The "exceptional" patent case just became more common. On April 29, in Octane Fitness v. Icon Health & Fitness, No. 12-1184, and Highmark v. Allcare Health Management Systems, No. 12-1163, the Supreme Court relaxed the standard for deeming a patent infringement case "exceptional" and for awarding attorney fees to the prevailing party.
In patent infringement cases, the common law "American rule" is generally followed, i.e., each party bears his own expenses and attorney fees. However, under the statutory fee-shifting provision of 35 U.S.C., section 285, a court may award to the prevailing party his attorney fees if the court finds that the case is "exceptional." The Court of Appeals for the Federal Circuit has recently interpreted "exceptional cases" to mean only those cases a) where there has been misconduct by a party during the litigation or in course of securing the patent, b) that were brought in subjective bad faith, or c) where the losing party's position was "objectively baseless." Octane, slip op. at 4.
In Octane, the Supreme Court rejected the Federal Circuit's formulation, holding 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. District courts may determine whether a case is 'exceptional' in the case-by-case exercise of their discretion, considering the totality of the circumstances." Slip op. at 7-8. In Octane's companion case, Highmark, the Supreme Court held that the proper standard for appellate review of the "exceptional case" determination under section 285 is abuse of discretion, which is the standard of review most deferential to the district court. Slip op at 4-5.
There are three primary takeaways from these rulings, besides the obvious one that attorney's fee awards should now be easier to obtain in patent cases.
The first takeaway is that the initial characterization of the rulings in some places as a blow to "patent trolls" (this article for instance) may be premature. An award of attorneys fees to a prevailing defendant can occur only after that case is resolved by a judgment, and most cases brought by so-called patent trolls, and most patent infringement cases in general, are settled before trial. A marginal increase in the ability of defendants to recover attorney's fees in the marginal number of patent cases that result in a judgment may have only a minimal effect on the calculus of whether a suit is brought (or the amount at which it is settled). The assumption that patent trolls have most to fear from these rulings also ignores that section 285 allows an award to the "prevailing party," which of course could also be the plaintiff. If patent fee awards became more frequent, section 285 could become a weapon in the patent troll's arsenal. Due to the unpredictability of the "totality of the circumstances" test, and the difficulty of reversing an award on appeal under the abuse of discretion standard, I could see the plaintiff's threat of a Section 285 award of fees inducing earlier and more lucrative settlements in some cases, possibly as many as, or more than, the number of cases where the defendant recovers attorney's fees.
The second takeaway is that the Court does not want district court's discretion limited by "mechanical" rules. Note especially the Court's disparaging tone toward what it called the Federal Circuit's "overly rigid" approach. Octane, slip op. at 8. Justice Sotomayor's opinion for a unanimous court explains that, recently, "the Federal Circuit abandoned that holistic, equitable approach [i.e., totality of the circumstances] in favor of a more rigid and mechanical formation." Id. at 4. When put that way, who could agree with the Federal Circuit's approach? Yet, while nearly unfettered discretion may be ideal for district court judges, it increases uncertainty. Practitioners and business clients appreciate predictable application of rules, which they won't get under a totality of circumstances test. As one of my law professors repeatedly told us, under a totality of circumstances test, everything is relevant and nothing is determinative. The Federal Circuit was created in 1982 to have exclusive appellate jurisdiction in patent cases in order to bring unity and predictability to patent law. A House Report on the bill that created the Federal Circuit stated that "the central purpose" of a nationwide patent court was "to reduce the widespread lack of uniformity and uncertainty of legal doctrine that exist in the administration of patent law." One could argue that it is thus properly part of the Federal Circuit's remit to try to create clearer rules and tests for applying otherwise vague concepts in patent law. It appears, however, that not one Supreme Court justice would agree with that argument, as all nine of the justices joined in Justice Sotomayor's opinion in Octane.
Which brings me to the third and final takeaway: Octane continues a trend in which the Supreme Court rejects the Federal Circuit's verbal tests and rules -- "mechanical formulation[s]" in Justice Sotomayor's parlance -- and instead adopts vague standards that the Supreme Court believes are better-grounded in its precedent and statutory language. In 1996, in Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17 (1996), the court held that the "function/way/result" test used by the Federal Circuit to determine infringement under the doctrine of equivalents was not the only test to evaluate what the Supreme Court viewed as the real issue under the doctrine of equivalents, which is whether the differences between the patent claim and the allegedly infringing product are "insubstantial." Id. at 40. In Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722 (2002), the court rejected the Federal Circuit's "per se" rule (id. at 737) that any amendment to the patent claim during the application process is a complete bar against infringement of the claim under the doctrine of equivalents; instead should be deemed in favor of deeming the amendment "a flexible bar, foreclosing some, but not all, claims of equivalence." (id. at 730). In eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), the court rejected the rule that a permanent injunction against a defendant found to have infringed would issue as a matter of course, and held that issuance of a permanent injunction should not be done automatically as part of a judgment of infringement but rather "as an act of equitable discretion by the district court." Id. at 391. In KSR Int'l Co. v. Teleflex Inc., 550 U.S. 398 (2007) the Supreme Court rejected the "teaching, suggestion, or motivation" test of the Federal Circuit for determining obviousness of patents claim, and instead adopted a "flexible approach" (id. at 415) finding that the Federal Circuit had "analyzed the issue in a narrow, rigid manner inconsistent with § 103 and our precedents" (id. at 428). In Bilski v. Kappos, 130 S. Ct. 3218 (2010), the Court said it "once again declines to impose limitations on the Patent Act that are inconsistent with the Act's text," id. at 3231, ruling that the Federal Circuit's "machine-or-transformation" test for a "process" eligible for patent protection under 35 U.S.C. , section 101, was not the exclusive test. Id. at 3227.
In sum, after Octane, attorneys fees awards should become more common; it's unclear whether that will affect defendants or plaintiffs more; there is no guidance from the Supreme Court as to factors courts should look to when a party requests a fee award; and the Supreme Court really does not like the use of "mechanical" tests or rules in patent infringement cases.