How District Courts Have Responded to the Supreme Court’s Fee Shifting Rulings

Originally appeared in InsideCounsel on February 18, 2015.

—By Sylvia Becker and Paul Margulies

In recent years, several legislative proposals for patent litigation reform were aimed at expanding fee-shifting rules to curb frivolous litigation. Those efforts, however, were largely eclipsed by two back-to-back decisions at the U.S. Supreme Court interpreting the Patent Act’s fee-shifting provision, 35 U.S.C. § 285, which authorizes a district court “in exceptional cases” to “award reasonable attorney fees to the prevailing party.”

First, in Octane Fitness, LLC v. ICON Health & Fitness, Inc., the Supreme Court overturned the Federal Circuit’s narrow view that a case is “exceptional” under Section 285 only “when there has been some material inappropriate conduct related to the matter in litigation, such as willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates Fed. R. Civ. P. 11, or like infractions.” Rejecting this rigid standard, the Supreme Court held instead that a case is “exceptional” simply when, considering the totality of the circumstances, it stands out from “ordinary” cases with respect to the strength of a party’s litigating position or the unreasonable manner in which the case was litigated.

Second, the Supreme Court lowered the prevailing party’s burden of proof in meeting this standard. In Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., the Supreme Court held that a district court’s determination of an “exceptional case” is subject to a deferential “abuse of discretion” standard on appeal instead of a de novo review.

These cases awarded district courts wide discretion in the determination of an exceptional case. Thus, in the absence of further legislative guidance, fee-shifting is entirely up to district court judges. As the district courts apply the new Supreme Court standards to the facts before them, certain trends may already be discerned.

Frequency

District courts across the country have embraced the relaxed standard since these Supreme Court decisions were issued in April 2014. Of the 54 district courts to have considered Section 285 post Octane Fitness, 25 found an exceptional case within the meaning of the statute. Most (20 out of 25) “exceptional” cases involved an award of fees to the accused infringer, either a defendant or declaratory judgment plaintiff. Of the five cases awarding fees to the prevailing patentee, two were cases of default judgment and the remaining three proceeded to trial, with the exceptional case finding premised, at least in part, on litigation misconduct.

Moreover, attorney fees were awarded in all 25 cases where the court found an exceptional case. To award attorney fees under Section 285, a district court must engage in a two-step process: the court must find that the case is exceptional; and it must decide that, in a further exercise of its discretion, fees should be awarded. Our survey suggests that the second step has been absorbed, at least in practice, within the finding of exceptionality itself.

Fees were awarded most frequently after a party prevailed at the summary judgment stage. Courts in the Northern District of California and Southern District of New York awarded fees more often than they denied them. District of Delaware courts, on the other hand, denied fees more often than they awarded them and the Eastern District of Texas did not award any fees.

Grounds

A number of courts have found that a non-practicing entity’s motivation to extract a nuisance settlement can constitute grounds for finding an exceptional case. Hallmarks of such a “predatory” strategy are filing boilerplate complaints against multiple defendants and using briefs “recycled” from prior cases. Moreover, courts have cited, as in Small v. Implant Direct Mfg. LLC, deterrence is as an appropriate consideration in making an exceptional case determination: “the need for the deterrent impact of a fee award is greater where there is evidence that the plaintiff is a ‘patent troll’ or has engaged in extortive litigation.”

Similarly, a failure to perform an adequate pre-filing investigation weighs strongly in favor of an exceptional case finding, though this was true whether the plaintiff is a non-practicing entity or a bona fide competitor.

While willful infringement was a prominent part of the prior Federal Circuit standard, a finding of willful infringement will not automatically result in a finding of an exceptional case. In Cognex Corp. v. Microscan Sys., Inc., the district court declined to enhance damages after a finding of willful infringement under 35 U.S.C. § 284, but still awarded attorney fees under Section 285 for wasteful “litigation tactics.” On the opposite end of the spectrum, a finding of willfulness in the context of a default — unopposed but with evidence supporting it — has been held sufficient to find an exceptional case.

Fees awarded

Federal Circuit precedent makes clear that the purpose of a Section 285 award “is not to punish the plaintiff for bringing an infringement claim but rather ‘to compensate a defendant for attorneys’ fees it should not have been forced to incur.’” The Supreme Court’s opinions have not altered this basic concept. Therefore, district courts tend to limit recovery to “those fees and expenses that are causally-related to the misconduct or frivolous arguments” underlying the exceptional finding and incurred “as a direct result.” That might be, for example, from the time an unfavorable claim construction issued and a party kept litigating or from the time of post-trial briefing where a party attempts to “reargue what was already decided.”

Conclusion

Applying the standard recently articulated by the Supreme Court, district courts have shown a greater willingness to award attorney fees to defendants who are forced to incur unnecessary expenses to defend against frivolous claims. Whether this will have a long term deterrent effect on bringing such claims in the first place remains to be seen. Because a district court’s inquiry into an exceptional case is focused on whether the particular circumstances of the case before it stand out from ordinary cases, it will be critical to track how the threshold for standing out from the “ordinary” evolves.

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