Feature

High (Court) Octane

Naomi Jane Gray

©2015. Published in Landslide, Vol. 7, No. 3, January/February 2015, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Traditionally, attorneys’ fees have been notoriously difficult for a prevailing party to recover in a trademark action. The United States Supreme Court’s recent opinion in a patent case, Octane Fitness, LLC v. ICON Health & Fitness, Inc.,1 has relaxed the applicable standard in construing the Patent Act’s identical fee-shifting provision, and may well result in a lower bar to the recovery of fees in trademark disputes. Indeed, the Third Circuit has recently extended Octane’s holding to a trademark fee application, in what is surely just the first opinion that will do so.

Section 35 of the Lanham Act permits courts to award attorneys’ fees to a prevailing party in “exceptional cases,” at the discretion of the district court judge.2 The legislative history, though sparse, reflects that Congress intended to afford the remedy in two situations: “First, the legislature envisioned ‘make whole’ compensation for certain victims of infringement; second, Congress endeavored to afford protection to defendants ‘against unfounded suits brought by trademark owners for harassment and the like.’”3

The Pre-Octane Hodgepodge

Before the Supreme Court’s decision in Octane, appellate courts did not interpret the “exceptional case” standard consistently, leading the Ninth Circuit to characterize “the line delineating ‘exceptional’ cases under the Lanham Act” as “murky” and “far from clear.”4 In the Eighth and Ninth Circuits, for example, a prevailing party could recover fees in cases deemed “groundless, unreasonable, vexatious, or pursued in bad faith.”5 The D.C. Circuit in Noxell Corp. v. Firehouse No. 1 Bar-B-Que Restaurant, an opinion authored by then-Judge Ginsburg and joined by then-Judge Scalia, held that “‘exceptional,’ as Congress used the word in section 35 of the Lanham Act, is most reasonably read to mean what the word is generally understood to indicate—uncommon, not run-of-the-mill.”6 In the Tenth Circuit, a prevailing plaintiff could recover fees by showing that the defendant acted in bad faith, while a prevailing defendant had to show that (1) the plaintiff’s case lacked foundation; (2) the plaintiff brought suit in bad faith; (3) the plaintiff prosecuted the case in an “unusually vexatious and oppressive manner”; or (4) “perhaps for other reasons as well.”7 This fourth category led the Seventh Circuit to remark that the Tenth Circuit “can hardly be said to have a test” at all.8 The Seventh Circuit itself, struggling to navigate its way through what it complained was “this jumble,” noted:

The failure to converge may be an illustration of “circuit drift”: the heavy caseloads and large accumulations of precedent in each circuit induce courts of appeals to rely on their own “circuit law,” as if each circuit were a separate jurisdiction rather than all being part of a single national judiciary enforcing a uniform body of federal law. But whether the difference in standards generates actual differences in result is unclear because the opinions avoid commitment by using vague words and explicit escape clauses, with the Tenth Circuit’s catchall (“perhaps for other reasons as well”) taking the prize. To decide whether the standards differ more than semantically would require a close study of the facts of each case.9

The Seventh Circuit concluded, after examining the policy goals underlying the Lanham Act’s attorneys’ fees provision, that

a case under the Lanham Act is “exceptional,” in the sense of warranting an award of reasonable attorneys’ fees to the winning party, if the losing party was the plaintiff and was guilty of abuse of process in suing, or if the losing party was the defendant and had no defense yet persisted in the trademark infringement or false advertising for which he was being sued, in order to impose costs on his opponent.10

Compounding these inconsistencies, some appellate courts applied a different standard to prevailing plaintiffs than to prevailing defendants. In Fogerty v. Fantasy, Inc., the United States Supreme Court held that the Copyright Act’s attorneys’ fees provision must be applied evenhandedly to both prevailing plaintiffs and prevailing defendants.11 In the wake of that decision, some appellate courts held that the same evenhanded rule must apply in construing § 35 of the Lanham Act.12 The Tenth Circuit, by contrast, expressed skepticism that “there should be, or even could be, perfect harmony between the standard for awarding attorney fees to a prevailing plaintiff and a prevailing defendant. The underlying conduct under scrutiny is different.”13

Octane: The Supreme Court Brooks No Arguments

Against the backdrop of this Lanham Act hodgepodge, the Supreme Court took up Octane, a patent case in which the Court interpreted § 285 of the Patent Act. Like its Lanham Act counterpart, § 285 authorizes an award of fees to the prevailing party in “exceptional” cases. Octane involved a dispute between competing manufacturers of fitness equipment.14 ICON, the plaintiff-respondent, sued Octane, the defendant-petitioner, alleging that certain of Octane’s elliptical machines infringed several claims of a patent owned by ICON. Although ICON “is a major manufacturer of exercise equipment,” it had never commercially sold a machine that incorporated the patented technology at issue.15

The district court granted summary judgment in favor of Octane, finding multiple claim elements lacking as a matter of law, both literally and under the doctrine of equivalents.16 The court denied Octane’s motion for attorneys’ fees pursuant to the Federal Circuit’s holding in Brooks Furniture Manufacturing, Inc. v. Dutailier International, Inc.17 In Brooks, the Federal Circuit held that “[a]bsent misconduct in conduct of the litigation or in securing the patent, sanctions maybe imposed against the patentee only if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.”18 ICON appealed the grant of summary judgment, and the Federal Circuit affirmed, characterizing one of ICON’s arguments as “without merit” and finding multiple claim limitations absent from the accused products.19 Octane cross-appealed, arguing that the district court had applied an overly restrictive standard in finding that the case was not “exceptional.”20 The Federal Circuit affirmed the denial of fees, and Octane appealed.21

Relying on Noxell and Fogerty, Octane argued that

the ordinary meaning of the statutory terms “may” and “exceptional”: (1) implies a broad grant of discretionary authority to district courts to consider a non-exclusive list of equitable factors in granting fee awards; and (2) forecloses the Federal Circuit’s novel requirement that a prevailing defendant must prove that the case was “baseless” and “brought in subjective bad faith.”22

Octane also cited Ninth Circuit authority for the proposition that “the mere absence of bad faith [does] not render a party ineligible for attorney fees if ‘other exceptional circumstances may warrant a fee award,’” such as where the plaintiff’s claims are “groundless, unreasonable, or vexatious.”23 ICON, on the other hand, argued that absent litigation misconduct or inequitable conduct in procuring the patent, awarding fees is tantamount to treating “the lawsuit itself as misconduct.”24

The Supreme Court reversed in a nearly unanimous25 opinion authored by Justice Sotomayor, embracing the arguments advanced by Octane and finding that Brooks was not consistent with § 285’s statutory text.26 The Court first traced the history of § 285, starting with the inception of its predecessor provision in 1946 and amendment to its current form in 1956, through its sparing and discretionary application by district courts over several decades, and culminating in the Federal Circuit’s decision in Brooks and its progeny. In Brooks and subsequent cases, the Court explained, the Federal Circuit “abandoned” the earlier “holistic, equitable approach” to patent fee awards “in favor of a more rigid and mechanical formulation.”27 First, in Brooks, the Federal Circuit limited the availability of fee awards to cases involving both subjective bad faith and objective baselessness of the patentee’s claims. Additionally, “because ‘[t]here is a presumption that the assertion of infringement of a duly granted patent is made in good faith[,] . . . the underlying improper conduct and the characterization of the case as exceptional must be established by clear and convincing evidence.’”28 In later cases, the Federal Circuit defined bad faith and baselessness even more narrowly, holding that “litigation is objectively baseless only if it is ‘so unreasonable that no reasonable litigant could believe it would succeed,’ and that litigation is brought in subjective bad faith only if the plaintiff ‘actually know[s]’ that it is objectively baseless.”29

The Supreme Court found that the Brooks “formulation is overly rigid” because it “superimposes an inflexible framework onto statutory text that is inherently flexible.”30 Cases involving litigation misconduct, or other types of misconduct, already provide independent grounds for sanctions.31 Sanctionable conduct, however, “is not the appropriate benchmark,” because unreasonable conduct may be sufficiently “exceptional” to warrant a fee award even if it is not independently sanctionable.32 Requiring both objective baselessness and subjective bad faith on the part of the plaintiff is likewise too restrictive, because conduct satisfying either one of these elements standing alone may be enough to merit fees.33 In making this point, the Court invoked Noxell for the proposition that “[s]omething less than ‘bad faith,’ we believe, suffices to mark a case as ‘exceptional.’”34 The Court further concluded that the Brooks test “is so demanding that it would appear to render § 285 largely superfluous.”35 Lastly, the Court rejected the Federal Circuit’s imposition of a “clear and convincing” burden of proof in connection with patent fee awards, finding that § 285 “imposes no specific evidentiary burden, much less such a high one.”36

Thus, the Supreme Court held that the Federal Circuit’s Brooks test is contrary to the express language of § 285, which (like its textually identical counterpart in the Lanham Act) provides: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”37 Because the Patent Act does not define what constitutes an “exceptional” case, the Court construed it “in accordance with its ordinary meaning.”38 “In 1952, when Congress used the word in § 285 (and today, for that matter), ‘[e]xceptional’ meant ‘uncommon,’ ‘rare,’ or ‘not ordinary.’”39 Accordingly, the 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.”40 In reaching its holding, the Court relied again, in part, on Noxell, the Lanham Act case in which then-Judge Ginsburg, joined by then-Judge Scalia, rejected a claim that fee-shifting awards must be supported by subjective bad faith, holding instead that the “exceptional case” standard should be construed according to its ordinary meaning—“uncommon, not run-of-the-mill.”41

Fair Wind: Octane Sails into the Lanham Act

The fee-shifting provision in § 285 is textually identical to the corresponding provision in Lanham Act § 35. Accordingly, it is likely that lower courts will gradually begin applying the Supreme Court’s interpretation of § 285 to fee motions in trademark cases. Such a progression would be consistent with the migration of other Supreme Court rules from one intellectual property field into another; for example, the application of the patent doctrine of willful blindness in copyright cases,42 and the extension of eBay’s43 rule regarding irreparable harm in patent permanent injunction applications to preliminary injunctions in both trademark and copyright cases.44 Although trademark litigants should not expect awards of attorneys’ fees to become “an ordinary thing,”45 the Supreme Court’s relaxation of the standard for fee awards in patent cases should result in a corresponding lowering of the bar in trademark cases.

Indeed, the process has already begun with the Third Circuit’s recent decision in Fair Wind Sailing, Inc. v. Dempster.46 In that case, the owner and operator of sailing schools sued a former employee for, inter alia, trade dress infringement after the former employee opened a competing sailing school. Fair Wind alleged that the defendant copied Fair Wind’s business by using the same catamaran type, teaching curricula and itineraries, method for soliciting student feedback, and website marketing.47 The district court dismissed for failure to state a claim, finding that (1) Fair Wind had failed to identify the trade dress it sought to protect, and failed to allege that any of the elements the defendant allegedly copied were inherently distinctive or had acquired secondary meaning; and (2) the elements of its alleged trade dress that Fair Wind did identify were functional.48 The district court awarded $36,347 in fees, and Fair Wind appealed both the dismissal and the fee award.

The Third Circuit affirmed on the merits, finding that Fair Wind’s trade dress “is the combination of its choice to solely employ catamaran vessels and its unique teaching curriculum, student testimonials, and registered domain name, which all combine to identify Fair Wind’s uniquely configured business to the general public.”49 The court characterized this supposed trade dress as “simply a hodgepodge of unconnected pieces of its business, which together do not comprise any sort of composite visual effect,”50 and found it unprotectable because it did not serve as a source indicator and because it was functional.

The court then turned to the issue of fees, analyzing the Supreme Court’s opinion in Octane and finding that it embraced “a definition of ‘exceptional’ far more expansive than the one articulated by the Federal Circuit in Brooks.”51 The court wasted no time finding Octane applicable in the trademark context: “Not only is § 285 identical to § 35(a), but Congress referenced § 285 in passing § 35(a).”52 The court also noted the Supreme Court’s reliance on Noxell, a Lanham Act case, in deciding Octane, concluding: “We believe that the Court was sending a clear message that it was defining ‘exceptional’ not just for the fee provision in the Patent Act, but for the fee provision in the Lanham Act as well.”53 Thus, the court held that “a district court may find a case ‘exceptional,’ and therefore award fees to the prevailing party, when (a) there is an unusual discrepancy in the merits of the positions taken by the parties or (b) the losing party has litigated the case in an ‘unreasonable manner.’”54

The Third Circuit remanded Fair Wind to the district court for a determination whether the case meets the newly articulated “exceptional” case standard. Thus, it remains to be seen how and to what extent the Supreme Court’s expansive and flexible interpretation will affect the actual determination of whether a case is sufficiently “exceptional” for an award of fees.

At the time of this writing, Fair Wind has not been cited in any other decision addressing the “exceptional” case requirement in the Lanham Act, and no other appellate court has applied Octane in that context. Nonetheless, Fair Wind is likely just the first opinion that will extend Octane’s holding to Lanham Act fee applications.

Endnotes

1. 134 S. Ct. 1749 (2014).

2. Lanham Act § 35(a), 15 U.S.C. § 1117(a).

3. Noxell Corp. v. Firehouse No. 1 Bar-B-Que Rest., 771 F.2d 521, 524 (D.C. Cir. 1985) (citing S. Rep. No. 93-1400 at 5, 6 (1974), reprinted in 1974 U.S.C.C.A.N. 7132, 7136).

4. Secalt S.A. v. Wuxi Shenxi Constr. Mach. Co., Ltd., 668 F.3d 677, 681, 687 (9th Cir. 2012).

5. See, e.g., Mattel Inc. v. Walking Mountain Prods., 353 F.3d 792, 816 (9th Cir. 2003) (vacating denial of attorneys’ fees to defendant and remanding where plaintiff’s case may have been either groundless or unreasonable); Cairns v. Franklin Mint Co., 292 F.3d 1139, 1156 (9th Cir. 2002) (affirming award of $2,308,000 in attorneys’ fees to defendant where plaintiff asserted groundless false advertising claim); Hartman v. Hallmark Cards, Inc., 833 F.2d 117, 123 (8th Cir. 1987) (affirming denial of fees where plaintiff’s claims were weak but “not baseless”).

6. 771 F.2d at 526.

7. Nat’l Ass’n of Prof’l Baseball Leagues, Inc. v. Very Minor Leagues, Inc., 223 F.3d 1143, 1147–48 (10th Cir. 2000).

8. Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, 626 F.3d 958, 960 (7th Cir. 2010).

9. Id. at 961–62.

10. Id. at 963–64.

11. 510 U.S. 517, 534 (1994).

12. See, e.g., Stephen W. Boney, Inc. v. Boney Servs., Inc., 127 F.3d 821, 826 (9th Cir. 1997).

13. Nat’l Ass’n of Prof’l Baseball Leagues, Inc. v. Very Minor Leagues, Inc., 223 F.3d 1143, 1148 (10th Cir. 2000).

14. Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1754 (2014).

15. Id. at 1754–55.

16. ICON Health & Fitness, Inc. v. Octane Fitness, LLC, No. 09-319 ADM/SER, 2011 WL 2457914 (D. Minn. June 17, 2011).

17. 393 F.3d 1378 (Fed. Cir. 2005).

18. Id. at 1381.

19. ICON Health & Fitness, Inc. v. Octane Fitness, LLC, 496 F. App’x 57, 62 (Fed. Cir. 2012).

20. Id. at 65.

21. Id.

22. Brief for the Petitioner at 21, Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (Dec. 2, 2104) (No. 12-1184), available at http://sblog.s3.amazonaws.com/wp-content/uploads/2013/12/Merits-Brief-Final.pdf.

23. Id. at 31.

24. Brief of Respondent at 22, Octane, 134 S. Ct. 1749 (Jan. 17, 2014) (No. 12-1184)

25. Justice Scalia joined in the opinion except as to footnotes 1–3, which discuss the legislative history of § 285.

26. Octane, 134 S. Ct. at 1752–53.

27. Id. at 1754.

28. Id. (alterations in original) (quoting Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1382 (Fed. Cir. 2005)).

29. Id. (alteration in original) (citations omitted).

30. Id. at 1756.

31. Id.

32. Id. at 1756–57.

33. Id. at 1757.

34. Id. (quoting Noxell Corp. v. Firehouse No. 1 Bar-B-Que Rest., 771 F.2d 521, 526 (D.C. Cir. 1985)).

35. Id. at 1758.

36. Id.

37. 35 U.S.C. § 285.

38. Octane, 134 S. Ct. at 1756 (internal quotations marks omitted).

39. Id. (alteration in original).

40. Id.

41. Noxell Corp. v. Firehouse No. 1 Bar-B-Que Rest., 771 F.2d 521, 526 (D.C. Cir. 1985).

42. Viacom Int’l, Inc. v. YouTube, Inc., 676 F.3d 19 (2d Cir. 2012) (applying willful blindness rule from Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011), to copyright claim in context of Digital Millennium Copyright Act).

43. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).

44. See, e.g., Herb Reed Enters., LLC v. Fla. Entm’t Mgmt., Inc., 736 F.3d 1239 (9th Cir. 2013) (following eBay, no presumption of irreparable harm on preliminary injunction motion in trademark case); Salinger v. Colting, 607 F.3d 68 (2d Cir. 2010) (following eBay, finding of likelihood of success on the merits in copyright infringement case does not give rise to presumption of irreparable harm on preliminary injunction motion).

45. Octane, 134 S. Ct. at 1753 n.1 (quoting S. Rep. No. 79-1503, at 2 (1946)).

46. 764 F.3d 303 (3d Cir. 2014).

47. Id. at 306.

48. Id. at 307.

49. Id. at 309 (internal quotation marks omitted).

50. Id. at 310.

51. Id. at 314.

52. Id. at 315.

53. Id.

54. Id.

Naomi Jane Gray

Naomi Jane Gray is a partner with Harvey Siskind LLP in San Francisco, where she focuses her practice on intellectual property and commercial litigation, arbitration, prosecution, and counseling. She authors the copyright law blog Shades of Gray®, found at http://www.shadesofgraylaw.com, and tweets under the handle @shadesofgraylaw.