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IP Alert: Two Recent U.S. Supreme Court Decisions Alter the Legal Landscape for Establishing and Appealing 35 U.S.C. § 285 Exceptional Cases

May 1, 2014

As previously reported, on April 29, 2014, the United States Supreme Court issued two opinions that overturn and redefine Federal Circuit precedent in two areas regarding “exceptional cases” under 35 U.S.C. § 285. The first case, Octane Fitness LLC v. ICON Health & Fitness, Inc., concerns the requirements for making an exceptional case determination. The second case, Highmark Inc. v. Allcare Health Management System, Inc., addresses the appellate standard of review for an appeal of a determination of exceptional case.

In Octane Fitness, after the district court granted Octane’s motion for summary judgment of non-infringement, Octane moved for attorney’s fees under section 285. The district court reviewed the Federal Circuit’s decision in Brooks Furniture Mfg., Inc. v. Dutailer Int’l, Inc. In the Brooks Furniture case, the Federal Circuit held that a case may be deemed exceptional under section 285 in one of two cases. Specifically, the Brooks Furniture court had held that an exceptional case determination may be made, first “when there has been some material inappropriate conduct,” including willful infringement, fraud, or inequitable conduct when prosecuting the patent, litigation misconduct, vexatious or unjustified litigation, conduct that violates Fed. R. Civ. P. 11, or similar infractions. Second, Brooks Furniture held that a court may make an exceptional case determination when the case is both “brought in subjective bad faith” and “objectively baseless.” 

The district court in Octane Fitness found that Octane could not meet either of these tests, and denied Octane’s motion for an exceptional case determination. On appeal, the Federal Circuit eventually upheld the district court’s rejection of an exceptional case, rejected the argument that the district court had applied an “overly restrictive standard,” and declined to “revisit the settled standard for exceptionality.” 

The Supreme Court granted a writ of certiorari and, in its April 29 opinion, reversed and remanded. The Court held that the Brooks Furniture framework was improper as failing to comport with the legislative history or the statutory text of section 285. The Court reasoned that the word “exceptional” in section 285 should be given its ordinary meaning (i.e., uncommon, rare, not ordinary, unusual, or special) and held 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.” The Court further found that the Brooks tests were both unacceptable because they “superimpose[ ] an inflexible framework onto statutory text that is inherently flexible.” 

Regarding the first Brooks Furniture path to willful infringement—“material inappropriate conduct”—the Court reasoned that this essentially extends only to “independently sanctionable conduct.” The Court determined that this was an inappropriate benchmark because it improperly excludes “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.” Regarding the second Brooks Furniture path, the Court found that the requirement for establishing both subjective bad faith and an objectively baseless case to establish an exceptional case was improper, as this test precluded an exceptional case determination where a case is either subjectively brought in bad faith or objectively baseless. The Court explained that either condition, standing alone, “may sufficiently set itself apart” from other cases and warrant an award of fees. 

Further, the Court noted that the strictures espoused by the Federal Circuit in Brooks Furniture essentially render section 285 superfluous. An exception to the “American rule” against fee shifting already permits a district court, using its inherent power, to impose fees where a party either willfully disobeys the court, or where a “losing party ‘acted in bad faith, vexatiously, wantonly, or for oppressive reasons.’” 

Finally, the Court held that the burden of establishing entitlement to fees under the clear and convincing evidentiary standard is improper because nothing in the sparse and plain language of section 285 requires such a high standard. Because the “preponderance of the evidence standard” is applied in patent infringement litigations and also generally applicable in civil actions, the Court held that this should likewise be the proper standard for an exceptional case analysis.

As in the Octane Fitness case, in Highmark, after the district court granted Highmark’s motion for summary judgment of non-infringement, Highmark moved for attorney’s fees under section 285. The district court found that Allcare had engaged in vexatious and deceitful conduct throughout the litigation and that it had brought its infringement claims only to force competitors to purchase a license and maintained the claims long after its own experts found the claims to be without merit. The court also found Allcare to have asserted defenses that its own attorneys knew to be frivolous. The district court found the case exceptional and awarded attorney fees to Highmark. 

On appeal, the Federal Circuit relied upon Brooks Furniture when it affirmed in part and reversed in part after a de novo and “without deference” review of the district court’s “objectively baseless” analysis and conclusion, which the Federal Circuit found to be “a question of law based on underlying mixed questions of law and fact.”  

After granting a writ of certiorari, the Supreme Court vacated and remanded. Referencing the concurrently issued Octane Fitness opinion, the Court reiterated that the determination of an exceptional case is left to the discretion of the lower court. The Court observed that the lower court is “‘better positioned’ to decide whether the case is exceptional . . . because it lives with the case over a prolonged period of time.” Thus, the proper standard of review is not review de novo (which applies to questions of law) and not review for clear error (which applies to questions of fact). Instead, exceptional case determinations are to be reviewed for an abuse of discretion. The Court acknowledged that questions of law may in some cases be relevant to a section 285 determination, but because the inquiry “at heart” is factual in nature, the abuse of discretion standard is nevertheless proper.

These companion cases are significant in many respects. For more information on these cases, please contact Fitch Even partner Jared E. Hedman, the author of this alert.

 

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