By Jeremy Elman and Andrew Stein

The United States Supreme Court issued two related opinions earlier today regarding the appropriate standard for awarding attorneys’ fees in patent litigation, Octane Fitness, LLC v. Icon Health & Fitness, Inc., and Highmark Inc. v. Allcare Health Management System, Inc. At issue in Octane was whether the “exceptional case” standard for awarding attorneys’ fees in patent litigation under 35 U.S.C. § 285 was too high, and at issue in Highmark was whether a District Court’s award under § 285 should be subject to deference or reviewed de novo.  Justice Sonia Sotomayor delivered the opinion of the Court in both cases, which was unanimous except for Justice Antonin Scalia disagreeing with three footnotes in Octane.

While the effect of these decisions on reducing patent troll litigation remains to be seen, they could have an immediate impact on the various legislative patent litigation reform proposals being considered in Congress.

The Court’s opinions today lower the standard for awarding attorneys’ fees and reviewing such decisions, overruling the Federal Circuit’s standard from Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F. 3d 1378 (2005).

In Octane, the parties are competing exercise manufacturers.  Icon sued Octane for patent infringement, and the district court found no infringement at summary judgment, so Octane sought attorneys’ fees under § 285.  The district court denied Octane’s motion under the Brooks Furniture standard, which required that the party seeking to shift attorneys’ fees under § 285 show that the infringement claim was “exceptional” both because it was “objectively baseless” and brought in “subjective bad faith.”  The Federal Circuit affirmed the denial of Octane’s motion under Brooks Furniture.

The Supreme Court’s 12-page decision in Octane today overturned the Brooks Furniture standard, finding instead that each case is a matter of discretion and should be evaluated on a case-by-case basis.  Justice Sotomayor wrote that “exceptional” is not defined in § 285, and thus found that exceptional means “uncommon,” “rare” or “not ordinary,” rejecting the Brooks Furniture standard requiring both objective and subjective portions as “overly rigid.”  The Court held that a party could satisfy § 285’s “exceptional” requirement by showing that, by a preponderance of evidence, the infringement claim is “simply one that stands out from others with respect to the substantive strength of a party’s litigating position (both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”

While it remains to be seen how courts will interpret this standard, the key language is that a claim must “stand out” for a district court to award attorneys’ fees to the prevailing party.  The opinion further stated that lowering the standard is proper because the prior Brooks Furniture standard requiring a finding of baselessness and bad faith should be addressed under a court’s inherent power to sanction, and changing the § 285 standard to cases that merely “stand out” is proper because otherwise § 285 would be superfluous.

In Highmark, Highmark filed a declaratory judgment that Allcare’s patent for “utilization review” in “managed health care systems” was invalid and unenforceable.  Allcare counterclaimed for patent infringement, and the district court entered a final judgment of noninfringement for Highmark at summary judgment.  After a § 285 “exceptional case” motion, the district court awarded Highmark its attorneys’ fees, finding that Allcare had engaged in a pattern of vexatious litigation conduct, and pursued frivolous claims and defenses.  The district court awarded Highmark slightly over $5 million in fees and expenses.  The Federal Circuit affirmed in part and reversed in part on a de novo basis without deference pursuant to Brooks Furniture, reversing the § 285 exceptional case finding as to one claim but not another, and awarding no fees for the litigation misconduct.

The Supreme Court’s five-page decision in Highmark today overturned the standard of de novo review for § 285 motions under Brooks Furniture.  Justice Sotomayor, citing her simultaneous opinion in Octane, wrote “[o]ur holding in Octane settles this case: Because § 285 commits the determination whether a case is ‘exceptional’ to the discretion of the district court, that decision is to be reviewed on appeal for abuse of discretion.”  The opinion cites the standard of Pierce v. Underwood, 487 U. S. 552, 558 (1988), which held that “decisions on ‘matters of discretion’ are ‘reviewable for ‘abuse of discretion.’”

Justice Sotomayor went on to say that a district court is “better positioned” to decide whether a case is exceptional due to its experience with the case over a “prolonged period of time.”   Thus, the Supreme Court held that “an appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district court’s § 285 determination.”

Now that the Supreme Court has made it easier to seek fees in patent cases based on existing law, the present disagreements in Congress regarding fee-shifting in patent cases may be moot.  The Court’s opinion in these cases could not have been more opportune: the Senate Judiciary Committee is holding another hearing on its leading patent litigation reform bill (S. 1720) on Thursday, May 1 at 10:00 am.