Will the Supreme Court Change the Landscape For ‘Patent Troll’ Litigation?

February 26, 2014 was an important day for tech and other companies that have found, or might potentially find, themselves becoming the target of what are known as non-practicing entities (or “patent trolls”), as the Supreme Court heard oral arguments on two “fee shifting” cases, Octane Fitness v. Icon Health and Fitness, and Highmark v. Allcare Health Management Systems.

In this month’s Emerging Trends, Kaye Scholer Intellectual Property Partners Stephen Holmes and James Blank talk with us about the potential impact of a Supreme Court ruling on these issues.

What are the specific issues in these two “fee shifting” cases?

Blank: The issue in Octane Fitness v. Icon Health and Fitness is whether the current two-prong standard for determining whether a case is “exceptional” enough to warrant attorneys fees should remain intact or be changed to a less rigorous standard, perhaps something more akin to “totality of the circumstances.”

And the related issue in Highmark v. Allcare Health Management Systems has to do with the standard of review the appellate court, the US Court of Appeals for the Federal Circuit, must apply when reviewing the district court’s decision to grant or deny the award of fees. Will the appeals court review the lower court’s decision “de novo,” meaning starting from scratch and without giving deference to the lower court? Or will it overturn that lower court decision only if there was an abuse of discretion? These two rulings, combined, will lay out the new “rules” for attorneys fees awards moving forward.

Holmes: The Patent Act provides that “the court in exceptional cases may award reasonable attorney fees to the prevailing party.” In theory, this fee provision should deter aggressive and frivolous litigation by non-practicing entities (so-called patent trolls), by emboldening companies being sued by the trolls to stand their ground and fight back, instead of settling. However, the test for an ‘exceptional case’ developed by the Federal Circuit has rendered this standard almost impossible to meet and is very sparingly applied. A party seeking fees currently has to prove, absent litigation or prosecution misconduct, that a claim was knowingly brought in subjective bad faith and that the claim was objectively baseless. In practice, therefore, fees are almost never awarded—or specifically, awarded in only about one percent of cases, according to a study referenced in Octane Fitness’ petition for certiorari. This leaves businesses being targeted by these often groundless and costly ‘patent troll’ lawsuits without any safety net, essentially forcing them to settle.

Practically speaking, what is the potential impact of a Supreme Court ruling in these cases?

Holmes: In these two cases, the Supreme Court could significantly alter the landscape of patent litigation. If it agrees with the Petitioners, patent plaintiffs—including patent trolls—will have to think twice before asserting weak patents because a district court will be able to consider the totality of the circumstances in awarding fees to the winning party (instead of the current, strict two-prong test) and because a district court’s award of fees will be harder to overturn on appeal. Notably, the US government has filed amicus briefs in both cases supporting the proposed changes in the fee-shifting standards.

Blank: In terms of whether a lowering of the two-pronged exceptionality standard from Octane will push things into a more favorable place for small businesses, that depends. A lowering of the standard for proving that patent cases are exceptional, where the patent owner has lost, would clearly cause patent owners (including trolls), to not only think twice but to think deeply before filing a lawsuit. That obviously would be helpful for business owners who face suits from patent trolls. The specter of a patent troll having to pay attorney fees if it loses should result in fewer cases being brought by patent trolls.

But on the other hand, often times even small business owners own patents too—that’s more and more the case in this country, where small business owners who are clearly savvy in many cases develop new technologies. They also need to seek patent protection, not just the big tech companies. So for businesses that own patents and might think about suing a larger or small competitor, they’ll also need to think twice and deeply before bringing a case. The cost of losing could be enormous and could bankrupt a small company.

Are particular companies and/or industries especially vulnerable to these kinds of suits?

Blank: No company, be it a start up or a long-established brand, is immune from suits by patent trolls. It affects companies across any number of industries, big and small. But the tech giants, some of which are individually hit with dozens of patent troll suits every year, will no doubt be observing these court proceedings with particular interest.

Did you have any reactions to the oral arguments?

Holmes: In the Octane Fitness case, although there was considerable discussion about the precise words to be given to district court judges in applying the “exceptional case” test, the overall message that the current standard is too hard—and that a change is needed—seemed to be well understood by the Justices.

During oral arguments in the Highmark case, there was a great deal of questioning over potential disparities between cases if more deference were to be given to the district courts, and whether the Federal Circuit would deliver more uniformity. While Allcare argued that the district courts would be too disparate, Chief Justice Roberts noted that the Federal Circuit judges had a great deal of disagreement among themselves on particular cases and Justice Scalia opined that this did not strike him as an area where Congress expected uniformity. Overall, the arguments for the Petitioner Highmark, advocating for more deference to district courts, seemed better received than those for the Respondent patent troll Allcare.

Do you have any “predictions” as to what the Supreme Court will ultimately decide?

Blank: By granting cert on two fee shifting cases in one term, the Supreme Court seems eager to tackle the fee-shifting issue. Yesterday’s oral arguments forOctane were quite illuminating, and the terminology over what constitutes “exceptional” was intensely debated.  I believe that the Court will ultimately settle on a lower, softer standard than the two-prong standard that’s currently in place, something along the lines of a “totality of circumstances” test which will allow a district court to use a variety of factors that the court will likely lay out in a non-exhaustive fashion in its ultimate opinion.

Holmes: While no one can predict the outcome, these cases do come at a very opportune time. The patent troll tide has recently been turning in a positive direction. Last year, the White House announced a patent troll initiative, and then the FTC announced a probe of patent assertions by these companies. Congress is also actively looking to pass patent litigation reforms aimed largely at deterring patent trolls. Many, including myself, believe that the Supreme Court may be of a similar mind, which is why it granted certiorari on these two cases to be heard on the same day.  I think the Supreme Court will change the standard making it easier for prevailing defendants to get their reasonable attorney fees. It will be interesting to see precisely how the Supreme Court relaxes the test.

Have you any final thoughts?

Holmes: From my perspective, the time to reconsider attorney fee awards has come, and, if the Supreme Court agrees, the impact upon technology and other companies that are victims of patent trolls will be significant.

Blank: Basically every company, big and small, troll and non-troll, will need to bear any new exceptionality standard the Supreme Court devises in mind when they are thinking about bringing a patent litigation, because their costs for losing even what they think is a legitimate patent case could be significant.