Easier Fee Shifting In Patent Cases, Maybe

Originally published in Los Angeles Daily Journal, March 6, 2014

The Supreme Court recently heard oral argument in two patent cases that could make it much easier for prevailing defendants to recoup their attorney fees from losing plaintiffs. Unlike the rule applied in English courts, which require losing parties to pay their opponent’s attorney fees, the American rule has long been that a prevailing party must bear its own fees. When Congress enacted the current Patent Act in 1952, it generally followed the American rule. It provided a fee-shifting provision in 35 U.S.C. Section 285 only for “exceptional cases” in which the district courts “may award reasonable attorney fees to the prevailing party.”

The first case, Octane Fitness v. ICON Health & Fitness, No. 12-1184, involves a small exercise device company sued by industry giant ICON on a patent that ICON itself did not use. Octane eventually won the lawsuit on summary judgment, but only after spending $1.8 million in the process. The district court denied an attorney fee award based on the U.S. Court of Appeals for the Federal Circuit’s rigid standard for applying Section 285. In a 2005 case, the Federal Circuit held that, absent litigation misconduct, a patent owner cannot be required to pay the prevailing party’s fees unless there is clear and convincing evidence that (1) the complaint was filed in subjective bad faith and (2) that the litigation was “objectively baseless.”

As in Octane, patent infringement lawsuits are rarely found to be “objectively baseless.” Patents are cloaked with a statutory presumption of validity, and litigants almost always can point to some objective basis for their claims. The Federal Circuit borrowed its “objectively baseless” rule from the high standard that the Supreme Court has used to determine if copyright litigants should be deprived of their antitrust immunity for filing lawsuits. In such cases, the copyright owners are immunized from liability unless they were pursuing “sham litigation” that was objectively without any basis. From Octane’s perspective, the Federal Circuit’s rule is far too rigid because it focuses exclusively on whether the lawsuit was “frivolous” or had “zero basis.” The rule prevented the district court from considering equitable factors, including the fact that ICON was a much bigger company that did not practice its own patent, that the patent had been shelved in the belief that it was worthless, and that discovery showed ICON had set out to use its patent to force its smaller competitor to pay a royalty or spend millions defending itself.

In the second case, Highmark v. Allcare Management Systems, No. 12-1163, the petitioner challenged the Federal Circuit’s de novo standard of review in fee award cases. The Federal Circuit considers the question of whether a patent claim was “objectively baseless” a legal question that does not require deference to trial courts. That approach makes sense considering the complexities of interpreting patents. But it has led to complaints that the Federal Circuit favors patent owners. Using de novo review, the Federal Circuit has reversed many district court fee awards, sometimes, as in Highmark, by finding the claims reasonable based on a reason that the patentee itself never advanced.

At argument in Octane, Justices Anthony Kennedy and Antonin Scalia pushed the petitioner to explain what new adjective should replace the “objectively baseless” standard. Octane’s counsel offered the phrase “unreasonably weak,” prompting Scalia to complain, “that’s not a standard … you realize how differently various district courts would operate if … you just say … unreasonably weak?” In response to a question from Chief Justice John Roberts, Octane’s counsel also suggested that fee shifting should be imposed to prevent a “gross injustice,” as a Senate report introducing the fee-shifting legislation had stated. But Roberts observed that this is just another adjective, and one that          “sounds like a very tiny portion of cases, lower than meritless.” Scalia noted that rather than offering a standard, Octane was suggesting that district courts should have discretion to consider “the totality of circumstances” in making their decisions. This is an approach that Scalia has criticized in the past as creating unpredictability and being inconsistent with fostering the rule of law.

Justice Ruth Bader Ginsburg indicated that she clearly favors allowing fee-shifting based on the ordinary definition of “exceptional,” the word used in Section 285, that is, “not run of the mine, uncommon.” Ginsburg adopted that definition of “exceptional case” in the fee-shifting provision of the Lanham Act when she penned an opinion for the D.C. Circuit panel where she sat with Scalia. The Lanham Act, enacted after the Patent Act, uses identical language.

Questioning ICON’s counsel, Scalia noted that the Federal Circuit’s high standard may well be encouraging meritless lawsuits. ICON’s attorneys, he noted, “might well [have] given them different advice if they didn’t know that, ‘Hey, nothing to lose, given the test the Federal Circuit has.'” The justices also attacked the rationale of applying an “objectively baseless” standard from the “sham litigation” exception for imposing antitrust liability on losing parties. Imposing liability for seeking redress in a lawsuit, they pointed out, involves constitutional, First Amendment concerns that are not present when merely deciding to shift fees. Scalia even noted that Congress has the power to go back to the “English rule.” ICON’s counsel conceded to general laughter that the presence of constitutional concerns wasn’t his “best argument.” That concession, however, exposed the Federal Circuit’s standard as somewhat arbitrary in the context of Section 285.

Justice Stephen Breyer also questioned the “objectively baseless” standard, noting that it favors the patentee by giving patent lawyers cover for filing lawsuits on patents that should not have been issued but often are. He noted that patent lawyers can file lawsuits on theories that are “just barely over the line” and coerce settlements from defendants. He wondered why fee shifting wouldn’t be appropriate in that situation even though the lawsuit would not be “frivolous given the standards for patenting that seem to be administered” by the Patent Office.

Arguments in Highmark focused on whether the Federal Circuit should have to defer to district court decisions on fee shifting. Ginsburg pointed out that leaving the decision with district courts could result in large disparities in how fees are awarded. The respondent’s counsel urged the court to let the Federal Circuit have the final say to promote uniformity. Otherwise, he noted, the hundreds of district court judges asked to find cases “exceptional” will make widely disparate decisions, some because they like patents, and others because they dislike them. That did not seem to persuade Scalia, who noted that Section 285 on its face confers discretion on the district courts to award fees, and “you don’t expect uniformity of decision making” with any statute that confers broad discretion.

It is difficult to predict how the Supreme Court will decide these cases. The justices seem interested in making it easier to impose fee shifting for weak claims, even if they are not totally lacking in support. There is a palpable dislike of any rule that encourages “patent troll” litigation. But the justices are also struggling to find a standard that can give parties some predictability. If the court does decide to favor an indeterminate standard – for example, Ginsburg’s “not run-of-the-mine” formulation – many plaintiffs will be more reluctant to file suits. That would be music to the ears of most companies concerned about “patent troll” litigation. But an indeterminate, vague standard may also result in unfairness. Small companies may be sanctioned with attorney fees though they brought infringement claims in good faith against competitors but lost those claims before a trial judge who came to dislike them or their counsel. While the “run-of-the-mine” formulation may work well for Lanham Act cases, which are fact-intensive, the justices may well find merit in continuing to use some objective measure for determining if a patent claim was reasonably interpreted, and in allowing the Federal Circuit to make that determination on appeal.

If the Supreme Court does make it easier to obtain fee awards from patent owners, its decision may persuade Congress to forego patent reform legislation that has already passed the House of Representatives. That legislation, sponsored by Rep. Bob Goodlatte, would impose automatic fee-shifting against losing parties in patent cases unless they can prove that their claims were “substantially justified.” Any concerns patent owners have about the Supreme Court’s potential decisions in Octane and Highmark pale in comparison to their fears of such a big move by Congress toward the English rule.