Back to News list

Supreme Court Enters Fray Over Patent Fee Awards

The Recorder

The U.S. Supreme Court is poised to consider a hot-button issue in patent litigation — how much latitude federal district judges should have to award attorneys fees to the prevailing party. In fact, the high court seems ready to reshape altogether the standards for what constitutes an "exceptional case" meriting a fee award. Patent attorneys — and nearly half of the Federal Circuit U.S. Court of Appeals — have criticized the current standards as nearly impossible to meet.

Decisions from the Supreme Court in two cases accepted Tuesday could discourage some nuisance-value patent troll litigation, though probably not the cases brought by more sophisticated non-practicing entities, patent attorneys said Tuesday.

The rulings, expected next year, also could force the Federal Circuit to start showing more deference to district judges on patent appeals.

The court granted certiorari in two cases — one closely watched, the other something of a sleeper. The first, Highmark v. Allcare Health Management Systems, asks whether the Federal Circuit must affirm exceptional case determinations under 35 U.S.C. 285 absent clear error. Certiorari was not surprising, given that the Federal Circuit split 7-5 over whether to hear the case en banc.

The second case, Octane Fitness v. Icon Health and Fitness, stems from a routine unpublished decision finding that Icon's case was neither "objectively baseless" nor "brought in bad faith," the Federal Circuit's two-part standard for an exceptional case. Octane Fitness argues that's the wrong test and that it should get back the $1.3 million it spent litigating the case even as an Icon executive gloated in internal emails about its annoyance value.

Perkins Coie appellate chief Dan Bagatell, who just won an exceptional case appeal for client Monolithic Power Systems, said the cert grant in Octane Fitness is especially intriguing. "It's challenging the basic construct" for determining an exceptional case, he said. "This isn't just dancing around the edges."

"It's kind of the one-two punch," said Keker & Van Nest patent litigator Matthias Kamber. "One, how should the district court decide this, and two, how should it should be reviewed by the Federal Circuit."

Octane Fitness stems from a fight with a competitor over the rails on an elliptical training machine. Octane argues that Icon asserted — in the words of its own vice president for global sales — an "old patent we had for a long time that was sitting on the shelf."

Octane says it spent $1.3 million before obtaining summary judgment. But U.S. District Judge Ann Montgomery of Minnesota ruled there was no evidence Icon's leadership actually knew its litigation was baseless. The Federal Circuit summarily affirmed Montgomery's finding in a single paragraph.

In Highmark, U.S. District Judge Terry Means of the Northern District of Texas did make an exceptional case finding, awarding about $5 million in attorneys fees and expenses in part due to Allcare's pursuit of two frivolous claims. But the Federal Circuit reversed the finding on one of the claims, finding Allcare's alternative claim construction was not objectively unreasonable. In so ruling, Judge Timothy Dyk held that the court reviews objective reasonableness "without deference since it is a question of law."

In dissent, Judge Haldane Mayer said the court was adopting a standard of review different from non-patent cases. "As a result of this appellate over-reaching, litigation before the district court has become a mere dress rehearsal for the command performance here," he wrote. Keker's Kamber said he wouldn't be surprised to see the Supreme Court say that district judges should be allowed to consider all the facts and circumstances when making an exceptional case determination. "Judges in their own courtroom can see how cases are being litigated," he said, "yet that doesn't seem to play too big a part in this two-part test."

"It all points to more discretion and more deference to the trial courts," said Berkeley attorney Andrew Dhuey, who recently argued for more Federal Circuit deference on claims construction. In his cert petition for Highmark, Hogan Lovells partner Neil Katyal argued that the case gives the Supreme Court a chance to strike a blow against frivolous litigation by patent trolls. Patent law experts had mixed views Tuesday as to how much impact favorable rulings would have on non-practicing entities.

Perkins Coie's Bagatell said he thought the timing of the cert grant was interesting, given recent moves in Washington to crack down on frivolous troll litigation. Federal Circuit Chief Judge Randall Rader has floated the idea of using §285 more aggressively, and Judge Kathleen O'Malley said at a conference last week that courts can handle the problem without congressional intervention. "Maybe this is part of that dialogue," Bagatell said.

But he, Kamber and Dhuey all pointed out that exceptional case determinations can apply to any litigant, troll or otherwise. "There's no point in putting the black hat on any one type of patent holder," said Dhuey.

More fee awards might discourage the patent holder who sues hundreds of small businesses to see if it can extract a few nuisance value settlements, Kamber said. But they're less likely to deter sophisticated, well-funded patent assertion entities who target a few large companies.

"At the end of the day," Kamber said, "we're still talking about exceptional cases."