How much discretion should a district court have in determining whether a case is “exceptional,” thereby entitling the prevailing accused infringer to an award of attorney fees?
Icon Health & Fitness sued Octane Health, alleging patent infringement over an elliptical exercise machine. After Octane won in federal district court on summary judgment, it moved for an award of attorney’s fees, arguing that the suit was an “exceptional case” under 35 U.S.C § 285. The district court denied the motion, and the Federal Circuit affirmed. In this case, the Supreme Court may determine the scope of a district court’s discretion in granting fees under § 285. Although affirming the Federal Circuit’s standard would prevent attorney fees in most instances, it would follow the usual American rule that each party generally bears its own costs of litigation. However, if the Supreme Court decides to broaden the lower courts’ discretion, this may limit frivolous or predatory patent suits. Icon argues that the Supreme Court should affirm the Federal Circuit’s two-part test because it comports with the legislative intent behind § 285 and prior judicial interpretation of that provision. Octane argues that the Supreme Court should overturn the Federal Circuit’s test because the test is not party neutral and violates principles of statutory construction.
Questions as Framed for the Court by the Parties
Does the Federal Circuit’s promulgation of a rigid and exclusive two-part test for determining whether a case is “exceptional” under 35 U.S.C § 285 improperly appropriate a district court’s discretionary authority to award attorney fees to prevailing accused infringers in contravention of statutory intent and this Court’s precedent, thereby raising the standard for accused infringers (but not patentees) to recoup fees and encouraging patent plaintiffs to bring spurious patent cases to cause competitive harm or coerce unwarranted settlements from defendants?
This case began as a patent infringement lawsuit filed by Respondent Icon Health & Fitness, Inc. (“Icon”). Icon claimed that the linkage used in elliptical machines manufactured by Petitioner Octane Fitness (“Octane”) infringed on Icon’s patent, U.S. Patent 6,019,710. The patented invention allows the user to adjust the stride length on the elliptical machine.
The United States District Court for the District of Minnesota granted Octane’s motion for summary judgment of noninfringement. Octane then moved for a grant of attorney fees under 35 U.S.C § 285, which allows a court to award attorney fees in “exceptional cases,” but the district court denied the motion. The district court found that Octane was not able to establish by clear and convincing evidence either of the two elements of exceptionality: (1) that the suit was brought in subjective bad faith and (2) that the suit was objectively baseless.
Both parties appealed to the United States Court of Appeals for the Federal Circuit, which has jurisdiction in patent appeals. Octane argued that the district court applied too restrictive a standard in deciding that the case was not exceptional. The Federal Circuit affirmed the judgment of the district court, both as to summary judgment of noninfringement and in declining to find the case exceptional. The Supreme Court granted certiorari.
Octane’s principal argument is that the current Brooks standard that the Federal Circuit used for determining whether or not a case is exceptional under § 285 is too narrow. Octane contends that the standard should rest on a more equitable and objectively verifiable basis, rather than include a subjective aspect as the test currently does. Icon, however, argues that the Brooks standard requiring the case to be objectively baseless and brought in bad faith, is the correct standard.
CURBING ABUSIVE PATENT LITIGATION
3M and several other large patent holders (collectively “3M”) point out, in support of Octane, that the Supreme Court’s ruling could help to curb abusive patent litigation. 3M argues that, in order to curb abusive patent litigation, courts should have equitable discretion in determining whether or not to award attorney fees to the prevailing party. 3M asserts that the current categories of conduct that permit fee awards—objectively baseless litigation with subjective bad faith, willful infringement, and inequitable conduct before the patent office—are too narrow and that not all predatory lawsuits fit neatly into these categories.
Apple, Inc., in support of neither party, believes this case is a perfect chance for the Supreme Court to address the issue of patent assertion entities (“PAEs”). As Apple describes them, PAEs are non-practicing entities that acquire patents and file lawsuits where they believe there is potential infringement. Apple argues that many PAEs sit on certain patents and allege infringement when larger companies have developed similar technology. Then these PAEs, according to Apple, attempt to threaten these companies with lawsuits in hopes of eliciting a large settlement or winning an actual lawsuit. Apple argues that broadening the discretion of the district courts to consider several factors will serve to discourage frivolous patent litigation.
Icon, however, does not feel that a consideration of PAEs, or “patent trolls,” should sway the Supreme Court’s decision. Icon agrees that trolls are a legitimate policy concern, but that the Court should not rewrite the patent statute in light of this current concern. Icon believes that Congress, not the courts, should construct an alternative rule regarding PAEs or patent trolls.
The United States, writing in support of Octane, agrees that district courts should be allowed broad discretion in determining whether or not to grant attorney fees. The United States believes that a totality-of-circumstances approach would be consistent with other intellectual property areas such as copyright and trademark law. Although the United States does not have a stance on whether fees are appropriate in this case, it believes that the judgment should be vacated, the case remanded, and the district court should apply the totality-of-circumstances standard including among other things, reasonableness of the claim, choice of venue, and predatory patent litigation.
Icon feels that the Federal Circuit’s standard is appropriate and that the Supreme Court should not change the law by adopting a lower standard. Icon argues that the fee-shifting standard in other intellectual property areas does not validate the United States’ or Octane’s interpretation. Icon notes that in the instance of the Copyright Act, the statute does not include the phrase “in exceptional cases” as in § 285. Icon relies on this distinction to bolster its proposition that in the area of patent law, fee-shifting requires bad faith or wrongful conduct under § 285
In an “exceptional” patent infringement case, a court “may award reasonable attorney fees to the prevailing party.” In 2005, the Federal Circuit ruled that, absent litigation or patent misconduct, a district court may only grant attorney fees to an accused infringer under § 285 if a patent holder brought the claim in “subjective bad faith” and the claim is “objectively baseless.” Octane argues that the Federal Circuit erred in adopting that two-prong test. Octane contends that the proper interpretation of § 285 allows a district court to exercise equitable discretion and consider the totality of the circumstances to determine whether to award attorney fees. Icon disagrees and argues that the Federal Circuit’s two-prong test is supported by precedent and congressional intent.
Octane argues that the words “may” and “exceptional” in § 285 imply that a district court has broad discretion to award attorney fees in a patent infringement case. Octane analogizes the fee-shifting provision of § 285 to similar provisions in other intellectual property statutes, specifically the Copyright Act of 1976 (copyrights) and the Lanham Act (trademarks). As such, Octane relies on precedent in Fogerty v. Fantasy, Inc. in which the Supreme Court rejected an interpretation of 17 U.S.C. § 505, which permits a court to award attorney fees in cases arising under the Copyright Act of 1976, that would automatize awarding attorney fees because such an interpretation strips a court of its discretion under the statute. Octane also finds support in Noxell Corp. v. Firehouse No. 1 Bar-B-Que in which the D.C. Circuit rejected an interpretation of § 1117(a) of the Lanham Act, which contains a fee-shifting provision that is identical to § 285, that would require a showing of bad faith for a court to award attorney fees.
Icon counters by arguing that Octane’s reliance on Fogerty and Noxell is misplaced. Icon distinguishes Fogerty from this case, noting that the attorney fee provision of § 505 does not require a case to be exceptional, unlike § 285. With respect to Noxell, Icon concedes that the attorney’s fee provision of § 1117(a) of the Lanham Act is textually identical to § 285, but Icon argues that the D.C. Circuit’s approach is not universal and there is no consensus among the circuit courts on how to determine whether a case is exceptional under § 1117(a). Icon notes that there are circuit courts that require a showing of bad faith for a case to be considered exceptional.
Octane argues that the Brooks test violates a principle enunciated by the Supreme Court in Fogerty that, for purposes of awarding attorney fees, a court should apply the same standard to a prevailing plaintiff as it applies to a prevailing defendant. Octane argues that the Brooks test makes it more difficult for accused infringers to recover attorney fees than for patent holders. Octane notes that, under Brooks, an accused infringer must show that the case is objectively baseless and that the patent holder brought the case in bad faith. Meanwhile, Octane contends, a patent holder need only show that there was a high likelihood of infringement and that the infringer was reckless in ignoring that likelihood.
Icon counters that the Federal Circuit has construed the two standards to be identical. Icon argues that the objective baselessness standard for prevailing accused infringers includes the same evaluations as the objective recklessness standard for prevailing patent holders. Further, Icon argues that Octane is mistaken in presuming that an accused infringer can only recover attorney fees by a showing of bad faith and objective baselessness. Icon argues that, under Brooks, a district court may also award attorney fees to a prevailing accused infringer by showing that patent holder engaged in fraud, litigation misconduct, violating Rule 11 of the Federal Rules of Civil Procedure, or another similar infraction.
STATUTORY CONSTRUCTION AND CONGRESSIONAL INTENT
Icon argues that Octane mistakenly presumes that the two-prong test is the only standard for determining whether a case is exceptional under the Federal Circuit’s rule. Icon notes that the two-prong test only applies if patent or litigation misconduct does not otherwise render a case exceptional. That is, Icon argues that a showing of bad faith is only required where such misconduct is absent.
Octane counters by arguing that the Federal Circuit’s rule essentially renders § 285 superfluous because a district court already possesses the inherent authority to award attorney fees where a litigant engaged in patent or litigation misconduct or has brought the case in bad faith. Octane argues that interpreting § 285 to be superfluous violates the principle of statutory construction that a court should not interpret a statute to have no effect. As such, Octane insists that a showing of bad faith should not be required in order for a case to be “exceptional” under § 285.
Icon argues that congressional intent supports the Federal Circuit’s two-prong test because Congress expressly intended § 285 to correspond with its statutory predecessor. Icon asserts that, under the statutory predecessor, courts were only allowed to award attorney fees in particular cases involving inappropriate conduct, such as fraud or vexatious litigation, by a party. Thus, Icon contends that the Federal Circuit’s test for determining whether a case is exceptional tracks longstanding precedent under § 285’s statutory predecessor, which Congress incorporated into § 285.
However, Octane argues that the legislative history of § 285 shows that Congress intended to grant district courts broad discretion to assess the totality of the circumstances to determine whether to award attorney fees. Octane agrees that § 285 should correspond with how courts have interpreted its statutory predecessor, but Octane notes that many lower courts never adopted a rigid test for determining whether a party should be awarded attorney fees. Instead, Octane argues, those courts interpreted the statute as allowing a district court to the power to consider a non-exhaustive variety of factors in making its determination.
Icon argues that Congress did not intend for § 285 to discourage patent holders from bringing patent infringement claims, and therefore, § 285 should be construed to avoid deterring patent holders from bringing reasonable claims. Icon contends that a patent holder has a First Amendment right to petition a court to protect a patent. Moreover, Icon argues that a looser standard for awarding attorney fees, such as the standard suggested by Octane, could discourage litigants from exercising their First Amendment rights. Icon argues that Congress, not the Court, should expressly declare that such a standard can be imposed.
Octane argues that First Amendment values are not reflected in patent litigation or a general attorney fees provision like § 285. Octane notes that the Federal Circuit’s two-prong test was lifted from the Supreme Court’s decision in Professional Real Estate Investors v. Columbia Pictures. Specifically, Octane argues that the two-prong test was appropriate in that case, but not here, because that case involved a narrow sham litigation exception to antitrust immunity.
If the Supreme Court affirms the Federal Circuit’s two-part test as an appropriate interpretation of § 285, this will narrow the discretion a federal court has to award attorney fees in patent litigation. Affirming the Federal Circuit would also make it more difficult for prevailing accused infringers to recover attorney fees and may incentivize patent trolling. If the Court rejects the Federal Circuit’s test as too narrow a reading of § 285, district courts may have more discretion to award attorney fees to accused infringers. Broadening discretion may deter patent holders from bringing frivolous claims, but it may also discourage patent holders from bringing legitimate claims.
- Dennis Crouch, Supreme Court’s New Patent Cases, Patently-O, Oct. 1, 2013.
- Peter Strand, Taking Exception to “Exceptional Case”? Supreme Court Scrutinizes Rules, IpQ, Oct. 2013.
- Greg Stohr, Patent-Suit Abuse Targeted as Supreme Court Accepts Case, Bloomberg, Oct. 1, 2013.