Supreme Court Update: Octane Fitness, LLC v. ICON Health & Fitness, Inc. (12-1184) and Highmark Inc. v. Allcare Health Management System, Inc. (12-1163)

April 29, 2014 Supreme Court Update

Greetings, Court fans!

The Court continued its steady flow of spring decisions today, handing down three more. Two have been making headlines for their potential (though unspoken) impact on "patent trolls" (a derogatory term used to refer to those that hold patents not to manufacture products, but to extract licensing fees or inhibit competition). Octane Fitness, LLC v. ICON Health & Fitness, Inc. (12-1184) and Highmark Inc. v. Allcare Health Management System, Inc., (12-1163), both involved the standard for attorney's fee awards under Section 285 of the Patent Act. Departing from the so-called American Rule, under which each party to a lawsuit bears its own litigation costs, Section 285 permits a district court to award reasonable attorney's fees to a prevailing party in "exceptional cases." In 2005, the Federal Circuit began interpreting that standard to require that a prevailing party establish, by clear and convincing evidence, either (a) "material inappropriate conduct" by the losing party; or (2) that the litigation was both objectively baseless and brought in subjective bad faith. The Federal Circuit also held, in the Highmark case, that a district court's decision finding objective baselessness involved a mixed question of law and was therefore subject to de novo review, rather than abuse of discretion review. The Court disagreed with the Federal Circuit on all fronts.

In Octane Fitness, Justice Sotomayor led a virtually unanimous Court (but for Justice Scalia's refusal to join three footnotes citing to legislative history), holding that the standard developed by the Federal Circuit to establish an "exceptional case" was "too rigid." As an initial matter, the "exceptional case" language, adopted in 1952, was not intended to substantively alter the prior standard that had provided for a "discretionary" award of fees, but which courts had long interpreted to apply only in rare circumstances. Second, dusting off a Webster's Dictionary from 1952, the Court concluded that "exceptional" merely meant "‘uncommon,' ‘rare,' or ‘not ordinary.'" Accordingly, the Court explained, an " ‘exceptional case' is simply one that stands out from others with respect to the substantive strength of the 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 should consider the "totality of the circumstances" and exercise their "equitable discretion" in determining whether a fee award is appropriate. In a footnote, the Court noted that under a similar fee-shifting statute, courts often consider factors such as "frivolousness, motivation, objective unreasonableness . . ., and the need in particular circumstances to advance considerations of compensation and deterrence." The Federal Circuit also erred in adopting a clear and convincing evidence standard. Section 285 "demands a simple discretionary inquiry" and "imposes no specific evidentiary burden, much less such a high one." Thus, the usual civil preponderance of the evidence standard applies.

Justice Sotomayor kept the pen for Highmark, where the Court (now entirely unanimous) applied the reasoning of Octane Fitness to reverse the Federal Circuit's conclusion that a district court's finding of objective unreasonableness should be reviewed de novo. Instead, an appellate court should review "all aspects of a district court's §285 determination for abuse of discretion." The Court emphasized that this is not unreviewable discretion—a district court's determination would be reversed if it was based on "an erroneous view of the law or on a clearly erroneous assessment of the evidence." However, that should be rare, as the section 285 inquiry "is, at heart, ‘rooted in factual determinations.'"

The upshot of this pair of cases is that district courts will have more latitude to issue fee awards in patent cases, including in situations where they see a need for "deterrence," which may include perceived abuses by patent trolls, who have previously been shielded by the Federal Circuit's stringent test and its presumption that the assertion of a duly granted patent is made in good faith.

We'll be back soon to bring you the Court's third decision of the day: Environmental Protection Agency v. EME Homer City Generation, L.P. (12-1182), a hefty environmental law decision that we are currently wading through. Until then, thanks for reading!

Kim, Jenny & Tadhg

Appellate and Complex Legal Issues Practice Group at Wiggin and Dana. For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400