The Patent Act’s fee-shifting provision allows trial judges to award attorneys’ fees to the prevailing party in patent litigation in “exceptional cases.”  Last month, the U.S. Supreme Court issued decisions in two cases on this subject, loosening the meaning of “exceptional” and requiring greater deference to a trial judge’s decision on whether to award attorneys’ fees.

In Octane Fitness, LLC v. ICON Health & Fitness, Inc., the Supreme Court addressed whether the Federal Circuit had set the “exceptional case” standard too high.  In Brooks Furniture (2005), the Federal Circuit had held that to qualify as “exceptional,” a patent case needed to either (1) involve “material inappropriate conduct” or (2) be both “objectively baseless” and brought in “subjective bad faith.”

The Supreme Court overruled the Federal Circuit’s standard and held that awarding attorneys’ fees is a matter of district court discretion and should be evaluated on a case-by-case basis.  Justice Sotomayor, writing for the court, criticized the Brooks Furniturestandard as “mechanical” and “unduly rigid.”  Since the statute does not define “exceptional,” the standard should be “inherently flexible.”

The Supreme Court held that an “exceptional” case that could support an award of attorneys’ fees 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.”

The decision to award attorneys’ fees should be entrusted to the equitable discretion of the trial judge based on the “totality of the circumstances.”  After all, who would know if a case is exceptional better than the judge who has observed the litigants’ conduct and positions for two or more years?

The Supreme Court also rejected the Federal Circuit’s requirement that an “exceptional case” must be proved by “clear and convincing evidence.”  The Supreme Court noted that the statute imposes no specific burden of proof and seemed to suggest that the lower “preponderance of the evidence” standard (that is, more likely than not) may be proper.

In Highmark Inc. v. Allcare Health Management Systems, the Supreme Court addressed the standard by which a district court’s decision on attorneys’ fees should be reviewed on appeal to the Federal Circuit.  In Brooks Furniture, the Federal Circuit had held that a trial court’s decision whether to award attorneys’ fees in a patent case was subject to de novo review, that is, with no deference to the trial judge’s rationale.

Relying on Octane Fitness, the Supreme Court overruled the Federal Circuit and held that a decision regarding attorneys’ fees should be reviewed on appeal only for abuse of discretion by the district court.  Justice Sotomayor, again writing for the court, reasoned 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.”  The Supreme Court also noted that a trial judge’s decision on attorneys’ fees is “rooted in factual determinations,” which are traditionally reviewed only for abuse of discretion.

Many have hailed the decisions as a double blow against patent “trolls,” a pejorative term used to describe entities that purchase and enforce patents solely to enforce them and thereby to collect damages awards or licensing fees.  Indeed, one can imagine that trial judges are primed to penalize parties who seek to enforce patents that are exposed as clearly invalid or who demand fees that are disproportionate to the patented invention’s role in the accused product or service.  Of course, the effect of these decisions on reducing patent litigation remains to be seen.

These decisions may have an impact on current Congressional proposals, some of which would further modify the standard for shifting of attorneys’ fees.  One of the recent proposals, in fact, puts the shoe on the other foot:  it would mandate an award of fees to the prevailing party unless the court finds that the non-prevailing party’s position and conduct were objectively reasonable and substantially justified or that exceptional circumstances would make an award unjust.

If such a bill were signed into law, it would make it that much easier for the prevailing party to recover attorneys’ fees in patent litigation.  Such a change would render Octane Fitness a moot point.  However, some have speculated that Congress may drop the proposed legislative changes to the fee-shifting provision in light of these Supreme Court cases.

Others criticize these decisions as the Supreme Court’s latest effort to erode patent owners’ property rights.  For nearly a decade, the general trend has been for the Supreme Court to reverse the Federal Circuit’s decisions and limit patent owners’ rights.  For example, in eBay v. MercExchange (2006), the Supreme Court made it more difficult for a patent owner to obtain an injunction against an infringer.

Some fault the Supreme Court for the vagueness of the “totality of the circumstances” test.  While that test may give judges flexibility, it makes it difficult for both patent owners and potential defendants in patent cases to assess the likelihood of an award of attorneys’ fees.  This can bring more uncertainty and risk into patent litigation.

While the impact of these two Supreme Court cases will reveal itself only over time, one thing is already clear: Plaintiffs with flimsy patent claims would be wise to think twice before filing suit.  A claimant’s calculus must now include the increased possibility that a loss in court could lead to a greater financial loss – paying the opposing party millions of dollars in attorneys’ fees.  The key questions going forward are: 1) Will these changes be effective enough to deter questionable patent suits and 2) Will they be so effective that they deter legitimate patent suits?