Supreme Court to Review “Exceptional Case” Standard for Patent Cases
This week the Supreme Court granted cert petitions in two patent cases: Octane Fitness v. Icon Health & Fitness and Highmark v. Allcare Health Management. Both cases address 35 U.S.C. § 285, which allows a court to award reasonable attorneys’ fees to the prevailing party in “exceptional cases.” Under Section 285, a case is “exceptional” if the litigation (1) was brought in subjective bad faith; and (2) is objectively baseless. Octane Fitness addresses the propriety of this two-prong test. Highmark addresses the appropriate standard for reviewing a district court’s exceptional case determination under the two-prong test.
In Octane Fitness, the district court granted accused infringer Octane’s motion for summary judgment of non-infringement, but denied Octane’s motion for attorneys’ fees under Section 285. The district court found that the litigation was neither objectively baseless nor brought in subjective bad faith. On appeal, Octane sought to lower the standard for exceptionality to “objectively reasonable” in order to “re-balance what it alleges as the power of large companies over smaller companies in infringement litigation.” The Federal Circuit affirmed, refusing to revisit “the settled standard for exceptionality.”
In its Supreme Court petition, Octane argued that Section 285, as interpreted by the courts over time, “has strayed from the original intent of preventing ‘gross injustice’ to an accused infringer (the result of a defendant having to spend $1 million plus to defend itself against overreaching and unfounded contentions), to a standard that is near-impossible for an accused infringer to meet no matter the unreasonableness of the litigation, and that consequently serves as no deterrent to the assertion of spurious claims.” Octane noted that a patentee, on the other hand, can establish an exceptional case solely on a finding of willful infringement. Willful infringement requires that a patentee show by clear and convincing evidence that (1) the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent; and (2) the accused infringer knew or should have known about this objectively-defined risk of infringement. According to Octane, a patentee’s ability to rely on a finding of willful infringement results in a lower threshold for prevailing patentees than for prevailing accused infringers seeking to recover their fees under Section 285.
In Highmark, after several years and millions of dollars in legal costs, accused infringer Highmark prevailed on summary judgment. Conducting an extensive analysis, the district court determined the case was exceptional under 35 U.S.C. § 285 on several grounds, including: (1) no pre-filing investigation was performed by an attorney – rather, attorneys relied on an analysis performed by a non-attorney/non-engineer, and claim charts and summary judgment rulings from another case in which Allcare had asserted the same patent (both of which focused on claim construction and not infringement); (2) Allcare asserted meritless defenses, knowing such defenses were not available; (3) Allcare argued in a jurisdictional motion to dismiss that it had no control over a pre-litigation survey of potential infringers, although subsequent Allcare filings contradicted that assertion; (4) Allcare engaged in needless alterations of its claim construction assertions; and (5) Allcare continued to pursue infringement claims as “leverage,” even after its own expert conceded there was no infringement.
Affording no deference to the district court’s findings that the suit was objectively baseless, the Federal Circuit reversed in part, finding that at least some of the aspects of the case were non-frivolous. In a sharply contested six to five vote, the Federal Circuit denied rehearing en banc. One of the dissents observed that the Federal Circuit’s de novo review “deviates from precedent . . . and establishes a review standard for exceptional case findings in patent cases that is squarely at odds with the highly deferential review adopted by every regional circuit and the Supreme Court in other areas of law.”
The Court’s grant of these two cases appears to confirm the need to address the rise of non-practicing entity (“NPE”) litigation. The patentee in Allcare was an NPE, and although the patentee in Octane Fitness is a large manufacturer/seller of exercise equipment, it never sold a commercial product covered by the patent at issue in that case. According to Blue Cross Blue Shield Association, who submitted an amicus brief in the Highmark case, “[t]he one weapon that parties sued by NPEs have to level the playing field and deter abusive litigation tactics is the threat of shifting attorney’s fees ‘in exceptional cases.’” Blue Cross further commented that Section 285 “plays a critical role in regulating the quality of patent infringement lawsuits,” because the prospect of the prevailing party recovering its attorneys’ fees “incentivizes patent holders and accused infringers to litigate only legitimate, good-faith disputes over patent infringement and validity.”