The Supreme Court issued two decisions Tuesday that will no doubt have interesting consequences for patent trolls and businesses that have been the target of patent trolls.

Non-practicing entities (NPEs) are companies that do not sell a product or service, but instead acquire patents for the purpose of monetization by way of licensing and/or suing for patent infringement. “Patent troll” is a derogatory term for NPEs, which assert patents of questionable validity or scope against businesses, typically requesting a licensing fee that is high, but less than the cost of defending a patent infringement lawsuit, effectively backing the businesses into a corner and requiring them to pay licensing fees to avoid the even higher cost of infringement litigation.

The Patent Act provides that a “court in exceptional cases may award reasonable attorney fees to the prevailing party.” 35 U.S.C. §285. Tuesday’s decisions should make it easier for a prevailing business that is unsuccessfully sued for patent infringement by a patent troll to recover the cost of litigation from the accusing patent troll, no doubt making a patent troll think twice about bringing litigation when it does not have a good likelihood of winning.

What constitutes an “exceptional case”?

In the first case, Octane Fitness, LLC v. ICON Health and Fitness, Inc., the issue on appeal was what constitutes an “exceptional case,” which would allow a district court to award attorney fees to the prevailing party. The Court of Appeals for the Federal Circuit had previously established that an “exceptional case” under 35 U.S.C. §285 was one in which:

  1. some material inappropriate conduct has been demonstrated; or
  2. the suit was brought in subjective bad faith and was objectively baseless.

On the second circumstance, the Federal Circuit had held that the litigation was objectively baseless only if it was “so unreasonable that no reasonable litigant could believe it would succeed,” and that litigation was brought in subjective bad faith only if the patent owner actually knew that the suit was objectively baseless. Further, the prevailing party had to establish that the case was exceptional by clear and convincing evidence. (Brooks Furniture Mfg. Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1382 [Fed. Cir. 2005]).

Because of this high threshold and its rigidity, few patent trolls have been forced to pay the attorney fees of successful defendants. As a result, many companies found it more economical to pay patent trolls to go away — i.e., pay a license fee — rather than fight.

Octane was beginning to look very similar to previous cases before both the trial court and Federal Circuit found the case did not rise to the level of “exceptional.” They rejected an award of attorney fees under §285 even though ICON was a much bigger company that had never commercialized the patent in suit, and there was an email exchange between ICON executives that the suit was brought as a “matter of commercial strategy.”

The Supreme Court rejected the standard previously established by the Federal Circuit, finding that it was “unduly rigid and impermissibly encumber[ed] the statutory grant of discretion to district courts.” 572 U.S. ____ (2014) (pg. 7-12). The court held that the term “exceptional” should be construed within its ordinary meaning, which the opinion states means “uncommon,” “rare” or “not ordinary.” (pg. 7). The court went on further to state that an “exceptional” case should be determined on a case-by-case basis and “is simply one that stands out from others with respect to the substantive strength of a party’s litigating position” or “the unreasonable manner in which the case was litigated.” (pg. 7-8). The requirement that patent litigants establish entitlement to fees under §285 by “clear and convincing evidence” also was rejected by the Supreme Court. The court held that “nothing in §285 justified such a high standard of proof,” but rather “demanded a simple discretionary inquiry.” (pg. 11).

What is the standard for review?

In the second case, Highmark, Inc. v. Allcare Health Management System, Inc., the issue on appeal was whether a district court’s exceptional-case finding, based on its judgment that a suit is objectively baseless, was entitled to deference. The trial court found that Allcare, the patent owner, had “engaged in a pattern of vexatious” and “deceitful” conduct throughout the litigation and awarded attorney fees under §285 to Highmark. 706 F. Supp. 2d 713, 737 (ND Tex. 2010).

The Federal Circuit reversed the exceptional-case determination, reviewing the question de novo (i.e., without deference to the trial court’s determination). The Federal Circuit reasoned that its “objectively baseless” standard, was a question of mixed fact and law, therefore requiring the appeal to be reviewed de novo. 687 F. 3d. 1300, 1309 (Fed. Cir, 2012). The Federal Circuit found that Allcare’s infringement claim was not unreasonable and that Allcare’s conduct did not merit an award of fees due to litigation misconduct. Id. at 1315-1319.

In vacating the Federal Circuit’s decision in Highmark, the Supreme Court reasoned that “traditionally, decisions on ‘questions of law’ are ‘reviewable de novo,’ decisions on ‘questions of fact’ are ‘reviewable for clear error,’ and decisions on ‘matters of discretion’ are ‘reviewable for abuse of discretion.’” Pierce v. Underwood, 487 U.S. 522, 558 (1988). The Supreme Court said that, based on its holding in Octane, which commits the §285 determination to the discretion of the trial court, the standard for appellate review of attorney fees awards under 35 U.S.C. §285 is for an abuse of discretion. 572 U.S. ___ (2014) (pg. 4). Further, the Supreme Court held that “an appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district court’s §285 determination.” (pg. 5).

Ramifications for patent trolls

Because of the recent nature of these two cases, the implications for patent trolls are unclear. At a minimum, however, these decisions will likely mean that trial courts will be more willing to award attorney fees to prevailing parties. By removing the unduly burdensome tests for an “exceptional case,” the Supreme Court has made it easier for courts to impose fees on patent trolls and other plaintiffs who bring meritless patent infringement suits.

The Supreme Court decisions join the already brewing legislative efforts to impose fee shifting on patent trolls whose cases are deemed vexatious. President Obama even weighed in on these legislative efforts during this year’s State of Union address, calling on Congress to “pass a patent reform bill that allows our businesses to stay focused on innovation, not costly, needless litigation.” Proponents of the reform assert that patent infringement suits by NPEs are often meritless, yet have little risk for the NPEs, forcing businesses into settling simply to avoid substantial legal costs.

As Congress moves to lower the bar for awarding attorney fees to prevailing parties in patent infringement suits, a change that likely would make it harder for patent trolls to conduct their businesses, trolls continue to file infringement suits. Last week, nearly 200 new patent infringement suits were filed, perhaps in anticipation of legislation targeting patent trolls. Everyone from Etsy to Estee Lauder to the NFL was sued. One company, eDekka, LLC, filed 87 lawsuits last week in East Texas alone.

The debate over patent reform will continue, particularly with respect to patent trolls. This week’s Supreme Court decisions likely will help to some extent, with Congress and the Obama Administration likely to take additional steps.