May 2, 2014
On April 29, 2014, the U.S. Supreme Court issued a pair of unanimous decisions lowering the bar for parties to recover their attorneys’ fees in "exceptional" patent cases pursuant to 35 U.S.C. § 285 and to protect those recoveries on appeal. The Court overturned the stringent tests developed by the Federal Circuit for prevailing on fee motions under section 285, holding that they were inconsistent with the text of the statute. Section 285 requires only that a case be "exceptional" to merit a fee award, or, in the Court’s words, "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." The Court also reduced the burden of proof for section 285 motions from clear and convincing evidence to a preponderance of the evidence, and held that the Federal Circuit should review district court decisions on such motions for abuse of discretion, rather than de novo.
Prior to this week’s decisions, when determining whether a litigant’s conduct was "exceptional" under section 285, district courts were bound to apply an exacting standard articulated by the Federal Circuit in 2005 in Brooks Furniture Manufacturing v. Dutailier International, Inc., 393 F.3d 1378. That standard limited the imposition of attorneys’ fees to the rare case in which there was clear and convincing evidence either that (1) there had been some "material inappropriate conduct" in the prosecution of the patent or conduct of the litigation at bar, or that (2) the litigation was both "brought in subjective bad faith" and "objectively baseless." Id. at 1381. The Federal Circuit further held in Brooks Furniture that whether a litigation was "objectively baseless" was a question of law to be reviewed on appeal de novo and "without deference." Id. at 1382. In practice, this resulted in several fee awards being vacated on appeal. See, e.g., id. at 1385 (vacating fee award); iLOR, LLC v. Google, Inc., 631 F. 3d 1372, 1380 (Fed. Cir. 2011) (same).
This week, in Octane Fitness, LLC v. ICON Health & Fitness, Inc., No. 12-1184, 572 U.S. __ (2014), the Supreme Court overturned the Federal Circuit’s Brooks Furniture standard for the imposition of fees, holding that it did not comport with the plain language of section 285, which simply requires a case to be "exceptional," not "objectively" and "subjectively" baseless or otherwise independently sanctionable. The Court also rejected the Federal Circuit’s requirement that litigants prove that a case is exceptional by clear and convincing evidence, and the Court held instead that litigants need merely meet the lower preponderance of the evidence standard. Further, in a companion decision issued the same day in Highmark Inc. v. Allcare Health Management System, Inc., No. 12-1163, 572 U.S. __ (2014), the Supreme Court held that it is within the discretion of a district court to determine whether a case is "exceptional," and that the appellate standard of review for such decisions is abuse of discretion, not de novo.
Below, we review the Octane and Highmark decisions in more detail. We are available to discuss further on request.
A. Background of the Octane and Highmark Cases
The parties in Octane are manufacturers of elliptical machines. ICON Health & Fitness owns U.S. Patent No. 6,019,710, which discloses an elliptical machine that dynamically adjusts to the exerciser’s stride. ICON sued Octane for infringing the ‘710 Patent. The district court granted Octane’s motion for summary judgment of non-infringement, after which Octane moved for attorneys’ fees pursuant to section 285. Applying the Brooks Furniture standard, the district court denied Octane’s motion, determining that Octane could not prove either objective baselessness or subjective bad faith on the part of ICON. ICON appealed the judgment of non-infringement, while Octane cross-appealed the denial of attorneys’ fees. The Federal Circuit affirmed the district court on both counts. 496 Fed. Appx. 57 (2012). In upholding the district court’s denial of attorneys’ fees, the Federal Circuit rejected Octane’s argument that the Brooks Furniture standard was overly restrictive, declining to revisit its "settled standard for exceptionality" under section 285. Id. at 65.
The Highmark case involved two health care providers. Allcare Health Management System, Inc. owns U.S. Patent No. 5,301,105, which discloses a "fully integrated" system for "utilization review" in "managed health care systems." Highmark Inc., a health insurance company, sued Allcare seeking a declaratory judgment that the ‘105 Patent was invalid, unenforceable, or not infringed. Allcare counterclaimed for patent infringement. Both parties filed motions for summary judgment, and the district court granted Highmark’s motion for summary judgment of non-infringement. Allcare appealed, and the Federal Circuit affirmed. 329 Fed. Appx. 280 (2009) (per curiam). Highmark then moved for fees pursuant to section 285, and the district court granted Highmark’s motion, determining that Allcare had engaged in a pattern of "vexatious" and "deceitful" conduct throughout the litigation and awarding Highmark approximately $5.1 million in fees and costs. Allcare appealed, and the Federal Circuit affirmed with respect to one claim of the ‘105 Patent and reversed with respect to another, remanding the case for an apportionment of the fees and costs as to the one claim for which the section 285 finding was upheld. 687 F.3d 1300 (2012). In reversing the exceptional-case determination as to one of the claims, the Federal Circuit reviewed that determination de novo.
B. The Supreme Court’s Decision in Octane
In Octane, the Supreme Court overturned the Federal Circuit’s articulation of the standard for determining that a case is "exceptional" pursuant to section 285. Justice Sonia Sotomayor, writing for the unanimous Court, held that "the framework established by the Federal Circuit in Brooks Furniture" for the application of section 285 to patent cases was "unduly rigid" and "impermissibly encumber[ed] the statutory grant of discretion to district courts" by "superimpos[ing] an inflexible framework onto statutory text that is inherently flexible." Octane, slip op. at 7-8. Justice Sotomayor explained that the Court’s decision was grounded in the plain language of section 285, writing that "[o]ur analysis begins and ends with the text of [section] 285: ‘The court in exceptional cases may award reasonable attorney fees to the prevailing party.’ This text is patently clear. It imposes one and only one constraint on district court’s discretion to award attorney’s fees in patent litigation: The power is reserved for ‘exceptional’ cases." Id. at 7.
After examining the legislative history of section 285 and various dictionary definitions of "exceptional," the Court explained 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. District courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances." Id. at 7-8.
In its opinion, the Court carefully parsed the Federal Circuit’s section 285 standard under Brooks Furniture and explained the ways in which it was misguided in light of other avenues available for fee awards. The Court noted that the first category of cases in which the Federal Circuit would permit the imposition of attorneys’ fees — those involving litigation misconduct — "appears to extend largely to independently sanctionable conduct." Id. at 8-9. "But sanctionable conduct is not the appropriate benchmark [for the application of section 285]. 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." Id. at 9.
The Court also found that the Federal Circuit had been overly restrictive in defining when a case was so meritless that a fee award was warranted even in the absence of misconduct: "In order for a case to fall within [the Federal Circuit’s] second category, a district court must determine both that the litigation is objectively baseless and that the plaintiff brought it in subjective bad faith. 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." Id. at 9 (emphasis in original).
Finally, the Court rejected the test applied by the Federal Circuit because it was "so demanding that it would appear to render [section] 285 largely superfluous." Id. at 10-11. In light of the fact that the Supreme Court has "long recognized a common-law exception to the general ‘American rule’ against fee-shifting . . . inherent in the power [of] the courts that applies for willful disobedience of a court order or when the losing party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons," the Court held that the statutory authority to impose attorneys’ fees as a sanction pursuant to section 285 should not be construed so "narrowly" so as to render it superfluous of the court’s already inherent power to shift fees in cases of willful disobedience and bad faith. Id. (citation and internal quotations omitted).
Finally, with respect to the evidentiary standard for establishing facts supporting an "exceptional" case determination, the Court rejected the Federal Circuit’s application of the clear and convincing standard. Id. at 11. "We have not interpreted comparable fee-shifting statutes to require proof of entitlement to fees by clear and convincing evidence[,]" and "nothing in [section] 285 justifies such a high standard of proof. Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one." Id. The Court held that the ordinary preponderance of the evidence standard should govern. Id.
C. The Supreme Court’s Decision in Highmark
In Highmark, the Supreme Court held that the appropriate standard of review for determinations of motions regarding section 285 is abuse of discretion. Highmark, slip op. at 5. Previously, the Federal Circuit had reviewed such determinations de novo and "without deference." Id. at 3. Rejecting this approach, the Court explained that because its decision in Octane "commit[ted] the determination whether a case is ‘exceptional’ to the discretion of the district court," that determination "is to be reviewed on appeal for abuse of discretion." Id. at 4. "[A]s a matter of the sound administration of justice," the Court observed, "the district court is better positioned to decide whether a case is exceptional . . . because it lives with the case over a prolonged period of time." Id. at 5 (internal quotation marks and citations omitted). "Although questions of law may in some cases be relevant to the [section] 285 inquiry, that inquiry generally is, at heart, rooted in factual determinations." Id. (internal quotation marks and citations omitted). Importantly, however, the Court affirmed that the application of the abuse of discretion standard to determinations of "exceptionality" under section 285 nevertheless permits the Federal Circuit to review "questions of law" de novo and "questions of fact" for "clear error." Id. at 4.
Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:
Stuart M. Rosenberg – Palo Alto (650-849-5389, email@example.com)
Brooke Myers Wallace – Los Angeles (213-229-7074, firstname.lastname@example.org)
Anne Champion – New York (212-351-5361, email@example.com)
Intellectual Property Group:
Josh Krevitt – New York (212-351-2490, firstname.lastname@example.org)
Wayne Barsky - Los Angeles (310-557-8183, email@example.com)
Mark Reiter – Dallas (214-698-3360, firstname.lastname@example.org)
Appellate and Constitutional Law Group:
Theodore B. Olson – Washington, D.C. (202-955-8500, email@example.com)
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7000, firstname.lastname@example.org)
Daniel M. Kolkey – San Francisco (415-393-8200, email@example.com)
Thomas G. Hungar - Washington, D.C. (202-955-8500, firstname.lastname@example.org)
Miguel A. Estrada – Washington, D.C. (202-955-8500, email@example.com)
© 2014 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.