In the much anticipated decision of Octane Fitness v. Icon Health & Fitness, the United States Supreme Court reversed the Federal Circuit's two-part test for determining whether a case is exceptional under Section 285 of the Patent Act, which authorizes district courts to award attorneys' fees to prevailing parties in "exceptional cases." Under previous precedent, the Federal Circuit defined a case to be "exceptional" as one that involves either "material inappropriate misconduct," or is both "objectively baseless" and brought in "subjective bad faith." Moreover, parties were required to make this showing by "clear and convincing evidence" which would be reviewed de novo on appeal.
Under the Federal Circuit's rubric, very few district courts awarded fees to the prevailing party because it was extremely difficult to prove and to judge whether a party brought its claims in "subjective bad faith," which required either at least a showing of recklessness or that a party knew or should have known there was not a reasonable basis for its claims. In recent years, this test came under sharp criticism from an industry beset by litigation brought by non-practicing entities or the so-called patent "trolls," who often fired off cases in en masse hoping to achieve quick settlements despite the actual merits of the case.
In order to give district courts more flexibility to make fee awards and redress perceived inequities with the standard, the Supreme Court has interpreted "exceptional" to mean "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." District courts may also consider the "totality of circumstances" in deciding whether a case is exceptional. Finally, by jettisoning the "clear and convincing" standard in favor of a "preponderance of evidence" standard, district courts now have considerable discretion in deciding whether to award fees, and such decisions will be revisited by the Federal Circuit only if there has been an "abuse of discretion."
Now that district courts are armed with substantial authority to shift fees when they deem appropriate, clients and practitioners alike should pay careful attention to their due diligence and conduct throughout the litigation. One can also expect that fee motions will be brought by prevailing parties as a matter of course and that courts will render more fee awards to curb abusive or frivolous litigation.
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