Supreme Court opens door to expanded fee-shifting in patent infringement litigation

Patent holders may consider hitting the “pause” button before enforcing their patents, based on a pair of U.S. Supreme Court decisions that relaxed the standard for awarding fees to the prevailing party in patent litigation. While several news outlets are (correctly) reporting that the Supreme Court rulings will make it easier for lower courts to impose financial penalties on so-called “patent trolls,” the facts behind the rulings suggest that the Court’s new standard may have an even broader effect.

Section 285 of the Patent Act permits a court to award reasonable attorney fees to the prevailing party in patent litigation in “exceptional cases.” Under the prior standard, a case could only be considered “exceptional” if either (i) there was “misconduct in the conduct of the litigation or in securing the patent,” or (ii) the litigation was brought in subjective bad faith and was “objectively baseless.” The prior standard also required that that there be “clear and convincing evidence” to declare the case exceptional.

In the first new decision, Octane Fitness LLC v. Icon Health & Fitness, the Court rejected the prior standard and stated:

[A]n “exceptional” case is simply one that stands out from the others with respect to the substantive strength of a party’s litigating positions . . . 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.

The Court emphasized this “equitable discretion” standard by stating that “there is no precise rule or formula for making these determinations.”

The Court also rejected the “clear and convincing evidence” standard and replaced it with a “preponderance of the evidence” standard. The Court explained that the lesser preponderance of the evidence standard “allows both parties to share in the risk of error in roughly equal fashion.”

On the same day as the Octane Fitness decision, the Court applied the new standard in a second case, Highmark Inc. v. Allcare Health Management System Inc.

The Court remanded both cases to the lower court for further review, and what happens next can have an even greater effect on patent litigation strategy going forward.

The Highmark case is notable in that the patent holder did not even initiate the litigation. Instead, Highmark filed an action seeking declaratory judgment of invalidity and non-infringement. Allcare counterclaimed that Highmark was infringing three of the claims of the patent. The lower court found in favor of Highmark, and it also found that Allcare’s counterclaim assertion of one of the three patent claims was objectively baseless. That single action by Allcare resulted in a $5 million exceptional case award – even though the court found Allcare’s allegations relating to the patent’s other claims to be reasonable.

The Octane Fitness case is notable in that it is not what one would typically consider to be a “patent troll” case. Icon Health, which produces NordicTrack exercise equipment, sued Octane Fitness for infringement of a patent covering components of an elliptical training machine. The district court found no infringement. Octane Fitness then sought attorney’s fees based on Icon’s “allegedly unreasonable claim construction positions, its privilege assertions over its pre-suit investigation, and emails allegedly supporting bad faith litigation in an effort to ‘go after’ Octane.”  Neither the Federal Circuit nor the district court found any issues with Icon’s conduct, and the Federal Circuit suggested that Octane sought attorney’s fees to “rebalance what it alleges as the power of large companies over smaller companies in patent infringement litigation.”  Now that the Supreme Court has remanded this case for reconsideration in view of the new standard, the court could — if it so chooses — alter this result.

The two cases indicate that patent holders should carefully consider every assertion of infringement. In Highmark, a single unreasonable claim resulted in an attorney’s fee award by the lower court. In Octane Fitness, the lower court has been given discretion to impose liability if it feels that the parties’ litigating positions are not appropriate, or if it considers the patent holders actions to be unreasonable. As often happens in Supreme Court decisions, the true effect of this new standard won’t be fully known until lower courts apply it to various fact patterns using their “case-by-case exercise of discretion.”

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