U.S. Supreme Court Agrees to Hear Two 'Exceptional Case' Appeals

, New York Law Journal

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Robert C. Scheinfeld
Robert C. Scheinfeld

On Oct. 1, 2013, the U.S. Supreme Court granted certiorari in two different patent infringement cases involving the issue of fee shifting in "exceptional cases" under 35 U.S.C. Section 285. Both of the cases, Highmark Inc. v. Allcare Health Management Systems1 and Octane Fitness v. ICON Health & Fitness,2 involve fee awards sought against non-practicing entities (NPEs), or so-called "patent trolls." Depending on how the court rules, it may become easier for defendants to recover their attorney fees when forced to defend "objectively baseless" infringement suits brought by patent trolls and others.

Section 285 provides that a "court in exceptional cases may award attorney fees to the prevailing party." Differing legal standards for what constitutes an "exceptional case" for plaintiffs and defendants have developed under Federal Circuit case law. If a plaintiff is able to prove willful infringement, that will typically provide the basis for the district court to find the requisite bad faith, find the case "exceptional" and award attorney fees, as well as enhanced damages, up to treble the actual damages found.3

For defendants seeking an "ex-ceptional case" determination and an award of fees, the standard is somewhat different, and as the petitioner in ICON argues, improperly more burdensome than the exceptionality standard for plaintiffs and thus contrary to the legislative intent underlying Section 285. The current standard, applied by the U.S. Court of Appeals for the Federal Circuit in ICON in affirming the district court's determination that the case was not exceptional, is that a defendant must prove that the plaintiff's infringement claim was both "objectively baseless" and brought in bad faith.4

'ICON v. Octane'

ICON, an NPE, sued Octane Fitness, alleging that Octane's elliptical training machines infringed its U.S. Patent No. 6,019,710. Octane brought a motion for summary judgment of non-infringement, pointing out that its machines lacked two of the important limitations in the patent claims asserted against it. The district court agreed and granted summary judgment. Octane had concurrently filed a motion for a determination that the case be found "exceptional" and that it be awarded its attorney fees. The court denied Octane's motion, finding that the suit was not objectively baseless and was not brought in bad faith.

The Federal Circuit affirmed both of the district court's rulings. Octane had asked the court to revisit its exceptional case standard, advancing the same arguments as it did in its petition for certiorari, namely that the Federal Circuit's standard was improper as it placed a heavier burden on defendants than plaintiffs to establish exceptionality and that it was contrary to statutory intent. The Federal Circuit declined, finding "no reason to revisit the settled standard for exceptionality." It appears, however, that the Supreme Court may disagree, as otherwise there would appear to be no other compelling reason for it to agree to hear the case.

'Highmark v. Allcare'

In Highmark, the question the Supreme Court has agreed to review is "whether a district court's exceptional case finding under 35 U.S.C. Section 285, based upon its judgment that a suit is objectively baseless, is entitled to deference." Allcare, an NPE, sued Highmark for patent infringement, alleging that Highmark's transaction processing systems infringed Allcare's U.S. Patent No. 5,301,105. Highmark moved for summary judgment of non-infringement, and its motion was granted by the district court. Highmark then sought a determination that the case be found exceptional and that it be awarded its attorney fees and sanctions. The district court agreed that the case was objectively baseless and exceptional and awarded Highmark nearly $5 million in fees and costs.

On appeal, the Federal Circuit reversed, in part, the district court's determination that the case was exceptional, holding that the issue of whether a patent infringement claim was "objectively baseless" is a conclusion of law that is reviewed de novo, rather than a factual finding for which the standard of review would be clear error. The Federal Circuit concluded that some of Allcare's claims were not objectively baseless.

In its petition, in addition to asking the Supreme Court to rule that the district court's "objectively baseless" finding was a question of fact entitled to deference, Highmark also asks the court to set a new standard under which district courts should award fees to defendants under Section 285. The new "exceptional case" standard urged by Highmark is that the plaintiff had an "objectively low likelihood of success" on its patent infringement claim.

How Is Court Likely to Rule?

The Supreme Court has not directly weighed in on the "exceptional case" issue in the patent context. There is, however, an analogue "exceptional case" standard in trademark law, which at least two of the justices addressed as circuit court judges. Both Justices Ruth Bader Ginsburg and Antonin Scalia were U.S. Court of Appeals for the D.C. Circuit judges when that court decided Noxell Corp. v. Firehouse No. 1 Bar-B-Que Restaurant.5Noxell involved an appeal in a trademark infringement case where the defendant restaurant, located in San Francisco, had been sued in the District of Columbia. The case was dismissed for improper venue, and the defendant on appeal sought an award of its attorney fees, claiming the unreasonable choice of venue rendered the case exceptional.

The issue on appeal was "whether an appellate court may award fees under [15 U.S.C. Section 1117(a)] to a litigant who demonstrates that…plaintiff's venue selection was improper and unreasonably imposed hardship on the fee applicant." The majority of the D.C. Circuit (composed of then-Judges Ginsburg and Scalia) held that the case was "exceptional" and that the defendant was entitled to an award of its fees, even though there was no showing of bad faith:

[W]e think it is fair to assume that Congress did not intend rigidly to limit the recovery of fees by a defendant to the rare case in which a court finds that the plaintiff "acted in bad faith, vexatiously, wantonly, or for oppressive reasons"; that exception to the "American rule," the Supreme Court has clarified, is always available unless Congress expressly forbids its operation. Something less than "bad faith," we believe, suffices to mark a case as "exceptional"…we regard as "exceptional" Noxell's decision to locate in the District of Columbia its suit against San Francisco firefighter English and the fledgling San Francisco barbeque [he] organized and operated.

The legislative histories of both "exceptional case" statutes ( U.S.C. Section 1117(a) and 35 U.S.C. Section 285) are thin. Section 285 was made to apply to both plaintiffs and defendants "to enable the court to prevent a gross injustice to the alleged infringer." Similarly, the intent underlying Section 1117(a) was to provide "protection against unfounded suits brought by trademark owners for harassment and the like." As a result, the rationale applied by Ginsburg and Scalia in the trademark context may apply equally in the patent context. If there are at least three more like minds on the court, then we could see change to the prevailing standard for exceptionality.

Robert C. Scheinfeld is a partner and the head of the intellectual property group in the New York office of Baker Botts, and Parker H. Bagley is counsel at Boies, Schiller & Flexner.

Endnotes:

1. No. 12-1163.

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