“Exceptional” Case for Attorney Fees under §285 is Determined with Simple Equitable Discretion by District Court Applying Preponderance of Evidence Standard.

Sadao Kinashi | May 23, 2014

Octane Fitness, LLC v. Icon Health & Fitness (S. Ct. 2014)

April 29, 2014

Justice Sotomayor

Summary

Regarding “exceptional” cases under §285 to award attorney fees, CAFC previously followed the  Brooks Furniture standard that a case is “exceptional” under §285 only “when there has been some material inappropriate conduct in litigation, such as willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates FRCP 11” etc. and that absent misconduct in litigation or in securing the patent, fees “may be imposed only if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.”

The Supreme Court held that the Brooks Furniture standard is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.  The Supreme Court held that the “exceptional” case for attorney fees in §285 simply means that the case stands out from others with respect to the substantive strength of a party’s position or the unreasonable manner in which the litigation was conducted and district courts may determine whether a case is “exceptional” with their equitable discretion, considering the totality of the circumstances.  The Supreme Court rejected the Federal Circuit’s requirement of “clear and convincing evidence” for the entitlement to fees under §285, and held that the standard is a preponderance of the evidence standard.

米国特許法285条の弁護士費用賠償が認められる「例外的」事件に関して、CAFCはBrooks Furniture判決において、「故意侵害、フロード、不公正行為、訴訟中の不正行為などの不適正行為があったか、そのような不適正行為がない場合は、(1)訴訟が悪意で提訴され、(2)客観的に見て訴訟の根拠のないものである場合に限るとしていた。

米国最高裁は、Brooks Furniture基準は不当に限定的であり、地裁の裁量を制限しているとした。そして、285条の「例外的」事件とは、単純に、訴訟当事者の立場の強さまたは、訴訟での非常識な振舞いなどにより他の事件から際立っているということであり、地裁は全体的な状況を考慮して裁量で決定すべきであるとした。また、最高裁は、「例外的」事件の立証基準も、CAFCのいう「明白で説得力のある証拠」ではなく、一般の民事事件の基準と同じ「証拠の優越」であるとした。

Details

I. A.     History Regarding 35 U.S.C. § 285

Prior to 1946, the Patent Act did not authorize the awarding of attorney’s fees to the prevailing party in patent litigation. In 1946, Congress amended the Patent Act to add a discretionary fee-shifting provision in §70, which stated that a court “may in its discretion award reasonable attorney’s fees to the prevailing party upon the entry of judgment in any patent case.” 35 U. S. C. §70 (1946 ed.).

Courts did not award fees under §70 as a matter of course. They viewed the award of fees not “as a penalty for failure to win a patent infringement suit,” but as appropriate “only in extraordinary circumstances.” The provision enabled them to address “unfairness or bad faith in the conduct of the losing party, or some other equitable consideration of similar force,” which made a case so unusual as to warrant fee-shifting.

In 1952, Congress amended the fee-shifting provision and recodified it as §285. Whereas §70 had specified that a district court could “in its discretion award reasonable attorney’s fees to the prevailing party,” the revised §285 provides:

The court in exceptional cases may award reasonable attorney fees to the prevailing party.

According to the Supreme Court, the addition of the phrase “exceptional cases” to §285 was “for purposes of clarification only,” and for three decades after the enactment of §285, courts (including CAFC) applied it in a discretionary manner, assessing various factors to determine whether a given case was sufficiently “exceptional” to warrant a fee award.

In 2005, in Brooks Furniture v. Dutailier Int’l, 393 F. 3d 1378 (2005),  the CAFC held that a case is “exceptional” under §285 only “when there has been some material inappropriate conduct related to the matter in litigation, such as willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates FRCP 11, or like infractions” and that “Absent misconduct in conduct of the litigation or in securing the patent,” fees “may be imposed against the patentee only if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.”

The CAFC subsequently clarified that litigation is objectively baseless only if it is “so unreasonable that no reasonable litigant could believe it would succeed,” and that litigation is brought in subjective bad faith only if the plaintiff “actually know[s]” that it is objectively baseless.

Brooks Furniture also held that because there is a presumption that the assertion of infringement of a duly granted patent is made in good faith, the underlying improper conduct and the characterization of the case as exceptional must be established by clear and convincing evidence.

I.B.      The Litigation

ICON Health & Fitness owns U. S. Patent No. 6,019,710 (’710 patent). ICON is a major manufacturer of exercise equipment, but it has never commercially sold the machine of the ’710 patent. Octane Fitness also manufactures exercise equipment, including elliptical machines known as the Q45 and Q47.

ICON sued Octane alleging that the Q45 and Q47 infringed the ’710 patent. The District Court granted Octane’s motion for summary judgment, concluding that Octane’s machines did not infringe ICON’s patent.Octane then moved for attorney’s fees under §285.

Applying the Brooks Furniture standard, the District Court denied Octane’s motion. It determined that Octane showed neither that (1) ICON had brought it in subjective bad faith nor that (2) ICON’s claim was objectively baseless.The District Court rejected Octane’sobjective baselessness argument. The court explained that although it rejected ICON’s infringement arguments, they were neither “frivolous” nor “objectively baseless.” The court also found no subjective bad faith on ICON’s part. The District Court dismissed as insufficient both (a) the fact that ICON is a bigger company which never commercialized the ’710 patent and (b) e-mail exchange between two ICON sales executives, indicating that ICON had brought the infringement action “as a matter of commercial strategy.”

ICON appealed the judgment of noninfringement, and Octane cross-appealed the denial of attorney’s fees. CAFC affirmed both orders. Denying attorney’s fees, CAFC rejected Octane’s argument that the District Court had “applied an overly restrictive standard in refusing to find the case exceptional under §285.”

II.     Ruling

Supreme Court emphasized that its analysis begins and ends with the text of §285.   [This apparently indicates that the decision does not give much weight to lower court decisions.] The Supreme Court stated that framework established by the Federal Circuit in Brooks Furniture is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.

First, the Supreme Court held that an “exceptional” case in §285 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. The Supreme Court also held that district courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances, and that equitable discretion should be exercised.

The Supreme Court explains: in the Brooks Furniture standard, a case is “exceptional” only if a district court either finds(A) litigation-related misconduct of an independently sanctionable magnitude or determines that (B) the litigation was both (1)“brought in subjective bad faith” and (2) “objectively baseless”; this formulation superimposes an inflexible framework onto statutory text that is inherently flexible.

According to the Supreme Court, litigation misconduct or certain other misconductappears to be independently sanctionable (e.g., willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation), but sanctionable conduct is not the appropriate benchmark. The Supreme Court says that “a district court may award fees in the rare case where a party’s unreasonable conduct—while not necessarily independently sanctionable—is nonetheless so exceptional as to justify an award of fees.”

The Supreme Court says that above (2) (requiring bad faith and objective baselessness) is also too restrictive because presenting either subjective bad faith or exceptionally meritless claims may sufficiently set itself warrant a fee award.

The Supreme Court also reasoned that the Brooks Furniture standard is so demanding that it would appear to render §285 largely superfluous. Supreme Court says that the court has long recognized a common-law exception to the general “American rule” against fee-shifting—an exception, for “willful disobedience of a court order’ ” or “when the losing party has ‘acted in bad faith, vexatiously, wantonly, or for oppressive reasons.”

Finally, Supreme Court rejected the CAFC’s requirement for “clear and convincing evidence” to establish the entitlement to fees under §285. Supreme Court stated that it has not interpreted other fee-shifting statutes to require clear and convincing evidence, and that nothing in §285 justifies such a high standard of proof because §285 demands a simple discretionary inquiry, and imposes no specific evidentiary burden, much less such a high one.

Supreme Court stated that patent-infringement litigation has always been governed by a preponderance of the evidence standard, and that it is the “standard generally applicable in civil actions,” because it “allows both parties to ‘share the risk of error in roughly equal fashion.’”

Thus, the judgment of the CAFC was reversed, and the case was remanded for further proceedings.

Takeaway

The Supreme Court held that the CAFC’s standard was unduly rigid, and that district courts may determine whether a case is “exceptional” with their equitable discretion, considering the totality of the circumstances. Also, Supreme Court rejectedCAFC’s requirement for “clear and convincing evidence” for the entitlement to fees under §285, and held thatthe standard is a preponderance of the evidence standard. Thus, this decision is expected to significantly increase cases determined as “exceptional” under §285.

Also, the decision indicates that non-sanctionable misconducts can make the case “exceptional.” It is difficult to tell what specific situation fit the situation or how often such situations will appear. However, such cases will be exceptional in the “exceptional” cases.

Although the decision says nothing about §284 for triple damages, doesn’t the same logic apply? The relevant portion of §284 reads: “In either event the court may increase the damages up to three times the amount found or assessed.” The text provides no specific evidentiary burden and does not even require the case be “exceptional.” Like §285, the text of §284 gives no reason to apply “clear and convincing evidence” standard.

 

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