Jump to Navigation | Jump to Content
American Bar Association

Intellectual Property Litigation Committee

Octane and Highmark: One Year Later

By Alison Haddock Hutton and S. Neil Anderson – September 3, 2015

 

Patent litigation, more than any other civil litigation, is expensive to defend. A recent law review article summarized current statistics collected on the mean cost of litigation as follows:

 

  • In 2013, the mean total cost of patent litigation was $968,000 for litigations with less than $1 million at stake, and $5,911,000 where more than $25 million was at stake.

  • Fees for nonpatent litigations in the same year, by comparison, were estimated to range between $15,000 and $122,000, depending on the type of case.

 

See Gaia Bernstein, “The Rise of the End User in Patent Litigation,” 55 B.C. L. Rev. 1443, 1483–84 (2014) (citing AIPLA, Report of the Economic Survey I-129 (2013)); Jared A. Smith & Nicholas R. Transier, “Trolling for an NPE Solution,” 7 Hastings Sci. & Tech. L.J. 215, 218 (2015).

 

At the same time that mean litigation cost for patent lawsuits has outpaced its nonpatent counterparts, the number of patent lawsuits brought by nonpracticing entities (NPEs) has increased by 34.1 percent. See Smith & Transier, supra, at 218 (noting that the number of patent lawsuits brought by NPEs increased from 24.6 percent in 2007 to 58.7 percent in 2012). In light of these statistics, patent defendants from many sectors have been calling for additional reform, both from the legislature and the judiciary.

 

Against this backdrop, the United States Supreme Court’s decisions in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014), and Highmark Inc. v. Allcare Health Management System, Inc., 134 S. Ct. 1744 (2014), represented what many thought was a watershed moment in countering baseless lawsuits and unnecessary patent litigation. Namely, these decisions, both issued on April 29, 2014, expanded the ability of prevailing parties in patent litigations to seek attorney fees by relaxing the standard imposed to prove a case is “exceptional” and by giving district courts more discretion to award fees. It also gave the Federal Circuit less latitude to overturn these decisions, holding that the appropriate review of attorney fees decisions under 35 U.S.C. section 285 is under an “abuse of discretion” standard.

 

Over a year has passed since these landmark decisions, and we decided to take a look back at what can be learned in that time of their impact on 35 U.S.C. section 285 and on patent litigation filings in general. As could be expected, the number of section 285 motions filed since the Octane and Highmark decisions has increased, and there likewise has been an increase in the number of such motions that have been granted as compared to the years before the decisions. The decisions also coincided with a general downturn in patent litigation filings in the latter half of 2014. Although the number of patent litigation filings has rebounded slightly in the first half of 2015, those statistics may be skewed by a large number of multidefendant filings in the first half of 2015 by a handful of law firms. As explained in greater detail herein, the real impact of Octane and Highmark on these statistics is probably best evaluated several years in the future, as more cases wind their way through the courts and reach the stage where attorney fees can be sought under the post-Octane section 285 standard.

 

Background
The Patent Act provides that “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.” 35 U.S.C. § 285. This statutory provision, which is counter to the usual “American rule” that each party to a litigation pays its own attorney fees, was first enshrined in statute in 1946, and was amended to its current form in 1952. See Darin Jones, “A Shifting Landscape for Shifting Fees: Attorney-Fee Awards in Patent Suits after Octane and Highmark,” 90 Wash. L. Rev. 505, 508–10 (2015).

 

Even after the enactment of the “exceptional case” language (which was determined to have merely codified existing practice), district courts and courts of appeals determined whether attorney fees were appropriate by evaluating all of the facts and circumstances of the case at hand. See Octane, 134 S. Ct. at 1753 (noting that for three decades after the enactment of the current section 285, courts applied it in a discretionary manner “assessing various factors to determine whether a given case was sufficiently ‘exceptional’ to warrant a fee award”).

 

By the 1990s, however, the Federal Circuit began to heighten the showing necessary to demonstrate that a case was “exceptional.” First, the Federal Circuit held that parties seeking attorney fees had to prove exceptionality by clear and convincing evidence rather than by a preponderance of the evidence. See Cambridge Prods., Ltd. v. Penn Nutrients, Inc., 962 F.2d 1048 (Fed. Cir. 1992). Then, in 2005, the Federal Circuit replaced the totality of circumstances test that both the district courts and Federal Circuit had been applying in favor of a more “rigid and mechanical formulation.” Octane, 134 S. Ct. at 1754. In Brooks Furniture Manufacturing, Inc. v. Dutailier International, Inc., 393 F.3d 1378, 1381–82 (Fed. Cir. 2005), the Federal Circuit held that a party seeking attorney fees in patent litigation could prevail only in two specific circumstances: (1) if the party seeking fees could prove (by clear and convincing evidence) material inappropriate litigation conduct, or (2) if the litigation had been brought in subjectively bad faith and was objectively baseless.

 

The Brooks Furniture “rigid” standard for awarding attorney fees under 35 U.S.C. section 285 prevailed for almost 10 years. Some studies have estimated that during the time period when the Brooks Furniture test was applied, fees were awarded in less than 1 percent of all filed patent cases. See Jones, supra, at 514–15 (citing Mark Liang & Brian Berliner, “Fee Shifting in Patent Litigation,” 18 Va. J.L. & Tech. 59, 87 & n.73 (2013) (reporting that fees under section 285 were awarded in only 208 of the approximately 32,570 patent cases filed between 2003 and mid-May 2013)). The same studies found that, when fees were granted, they were much more likely to be awarded to plaintiffs than to defendants.

 

The Octane and Highmark Decisions
In Octane and Highmark, the Supreme Court rejected the Brooks Furniture framework, and thus the Federal Circuit regime that rarely awarded attorney fees to prevailing parties in patent litigation. In Octane, the Supreme Court unanimously held that the Federal Circuit’s exceptional-case framework under Brooks Furniture was “unduly rigid” and an “encumb[rance] [on] the statutory grant of discretion to district courts.” Octane, 134 S. Ct. at 1755. Likewise, a unanimous Court held that because the new framework would be “rooted in factual determinations,” the Federal Circuit should apply an abuse-of-discretion standard when reviewing a district court’s section 285 determination. Highmark, 134 S. Ct. at 1749.

 

At issue in Octane was a patent that disclosed an elliptical exercise machine that “allows for adjustments to fit the individual stride paths of users.” Octane, 134 S. Ct. at 1754. Octane prevailed on summary judgment of noninfringement and subsequently moved for attorney fees under section 285. Applying the Brooks Furniture standard, the district court denied Octane’s motion for fees and the Federal Circuit affirmed. Icon Health & Fitness, Inc. v. Octane Fitness, LLC, No. 09-319, 2011 U.S. Dist. LEXIS 100113 (D. Minn. Sept. 6, 2011); Icon Health & Fitness, Inc. v. Octane Fitness, LLC, 496 F. App’x 57 (Fed. Cir. 2012).

 

The Supreme Court granted certiorari and reversed the decision of the Federal Circuit. According to the Supreme Court, the Brooks Furniture standard for awarding attorney fees to prevailing parties in patent litigations was “unduly rigid” and inconsistent with 35 U.S.C. section 285. Octane, 134 S. Ct. at 1755. An “exceptional” case pursuant to section 285 was not one that was “objectively baseless” and “brought in subjective bad faith,” but any case which, in the discretion of the district court, “stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” Octane, 134 S. Ct. at 1756. The Supreme Court also rejected the Federal Circuit’s requirement that patent litigants establish their entitlement to fees under section 285 by clear and convincing evidence. The Court noted, “Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one. Indeed, patent-infringement litigation has always been governed by a preponderance of the evidence standard[.]” Octane, 134 S. Ct. at 1758.

 

In a companion case to Octane Fitness, the Supreme Court held that an appellate court should review “all aspects of a district court’s § 285 determination for abuse of discretion” rather than a more searching standard of review. Highmark, 134 S. Ct. at 1747. The patent-in-suit in the Highmark case covered “utilization review” in “managed health care systems.” Highmark, 134 S. Ct. at 1747.Highmark sued the patent holder seeking a declaratory judgment that, among other things, it did not infringe the patent, and the district court entered a final judgment of noninfringement in favor of Highmark. The Federal Circuit affirmed, and Highmark moved for fees under section 285. The district court granted the motion, reasoning that Allcare had engaged in a pattern of vexatious and deceitful litigation conduct and maintained claims against Highmark “well after such claims had been shown by its own experts to be without merit.” Highmark, 134 S. Ct. at 1747. On appeal, reviewing de novo, the Federal Circuit reversed part of the exceptional-case determination. On review, the Supreme Court held: “Because § 285 commits the determination whether a case is ‘exceptional’ to the discretion of the district court, that decision is to be reviewed on appeal for abuse of discretion.” Highmark, 134 S. Ct. at 1748.

 

On remand to the district court, the District of Minnesota granted Octane’s renewed motion for attorney fees and costs, finding that the case was exceptional under 35 U.S.C. section 285. Icon Health & Fitness, Inc. v. Octane Fitness, LLC, No. 09-319, 2015 U.S. Dist. LEXIS 85571 (D. Minn. July 1, 2015). The Federal Circuit vacated the district court’s award of attorney fees in Highmark as well and remanded for reconsideration under the new standard articulated in Octane. Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 577 F. App’x 995, 997 (Fed. Cir. 2014). The Northern District of Texas reaffirmed its prior finding that the case was exceptional and reissued attorney fees to Highmark. Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., No. 4:03-cv-01384 (N.D. Tex. June 23, 2015).

 

The Effect of a Lessened Standard on Attorney Fee Awards
Commentators welcomed the Octane and Highmark decisions as offering “hope for more frequent fee awards.” Jones, supra, at 523. And the statistics show that post-Octane, not only have the number of section 285 motions increased as attorneys test the waters of these decisions, but also increasing are the percentage of such motions that have been granted. According to one study, between the day the Octane and Highmark decisions were announced and December 31, 2014, roughly 47 percent of the attorney fee decisions issued resulted in an award of attorney fees, representing a percentage increase in attorney fee awards of at least 15 percent. See Smith & Transier, supra, at 247–48 (citing articles suggesting that the success rate for exceptional-case motions during the Books Furniture regime was around 32 percent).

 

We reviewed statistics pulled from Docket Navigator Analytics to conduct a similar analysis and likewise concluded that the number of section 285 motions filed is generally increasing and the percentage of section 285 motions that have been granted in full or in part has increased, though our results varied slightly from what was reported by the commentators above. We compared the number of 35 U.S.C. section 285 motions filed, and subsequently granted, denied, or partially granted, for the time period 2008 to July 1, 2015 (all years that were available). (Note that Docket Navigator also included an “other” category representing dispositions of section 285 motions on another basis, such as an order referring the decision to a magistrate judge or special matter, deferring the decision, or ordering additional briefing. We did not include those figures in our calculations of percentages.)

 

In 2014, the number of motions for attorney fees filed represented a 41.6 percent increase from the average number of motions filed in 2008–2013 (i.e.,the pre-Octane period), and the number of motions filed in 2015 is on track to be a 64.7 percent increase over the 2008–2013 average. From January 1 to July 1, 2015, 41 percent of section 285 motions filed were granted in full or in part (in part usually meaning that attorney fees were awarded, but not on the complete requested amount), compared to 2008–2013, when, on average, only 34.9 percent of section 285 motions were granted in full or in part. Again, this represents the results of only a little over a year’s worth of cases working their way through the system post-Octane, but already represents a measurable increase in the percentage of time that attorney fees motions have been granted.

 

One author has also noted that defendants in particular have fared better with section 285 motions than plaintiffs, reporting that defendants’ fees motions post-Octane were successful approximately 48 percent of the time, compared to pre-Octane when plaintiffs won more than twice the number of fee awards as defendants. Jones, supra, at 526–27.

 

What impact the Octane and Highmark decisions may have had on the broader patent litigation landscape is less clear. Commentators suggested shortly after the opinions were issued that the Octane standard could provide a much more “substantial shield to defendants,” i.e.,that the Octane and Highmark rulings would dissuade would-be NPEs. Smith & Transier, supra, at 247–48. And at least one prominent patent blogger, Dennis Crouch of PatentlyO, argued that Octane and Highmark, among other factors, contributed to the recent and sharp decrease in patent litigation in the summer and fall of 2014. See Dennis Crouch, “A Major Drop in Patent Infringement Litigation?,” PatentlyO (Oct. 9, 2014). One of the “other factors” Crouch attributed to this drop was the Alice Corp. Pty. Ltd. v. CLS Bank International, 134 S. Ct. 2347 (2014), decision invalidating patent claims as not patent eligible under 35 U.S.C. section 101. Pricewaterhouse Coopers agreed, suggesting that the 13 percent decrease in patent litigation filings in 2014 was a result of Alice Corp., not fear of attorney fee awards. See PricewaterhouseCoopers, 2015 Patent Litigation Study: A Change in Patentee Fortunes (May 2015).

 

Our review of litigation statistics from Docket Navigator also suggests that the number of patent cases filed per year, which had been experiencing a steady year-over-year increase in the years leading up to 2013, declined in 2014 (with a significant decline in filings in Q3 and Q4 2014 after the Octane and Highmark decisions). However, our review indicates that filings are back up in 2015, and Docket Navigator predicts that 2015 will yield the highest number of patent litigation filings ever. PatentlyO has likewise reported that, while pending patent litigation remains below the all-time high of late 2013 and early 2014, as of February and March of 2015, the decline in suits had plateaued. See Jason Rantanen, “Patent Litigation Data—March 2015,” PatentlyO (July 1, 2015).

 

These statistics, however, may be misleading. When looking at the top firms representing plaintiffs in patent litigations in the first half of 2015 versus those representing plaintiffs in the first half of 2010, a noticeable factor jumps out: two law firms (Austin Hansley PLLC and the Tadlock Law Firm) appeared on behalf of plaintiffs, either alone or with other counsel, in 12.6 percent of all patent litigations filed in the first half of 2015. In fact, the top five plaintiffs’ firms in cases filed in the first half of 2015 appeared in slightly over 20 percent of all patent cases filed. By comparison, in the first half of 2010, no single plaintiffs’ firm appeared in any substantial percentage. The firm that appeared on more plaintiffs’ cases than any other in 2010—at 1.9 percent—was Morris, Nichols, Arsht & Tunnell LLP, a well-known firm in Delaware that predominantly represents a broad scope of parties in patent litigation. Therefore, the slight uptick in patent litigation filings in the first half of 2015 may be the result of a few plaintiffs’ firms getting trigger-happy with patent litigation filings, and may not reflect anything about the long-term impact of Octane and Highmark on the patent litigation landscape.

 

The true impact of Octane and Highmark will only come into focus over time. Patent filings remain high, which from a pure statistical basis would suggest that Octane and Highmark have not had a meaningful impact. But, these statistics do not capture other, more difficult to measure impacts of the decisions, such as plaintiffs making lower settlement demands, dismissals of lawsuits in response to threats of section 285 motion practice, plaintiffs acting more responsibly in ending lawsuits in response to adverse claim construction rulings, and plaintiffs more quickly withdrawing claims in light of adverse case developments for fear of attorney fee awards. As lawyers have an opportunity to gain further experience in learning where courts are drawing the lines, it is foreseeable that the number of fee motions will actually decline as a percentage relative to the number of cases being filed, but that the success rates on such motions will increase.

 

Keywords: litigation, intellectual property, patents, attorney fees, exceptional cases, abuse of discretion

 

Alison Haddock Hutton is a partner and S. Neil Anderson is an associate at Duane Morris LLP in Atlanta, Georgia.

 


 
Copyright © 2017, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).