Are High Octane Legal Fees Bad for Business?

2013-09-18_OctaneLitigationSCOTUSUsing litigation to stifle competition is common. Can it also be exceptional? The Supreme Court will decide whether to weigh in on the standard for whether a case is “exceptional” to warrant attorneys fees when it considers the petition for writ of certiorari in Octane Fitness LLC v. Icon Health & Fitness, Inc., No. 12-1184 later this month. In brief, Icon holds a patent (the ‘710 patent) for a type of elliptical machine. Octane makes and sells elliptical machines based on licensed patented technology predating the ‘710 patent. Icon sued Octane claiming infringement of the ‘710 patent. After three years and over one million dollars in legal fees, Octane prevailed on summary judgment and moved for attorney’s fees arguing that Icon’s claims were clearly without merit and brought solely for the purpose of destroying Octane’s relatively small business. For the full details, read the petition, opposition, and reply.

The district court denied the motion, applying a two part test requiring that prevailing alleged infringer defendants demonstrate that the litigation was both brought in subjective bad faith and objectively baseless. The Federal Circuit affirmed and Octane seeks certiorari, arguing that the two part standard is different from and higher than the standard for awarding fees to prevailing patent holders in conflict with Supreme Court precedent. Octane further argues that other Circuits interpreting similar language in the trademark context have not required this high standard for determining whether a case is “exceptional”. Underlying Octane’s arguments is the premise that the two part standard makes it essentially impossible for alleged infringers to obtain fees and encourages patent holders to bring weak claims and drag out litigation solely to drive up costs. In other words, the practical inability for the prevailing alleged infringer to get attorneys fees encourages anticompetitive behavior.

The Age-Old Question

The tension between the monopoly power granted by a patent and anticompetitive activity is not new, nor is it an issue foreign to the Court. Earlier this year, the Court held that settlements involving so-called “reverse payments”–where the patent-holder plaintiff pays an alleged infringer defendant to stay out of the market–are subject to scrutiny under the antitrust laws. See FTC. v. Actavis, 133 S. Ct. 1522 (2013). In so doing, the Court recognized the monopoly right of patent holders but noted that the improper use of the patent monopoly power violates antitrust laws. Will the Court’s seeming concern about anti-competitive uses of patent power lead it to enter the fray here? The hook will be whether the Court views this as a question of law about the differing standards applied under the same statutory language or as a question of policy for Congress whether it should be easier for prevailing defendants to obtain fees.

While the issue percolates before the Court, alleged infringer defendants should do their best to litigate efficiently to keep costs down while developing a clear record directed at meeting the two-part standard for bad faith and objective baselessness.

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