Chapter §20.06 Attorney Fees in Exceptional Cases

• Jurisdiction: United States

§20.06 Attorney Fees in Exceptional Cases

[A] Statutory Basis: 35 U.S.C. §285

"The default rule in litigation in U.S. federal courts is the American Rule, under which both sides, win or lose, must bear their own attorneys' fees."⁸⁶³ The rule is a " 'bedrock principle' " in American jurisprudence.⁸⁶⁴ It can be displaced only by an "express grant from Congress."⁸⁶⁵ The rationales for the American Rule are to preserve fair access to justice and the difficulty of litigating the amount of fees.⁸⁶⁶

The default American Rule applies in U.S. patent litigation. But in rare cases, courts order attorney fee shifting (that is, imposing a prevailing patentee's attorney fees on the defendant/infringer/validity challenger, or vice versa—imposing a prevailing defendant's attorney fees on the patentee) in patent cases deemed to be "exceptional" under 35 U.S.C. §285.⁸⁶⁷

When willful infringement has been found (as examined in the previous section⁸⁶⁸) and the patent's validity sustained, patentees will frequently seek not only enhancement of damages under 35 U.S.C. §284 but also payment of their attorney fees by the infringer under 35 U.S.C. §285. Section 285 requires that a case be deemed "exceptional" to merit fee shifting to the prevailing party, as detailed below. The two types of awards for patentees—enhanced damages under §284 and attorney fees under §285—are not necessarily linked; the grant of one does not preclude denial of the other.⁸⁶⁹ The patentee's attorney fees also may be imposed on infringers for reasons other than willfulness, such as the infringers' litigation misconduct.⁸⁷⁰

Attorney fee shifting is certainly not limited to patent owners. It also occurs when defendants prevail. A prevailing defendant/accused infringer may seek attorney fees based on a lack of merit in the patentee's lawsuit or various types of misconduct by the patentee as detailed below, such as vexatious litigation.⁸⁷¹ Defendants who prevail in establishing that they did not infringe and/or that the patent asserted is invalid, e.g., particularly when a patentee drops its lawsuit after substantial pre-trial preparation, will seek their attorney fees in many cases.

Section 285 of the Patent Act, titled "Attorney Fees," provides,

The court in exceptional cases may award reasonable attorney fees to the prevailing party. ⁸⁷²

Parsing the quoted statutory language, an attorney fees award under 35 U.S.C. §285 (1) is discretionary with the district court, (2) is limited to "exceptional cases," (3) requires that the award be made to the "prevailing party," and (4) must be "reasonable" as to the amount of fees. Each of these aspects of §285 is analyzed in separate subsections below.

The law on attorney fee shifting in patent cases took a dramatic turn in 2014, seemingly making the remedy more frequently available. In two unanimous decisions further examined below, the Supreme Court jettisoned as "overly rigid" the Federal Circuit's demanding standard for district court determinations of "exceptionality" and reemphasized the district courts' discretion in assessing attorney fee awards.⁸⁷³ The Supreme Court's 2014 decisions in Octane Fitness, LLC v. ICON Health & Fitness, Inc. ("Octane Fitness II"),⁸⁷⁴ and Highmark Inc. v. Allcare Health Mgmt. Sys., Inc. ("Highmark III"),⁸⁷⁵ decidedly changed the law of attorney fee awards in patent cases, potentially making the awards easier to attain.⁸⁷⁶

Notwithstanding the 2014 change in standard, the requirement that a case be "exceptional" to merit the remedy of attorney fee shifting remains good law—it is the statutory mandate. Hence, fee shifting in patent cases is by no means automatic, even in cases of proven misconduct. The Court in Octane Fitness II interpreted "exceptional" by its "ordinary meaning" to include "rare."⁸⁷⁷

Notably, Professor Chien's empirical research indicates that, at least prior to Octane Fitness II and Highmark III,

[a]ttorney's fees are awarded infrequently: from 2005 to 2011, there were on average fifty-six awards per year; in comparison to around 3,000 patent case filings on average per year. The majority of the attorney fee awards are made in cases that go to trial. Slightly less than half of the awards are to prevailing defendants. ⁸⁷⁸

Future litigation will determine whether these statistics will be altered to any significant extent by the Supreme Court's 2014 loosening of the law on what constitutes an exceptional case under 35 U.S.C. §285. One source reported in August 2016 that the grant rate for attorney fee motions has remained "relatively stable" since 2010.⁸⁷⁹ However, of the fee awards during the 2014–2015 post-Octane II period studied, only about a quarter of awards went to patentees.⁸⁸⁰

[B] Discretionary with District Court

Because the wording of §285 is permissive rather than mandatory (i.e., a court "may" award attorney fees), the plain language of the statute indicates that even finding a case exceptional need not compel a district court to award attorney fees to the prevailing party.

In an August 2014 non-precedential decision on remand from the Supreme Court's decision in Octane Fitness II, the Federal Circuit agreed with this reading of §285, observing that

[t]he Supreme Court's decision in Octane did not . . . revoke the discretion of a district court to deny fee awards even in exceptional cases. Long before Brooks Furniture [Brooks Furniture Mfg., Inc. v. Dutailier Int'l, Inc., 393 F.3d 1378 (Fed. Cir. 2005)], we held that "an exceptional case does not require in all circumstances the award of attorney fees." S.C. Johnson & Son, Inc. v. Carter–Wallace, Inc., 781 F.2d 198, 201 (Fed.Cir.1986); see also Gardco Mfg., Inc. v. Herst Lighting Co., 820 F.2d 1209, 1215 (Fed.Cir.1987) ("After the district court determines that a case is exceptional, there remains in every case its freedom to exercise its discretion informed by the court's familiarity with the matter in the litigation and the interest of justice." (internal quotations omitted)). Indeed, in the companion case Highmark, the Court held that "[b]ecause §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" and that district courts should have discretion in "all aspects of [the] §285 determination." Highmark, 134 S.Ct. at 1748–49. ⁸⁸¹

Well before the Supreme Court's rejection of the Circuit's restrictive Brooks Furniture standard for exceptional case, further detailed below,⁸⁸² the Federal Circuit in 2002 had adopted a general rule that when willful infringement has been found, a district court that decides a case is nevertheless not exceptional under 35 U.S.C. §285 should explain why it is not.⁸⁸³ Similarly, the Circuit held that if a district court concludes that a case is exceptional under §285 but refuses to award attorney fees, it must normally explain that decision as well. The Circuit recognized an exception to these rules, however, where the record sets forth adequate grounds for affirming the district court's decision making.⁸⁸⁴

Notwithstanding this Circuit precedent, the Supreme Court's 2014 decision in Highmark Inc. v. Allcare Health Mgmt. Sys., Inc. ("Highmark III")⁸⁸⁵ emphasized the district courts' discretion in awarding attorney fees.⁸⁸⁶ The Court held that a district court's determination that a case is "exceptional" so as to justify fee-shifting is a matter of discretion rather than a question of law or a question of fact.⁸⁸⁷ Accordingly, "an appellate court should review all aspects of a district court's §285 determination for abuse of discretion."⁸⁸⁸

In light of Highmark III's emphasis on district court discretion, whether the Federal Circuit's pre-Highmark decisions requiring district courts to make certain explanations or justifications (i.e., when infringement is willful but the case is not deemed exceptional or when a case is deemed exceptional but the court does not award attorney fees) remain good law awaits further judicial decision-making.

[C] Categories of "Exceptional" Cases

A finding by a district court that a case is "exceptional" under 35 U.S.C. §285 so as to justify assessing attorney fees against an adjudged infringer may be based on a determination that the infringement was willful.⁸⁸⁹ As discussed in the previous section, such a determination also may support an enhancement of damages under 35 U.S.C. §284.⁸⁹⁰

However, an exceptional case determination is not limited to situations of willfulness by the infringer. Attorney fees can also be assessed against a patentee based on a lack of merit in its infringement lawsuit,⁸⁹¹ for example, when the suit is frivolous.⁸⁹² The Federal Circuit has also ruled that attorney fees can be awarded on the basis of a patentee's inequitable conduct in the procurement of the patent in suit.⁸⁹³

Moreover, exceptional cases can be based on the litigation misconduct of either party, for example when either party engages in "vexatious or unjustified litigation."⁸⁹⁴ Although not exclusively, such cases primarily involve the litigation tactics of patentees, often patent assertion entities. For example, the Federal Circuit in its 2017 decision, Rothschild Connected Devices Innovations, LLC v. Guardian Protection Servs., Inc.,⁸⁹⁵ reversed an Eastern District of Texas's denial of attorney fees to a defendant. Rothschild's patent in suit was directed to a system and method for customizing consumer products that utilized an Internet server to instruct mixing hardware about a user's preferred mix of solids and fluids. The patentee had asserted its patent in 58 cases against technologies ranging from "video cameras to coffeemakers to heat pumps."⁸⁹⁶ According to the accused infringer, the patentee had settled the "vast majority, if not all" of these cases for "significantly below the average cost of defending an infringement lawsuit."⁸⁹⁷ The Federal Circuit determined that the "undisputed evidence regarding Rothschild's vexatious litigation...