, discretionary inquiry. Explaining that its “analysis begins and ends with the text of § 285,” the court observed that the statute “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.”
Because the statute did not further define the term “exceptional,” the court construed it in accordance with its ordinary meaning, and held that “an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of the 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.”
The court stressed that there is “no precise rule or formula” for making this determination, but that it is a discretionary judgment based on the totality of circumstances.
The Octane court next critiqued the Brooks Furniture approach, which “superimposes an inflexible framework onto statutory text that is inherently flexible.” The first alternative in Brooks Furniture—litigation or patent prosecution misconduct—mostly covered “independently sanctionable conduct,” while Section 285 was intended to apply to cases where a party’s conduct is “exceptional” but not necessarily sanctionable. Moreover, the second category in Brooks Furniture—objectively baseless claims brought in subjectively bad faith—was also too restrictive because “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.” In other words, a district court shouldn’t have to find both circumstances present to award fees.
The court’s comment here may have the largest practical effect on future cases. It is usually difficult to prove subjective bad faith—rarely is there a smoking gun document or party admission about bringing the suit to purposely game the system, and even circumstantial evidence of bad faith is hard to gather. But now a court can award fees based solely on the objective weakness of the plaintiff’s claim—something that is easier for a defendant to analyze and prove.
Indeed, the Supreme Court criticized the Federal Circuit’s test as “so demanding that it would appear to render § 285 largely superfluous,” and a major hurdle toward meeting the test was the required proof of bad faith.
Octane then cemented its more flexible approach to fee-shifting by adopting a lower evidentiary standard for Section 285. It substituted the old “clear and convincing evidence” test for “a simple discretionary inquiry” imposing “no specific evidentiary burden.” The court then suggested that the applicable standard should comport to preponderance of evidence test generally used in civil actions, including patent infringement cases.
The Supreme Court resolved the other remaining question—the standard of appellate review for fee awards—in its Highmark decision. In a brief decision spanning only five pages, the court concluded that “our holding in Octane settles this case: Because Section 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.”
Although acknowledging that a district court may encounter legal questions (which usually get de novo review) when analyzing the strength of a party’s case, the Supreme Court concluded that the inquiry “is, at heart, rooted in factual determinations,” and thus adhered to the deferential standard of review implied by the statutory text.
Both Octane and Highmark opinions may have a significant impact on patent litigation. There has been much discussion in recent years about the problems caused by “patent trolls”—i.e., plaintiffs who buy up patents originally owned by others and then pursue nuisance settlements from everyone in the industry, either through threatening letters or filing a suit with the goal of quick resolution.
Many view these suits as exceedingly weak. The Supreme Court’s decisions give district courts more discretion to deal with the “troll” problem by shifting fees, which would potentially discourage plaintiffs from filing them, and encourage defendants to fight them, knowing that they may be able to recoup their litigation expenses if they prevail. Moreover, district courts may be more likely to award fees now that they know their decisions will receive deference on appeal.
Indeed, Highmark gives some insight into the stakes involved—the defendant there prevailed on non-infringement, but only after spending at least $4.6 million in fees, which the district court awarded but the Federal Circuit had taken away. Changing which party has to bear that type of cost could dramatically alter the dynamics of patent litigation.
The true test, though, will be how the district courts implement their newly-restored discretion. Section 285 isn’t actually going to deter plaintiffs from bringing questionable suits unless district courts are aggressive about punishing those that already sued. And whether district courts will do this remains to be seen.
There is, unfortunately, one reason to be skeptical that much will change. Patent litigation is complex. It often involves difficult technology. And although the legal standards are usually easy to articulate, they can be hard to apply. This complexity leaves a lot of room for a plaintiff to argue that its suit, although not successful, is not so weak that it “stands out” from all the other difficult patent cases on the judge’s docket.
Indeed, the complexity of patent litigation—which leads to high legal bills and uncertain outcomes—is a part of what has created the troll problem in the first place. Hopefully it does not impede the use of Section 285 to solve the problem.
One final point: Congress is currently considering legislation that might change fee-shifting in patent cases, and which makes it unclear how long the Octane-Highmark framework is destined to live. One proposal recently passed by the House would require courts to award a prevailing party its reasonable fees and expenses unless the other party’s conduct and position was reasonably justified in law and fact or special circumstances make an award unjust. The proposal was passed with an eye toward changing the Federal Circuit’s rigid Brooks Furniture standard, and so it’s uncertain whether this is actually much of a departure from the new Octane-Highmark framework.
But it is difficult to predict how the courts may interpret this language. Now that the Supreme Court has loosened the standard for fee-shifting, it will be interesting to observe the Congressional response. Perhaps Congress will decide that it no longer needs to intervene on this issue. Or possibly it will nevertheless enact a new standard, which will be the subject of further judicial interpretation.
Craig Countryman is a principal with Fish & Richardson P.C. His practice involves patent litigation in all areas of technology.
Alex Gelberg is an associate with Fish & Richardson. His practice emphasizes patent litigation in the areas of electrical engineering and computer science.