Practice Guide to Section 285 "Exceptional Case" Findings

Prior to Octane, according to the Federal Circuit, a case was deemed "exceptional" under section 285 in only two limited circumstances: (1) "when there has been some material inappropriate conduct," or (2) when a party's litigating position was both "objectively baseless" and "brought in subjective bad faith." Brooks Furniture Mfg., Inc. v. Dutailier Int'l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005). Moreover, to be "objectively baseless," the litigating position had to be "so unreasonable that no reasonable litigant could believe it would succeed." iLOR, LLC v. Google, Inc., 631 F.3d 1372, 1378 (Fed. Cir. 2011). "Subjective bad faith" could be proven by showing either "reckless conduct" regarding, or actual knowledge of, the "objectively baseless" nature of the litigating position. Kilopass Tech., Inc. v. Sidense Corp., 738 F.3d 1302, 1310 (Fed. Cir. 2013).

The Federal Circuit standard rejected by the Supreme Court also required the party seeking attorney fees to establish the "exceptional" nature of the case by clear and convincing evidence. Brooks Furniture, 393 F.3d at 1382. And, based on pre-Octane Federal Circuit law, a district court's determination of objective reasonableness was reviewed on appeal de novo and without deference. See Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc., 682 F.3d 1003, 1004–06 (Fed. Cir. 2012).

Suffice it to say that, in the pre-Octane words of the Federal Circuit, section 285 imposed an "exacting standard." iLOR, 631 F.3d at 1377.

The Supreme Court unanimously countermanded the Federal Circuit's substantive standard, burden of proof, and scope of review section 285 jurisprudence. The Court held that the Federal Circuit's substantive standard was contrary to the "inherently flexible" text of section 285. Octane,134 S. Ct. at 1756. The Court instead endorsed a discretionary "totality of the circumstances" framework. Following Octane, a case may be found to be "exceptional" under section 285 for any one or more of three broad reasons: (1) lack of substantive strength of litigating position, (2) unreasonable conduct, or (3) subjective bad faith. Id. at 1756–57.

As was the situation pre-Octane, though, after a district court finds a case "exceptional," it still must decide whether an award of attorney fees is appropriate and, if so, the amount of attorney fees to award. See ICON Health & Fitness, Inc. v. Octane Fitness, LLC, 576 F. App'x 1002, 1005 (Fed. Cir. 2014) (on remand) (noting Supreme Court's Octane decision "did not . . . revoke the discretion of a district court to deny fee awards even in exceptional cases").

The Supreme Court also ruled that the evidentiary burden for showing "exceptional case" status under section 285 is not clear and convincing evidence but the usual civil case evidentiary burden of a preponderance of the evidence. Octane, 134 S. Ct. at 1758. In a companion case to Octane decided the same day (April 29, 2014), the Court further held that all aspects of an "exceptional case" finding are reviewed on appeal only for abuse of discretion. Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744, 1749 (2014).

In sum, post-Octane,a party seeking "exceptional case" status pursuant to section 285 may invoke the considerable discretion of a district court and rely on the "totality of the circumstances." The Federal Circuit now has limited authority to overturn a district court's finding of exceptionality.

Applications of the Octane Framework

Under the "overly rigid" Federal Circuit substantive standard, it was rare for cases to be deemed "exceptional" under section 285. For example, according to a Federal Circuit Bar Association study, in the year preceding Octane, district courts ruled on 46 motions filed by accused infringers seeking attorney fees based on section 285, and only 13 percent were granted. Fed. Circuit Bar Ass'n, A Comparison of Pre Octane and Post Octane District Court Decisions on Motions for Attorneys' Fees under Section 285, at 1 (2015). By contrast, in the 11 months following Octane, district courts granted 36 percent of 85 motions. Id. Another study found that the grant rate increased from 23 percent in 2011 to 43 percent during the first 10 months after Octane. Hannah Jiam, "Fee-Shifting and Octane: An Empirical Approach Toward Understanding 'Exceptional,'" 30 Berkeley Tech. L.J. (forthcoming 2015).

Our own review of post-Octane orders confirms this trend. We identified more than 160 district court orders on Docket Navigator and Westlaw that were entered from April 29, 2014, through September 14, 2015, regarding the "exceptional" status of patent cases. Of those, approximately 37 percent granted (or granted in part) section 285 attorney fees requests. A closer analysis of those orders reveals additional interesting information.

First, the initial post-Octane spike in the grant rate of section 285 attorney fees requests has receded, but only slightly. Based on our analysis, 40 percent were granted (or granted in part) in the first eight months following Octane (May through December 2014). In the following eight months (January through September 14, 2015), the grant rate was 35 percent.

Second, the number of section 285 attorney fees orders continues to increase. In the first eight months after Octane, district courts ruled on 72 requests. In the following eight months, they ruled on 92 requests, a 28 percent increase. The table below summarizes the results of this analysis.

Third, the lion's share of post-Octane orders that found cases "exceptional" have been in favor of accused infringers, not patentees. Of the 61 requests that were granted (or granted in part), 47 (77 percent) awarded attorney fees to accused infringers. Interestingly, of the 14 (23 percent) orders in favor of patentees, eight were granted based on default judgments, not at the conclusion of contested litigation. And, of those eight, three were based solely on a finding of willfulness, and three others were granted summarily without written explanation.

Thus, a comprehensive examination of district court orders strongly suggests that the increase in granted section 285 attorney fees requests, especially when a district court has expressly considered the "totality of the circumstances," has largely benefited accused infringers. These statistics also help to explain why much of the section 285 discourse to date has focused on whether the risk of an attorney fees award discourages nonpracticing entities (NPEs) from filing substantively weak patent infringement complaints. However, practitioners should keep in mind that patentees may also be awarded section 285 attorney fees.

Finally, as the pool of post-Octane orders expands, different forums are developing their own "exceptional case" jurisprudence. As of September 14, 2015, five district courts had each ruled on more than six post-Octane requests for "exceptional case" findings: Central District of California (23), Northern District of California (21), District of Delaware (15), Eastern District of Texas (13), and Southern District of New York (13). The rates at which those forums granted requests varied significantly. The difference is starkest when comparing the District of Delaware's 47 percent grant rate with the 0 percent grant rate of the Eastern District of Texas. A summary of the grant rates in the selected five districts is in the table below.

Substantial empirical evidence demonstrates the advantage of forum shopping in patent cases. See, e.g., Kimberly A. Moore, "Forum Shopping in Patent Cases: Does Geographic Choice Affect Innovation?," 83 J. Pat. & Trademark Off. Soc'y 558, 585 (2001). And, while it may be too soon to reach a conclusion, the apparent disparity in district courts' section 285 grant rates will most likely further promote forum shipping. A practitioner, whether representing a patentee considering asserting an infringement claim or an accused infringer contemplating commencing a declaratory judgment action, would be well advised to investigate section 285 grant rates before choosing the forum to commence litigation.

What Makes a Case "Exceptional" under Section 285?

The Supreme Court suggested some factors that district courts might consider in determining whether a case "stands out from others": "'frivolousness, motivation, objective unreasonableness (both in the factual and legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.'" Octane, 134 S. Ct. at 1756 n.6 (quoting Fogerty v. Fantasy, Inc., 510 U.S. 517, 534 n.19 (1994) (similar Copyright Act provision)). However, it is impracticable, if not impossible, to compile an exhaustive list of such factors or the relative weight each factor should be accorded. See generally Amanda L. Major & Jonathan Uffelman, "A Practitioner's Guide to Post-Octane Fitness Decisions: The New Landscape of Section 285 Attorney Fees," 89 Pat. Trademark & Copyright J. 391 (2014) (reviewing post-Octane orders through November 2014); Jiam, supra, at 23–33.

The 2015 Report of the Economic Survey of the American Intellectual Property Law Association relates that the median costs of patent infringement litigation through final dispositions on the merits with $1 to $10 million at risk are $2 million. Id. at I-106. With $10 to $25 million at risk, median costs jump to $3.1 million, and then to $5 million with over $25 million at risk. Id. at I-107, I-108. It is safe to assume that attorney fees account for the vast majority of these litigation costs.

It should thus come as no surprise that district courts have awarded multimillion dollar section 285 attorney fees awards post-Octane. See, e.g., ICON Health & Fitness, Inc. v. Octane Fitness, LLC, No. 09-319 ADM/SER, slip op. at 12 (D. Minn. Sept. 1, 2015) (on remand) (over $1.6 million); Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., No. 4:03-cv-01384-Y, slip op. at 3–4 (N.D. Tex. June 23, 2015) (on remand) (over $4.6 million). It should also come as no surprise that the dual policies of compensation and deterrence often underlie section 285 attorney fees awards. See Octane, 134 S. Ct. at 1757 n.6 (noting "the need in particular circumstances to advance considerations of compensation and deterrence").

Below, for the benefit of practitioners, we highlight several factors that district courts regularly consider post-Octane. As an organizational aid, we group the factors under the three broad, often overlapping, bases for "exceptional case" findings that the Supreme Court identified in Octane, 134 S. Ct. at 1756–57: lack of substantive strength of litigating position, unreasonable conduct, and subjective bad faith.

Lack of Substantive Strength of Litigating Position

To show that a party's litigating position warrants an "exceptional case" finding, it is not sufficient to rely exclusively on the fact that the position did not ultimately prevail. See Octane, 134 S. Ct. at 1753 (noting § 285 attorney fees are not "a penalty for failure to win a patent infringement suit"). In considering the "totality of the circumstances," district courts have often weighed the following factors in determining whether the lack of substantive strength of a party's litigating position "stands out."

Inadequate presuit due diligence. See Checkpoint Sys., Inc. v. All-Tag Sec. S.A., No. 01-2223, 2015 WL 4941793, at *4 (E.D. Pa. Aug. 19, 2015) (holding presuit investigation "inadequate" and awarding attorney fees where patentee never evaluated accused product and relied on two counsel opinions "given years before filing"); Yufa v. TSI Inc., No. 09-cv-01315-KAW, 2014 WL 4071902, at *3 (N.D. Cal. Aug. 14, 2015) (finding support for attorney fees award because patentee brought suit "without purchasing or testing any of [accused infringer's] products," but limiting award because experienced patentee was pro se).

Party knew or should have known litigating position was meritless. See Alzheimer's Inst. of Am., Inc. v. Avid Radiopharmaceuticals, No. 10-cv-6908, 2015 WL 1422337, at *3 (E.D. Pa. Mar. 30, 2015) (citing plaintiff's knowledge that it did not own asserted patent and deterrence as justifications for attorney fees award); Bayer Cropscience AG v. Dow Agrosciences LLC, No. 12-256, 2015 WL 1197436, at *8 (D. Del. Mar. 13, 2015) (awarding attorney fees in part because patentee's position was "directly contradicted by the record evidence [it] had obtained through early discovery").

Failure to produce evidence to support claim. See Yufa, 2014 WL 4071902, at *3–4 (noting that patentee, an experienced pro se litigant, pressed claim despite absence of evidence); Cognex Corp. v. Microscan Sys., Inc., No. 13-cv-2027, 2014 WL 2989975, at *4 (S.D.N.Y. June 30, 2014) (awarding attorney fees to patentee in part because defenses were unsupported by evidence).

More difficult to show "exceptional case" status before trial. See Trover Grp., Inc. v. Dedicated Micros USA, No. 2:13-cv-1047-WCB, 2015 WL 4910875, at*3 (E.D. Tex. Aug. 17, 2015) (denying attorney fees, stating "for a case dismissed before trial to be designated exceptional, evidence of the frivolity of the claims must be reasonably clear without requiring a 'mini-trial' on the merits").

Practitioners should note that filing a motion for summary judgment may beneficially influence a district court's "exceptional case" finding. See Stragent, LLC v. Intel Corp., No. 6:11-cv-421, 2014 WL 6756304, at *5 (E.D. Tex. Aug. 6, 2014) (Dyk, J., sitting by designation) (denying attorney fees after jury trial because accused infringer could have pursued summary judgment to reduce fees).

On the other hand, winning on the merits before trial may not be sufficient to render a case "exceptional." See Barron v. SCVNGR, Inc., No. 13-40084-TSH, 2015 WL 1815633, at *2 (D. Mass. Apr. 21, 2015) (noting that grant of summary judgment before scheduling conference or discovery "bears some reflection of the substantive strength of [patentee's] claim," but denying attorney fees to accused infringer); CreAgri, Inc. v. Pinnaclife, Inc., No. 11-cv-06635-LHK-PSG, 2014 WL 2508386, at *9–12 (N.D. Cal. June 3, 2014) (granting summary judgment to accused infringer, but denying attorney fees because patentee performed adequate prefiling investigation, prevailed on some claim construction issues, and advanced reasonable infringement allegations).

Frivolous claim construction positions. See Vehicle Operation Techs. LLC v. Ford Motor Co., No. 13-712-RGA, 2015 WL 4036171, at *3 (D. Del. July 1, 2015) (awarding attorney fees, finding patentee's proposed claim construction "frivolous"); Chalumeau Power Sys. LLC v. Alcatel-Lucent, No. 11-1175-RGA, 2014 WL 4675002, at *2 (D. Del. Sept. 12, 2014) (same); Tech. Innovations, LLC v. Amazon.com, Inc., No. 11-690-SLR, 2014 WL 3703582, at *1 (D. Del. July 23, 2014) (awarding attorney fees, noting "there is a threshold below which a claim construction is so unreasonable that no reasonable litigant could believe it would succeed" (internal quotation marks omitted)).

Litigating position based on complex or developing law. See Gametek LLC v. Zynga, Inc., No. CV 13-2546 RS, 2014 WL 4351414, at *3 (N.D. Cal. Sept. 2, 2014) (denying attorney fees, noting invalidity finding does not make case ipso facto exceptional, "particularly . . . where the critical issue of inventive concept is evolving" after Alice); EON Corp. IP Holdings, LLC v. FLO TV Inc., No. 10-cv-812-RGA, 2014 WL 2196418, at *2(D. Del. May 27, 2014) (denying attorney fees, noting patentee's position "turned on a complex and evolving area of [§ 101] law" and "the [court's] decision was not an easy one").

Failure or success in related proceedings. See TechRadium, Inc. v. FirstCall Network, Inc., No. 4:13-cv-2487, 2015 WL 862326, at *7(S.D. Tex. Feb. 27, 2015) (awarding attorney fees to accused infringers in part because action was filed as leverage for settlement negotiations and patentee's claim construction position in first action precluded infringement); EON Corp. IP Holdings LLC v. Cisco Sys. Inc., No. 12-cv-01011-JST, 2014 WL 3726170, at *6 (N.D. Cal. July 25, 2014) (denying attorney fees in part because of patentee's success in other litigation over same patent-in-suit).

Unreasonable Conduct

In Octane, the Supreme Courtheld that "a district court may award fees in the rare case in which a party's unreasonable conduct—while not necessarily independently sanctionable—is nonetheless so 'exceptional' as to justify an award of fees." Octane,134 S. Ct. at 1757. Although the Supreme Court clarified that the scope of "unreasonable conduct" is broader than sanctionable conduct, the Federal Circuit has stated that its pre-Octane "litigation misconduct line of § 285 cases" remains good law. SFA Sys., LLC v. Newegg Inc., 793 F.3d 1344, 1349 (Fed. Cir. 2015). Just as a losing position alone does not support an "exceptional case" finding for purposes of section 285, aggressive litigation strategies, without more, typically do not suffice to justify an attorney fees award on grounds of "unreasonable conduct." See, e.g., E. Coast Sheet Metal Fabricating Corp. v. Autodesk, Inc., No. 12-cv-517-LM, 2015 WL 4603463, at *10 (D.N.H. July 30, 2015) (denying attorney fees, noting that damages theory "attempting to recover more than a case may ultimately be worth is a common litigation tactic, not something that makes a case stand out"); Gametek, 2014 WL 4351414, at *3 (finding patentee's "aggressive litigation strategy" did not justify fee-shifting). As factors adding to the "totality of the circumstances," district courts considered the following indicia of "unreasonable conduct."

Inconsistent litigating positions or making false representations. See Pure Fishing, Inc. v. Normark Corp., No. 10-cv-2140-CMC, 2014 WL 5474589, at *5 (D.S.C. Oct. 28, 2014) (granting in part § 285 motion based on patentee's "shifting positions" on claim construction and lack of support for positions); Kilopass Tech. Inc. v. Sidense Corp., No. 10-cv-2066 SI, 2014 WL 3956703, at *10 (N.D. Cal. Aug. 12, 2014) (on remand) (awarding attorney fees in part because patentee's inconsistent positions in different proceedings gave appearance of "gamesmanship").

Litigation tactics causing delay or increasing costs. See Large Audience Display Sys., LLC v. Tennman Prods., LLC, No. 2:11-cv-03398-R, slip op. at 3 (C.D. Cal. Aug. 18, 2015) (awarding attorney fees, finding patentee prolonged reexamination and litigation by refusing to provide U.S. Patent and Trademark Office with dispositive prior art and then, despite invalidation of claims, seeking to assert additional claims in litigation; also finding patentee violated canons of professional conduct by "proffering clearly privileged information" in response to § 285 motion); Cambrian Sci. Corp. v. Cox Commc'ns, Inc., No. 8:11-cv-01011 AG (JPRx), 2015 WL 178417, at *7–8(C.D. Cal. Jan. 6, 2015) (awarding attorney fees to accused infringers based on patentee's meritless claims, overly broad and burdensome discovery requests, and uncooperative behavior that unnecessarily prolonged discovery).

Ignoring court orders or relitigating issues. See TechRadium, 2015 WL 862326, at *7(awarding attorney fees because patentee's claim construction position "was merely a vehicle to relitigate prior, clearly rejected, positions"); TNS Media Research, LLC v. TiVo Research & Analytics, Inc., No. 11-cv-4039 (SAS), 2014 WL 5639930, at *10 (S.D.N.Y. Nov. 4, 2014) (holding that patentee's disregard of warning not to ignore previously construed terms "strongly favor[ed]" award of attorney fees), vacated on reversal of underlying decision, 616 F. App'x 421 (Fed. Cir. 2015).

Inequitable conduct heavily favors "exceptional case" finding. See Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276, 1289 (Fed. Cir. 2011) ("[P]revailing on a claim of inequitable conduct often makes a case 'exceptional.'"); Worldwide Home Prods., Inc. v. Bed, Bath & Beyond, Inc., No. 11CV3633-LTS-MHD, 2015 WL 1573325, at *2 (S.D.N.Y. Apr. 9, 2015) (awarding attorney fees because "no genuine dispute of material fact as to inequitable conduct"); DietGoal Innovations LLC v. Chipotle Mexican Grill, Inc., No. 2:12-cv-00764-WCB, 2015 WL 1284669, at *5 (E.D. Tex. Mar. 20, 2015) (noting evidence of inequitable conduct can "weigh heavily in favor" of "exceptional case" finding—especially when it satisfies the clear-and-convincing standard—but finding insufficient evidence of such conduct).

It is noteworthy that district courts applied different evidentiary standards to measure inequitable conduct claims raised for the first time with a section 285 request. Compare Stretchline Intellectual Props. Ltd. v. H&M Hennes & Mauritz LP, No. 2:10-cv-371, 2015 WL 5175196, at *10 (E.D. Va. Feb. 24, 2015) (applying preponderance of the evidence standard to inequitable conduct and denying attorney fees), and E. Coast, 2015 WL 4603463, at *5 (same), with Robbins Co. v. Herrenknecht Tunnelling Sys. USA, Inc., No. 5:13-CV-2113, 2015 WL 3454946, at *4 (N.D. Ohio May 29, 2015) (applying clear and convincing evidence standard to inequitable conduct and denying attorney fees).

Willfulness supports "exceptional case" finding. See Keystone Global LLC v. Auto Essentials, Inc., No. 12-cv-9077 (DLC), 2015 WL 224359, at *7 (S.D.N.Y. Jan. 16, 2015) (finding willfulness is sufficient for "exceptional case" finding, but not awarding attorney fees because of inadequacy of time records).

Prevailing party's litigation conduct. See Gaymar Indus., Inc. v. Cincinnati Sub-Zero Prods., Inc., 790 F.3d 1369, 1373 (Fed. Cir. 2015) (stating that, under Octane, consideration of litigation conduct "includ[es] the conduct of the movant"); NXP B.V. v. BlackBerry, Ltd., 58 F. Supp. 3d 1313, 1325 (M.D. Fla. 2014) (denying attorney fees, noting that "[a]ny delay, expense or inconvenience that resulted [wa]s a shared responsibility of the parties").

Subjective Bad Faith

Compared to findings of lack of substantive strength of litigating position and unreasonable conduct, few post-Octane "exceptional case" findings have been grounded on "subjective bad faith." Nevertheless, a few orders illustrate that district courts consider the following factors in a "bad faith" analysis.

Attempting to extract nuisance value settlement. See Summit Data Sys., LLC v. EMC Corp., No. 10-749-GMS, 2014 WL 4955689, at *4 (D. Del. Sept. 25, 2014) ("[Patentee's] practice of extracting settlements worth a fraction of what the case would cost to litigate supports a finding of exceptionality."); Lumen View Tech., LLC v. Findthebest.com, Inc., 24 F. Supp. 3d 329, 336 (S.D.N.Y. 2014) (concluding that patentee's conduct was "part of a predatory strategy aimed at reaping financial advantage from the inability or unwillingness of defendants to engage in litigation against frivolous patent lawsuits").

Motivation as competitor or NPE. See Checkpoint, 2015 WL 4941793, at *3 (finding patentee "brought suit in bad faith with the improper motive of crippling [competitors'] business"); Small v. Implant Direct Mfg. LLC, No. 06 Civ. 683, 2014 WL 5463621, at *4 (S.D.N.Y. Oct. 23, 2014) (denying attorney fees, noting "need for the deterrent impact of a fee award is greater where there is evidence that [patentee] is a 'patent troll'").

Patent misuse highly probative of "subjective bad faith." Home Gambling Network, Inc. v. Piche, No. 2:15-CV-610-DAE, 2014 WL 2170600, at *9 (D. Nev. May 22, 2014) ("[P]atent misuse is highly probative of [patentees'] bad faith in bringing the patent infringement claim to begin with—[patentees] first tried to limit [accused infringers'] usage of something that was never owned by them, and then attempted to sue for infringement of steps of the patent that they voluntarily relinquished years earlier.").

Conclusion

Whether the Octane framework for "exceptional case" findings will achieve the dual goals of compensation and deterrence remains unanswered. It is noteworthy that Congress is considering bills that modify the criteria for awarding attorney fees under section 285 closer to the "English rule" that a losing party pays the prevailing party's attorney fees. See Protecting American Talent and Entrepreneurship (PATENT) Act, S. 1137, 114th Cong., § 7 (2015); Innovation Act, H.R. 9, 114th Cong, § 3 (2015).

For now, practitioners should track the rapidly growing repository of post-Octane orders for guidance when moving for or opposing section 285 attorney fees. In particular, practitioners should carefully assess how a district court might assess prefiling investigations, reasonableness in continuing to press claims or defenses, discovery disputes, dispositive motions practice, litigation conduct, and motives when considering the "totality of the circumstances" under the post-Octane section 285 framework. And, as each district court manifests its own particular applications of this discretionary area of the law, practitioners should develop litigation strategies with an understanding of the factors that each forum weighs when making an "exceptional case" finding.

Practitioners should always keep in mind that the district court which presided over the case now has broad, and largely unreviewable, discretion to shift fees under section 285 in the interests of compensation and deterrence.

Keywords: litigation, intellectual property, patents, fee-shifting, exceptional cases, forum shopping, exceptional case, section 285, Octane Fitness, cost-shifting

_{Copyright © 2016, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).}