Supreme Court on patent attorneys fees

Today the Supreme Court published two opinions, each dealing with attorneys’ fees in patent cases.  See Highmark Inc. v. Allcare Health Management System, Inc. and Octane Fitness, LLC v. ICON Health & Fitness, Inc.

Since my days in law school I have chafed under the “American rule” which says that for most kinds of lawsuit, neither party is obligated to reimburse the other party for its attorneys’ fees.  I have always felt that it would somehow be more “right” or “fair” for the losing party to have to reimburse the prevailing party for its attorneys’ fees in all kinds of lawsuits.  I still recall how I felt when I first laid my eyes on 35 USC § 285 (this was during my first few days as a patent lawyer, back when dinosaurs roamed the earth and there were no cell phones or Internet) and saw to my great delight that patent law was one of the small handful of types of lawsuit where the losing party would have to reimburse the prevailing party for its attorneys’ fees.

Except not.  Lurking toward the end of Section 285 is the place where it says that the award of attorneys’ fees to the prevailing party will happen only in “exceptional cases”.  Most US practitioners, your scribe included, have gone their entire career without ever seeing a district judge award attorneys’ fees to the prevailing party (35 USC § 285).  Instead the way the case ends is that each party licks its wounds and goes home.  It seems that I have never participated in an “exceptional case” and do not recall ever even having been in the same room with a person who participated in an “exceptional case”.

The Court of Appeals for the Federal Circuit seems to have felt that very few patent cases ever rise to the level of being “exceptional”.  The Federal Circuit communicated these feelings in a couple of ways.  One way was to publish its opinion in Brooks Furniture, an opinion that said that the way you know whether a patent case is “exceptional” is by looking to see whether the case either involves “material inappropriate conduct” or is both “objectively baseless” and “brought in subjective bad faith”.  When you look to see whether these three conditions are or are not satisfied you have to see whether there is “clear and convincing evidence”, says Brooks.  And the Federal Circuit helpfully motivated district judges to avoid straying from the teachings of Brooks Furniture by reminding them that any finding of “exceptionality” would be reviewed de novo.

The second way that the Federal Circuit communicated these feelings was by reversing federal district judges when they put forth the view that a case was “exceptional”.  Highmark was such a case.

Now come these two opinions, Octane and Highmark.  What these Supreme Court cases stand for is:

• it is the District Court, not the Federal Circuit, that gets to decide if a patent case is exceptional;  and
• the District Court does not have to follow Brooks Furniture any more.

Going forward, the District Court gets to decide whether a patent case is exceptional “in the case-by-case exercise of [its] discretion, considering the totality of the circumstances”.  The district judge used to be at risk of being reversed about this, because the Federal Circuit felt it had the power to review this question de novo.  The district judge used to feel constrained by the detailed conditions set forth in the Brooks Furniture case.

But going forward, to find a case “exceptional” the district judge does not have to satisfy the detailed requirements of Brooks Furniture but instead merely has to consider the totality of the circumstances.  And the district judge does not need to worry about a de novo review.  The standard of review, going forward, is the “abuse of discretion” standard.  The district judge is safe from being reversed except in the (rather unlikely) event that an appellant is able to show that the district judge “abused” his or her discretion.

As you may imagine, since I don’t like the American rule, I rather like these two Supreme Court cases.  They empower district courts with the ability to find patent cases “exceptional” without having to be so afraid of being reversed on appeal.

The way I see it, these cases will have ripple effects going far beyond the activities in federal district courts.  One category of ripple effect will be the world of settlement negotiations.  Traditionally a patent owner with a dubious theory of infringement would be able to proceed in licensing and enforcement activities, pretty secure in the knowledge that it would never have to answer for its actions by way of having to reimburse the other side for its attorneys’ fees.  Also traditionally, the target of a dubious patent claim would hesitate to “clear the air” by filing a declaratory judgment (“DJ”) action, the hesitation flowing from the reality that the target would never be reimbursed for the cost of filing and litigating the DJ action.

But now with these two Supreme Court cases in place, a patent owner with a dubious theory of infringement might hold back from enforcement threats.  A target of a dubious claim could resist an enforcement effort with the knowledge that if the target were to file a DJ action, there is the chance that the cost of the DJ action could be shifted to the patent owner.

Related to this is the fact that when a case settles, it is because the parties have found some middle ground that is bracketed by the best and worst possible results anticipated by each of the parties.  For a dubious patent case, as of now with these two Supreme Court cases, the brackets will have shifted ever so slightly in the direction that favors the target party and disfavors the patent owner.

Meanwhile, what about the patent owner with a meritorious patent claim but limited litigation resources?  Traditionally this party has little choice but to settle cheaply or perhaps not even attempt enforcement.  With these two Supreme Court cases in place, however, the brackets will have shifted ever so slightly in the direction that favors the patent owner and motivates the infringer to cough up a bit more money.

These Supreme Court cases will tend to level the playing field as between parties with assymmetrical litigation resources.  They will promote settlements that are closer to what I would term the “fair” or “right” outcomes.  And they will tend to punish parties (patent owners or infringers alike) who take unreasonable positions.