Supreme Court Addresses Fee Shifting in Patent Infringement Cases

Transcription

1 Supreme Court Addresses Fee Shifting in Patent Infringement Cases In Pair of Rulings, the Supreme Court Relaxes the Federal Circuit Standard for When District Courts May Award Fees in Patent Infringement Cases and Limits Appellate Review of Those Awards SUMMARY On April 29, the Supreme Court issued two unanimous opinions that: (1) give federal district courts broad authority to award attorneys fees in patent infringement cases and (2) limit appellate review of those awards. Section 285 of the Patent Act provides that attorneys fees may be awarded to prevailing parties in a patent infringement action in exceptional cases. 1 In Octane Fitness, 2 the Supreme Court overturned Federal Circuit precedent limiting exceptional cases, and instead held that an exceptional case is simply one that stands out from others with respect to either the substantive strength of a party s litigating position or the unreasonable manner in which the case was litigated. 3 The Court also rejected the clear and convincing evidence standard for this inquiry, holding that only a preponderance of the evidence is required to find a case exceptional. 4 In Highmark, 5 the Supreme Court also held that a district court s grant of attorneys fees to a prevailing party is reviewable by an appellate court only for abuse of discretion by the district court rather than de novo (without deference to the district court). 6 BACKGROUND Octane Fitness v. ICON Health & Fitness ICON Health & Fitness, a manufacturer of exercise equipment, owns a patent that covers an elliptical exercise machine with adjustable stride lengths. ICON sued Octane, another exercise equipment manufacturer, alleging that two of Octane s models infringed its patent. The district court granted Octane s motion for summary judgment and ruled that the machines did not infringe. 7 Octane then moved for attorneys fees. 8 New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 Relying on the Federal Circuit s opinion in Brooks Furniture Mfg., Inc. v. Dutailier Int l, Inc., 393 F.3d 1378 (Fed Cir. 2005) which held that a case was exceptional only when there had been either some material inappropriate conduct related to the matter in litigation or if the litigation was brought in subjective bad faith and objectively baseless the district court denied the motion for attorneys fees. 9 ICON appealed the judgment of non-infringement, and Octane cross-appealed the denial of attorneys fees. The Federal Circuit affirmed both decisions. 10 Highmark v. Allcare Health Management Allcare Health Management owns a patent that covers a process for reviewing treatments in a managed healthcare system. Highmark sued Allcare seeking declaratory judgment that the patent was invalid and unenforceable, or if valid, that Highmark was not infringing it. Allcare counterclaimed for infringement. On summary judgment motions, the district court entered a final judgment of non-infringement. 11 Highmark moved for fees and was awarded more than $5 million in attorneys fees, experts fees and costs. 12 The district court held the case was exceptional under the Patent Act and Brooks Furniture as to two infringement claims because Allcare failed to perform an adequate pre-filing investigation and knowingly maintained meritless infringement claims and frivolous defenses. 13 The Federal Circuit upheld the exceptional-case determination with respect to one infringement claim and reversed with respect to the other. 14 In its opinion, the Federal Circuit held that whether a claim is objectively baseless, as required by Brooks Furniture in order to award fees, was a matter of law and so is reviewed de novo, without deference to the district court. 15 The Federal Circuit also held that prevailing parties must establish that a case is exceptional by clear and convincing evidence. 16 The Supreme Court granted certiorari in both cases, and heard argument for both on February 26, THE SUPREME COURT S DECISIONS A. Octane Fitness v. ICON Health & Fitness In Octane Fitness, the Supreme Court held that the word exceptional in the Patent Act should be construed in accordance with its ordinary meaning, and referred to dictionaries both modern and from before the fee-shifting provision reached its current form in 1952 that defined the word exceptional as uncommon, rare, or not ordinary. 17 Following this interpretation, the Court held that an exceptional case is simply one that stands out from others with respect to (1) the substantive strength of a party s litigating position (considering both the governing law and the facts of the case) or (2) the unreasonable manner in which the case was litigated. Courts are to exercise their discretion on a case-by-case basis and considering all relevant facts, with no precise rule or formula for determining whether a case is exceptional and fee shifting is warranted

3 The Court explained that the Federal Circuit s fee-shifting standard under Brooks Furniture was too rigid on three bases. First, the Court noted that litigation misconduct is already sanctionable, so that the first part of the Federal Circuit s standard was superfluous. Second, the Court stated that the requirement that litigation be objectively baseless and brought in subjective bad faith was too strict, because a case that is either objectively baseless or brought in subjective bad faith might warrant a fee award. Third, the Court concluded that the Federal Circuit inappropriately imported a standard based on the sham litigation exception to the First Amendment right to petition the government. The Court ruled that importing that standard had no support in the patent fee-shifting statute and otherwise made no sense in the context of a fee award. 19 The Court held that a fee-shifting determination demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less a high one. The Court pointed out that patent infringement litigation has always been governed by a preponderance of the evidence standard, as civil litigation is generally. The Court also noted it never required a clear and convincing standard for any other feeshifting provision. 20 B. Highmark v. Allcare Health Management In a very short decision, the Supreme Court held that its decision in Octane settles this case: Because [the fee-shifting provision of the Patent Act] 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. 21 The Court noted that a district court, rather than the Federal Circuit, is better positioned to decide whether a case is exceptional... because it lives with the case over a prolonged period of time. 22 IMPLICATIONS These decisions together will likely lower the bar for an award of fees to the prevailing party in patent litigation. Accordingly, the decisions may deter, to some extent, suits by non-practicing entities (often referred to as patent trolls ), and parties charged with infringement may find it more attractive to litigate cases to their conclusion rather than settle. On the other hand, the rulings do not signal a shift to the English Rule in which the loser generally pays the costs of the prevailing party. By statute, the award of attorneys fees remains a matter for exceptional cases, and fee awards would not be expected to become a matter of course in infringement actions. This may change if current proposals pending in Congress are enacted into law. In any event, and regardless of the standard employed, once a district court grants attorneys fees, that decision is less likely to be reversed on appeal. * * * Copyright Sullivan & Cromwell LLP

4 ENDNOTES U.S.C Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. (2014). Octane Fitness, 572 U.S., slip op. at 7-8. Id. at 11. Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 572 U.S. (2014). See Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 687 F.3d 1300 (Fed. Cir. 2012). ICON Health & Fitness, Inc. v. Octane Fitness, LLC, 2011 WL , Civ. No (D. Minn. June 17, 2011). ICON Health & Fitness, Inc. v. Octane Fitness, LLC, 2011 WL , Civ. No (D. Minn. Sept. 6, 2011). Id. at *4. ICON Health & Fitness, Inc. v. Octane Fitness, LLC, 496 Fed. App x 57 (Fed. Cir. 2012). See Highmark, 572 U.S., slip op. at 2. Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 706 F. Supp. 2d 713 (N.D. Tex. 2010). See Highmark, 572 U.S., slip op. at 2. Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 687 F.3d 1300 (Fed. Cir. 2012). Id. at Id. at Octane Fitness, 572 U.S., slip op. at 7. Id. at 8. Id. at Id. at 11. Highmark, 572 U.S., slip op. at 4. Id. at 5 (quotation omitted). -4-

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