Feature

Making the Nonprevailing Party Pay: The Statistics of Exceptional Cases Two Years after Octane and Highmark

Lionel M. Lavenue, Sean D. Damon, and R. Benjamin Cassady

©2016. Published in Landslide, Vol. 8, No. 6, July/August 2016, 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.

Two years have passed since the Supreme Court rejected the Federal Circuit’s ruling that 35 U.S.C. § 285 allowed fee shifting only upon clear and convincing evidence of both objective and subjective bad faith. On the same day, it rejected the standard of review framework for attorneys’ fees. From the moment Octane1 and Highmark2 issued, the patent community assumed that these two cases would cause an increase in awards of fees. Under the new standard, 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.”3 Thus, the statute requires two basic showings: (1) the case is “exceptional,” and (2) the party seeking the fees is a “prevailing party.” Now we look to see not only if the Court’s decisions in Octane and Highmark prompted more litigants to file motions for attorneys’ fees but also if they increased a moving party’s chances of actually prevailing and receiving awards under § 285.

Background

In Octane, the Court considered the standard that courts should apply when deciding whether a case is exceptional and thus justifies awarding attorneys’ fees. ICON sued Octane for patent infringement. Octane won summary judgment of noninfringement and sought attorneys’ fees under 35 U.S.C. § 285. The district court denied attorneys’ fees based on the Brooks Furniture standard,4 which required both objectively baseless claims and subjective bad faith, and the Federal Circuit subsequently affirmed.5 The Supreme Court reversed and remanded, abrogating the Federal Circuit’s Brooks Furniture standard.

In Highmark, Highmark filed a declaratory judgment action for invalidity, unenforceability, and noninfringement against Allcare’s patent. Highmark won summary judgment of noninfringement and sought attorneys’ fees under § 285 for litigation misconduct. The district court awarded fees for litigation misconduct for two patent claims. But the Federal Circuit reviewed de novo, affirmed the attorneys’ fee award for one claim, and reversed the award for the second claim based on the Brooks Furniture standard.6 The Supreme Court vacated and remanded based on the Octane standard and held an abuse of discretion standard applies.

Clarifying Patent Law: The Pre-Octane Patent World

Section 285 provides that “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.”7 Although Congress expressly authorized discretionary fee shifting for exceptional cases in the 1946 Patent Act, the Senate report on the act indicated otherwise. At the time, “[i]t [was] not contemplated that the recovery of attorney’s fees will become an ordinary thing in patent suits.”8

The Federal Circuit established in Brooks Furniture the longstanding interpretation that “exceptional cases” under § 285 required litigation that is (1) objectively baseless and (2) brought in “subjective bad faith.”9 Further, the Federal Circuit required clear and convincing evidence for both prongs.

But in the decades that followed, patent litigation practices changed, and some abusive tactics emerged. To reduce these abusive practices in patent litigation, the White House, some justices on the Supreme Court, and many members of Congress urged reform. Proposals for legislative changes to allow fee shifting are a particularly contentious issue, however. Fee shifting would allow district court judges to order the nonprevailing party to pay the attorneys’ fees and other costs of the prevailing party. Such an approach would depart significantly from the traditional “American rule” that each party pays its own legal fees.

One of the proposed bills, the Innovation Act (H.R. 9)—originally introduced by Representative Bob Goodlatte (R-Va.) in October 2013 and advanced as “the solution to the problem of abusive patent litigation”10—swiftly passed the House in December 2013. But its Senate counterpart, the Patent Transparency and Improvements Act (S. 1720)—introduced by Senator Patrick Leahy (D-Vt.) in November 2013—stalled and died. Regarding fee shifting, according to proponents of the Innovation Act and the PATENT Act, patentees allegedly have an advantage under the traditional “American rule,” where each party generally pays its own fees, absent exceptional circumstances.11 Because accused infringers often face higher fees and costs of litigation, this rule arguably drives wrongly accused parties to settle, especially when the total attorneys’ fees and costs to defend the case exceed the cost of settlement.

Table 1. Attorneys' Fees under § 2285 Pre- and Post-Octane

Octane and Highmark: Raising Motions and Lowering the Bar

The Supreme Court, in Highmark, unanimously rejected the Federal Circuit’s de novo review for attorneys’ fee awards. The Court ruled instead that fee awards should be reviewed for “abuse of discretion.” In Octane, the Court held that an exceptional case is 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.”12 This effectively lowered the standard for the awarding of attorneys’ fees. District courts were instructed to apply this standard on a case-by-case basis while considering the totality of the circumstances.

The Post-Octane Patent World

In 2002, there were a total of 50 motions for attorneys’ fees, with an award rate of 20 percent.13 In 2011, the number of attorneys’ fee motions rose to 86 with an award rate of 23 percent.14 No longer is it necessary to presume the effects of Octane, for the facts speak for themselves. In the 12 months preceding Octane, only 13 percent of § 285 motions were granted. A little over a year following Octane, however, the number of § 285 motions filed rose precipitously: a total of 122 motions were filed, and the number of awards nearly doubled the preceding year with an award rate of 42 percent.15

Nearly two years since Octane and Highmark, these decisions are having a lasting effect on attorneys’ fee awards. A total of 206 motions have been decided by the courts. They have granted or deferred16 89 attorneys’ fee motions while denying 127. Thus, the attorneys’ fee award rate is still considerably higher at 33 percent when compared with the pre-Octane period (see tbl. 1). The decline in the success rate of attorneys’ fee motions from a year after Octane to two years later demonstrates that although the standard for awarding fees may be less stringent, it is far from guaranteed that a prevailing party will be awarded attorneys’ fees in a patent infringement case.

Figures 1 and 2 compare the number of § 285 motions granted, denied, or deferred by district courts. Figure 1 depicts post-Octane decisions through September 1, 2015, while figure 2 captures cases decided a little under two years since Octane through March 22, 2016.

Figure 1. Motions Granted/Denied/Deferred by District—One Year Later

 

Figure 2. Motions Granted/Denied/Deferred by District—Two Years Later

 

The figures illustrate just how Octane has lowered the bar for determining a case to be “exceptional.” Patent practitioners, as a result, have filed a total of 377 motions for attorneys’ fees under § 285. Plaintiffs are probably just as aware of these statistics as defendants, and it will likely affect their forum shopping decisions. One may assume that districts that handle a significant number of patent litigations are less likely to determine a case as “exceptional” given their history with patent litigation. But several of these districts are awarding attorneys’ fees at a rate significantly higher than the pre-Octane period. For example, the Central District of California has granted more awards for attorneys’ fees than it has denied. The Northern District of California and the District of Delaware have granted eight while denying 16 and 24, respectively. This may be due to judges’ desire to prevent frivolous lawsuits from appearing on their dockets, or it could be a symptom of the egregious behaviors of the nonprevailing parties.

Although, the majority of fee award motions have not determined the amount of attorneys’ fees to be awarded to the prevailing party, awards over $1 million are no longer considered outliers. As of March 1, 2015, courts had determined the actual fee award in only 12 cases, with a few above $1 million.17 Fast forward a year, and we find that 14 out of the total 36 awards exceed $1 million, with three exceeding $5 million. Figure 3 shows the distribution of attorneys’ fees based on the total amounts awarded through March 22, 2016.

Figure 3. Attorneys' Fees Amount Awarded

Conclusion

The Supreme Court did not define the standard for an “exceptional” case when it articulated that the Federal Circuit’s standard was too stringent. It thus allowed for a wide variation in exceptionality determinations, often making the answer to a client’s questions of what is “unreasonable” hard to answer. Judges appear to agree where a party knowingly brings a suit when it does not have ownership of the patent; or where a party withholds or acts in bad faith with document production during discovery; or where the court finds inequitable conduct before the U.S. Patent and Trademark Office; or where vexatious, unjustified, and otherwise bad faith litigation tends to rise to the level of “exceptional.” But one thing becomes clear: Octane and Highmark provided the district courts with the discretion necessary to shift attorneys’ fees in patent litigations. Any steps furthering patent reform should now concentrate on providing clarity on what is “unreasonable” and what is “exceptional.”

Endnotes

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

2. Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744 (2014).

3. Octane, 134 S. Ct. at 1756.

4. Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378 (Fed. Cir. 2005).

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

6. Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 687 F.3d 1300 (Fed. Cir. 2012).

7. 35 U.S.C. § 285.

8. S. Rep. No. 1503, 79th Cong., 2d Sess. (1946), reprinted in 1946 U.S.C.C.A.N. 1386, 1387 (“[B]ut the discretion given the court in this respect . . . will discourage infringement of a patent by anyone thinking that all he would be required to pay if he loses the suit would be a royalty. The provision is also made general so as to enable the court to prevent a gross injustice to an alleged infringer.”).

9. 393 F.3d at 1381–82.

10. Press Release, Congressman Jerrold Nadler, Nadler, Goodlatte, DeFazio, Issa, Smith, Lofgren, Eshoo Introduce Patent Litigation Reform Bill (Feb. 5, 2015), https://nadler.house.gov/press-release/nadler-goodlatte-defazio-issa-smith-lofgren-eshoo-introduce-patent-litigation-reform (quoting Rep. Eshoo).

11. Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2164 (2015) (“Our basic point of reference when considering the award of attorney’s fees is the bedrock principle known as the American Rule: Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.”).

12. Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1756 (2014).

13. Hannah Jiam, Fee-Shifting and Octane Fitness: An Empirical Approach toward Understanding “Exceptional, 30 Berkeley Tech. L.J. 611, 623–24 (2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2597195.

14. Id.

15. Statistics based on cases filed from April 29, 2014, to September 15, 2015. The cases were collected using Westlaw and Docket Navigator and excluded cases published exclusively on Lexis Nexis.

16. Deferred means decision on appeal, remanded for further consideration under Octane and Highmark, or dismissed without prejudice to renew motion.

17. Jiam, supra note 13, at 627.