By Peter A. Jackmam

On April 29, 2014, the U.S. Supreme Court issued a unanimous decision that greatly liberalized the standard by which district courts award attorney fees to the prevailing parties of a patent litigation (“fee-shifting”). Prior to this decision, fee-shifting was limited to cases involving “material inappropriate conduct” or where the basis for the case was “both ‘objectively baseless’ and ‘brought in subjective bad faith.’” Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1751 (2014) (quoting Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005)). However, in Octane Fitness, the Court rejected such restrictive standards. Octane Fitness, at 1755. The Court held that the Brooks Furniture standard was “unduly rigid, and it impermissibly encumber[ed] the statutory grant of discretion to district courts.” Id. With this decision, the Supreme Court restored the discretionary power back to the district courts, once again making fee-shifting a realistic possibility in “exceptional” patent infringement cases.

The Brooks Furniture Standard

Section 285 of the Patent Act provides that “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.” 35 U.S.C. § 285 (emphasis added). For much of the statute’s history, the district courts applied the provision in a discretionary manner, “consider[ing] the totality of the circumstances” in determining whether a case was “sufficiently ‘exceptional’ to warrant a fee award.” Octane Fitness at 1753-54.

However, in 2005, the Federal Circuit rejected the more relaxed approach in favor of a “more rigid and mechanical” fee-shifting standard. Octane Fitness, at 1754. In Brooks Furniture v. Dutailier International, the Federal Circuit held that there were only two circumstances in which a case was deemed “exceptional” for purposes of § 285: (1) “there [was] some material inappropriate conduct related to the matter in litigation,” or (2) “the litigation [was] brought in subjective bad faith, and . . . [was] objectively baseless.” Id. (quoting Brooks Furniture, at 1381 (Fed. Cir. 2005)). The court also held that the party seeking attorney fees must establish the “exceptional” nature of the case “by clear and convincing evidence.” Id.

The Brooks Furniture‘s Definition of “Exceptional” Rejected

According to the Court, Brooks Furniture‘s definition of “exceptional” was inappropriate, as it was not in line with the intent of Congress. Id. at 1757. With the addition of the words “exceptional cases” to § 285 of the Patent Act, Congress never intended to “substantively alter the meaning of the statute.” Id. at 1754. It merely wanted “to ‘expres[s] the intention of the [1946] statute as shown by its legislative history'” and to clarify the courts’ historically discretionary approach in interpreting that intent. Id. at 1753, footnote 2 (quoting S. Rep. No. 82-1979, p. 30 (1952)).

The Court emphasized that the “Patent Act does not define ‘exceptional'”, and therefore construed the term “‘in accordance with [its] ordinary meaning.'” Id. (quoting Sebelius v. Cloer, 133 S. Ct. 1886, 1889 (2013)). And both today and back in 1952 when § 285 was codified, the term “‘[e]xceptional’ meant ‘uncommon,’ ‘rare,’ or ‘not ordinary.'” Id. at 1756. Material misconduct, bad faith, or some other “‘vexatious[], wanton[], or . . . oppressive'” act was not a necessary element. Id. at 1757 (quoting Noxell Corp. v. Firehouse No. 1 Bar-B-Que Restaurant, 771 F.2d 521, 526 (C.A.D.C. 1985)).

With this definition in mind, the Court held that “exceptional” cases as those that simply “stand[] 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.” Id. at 1756. And in determining whether a case satisfies this definition, the Court recognized the district courts’ complete “discretion [over the matter], considering the totality of the circumstances.” Id.

The Brooks Furniture‘s Standard of Proof Rejected

In addition to rejecting Brooks Furniture’s definition of “exceptional,” the Court also rejected the Federal Circuit’s requirement that parties seeking attorney fees in patent litigations establish their case by “clear and convincing evidence.” Id. at 1758. The Court noted that there was “nothing in § 285 [to] justif[y] such a high standard of proof.” Id. Moreover, “patent-infringement litigation ha[d] always been governed by a preponderance of the evidence standard.” Id. Accordingly, the Court held that patent litigants need only establish their entitlement to fees under §285 by the preponderance of the evidence standard. Id.

Future of Fee-Shifting in Patent Litigations

Although the ultimate ramifications of the Octane decision remain to be seen, the Court’s new standard for fee-shifting in patent litigations should make attorney fees more frequently pursued and readily available to prevailing parties in many patent infringement cases. This is especially true in light of the Court’s unanimous decision in Highmark Inc. v. Allcare Health Mgmt. Sys. 134 S. Ct. 1744 (2014), also issued on April 29, 2014. In Highmark, the Court held that because district courts have great discretion as to whether a case is “exceptional,” such decisions may only be reviewed “on appeal for abuse of discretion.” Id. at 1748 (holding that the text of § 285 expressly states that district courts have discretion in making the determination and deference should be given to the district courts because they are in a better position to decide whether a case is exceptional).

Until such time it becomes more clear how district courts will determine whether one case stands out from another with respect to the substantive strength of a party’s litigating position or the unreasonable manner in which the case was litigated, potential patent plaintiffs should conduct due diligence prior to filing suit and litigation counsel should be mindful of their conduct during the litigation. Otherwise, such litigants may not only end up losing the case but also paying the opposing party’s attorney’s fees under the Supreme Court’s new fee-shifting standard.

About Peter A. Jackman and Daniel K. Choo

Peter A. Jackman (www.skgf.com/peterjackman) is a Director and Daniel K. Choo is a Summer Associate of Sterne, Kessler, Goldstein & Fox P.L.L.C. The views expressed herein are those of the authors and should not be attributed to former, present, or future clients or any employees of Sterne, Kessler, Goldstein & Fox P.L.L.C.