This morning, the Supreme Court decided two cases, Octane Fitness v. Icon Health and Highmark v. Allcare Health Management. These cases are a major step forward to cleaning up abuses in the patent system, but they also highlight the need for continuing efforts in Congress toward patent reform.
Both cases dealt with the issue of “fee shifting,” in which the losing party to a lawsuit pays the legal fees of the winning party. Ordinarily, in American litigation, each party pays its own legal fees regardless of the outcome. There are good reasons for this, primarily ensuring that individuals and small parties can get a foot into the door of the justice system.
But patent lawsuits are different, as Congress has acknowledged. Patent cases are commercial litigation between knowledgeable parties, and they are prone to abuse in ways not seen in other areas of the law. So the Patent Act provides for shifting of fees in “exceptional cases.”
Under the Supreme Court’s formulation, a case is “exceptional” if (1) it “stands out from others with respect to the substantive strength of a party’s litigating position” OR (2) “the unreasonable manner in which the case was litigated.” In doing so, the Supreme Court rejected a prior fee shifting test used by the appeals court, which permitted fee shifting only if the losing party (1) was objectively unreasonable about the merits of the case, AND (2) brought the case in bad faith. According to the Supreme Court, this test was “overly rigid,” and the Court favored a much more flexible test, giving more discretion to district courts.
This is an important win: it means that the patent fee shifting law that exists today will actually be meaningful, rather than “superfluous” under the previous formulation of the Federal Circuit.
But it also gives fuel to the misguided argument that Congress doesn’t need to do fee shifting, because the Supreme Court has already acted. We know that opponents of patent reform have already argued for delaying until Octane Fitness was decided; now that it’s decided it’s likely that they will ask Congress to delay until the courts sort out their interpretation of the case, or they will ask Congress to stop patent reform in view of the fact that the Court already took care of it.
This is mistaken for a couple of reasons. For one thing, the broad test issued by the Court is still subject to interpretation by lower courts, and we have seen at least in the patentable subject matter and obviousness arenas that the Federal Circuit is wont to try to limit and even ignore Supreme Court law.
Second, as the justices noted during oral argument, drawing a fee shifting line is a war of adjectives: defining the degree of exceptionality is really a matter of personal judgment that will now be the responsibility of every district court judge. To make sure that those district court judges understand the pressing problem of patent abuse, they must hear a message of the importance of patent reform from all sides: the Supreme Court, the White House, and Congress. The first two have already spoken; we await the third.
Finally, while the Supreme Court has crafted a rule that will rein in many abusive patent lawsuits, the Court is constrained by the text of the existing law. Congress is much more free to change the wording of the statute, to carefully and accurately reflect the needs of an increasingly technology-driven society.
The Supreme Court’s decision certainly brings the law of fee shifting closer to its proper place of deterring wrongful and detrimental patent assertion. But it is pulling out one leg of a four-legged stool of patent abuse. Real change demands a clear, consistent message from all decision makers. Congress is among them, and should act now to reform the patent system.
Image credit TexasGOPVote.com
 Here’s a puzzle: what if abusive patent trolls become so common, that any one suit no longer “stands out from others”? The answer, I think, is that the “others” doesn’t refer to the actual distribution of cases, but a sort of hypothetical ordinary patent lawsuit—the one we see in the movie Flash of Genius, for example. Abusive trolls will always stand out from this sort of legitimate case, no matter how prevalent the trolls are.