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By Jessica Engler and Devin Ricci

On May 21, 2014, Senate Judiciary Committee Chairman Patrick Leahy pulled the plug on the latest bill aimed at fighting patent trolls. The term “patent troll” is an aptly coined name for non-practicing entities, companies formed to hold and collect royalties on patent rights without manufacturing, using, or otherwise selling the patented products or processes. The news of the judiciary committee’s removal of patent reform from the agenda has left many wondering about the future of patent reform. While some are predicting that patent reform will not be addressed until the next term, another branch of government has recently begun issuing rulings that affect the American patent law sector, potentially making patent infringement litigation costlier to trolls.

On April 29, 2014, the United States Supreme Court issued opinions in both Octane Fitness, LLC v. Icon Health & Fitness, Inc. and Highmark v. Allcare Health Management System, Inc. In both Octane Fitness and Highmark, the Supreme Court was presented with the nearly identical issue of when attorney’s fees can be awarded to the winning party of a patent infringement suit. These two opinions are the first decisions in a line of several patent cases currently on the Supreme Court’s intellectual property-heavy docket.

The Patent Act permits district courts to award attorney’s fees to prevailing parties in “exceptional circumstances;” however, the Patent Act does not provide a definition or examples of what would constitute those “exceptional circumstances.” 35 U.S.C. § 285. Though early decisions had taken a holistic, equitable approach to awards of attorney’s fees, in the 2005 case Brooks Furniture Manufacturing, Inc. v. Dutailier Int’l, Inc., the Federal Circuit Court adopted a rigid and mechanical formulation for determining if such fees would be awarded. 393 F.3d 1378 (2005). Under Brooks Furniture, a prevailing party could recovery attorney’s fees only when: (1) the opposing party engaged in misconduct during the litigation or in securing the patent; or (2) when the claim of infringement is objectively baseless and brought in bad faith. The Federal Circuit Court has subsequently stated that a claim is “objectively baseless” only when the claim is “so unreasonable that no reasonable litigant could believe it would succeed,” and that litigation is brought in bad faith only when the plaintiff “actually know[s]” the claim is objectively baseless. iLOR, LLC v. Google, Inc., 631 F.3d 1372, 1378 (2011). Last, the Brooks Furniture decision stated that the evidence of this bad faith must be “clear and convincing,” the most burdensome legal standard of proof.

By requiring this rigid, nearly-impossible standard for the award of attorney’s fees, the Brooks Furniture decision insulated patent trolls from the costly repercussions of their highly litigious behavior. The typical modus operandi of a patent troll commences with a demand letter sent to an alleged infringer demanding payment of a licensing fee for the allegedly impermissible use of the patent trolls’ patented technology. In an overwhelming number of cases the patent trolls’ claims of infringement are extremely weak and may even be invalidated if brought to trial. However, the high cost of patent litigation often renders it more economical to pay the licensing fee or settle, further promulgating the patent trolls’ ability to collect funds on extremely weak claims. As stated by Apple, Inc. in an amicus curiae brief to the Supreme Court, the opening line of many negotiations with patent trolls is some form of “What we are asking for is less than it will cost you to litigate this case to judgment.”

The Supreme Court, in its Octane Fitness and Highmark decisions, recognized that the Brooks Furniture framework is unnecessarily rigid, and that it impermissibly encumbers the district courts’ discretion. In Octane Fitness, the Court held that the term “exceptional” should be given its ordinary meaning; thus, an “exceptional” case is “one that stands out from the others with respect to the substantive strength of the party’s litigating position or the unreasonable manner in which the case was litigated.” This definition permits the district court to look to the totality of the circumstances in determining whether the case is one that would be described as “exceptional.” In so doing, the Court rejected the requirement that patent litigants establish their entitlement to fees by “clear and convincing evidence” and instead adopted a more relaxed standard. Further, in Highmark, the Supreme Court noted that because attorney’s fees were within the district court’s discretion, the Federal Circuit Court can only review that award for an “abuse of discretion.”

These opinions will likely have several positive effects against the more nefarious behaviors of patent trolls. Under this relaxed standard for attorney’s fees, the district courts will now have a greater ability to impose costs upon parties whom they believe have brought unreasonable claims. With that flexibility reinstated, an increase in attorney’s fees awards for patent litigation may be anticipated. Further, the Highmark decision has greatly hindered the Federal Circuit Court’s role in the determination to award attorney’s fees. Because the Federal Circuit Court can only review the decisions to determine whether they are an abuse of the district court’s discretion, the Federal Circuit Court can no longer reverse awards of attorney’s fees on the basis that the case does not include “exceptional” circumstances. Therefore, if a party is granted attorney’s fees by the district court, there may be less danger that the award will be reversed on appeal.

The impact of these decisions is already starting to take shape. Wasting no time, the Supreme Court put these opinions into action with its recent decision in Kobe Properties v. Checkpoint Systems. The district court in Kobe Properties issued a $6.6 million award of attorney’s fees against the patent owner. Using the now defunct standard, the Federal Circuit Court reversed the district court’s award because it found that the patent owner’s lawsuit was not “objectively baseless.” Under the decisions of Octane Fitness and Highmark, the award has now been reinstated and the case remanded back to the Federal Circuit Court for reconsideration in light of these decisions. However, the Federal Circuit Court’s hands may now be tied as it will have to consider the award under the “abuse of discretion” model, and not on the merits.