In twin unanimous opinions issued yesterday, the U.S. Supreme Court has rejected long-standing Federal Circuit rules governing the award of attorneys’ fees to the prevailing party in patent litigation, and appellate review of those awards. The decisions give district judges more discretion to award fees, overturn the “clear and convincing evidence” standard of proof, and insulate the awards from previous de novo review, in favor of the “abuse of discretion” standard. Court observers believe these rulings will be used most frequently against so-called “patent trolls” when they bring suits that ultimately fail at the trial court, either through pre-trial motions or at trial. But nothing in these opinions limits them to any particular type of party or case.

The Supreme Court granted certiorari in Octane Fitness, LLC v. ICON Health & Fitness, Inc., No. 12-1184, and in Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., No. 12-1163, to review the Federal Circuit’s standards governing the award of exceptional case damages under 35 U.S.C. § 285, and both cases were argued February 26, 2014. The Octane Fitness case focuses on the Federal Circuit’s exceptional case standards articulated in Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378 (Fed. Cir. 2005), and presented the following question for review: “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?”

Octane Fitness involved a claim of patent infringement brought by a fitness equipment manufacturer against its competitor to enforce a patent that was never commercialized. In the case below, the district court granted summary judgment of non-infringement for Octane, but denied its motion for fees, concluding that the case was not “exceptional” under the existing Federal Circuit precedent interpreting § 285. When the Federal Circuit summarily affirmed that conclusion, Octane sought certiorari, contending that the Federal Circuit’s limitation of fees to cases that show both objective baselessness and subjective bad faith is contrary to prevailing legal principles, including precedent interpreting the identical language of the Lanham Act.

The Supreme Court decision, written for the full Court by Justice Sotomayor, held that the Federal Circuit’s Brooks Furniture test was unduly rigid and impermissibly encumbers the statutory grant of discretion to district courts found in § 285. Finding that the statute does not define “exceptional,” the Court construed the word in accordance with its ordinary meaning with the assistance of contemporaneous dictionary definitions, holding 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.” Octane Fitness, LLC v. ICON Health & Fitness, Inc., No. 12-1184, slip op. at 7-8 (U.S. April 29, 2014). According to the Supreme Court, when Brooks Furniture attempted to impose some meaning on the word “exceptional” by requiring either sanctionable litigation misconduct, or a combination of objective baselessness and subjective bad faith, the Federal Circuit improperly “superimpose[d] an inflexible framework onto statutory text that is inherently flexible.” Id., slip op. at 9. The result is a test that is “too restrictive.” Id. Finally, where no other fee shifting statute has been interpreted to require any increased standard of proof, the Court further rejected that portion of Brooks Furniture requiring proof by clear and convincing evidence. Id., slip op. at 11.

Octane Fitness’s companion case, Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., No. 12-1163, also was argued on February 26, 2014, and focuses on the standard of review that should apply to a district court’s findings under 28 U.S.C. § 285. In this case non-practicing entity Allcare similarly suffered a summary judgment of non-infringement, but unlike ICON, Allcare was held liable for the defendant’s fees and costs under 28 U.S.C. § 285. Over a strong dissent, a Federal Circuit panel reversed the fee award for part of the case, holding that a district court’s objective baselessness determination is reviewed “without deference,” or de novo. Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., No. 12-1163, slip op. at 3 (U.S. April 29, 2014). The Federal Circuit denied rehearing en banc by a vote of six to five. Certiorari was granted on this question: Whether a district court’s exceptional-case finding under 35 U.S.C. § 285, based on its judgment that a suit is objectively baseless, is entitled to deference.

In another unanimous opinion written by Justice Sotomayor, the Court held today that all aspects of a district court’s exceptional case determination should be reviewed only for abuse of discretion. After the Octane Fitness decision wiped away the Federal Circuit’s previous rules governing exceptional case determinations and replaced them with one of broad district court discretion, the Court then reached the obvious conclusion that any part of such a decision should be reviewed only for abuse of that discretion. Id., slip op. at 4.

These decisions expanding the circumstances under which attorneys’ fees will be awarded to prevailing parties, and insulating those awards from appellate review, come at a critical moment in the legislative battle over patent litigation reform. The Innovation Act passed by the House contains a fee shifting provision that has proven controversial, with pressure increasing from large patent-owning corporations to scale back, and even terminate, patent litigation reform by legislation. The Senate Judiciary Committee has not yet voted out its responsive package for consideration by the whole Senate, even though proposals have been pending since January. Opponents of legislation are likely to argue that these new standards should be applied and refined through the normal jurisprudential process, before legislation is enacted that could have unintended, negative consequences.