On April 29, 2014, the United States Supreme Court lowered the bar for prevailing litigants in certain patent suits to seek attorneys’ fees, reversing a Federal Circuit panel decision to hold that the Federal Circuit’s traditional framework for assessing “exceptional cases” under 35 U.S.C. § 285 is unduly rigid and impermissibly encumbers the discretion of district courts. Octane Fitness, LLC v. ICON Health & Fitness, Inc., No. 12-1184 (Apr. 29, 2014). The Court also held that an appellate court should review all aspects of a district court’s exceptional case determination for abuse of discretion. Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., No. 12- 1163 (Apr. 29, 2014).
ICON Health & Fitness (“ICON”) owns a patent relating to the linkage used in elliptical machines allowing the user to adjust the stride length. Icon sued Octane Fitness alleging Octane Fitness’s elliptical machines infringed several claims of ICON’s patent. The District Court granted Octane Fitness’s motion for summary judgment of non-infringement. Octane Fitness subsequently moved for award of attorney’s fees under 35 U.S.C. § 285. The District Court denied Octane Fitness’s motion for attorney’s fees finding that Octane Fitness failed to demonstrate by clear and convincing evidence that (1) that the suit was brought in “subjective bad faith” and (2) that the suit was “objectively baseless.”
The Federal Circuit affirmed the District Court’s summary judgment of noninfringement and declined to find that Octane Fitness established exceptional case under § 285 by clear and convincing evidence. In its cross-appeal, Octane Fitness sought to lower the standard for exceptionality to “objectively unreasonable.” The Federal Circuit declined to lower the standard to “objectively unreasonable,” and found no reason to revisit the settled “objectively baseless” standard for exceptionality.
Allcare Health Management Systems, Inc. (“Allcare”) owns a patent relating to a method of data entry and management useful in the healthcare industry. Allcare notified Highmark, Inc. (“Highmark”) that it believed that Highmark’s transaction processing system infringed Allcare’s patent. Highmark filed for declaratory judgment of non-infringement. Allcare counterclaimed, alleging infringement of several claims of its method patent. The District Court granted Highmark summary judgment of non-infringement at trial. Highmark subsequently moved for attorney’s fees for exceptional case under § 285, which fees were awarded by the District Court.
The Federal Circuit affirmed the District Court’s finding of exceptional case for one patent claim at issue, but reversed the exceptional case finding for a second patent claim at issue. Because the framework for exceptional case is a question of both law and fact, the Federal Circuit reviewed the exceptional case determinations de novo, and did not afford deference to the District Court’s findings.
The Supreme Court’s Opinions
In a decision delivered by Justice Sotomayor, the Supreme Court first determined that the Federal Circuit’s traditional exceptional case framework as set forth in Brooks Furniture is inconsistent with the statutory text of § 285. The Court recognized that the Patent Act does not define “exceptional” and thus should be construed in accordance with its ordinary meaning and in light of Congress’s intent. The Court found 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.” Thus, “District Courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.” The Court noted that such discretion is comparable to that provided for by the Copyright Act.
The Court then determined that the Federal Circuit’s exceptional case framework is an inflexible framework imposed onto § 285, which is inherently flexible. As to litigation misconduct, the Court elaborated that “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.” The Court also stated that “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.” (emphasis added). The Court further explained that the roots for “subjective bad faith” and “objective baselessness” lie in antitrust doctrine, not in the text of § 285.
The Court held that the Federal Circuit’s Brooks Furniture framework “is so demanding that it would appear to render § 285 largely superfluous.” The Court explained that common law has long recognized an exception to the American rule against fee-shifting when a party acts in willful disobedience of a court order, or acts in bad faith, vexatiously, wantonly, or for oppressive reasons. As such, the Court noted that it had previously declined to construe fee-shifting provisions narrowly to avoid rendering such provisions superfluous, and thus declined to do so in the case of Octane Fitness.
Finally, the Court rejected the Federal Circuit’s requirement that litigants establish their entitlement to fees under § 285 by clear and convincing evidence, noting that comparable fee-shifting statutes have not been interpreted to impose such a requirement. Looking to the text of § 285, the Court found it imposes no specific evidentiary burden, much less a high one such as clear and convincing evidence. Rather, § 285 “demands a simple discretionary inquiry.”
In a unanimous decision delivered by Justice Sotomayor, the Court held, based on its determination in Octane Fitness, LLC v. ICON Health & Fitness, Inc., that “because § 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.” The Court explained that its precedent holds that decisions on matters of discretion are reviewable for abuse of discretion. The Court noted that “although questions of law may in some cases be relevant to the § 285 inquiry, that inquiry generally is, at heart, ‘rooted in factual determinations.’”