The Supreme Court Re-Empowers District Courts To Exercise Their Discretion Deciding What Is An “Exceptional” Patent Infringement Case

May 14, 2014

By: Eric G. Soller

The United States Supreme Court issued two unanimous decisions on April 29, 2014 relating to the award of attorney fees in “exceptional” patent infringement cases.

In Octane Fitness, LLC v. Icon Health & Fitness, Inc., Case No. 12-1184, the Supreme Court reversed the Federal Circuit and held that the Brooks Furniture framework for determining whether a case is “exceptional” under Section 285 of the Patent Act is unduly rigid and impermissibly encumbers the statutory grant of discretion to district courts to award reasonable attorney fees to prevailing accused infringers. Section 285 states: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”

In Brooks Furniture, the Federal Circuit held that a case may be deemed “exceptional” only in two limited circumstances, either: (1) when there has been some “material inappropriate misconduct” (e.g., willful infringement, patent procurement fraud, or litigation misconduct) related to the matter in litigation; or (2) when the litigation is both “objectively baseless” (i.e., so unreasonable that no reasonable litigant could believe that it would succeed on the merits) and “brought in subjective bad faith” (i.e., the plaintiff actually knows that its claim has no objective foundation).

The Supreme Court rejected the Brooks Furniture framework established by the Federal Circuit for a number of reasons. The Supreme Court stated that the Brooks Furniture framework is too restrictive in defining only two categories of cases in which reasonable attorney fee awards are allowed. The Supreme Court noted that the first category of cases involves “material inappropriate misconduct” which appears to extend largely to independently sanctionable conduct, which is not the appropriate benchmark. Rather, a district court may award reasonable attorney 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. With respect to the second category, the Supreme Court noted that a case presenting either subjective bad faith or exceptionally meritless claims may rise to the level of being “exceptional” to warrant an award of reasonable attorney fees. The Supreme Court stated that the Federal Circuit imported the second category from a court decision involving antitrust law, which finds no roots in the text of section 285.

The Supreme Court also stated that the Brooks Furniture framework superimposes an inflexible framework onto statutory text that is inherently flexible. The Supreme Court indicated that the Brooks Furniture’s requirement that patent litigants establish their entitlement to reasonable attorney fees by clear and convincing evidence is not justified by Section 285, which imposes no specific evidentiary burden. The Supreme Court noted that patent infringement litigation has always been governed by the lower standard of a preponderance of the evidence.

The Supreme Court noted that Section 285 clearly imposes one and only one constraint on district courts’ discretion to award attorney fees in patent litigation: The power is reserved for “exceptional” cases. The Supreme Court instructed that district courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances.

In Highmark Inc. v. Allcare Health Management Systems, Inc., Case No. 12-1163, the Supreme Court found that the Federal Circuit should give deference to a district court’s determination that litigation was “exceptional” under Section 285. The Federal Circuit applied a de novo review standard that is traditionally applied to decisions on “questions of law.” The Supreme Court held that attorney fee awards under Section 285 are “matters of discretion” and are thus reviewable for “abuse of discretion.” The Supreme Court stated that an appellate court should apply an abuse of discretion standard in reviewing “all aspects” of a district court’s Section 285 determination, because “[a]lthough questions of law may in some cases be relevant to the [Section] 285 inquiry, that inquiry generally is, at heart, ‘rooted in factual determinations.’”

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