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United States Supreme Court Eases Requirement for Award of Costs in Patent Litigation

May 1, 2014

By Ken Bousfield

On April 29, 2014, the United States Supreme Court has made it easier for a successful patent litigant to obtain an award of attorney’s fees based on two decisions: Octane Fitness LLC v. ICON Health & Fitness Inc; and Highmark Inc. v. Allcare Health Management System, Inc.. Accordingly, patent trolls now face a significant risk of having to pay costs if unsuccessful.

In Canada costs are customarily awarded to the successful litigant (the “English” rule). In the U.S. each party usually bears its own costs (the “American” rule). The perception has been that low merit patent litigation, often pejoratively termed “trolling”, is encouraged by the “American” rule, because the risk of a losing plaintiff having to pay costs is low. Patent “trolling” is less common in Canada.

Under U.S. patent law1, “a court in exceptional cases may award reasonable attorney fees to the prevailing party”.

In Brooks Furniture Manufacturing., Inc., v. Dutailier International, Inc, 393 F. 3d 1378 (2005) the Court of Appeal for the Federal Circuit had set a high standard, that a “case may be deemed exceptional...only in two limited circumstances: “where there has been some material inappropriate conduct,” or when the litigation is both “brought in subjective bad faith” and “objectively baseless””. Further, such a showing had to be by “clear and convincing evidence”. As a practical matter, this standard could almost never be met. A troll could safely commence speculative cases in the hope of extracting settlements from risk-averse defendants, while facing only the most remote risk of an adverse award of costs. The Supreme Court has now ruled that the Brooks Furniture standard was unduly rigid and impermissibly encumbered the statutory grant of discretion to the court trying the case.

The standard applied by the U.S. Supreme Court in Octane and Highmark, considers a case “exceptional” where it stands out from the ordinary in respect of the party’s litigating position or the unreasonable manner in which the case was litigated. What is “exceptional” is to be left to the discretion of the district court considering the totality of the circumstances. This right of discretion may make it difficult to overturn a costs award on appeal. The Supreme Court also held that the normal burden of proof on the balance of probabilities is to apply, rather than the more onerous “clear and convincing” standard.

Attorneys’ fees may now be awarded more often. The possibility of facing such an award may discourage speculative cases. For example, the successful defendant’s costs in Highmark were U.S. $5.28 million.

Octane and Highmark may be seen in the context of ongoing patent reform in the United States. Broad bi-partisan consensus in Congress led to enactment of the America Invents Act (AIA) in September 2012. The AIA dealt predominantly with USPTO procedures. It left aside a number of unresolved litigation-oriented issues often associated with patent “trolling”.

More recently, the Goodlatte-Scott amendment (HR 3309) would amend the law to conform to the “English” rule (i.e., as in Canada), and to require clear identification of the real party seeking to enforce patent rights, such that a troll could not hide behind a shell2.  The intent would be substantially to increase the risk faced by trolls. However, the corresponding Senate bill, (S 1720) of Senator Leahy, has not yet obtained a similar level of support, and these provisions are some distance from being enacted.

By its decisions in Octane and Highmark the U.S. Supreme Court has altered the balance of risk in patent litigation, even as Congress continues to mull over reform.

1 35 USC 285
2 HR 3309 passed by a vote of 325 – 91 in the House of Representatives on December 5, 2013.

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