On April 29 2014 the Supreme Court lowered the bar for prevailing litigants in certain patent suits to seek attorneys' fees, reversing a Federal Circuit panel decision to hold that the Federal Circuit's traditional framework for assessing "exceptional cases" under 35 USC § 285 was unduly rigid and impermissibly encumbered the discretion of district courts.(1) The court also held that an appellate court should review all aspects of a district court's exceptional case determination for abuse of discretion.(2)
ICON Health & Fitness owns a patent relating to the linkage used in elliptical machines allowing the user to adjust the stride length. ICON sued Octane Fitness, alleging that Octane's elliptical machines infringed several claims of its patent. The district court granted Octane's motion for summary judgment of non-infringement. Octane subsequently moved for award of attorney's fees under 35 USC § 285. The district court denied Octane's motion for attorneys' fees, finding that Octane had failed to demonstrate by clear and convincing evidence that:
- the suit was brought in "subjective bad faith"; and
- the suit was "objectively baseless".
The Federal Circuit affirmed the district court's summary judgment of non-infringement and declined to find that Octane had established exceptional case under Section 285 by clear and convincing evidence. In its cross-appeal, Octane sought to lower the standard for exceptionality to "objectively unreasonable". The Federal Circuit declined to lower the standard and found no reason to revisit the settled objectively baseless standard for exceptionality.
Allcare Health Management Systems, Inc owns a patent relating to a method of data entry and management useful in the healthcare industry. Allcare notified Highmark, Inc that it believed that Highmark's transaction processing system infringed its patent. Highmark filed for declaratory judgment of non-infringement. Allcare counterclaimed, alleging infringement of several claims of its method patent. The district court granted Highmark summary judgment of non-infringement at trial. Highmark subsequently moved for attorneys' fees for exceptional case under Section 285, which were awarded by the district court.
The Federal Circuit affirmed the district court's finding of exceptional case for one patent claim at issue, but reversed the exceptional case finding for a second patent claim at issue. Because the framework for exceptional case is a question of both law and fact, the Federal Circuit reviewed the exceptional case determinations de novo and afforded no deference to the district court's findings.
In a decision delivered by Justice Sotomayor, the Supreme Court first determined that the Federal Circuit's traditional exceptional case framework as set forth in Brooks Furniture was inconsistent with the statutory text of Section 285. The court recognised that the Patent Act does not define 'exceptional', and thus should be construed in accordance with its ordinary meaning and in light of Congress's intent.
The court found that:
"an 'exceptional' case is simply one that stands out from others with respect to the substantive strength of a party's litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated."
Thus, "District Courts may determine whether a case is 'exceptional' in the case-by-case exercise of their discretion, considering the totality of the circumstances". The court noted that such discretion is comparable to that provided for by the Copyright Act.
The court then determined that the Federal Circuit's exceptional case framework was an inflexible framework imposed on Section 285, which is inherently flexible. As to litigation misconduct, the court elaborated that "a district court may award fees in the rare case in which a party's unreasonable conduct – while not necessarily independently sanctionable – is nonetheless so 'exceptional' as to justify an award of fees". The court also stated that "a case presenting either subjective bad faith or exceptionally meritless claims may sufficiently set itself apart from mine-run cases to warrant a fee award" (emphasis added). The court further explained that the roots for "subjective bad faith" and "objective baselessness" lie in antitrust doctrine, not in the text of Section 285.
The court held that the Federal Circuit's Brooks Furniture framework was "so demanding that it would appear to render § 285 largely superfluous". The court explained that common law has long recognised an exception to the US rule against fee-shifting when a party acts in wilful disobedience of a court order or in bad faith, vexatiously, wantonly or for oppressive reasons. As such, the court noted that it had previously declined to construe fee-shifting provisions narrowly to avoid rendering such provisions superfluous, and thus declined to do so in Octane's case.
Finally, the court rejected the Federal Circuit's requirement that litigants establish their entitlement to fees under Section 285 by clear and convincing evidence, noting that comparable fee-shifting statutes have not been interpreted to impose such a requirement. Looking to the text of Section 285, the court found that it imposes no specific evidentiary burden, much less a high one such as clear and convincing evidence. Rather, Section 285 "demands a simple discretionary inquiry".
In a unanimous decision delivered by Sotomayor, the court held – based on its determination in Octane – that "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 court explained that its precedent holds that decisions on matters of discretion are reviewable for abuse of discretion. The court noted that "although questions of law may in some cases be relevant to the § 285 inquiry, that inquiry generally is, at heart, 'rooted in factual determinations'".
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