The “Exceptional” Patent Case Is Now Less “Exceptional”

Patent litigation is expensive, and that expense often unfairly tips the negotiating table against legitimate businesses defending unmeritorious infringement suits filed by patent trolls. The Patent Act provides some relief, stating that “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.”¹ Historically, however, courts have been reluctant to deem cases “exceptional” and award fees, and the Federal Circuit often has modified fee awards on appeal. Two decisions from the U.S. Supreme Court yesterday drastically could change the “exceptional case” analysis.

In 2005, the Federal Circuit held that a defendant demonstrated entitlement to attorneys’ fees under the “exceptional case” standard only if it showed by clear and convincing evidence that the litigation was brought in subjective bad faith and was objectively baseless.² Yesterday, in Octane Fitness, LLC v. Icon Health & Fitness, Inc., the U.S. Supreme Court unanimously struck down this standard because it is “unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.”³ In its place, the Supreme Court held “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.”⁴ Moreover, under the Supreme Court’s decision, a prevailing party now must prove the “exceptional case” standard only by a preponderance of the evidence, as opposed to the much higher clear and convincing evidence standard.⁵

In a companion case also unanimously decided yesterday, Highmark, Inc. v. Allcare Health Management System, Inc., the Supreme Court raised the bar for overturning a fee award under the “exceptional case” standard on appeal.⁶ In that case, the Federal Circuit modified the district court’s “exceptional case” fee award, applying a de novo standard of review without deference to the district court.⁷ Relying in large part on the new standard set forth in Octane Fitness, the Supreme Court in Highmark held that appellate courts must give deference to district courts, stating that “[b]ecause § 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.”⁸  Additional background information about the Octane Fitness and Highmark cases can be found in our earlier Alert.

Taken together, yesterday’s Octane Fitness and Highmark cases represent a substantial shift in the law relating to attorneys’ fee awards in patent litigation.  Fee awards against defendants often go hand-in-hand with a finding of willful infringement, and that is unlikely to change under the Supreme Court’s new standard.  However, in view of yesterday’s Supreme Court Decisions, defendants are much more likely to seek attorneys’ fees against plaintiffs, particularly patent trolls, in unmeritorious patent infringement suits.  Of course, it remains to be seen how district courts will apply the new standard and whether it will, in fact, have any measurable impact on patent troll litigation.

As we have discussed in several recent Alerts,⁹ all three branches of the federal government and many state governments are currently pursuing initiatives to reform patent litigation in one way or another.  We will continue to monitor these efforts and provide updates as appropriate.

If you have any questions about the content of this alert, please contact one of the authors listed above or any member of our Intellectual Property & Technology Team.