Supreme Court Rejects Federal Circuit’s Exceptionality Test

 WASHINGTON, D.C. — (Mealey’s) The standard employed by the Federal Circuit U.S. Court of Appeals for awards of attorney fees in patent cases is “unduly rigid” and “impermissibly encumbers the statutory grant of discretion to district courts,” the U.S. Supreme Court ruled yesterday (Octane Fitness LLC v. ICON Health & Fitness Inc., No. 12-1184, U.S. Sup.; 3/3/14, Page 6) [lexis.com subscribers may access Supreme Court briefs and the opinion for this case].

In reversing and remanding an October 2012 ruling by the Federal Circuit, the Supreme Court, in an opinion written by Justice Sonia Sotomayor, expressly rejected the Federal Circuit’s reliance on Brooks Mfg. v. Dutailier Inc., 393 F.3d 1378 (Fed. Cir. 2005) [enhanced version]; See 1/17/05, Page 12]) because Brooks “superimposes an inflexible framework onto statutory text that is inherently flexible.”

Accordingly, the Supreme Court announced that a case qualifies as “exceptional” when it “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.”

“District courts may determine whether a case is ‘excep­tional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.  As in the comparable context of the Copyright Act, ‘[t]here is no precise rule or formula for making these determinations,’ but instead equitable discretion should be exercised ‘in light of the considerations we have identified,’” the Supreme Court added, citing Fogerty v. Fantasy, Inc., (510 U. S. 517, 534 [1994]).

Final Judgment

Respondent ICON Health & Fitness Inc. manufacturers and sells exercise equipment.  In 2000, ICON obtained U.S. patent No. 6,019,710, titled “Exercising Device with Elliptical Movement.”  The patent is directed to the linkage system of an elliptical exercise machine. Petitioner Octane Fitness LLC is a Minnesota startup company that produces elliptical machines that are sold to fitness clubs and specialty fitness stores.  Its products include the Q45 and Q47 series of elliptical machines, which are licensed under U.S. patent No. 5,707,321. In 2009, ICON sued Octane in the U.S. District Court for the District of Minnesota, alleging that the Q45 and Q47 infringe several claims of the ‘710 patent.

After Octane moved for summary judgment, Judge Ann D. Montgomery conducted claim construction briefing and a hearing and issued an opinion construing various terms of the ‘710 patent.  Octane renewed its motion for summary judgment of noninfringement, and in June 2011 the judge granted Octane’s request after finding several elements missing both literally and equivalently, including the “stroke rail” and “means for connecting” limitations.  After ICON and Octane stipulated to the dismissal of Octane’s counterclaim for a declaratory judgment of invalidity of the ‘710 patent, the judge entered final judgment, and ICON appealed to the Federal Circuit.

Traditional Equitable Factors

While the appeal was pending, Octane moved in the District Court for a declaration that the case is exceptional and an award of more than $1.3 million in attorney fees pursuant to 35 U.S. Code Section 285.  Octane argued that the unreasonable and baseless positions maintained by ICON throughout the litigation, as shown by emails and deposition testimony evidence, proved that ICON’s suit was vexatious and unjustified and warranted a finding of exceptional case status and fees.  In September 2011, Judge Montgomery denied Octane’s motion because “the plaintiff's case must have no objective foundation, and the plaintiff must actually know this.” Applying that standard, the judge reasoned that the case was not objectively baseless.  The judge also found that there was no clear and convincing evidence of subjective bad faith on the part of ICON.  Octane appealed the attorney fee ruling to the Federal Circuit, which consolidated the appeals.  In October 2012, the Federal Circuit affirmed both holdings.  Specifically, with regard to attorney fees, the Federal Circuit found “no reason to revisit the settled standard for exceptionality” in Brooks.

After the Federal Circuit denied rehearing and rehearing en banc, Octane filed a petition for writ of certiorari with the Supreme Court.  The petition was granted in October 2013, and oral arguments were held in February 2014.

‘Too Restrictive’

Reversing and remanding, the Supreme Court began by noting that the first category of cases in which the Federal Circuit allows fee awards — those involving misconduct — “appears to extend largely to independently sanctionable conduct.”  Sanctionable conduct “is not the appropriate benchmark,” however, according to the Supreme Court. 

“Under the standard announced today, 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,” the Supreme Court added.

Furthermore, the second category of cases under Brooks that qualify for an award of attorney fees — those which include objectively baseless claims and were brought in subjective bad faith — “is also too restrictive,” according to the Supreme Court, because “a case presenting either subjective bad faith or exceptionally meritless claims may sufficiently set itself apart from mine-run cases to warrant a fee award.”

Simple Discretionary Inquiry 

After deeming Brooks “so demanding that it would appear to render §285 largely superfluous,” the Supreme Court concluded by indicating it must also reject Brooks’ requirement that litigants establish their entitlement to fees under Section 285 by “clear and convincing evidence.” 

“We have not interpreted comparable fee-shifting statutes to require proof of entitlement to fees by clear and convincing evidence. And nothing in §285 justifies such a high standard of proof.  Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.  Indeed, patent-infringement litiga­tion has always been governed by a preponderance of the evidence standard and that is the ‘standard generally applicable in civil actions,’ because it ‘allows both parties to ‘share the risk of error in roughly equal fashion,’” the Supreme Court concluded, citing Herman & MacLean v. Huddleston,459 U. S. 375, 390 (1983) [enhanced version].

Justice Antonin Scalia joined in the ruling, with the exception of three footnotes. 

Octane is represented by Rudolph A. Telscher, Kara R. Fussner, Steven E. Holtshouser and Daisy Manning of Harness, Dickey & Pierce in St. Louis. Larry R. Laycock, David R. Wright and Jared J. Braithwaite of Maschoff Brennan Laycock Gilmore Israelsen & Wright in Salt Lake City, Carter G. Phillips and Ryan C. Morris of Sidley Austin in Washington and Constantine L. Trela Jr. of Sidley Austin in Chicago represent ICON.  Martinez of the U.S. Department of Justice in Washington represents the government.

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