The U.S. Court of Appeals for the Fourth Circuit has ruled that a prevailing party is entitled to attorney fees only if it convinces the court by a preponderance of the evidence that the case was “exceptional.”

In the underlying dispute, Verisign sued XYZ.com, alleging false advertising based on a “gold rush” scheme in which XYZ misleadingly inflated the number of customers who bought XYZ domain names on its launch day. Verisign claimed that XYZ lied about selling hundreds of thousands of domain names to promote its business when, in fact, it had given them away for free.

A district court judge was not persuaded and granted summary judgment in favor of XYZ. The defendant then moved for attorney fees under the Lanham Act pursuant to section 1117(a), which permits the court in exceptional cases to award reasonable attorney fees to the prevailing party.

The district court denied the motion, holding that under the Lanham Act, a prevailing party seeking attorney fees must prove its entitlement to fees with “clear and convincing evidence.” The court also suggested that evidence of bad faith or independently sanctionable conduct was required in order to prove an exceptional case.

XYZ appealed, and the Fourth Circuit reversed, finding the district court applied an incorrect standard.

In a 2015 decision, Georgia-Pacific Consumer Products LP v. von Drehle Corp., the Fourth Circuit adopted the U.S. Supreme Court’s interpretation of an “exceptional case” in an identical provision of the Patent Act in Octane Fitness, LLC v. ICON Health & Fitness, Inc.

The federal appellate panel concluded that “a district court may find a case ‘exceptional’ and therefore award attorneys fees to the prevailing party under section 1117(a) when it determines, in light of the totality of the circumstances, that (1) there is an unusual discrepancy in the merits of the positions as either frivolous or objectively unreasonable; (2) the non-prevailing party has litigated the case in an unreasonable manner; or (3) there is otherwise the need in particular circumstances to advance considerations of compensation and deterrence.”

Having reaffirmed the analysis for an “exceptional case,” the Fourth Circuit then established the correct standard for the burden of proof.

“We are persuaded that Georgia-Pacific and Octane Fitness together require a party to prove that a case is an ‘exceptional case’ under section 1117(a) of the Lanham Act by a preponderance of the evidence,” the Fourth Circuit wrote. “Because we have already adopted the Octane Fitness standard for awarding these fees, we see no reason not to adopt the Octane Fitness burden of proof as well. And in Octane Fitness, the Supreme Court explicitly rejected a clear and convincing evidentiary standard for Patent Act cases in favor of a preponderance of the evidence standard. Thus, Georgia-Pacific and Octane Fitness require a party to prove an ‘exceptional case’ by a preponderance of the evidence.”

Further, “we are also convinced that this burden of proof is the correct one,” the federal appellate panel added. The Lanham Act, like the Patent Act, requires a simple discretionary inquiry and imposes no specific evidentiary burden, much less such a high one, the court said. The preponderance of evidence standard is also the standard generally applicable in civil actions.

The Fourth Circuit found additional support from other appellate courts, as both the Fifth and Ninth Circuits have held that Octane Fitness’s preponderance of the evidence standard applies when establishing an exceptional case under the Lanham Act, while the Third, Sixth, Eleventh and Federal Circuits have all concluded that Octane Fitness applies to Lanham Act cases without applying a different standard.

The panel also took the time to explicitly reject the district court’s use of a “bad faith” requirement to prove that a case is exceptional, and clarified “that the losing party’s conduct need not have been independently sanctionable or taken in bad faith in order to merit an award of attorney fees to the prevailing party under the Lanham Act.”

Vacating the district court’s decision, the panel remanded the case for consideration of attorney fees under the preponderance of the evidence standard.

To read the opinion in Verisign, Inc. v. XYZ.com LLC, click here.

Why it matters: For practitioners, the Fourth Circuit’s decision brings greater consistency to the question of the applicable standard when determining whether to award attorney fees to a prevailing party in a Lanham Act case. As the federal appellate panel pointed out, three circuits are on the same page in terms of the preponderance of the evidence standard, none has explicitly rejected the standard, and another four have applied Octane Fitness without applying a different evidentiary standard.