Abstract
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At the three-year anniversary of Octane Fitness and Highmark, this installment of the “Holman Report” takes a quick look at how these decisions are playing out in the courts, specifically through the lens of “biotechnology cases.” The article begins with some background on the Patent Act's fee-shifting provision, 35 U.S.C. § 285, and then provides a synopsis of the 2014 Supreme Court decisions. I will then delve into the specifics of some recent biotechnology patent cases that have awarded attorney fees and reviewed fee-shifting decisions under the new standards mandated by Octane Fitness and Highmark. For the purposes of this article, I treat any patent litigation that involves either a patent relating to biotechnology, or a party engaged in commercializing biotechnology (including pharmaceutical companies), as a “biotechnology patent case.”
Under the so-called American Rule, “each litigant pays his own attorney's fees, win or lose.” 2 However, § 285 provides that “[a] court in exceptional cases may award reasonable attorney fees to the prevailing party.” 3 The award of attorney fees is intended to both deter egregious misconduct and compensate the prevailing party for the expense it incurred vindicating its rights. 4
For decades, the Court of Appeals of the Federal Circuit, like the regional circuits before it, instructed district courts to consider the “totality of the circumstances” when making fee-shifting determinations under § 285. In its 2005 Brooks Furniture decision, however, the Federal Circuit (in the words of the Supreme Court) “abandoned that holistic, equitable approach in favor of a more rigid and mechanical formulation.” 5 Brooks Furniture held that a patent case is “exceptional” for the purpose of an award of attorney fees only under a narrowly circumscribed set of circumstances: willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, conduct that violates Rule 11 of the Federal Rules of Civil Procedure, vexatious or unjustified litigation, and “like infractions.” 6
Perhaps most controversially, given the perceived problem of so-called “patent trolls,” Brooks Furniture held that a determination of exceptionality based on “vexatious or unjustified litigation” is only allowed if the litigation is both (1) objectively baseless and (2) brought in subjective bad faith. In subsequent decisions, the Federal Circuit clarified that under Brooks Furniture a litigation is objectively baseless only if it is “so unreasonable that no reasonable litigant could believe it would proceed,” 7 and that litigation is brought in subjective bad faith only if the plaintiff “actually know[s]” that it is objectively baseless. 8
In addition, Brooks Furniture held that “the underlying improper conduct in the characterization of the case as exceptional must be established by clear and convincing evidence.” 9 Subsequently, in Highmark Inc. v. Allcare Health Management, the Federal Circuit held that because the question of whether litigation is “objectively baseless” under Brooks Furniture “is a question of law based on underlying mixed questions of law and fact,” a determination of objective baselessness is reviewed on appeal de novo and without deference to the lower court. 10
In short, Brooks Furniture made it more difficult for a prevailing party to be awarded attorney fees, particularly on the basis of “vexatious or unjustified litigation,” by: (1) imposing the two-fold requirement of objective baselessness and subjective bad faith; and (2) requiring that exceptionality be established by clear and convincing evidence, rather than the more lenient preponderance of evidence standard that is normally the default in patent litigation. And the Federal Circuit's interpretation of Brooks Furniture in Highmark Inc. v. Allcare Health Management constrained the discretion of district court judges, by prescribing de novo review on appeal of at least some aspects of a lower court's determination of exceptionality.
In 2014, the U.S. Supreme Court dismantled the Brooks Furniture framework in two unanimous decisions issued on the same day, Octane Fitness and Highmark. In Octane Fitness, the Court characterized the Brooks Furniture framework as unduly rigid and impermissibly impinging upon the statutory grant of discretion to district courts. The Court pointed out that § 285 imposes only one constraint on a district court's discretion to award attorney fees: the power is reserved for “exceptional cases.” Under the Octane Fitness test for exceptionality:
[A]n “exceptional” case is simply one that 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. District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances.
In a footnote, the Court pointed out that its 1994 Fogerty decision identified a “nonexclusive” list of “factors” to be used in determining whether attorney fees should be awarded in copyright cases, including “frivolousness, motivation, objective unreasonableness (both in the factual and legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.” 11 Presumably, the same sorts of factors would be relevant in the award of attorney fees in patent cases under § 285.
Octane Fitness also rejected Brooks Furniture's requirement that patent litigants establish their entitlement to fees under § 285 by “clear and convincing evidence.” The Court found nothing in § 285 that would justify such a high standard of proof, and observed that “patent-infringement litigation has always been governed by a preponderance of the evidence standard, and that is the standard generally applicable in civil actions, because it allows both parties to share the risk of error in roughly equal fashion.”
In the other case decided that day, Highmark, the Court overturned the Federal Circuit's decision to review a district court's determination of objective baselessness de novo, and held that because § 285 commits the determination of whether a case is “exceptional” to the discretion of the district court, all aspects of a district court's exceptional-case determination are to be reviewed under the far more deferential “abuse of discretion standard.” The Court found that “as a matter of the sound administration of justice,” a district court “is better positioned” to decide whether a case is exceptional, because it lives with the case over a prolonged period of time.
Let us take a quick look at how the courts are applying Octane Fitness and Highmark in patent litigations relating to biotechnology. I took a sampling of ten post-Octane Fitness/Highmark biotechnology decisions in which the district court decided a motion for attorney fees under § 285, and found that in five out of the ten the district court awarded attorney fees. 12 I think that 50% is quite a bit higher than one would have expected under the more demanding Brooks Furniture framework, consistent with the prediction that Octane Fitness should render it substantially easier for a prevailing party to receive attorney fees. Interestingly, in 2015 the Federal Circuit Bar Association likewise found that post-Octane Fitness, 50% of motions for fees under § 285 filed by accused infringers were being granted, a three-fold increase compared to the 12 months preceding Octane Fitness, in which only 13% of such motions were granted. 13
There appear to be only two Federal Circuit biotechnology decisions applying the Highmark standard to an appeal of a district court's decision to award or deny attorney fees, and once again, consistent with the high level of deference inherent in the abuse of discretion standard, in both cases the appellate court affirmed the district court's decision. 14 In one of the decisions, Bayer CropScience, the district court awarded attorney fees, while in the other, University of Utah, the district court denied a motion for attorney fees, illustrating the fact that the deferential “abuse of discretion” standard cuts both ways.
In an attempt to provide some insight as to the types of fact patterns that will result in an award of attorney fees under Octane Fitness, here are brief synopses of the five biotechnology patent cases I found in which attorney fees were awarded to the prevailing party.
In Gilead v. Merck, the court awarded attorney fees to Gilead, the infringer, based on patent owner Merck's “numerous unconscionable acts, including lying, unethical business conduct, and litigation misconduct.” 15 The unconscionable acts were primarily committed by a former Merck employee, an in-house patent attorney involved in preparing and prosecuting the asserted patents. The attorney's misconduct included egregious violations of his obligations of confidentiality to a research partner of Merck and pervasive dishonesty in his testimony during the litigation. Even Merck did not dispute the exceptional nature of this case. In fact, the award of attorney fees was only a relatively minor component of the harm that this former employee's action wreaked upon Merck. Gilead had originally been found liable for infringing Merck's valid patents and awarded $200 million by a jury, before the court found out about the in-house attorney's unconscionable acts and declared the patents unenforceable under the doctrine of unclean hands, wiping out the $200 million judgment.
In Novartis v. Webvention Holdings, the court ordered patent owner Webvention to pay Novartis' attorney fees. 16 If there is such a thing as a patent troll, Webvention would appear to have been one. After acquiring a patent in 2009 directed to a webpage functionality known as “mouse over” or “preview,” the company began a broad enforcement campaign demanding a “five-figure license fee” from companies it said were using the patented technology, including Novartis. The court found that Webvention's exceptionally egregious misconduct began when it first acquired the patent and started demanding licensing fees at a cost intended to induce settlements, then continued with its withholding of information in front of the Patent and Trademark Office (PTO), and extended to its conduct in relation to Novartis, justifying an inference of improper motives, litigation misconduct, and subjective bad faith, and counseling in favor of awarding attorney fees in order to deter this kind of litigation misbehavior. The Webvention principals attempted to avoid financial liability by dissolving Webvention in 2015, but the district court held that winding up the business did not render them immune from an obligation to pay attorney fees. The court “order[ed] Webvention counsel to identify all principals, including officers and agents, of [Webvention] by name and their last known address within fourteen days in order to facilitate the award of attorney's fees.”
In Classen Immunotherapies v. Biogen Idec, the court awarded Biogen attorney fees based on Classen's pursuit of its infringement litigation for more than nine years, in spite of the fact that any “reasonable litigant” would have realized within five months of the initial filing that there was no reasonable expectation of success on the merits. 17 In fact, Classen's infringement allegations were based on nothing more than Biogen's act of licensing its technology to a third party, which occurred years before Classen obtained or applied for the patents-in-suit, and Biogen's sponsorship of a website for patients with multiple sclerosis that discusses the potential relationship between vaccination and autoimmune disorders and that includes hyperlinks to articles discussing publications directed to research in that area.
In Roxane Labs. v. Camber Pharm, the patent owner Roxane marketed a generic calcium acetate capsule product and sued competing pharmaceutical manufacturers that were marketing their own generic calcium acetate capsules. 18 After the defendants prevailed on the merits, the district court found the case to be exceptional and awarded attorney fees, based on the implausibility of Roxanne's claim construction argument. The asserted patent claims explicitly required a “capsule that is size 00 or less,” while the accused infringing products were size 00el capsules. Size 00e1 capsules are unambiguously larger than size 00 capsules, according to standardized sizing definitions used in the pharmaceutical industry, and no intrinsic evidence even colorably supported Roxane's claim construction theory or suggested that the inventors understood “size 00 or less” to include a capsule of a larger size. The court concluded by noting that:
Roxane's claim construction case depended on persuading the Court to look to the extrinsic evidence and credit its experts. Federal Circuit law bars a Court from basing a claim construction on extrinsic evidence except where the intrinsic evidence is ambiguous. Roxane has offered no evidence that the intrinsic evidence was arguably ambiguous, nor that there was another ground to base the construction on the extrinsic evidence.
Finally, in Bayer CropScience AG v. Dow AgroSciences, the patentee Bayer sued Dow claiming infringement of patents relating to soybeans genetically engineered to tolerate herbicide. Dow raised as an affirmative defense a license that Bayer had granted to a third party, and which had been subsequently sublicensed to Dow. 19 Bayer argued that the license only permitted non-commercial exploitation of the technology, and thus Dow's commercial activity was infringing. The district court entered summary judgment in favor of Dow, and awarded attorney fees. The court explained that the case was exceptional and stood out from others because “the positions Bayer took to support their contract interpretation arguments were directly contradicted by the record evidence Bayer had obtained through early discovery and Bayer should have made every effort to discover before filing suit.” On appeal, the Federal Circuit affirmed the award of attorney fees, noting that in Octane Fitness the Supreme Court had considerably lowered the legal standard for awarding fees, and that the Supreme Court's decision in Highmark had established the highly deferential “abuse of discretion” standard for appellate review of attorney fee awards.
Although fee shifting works both ways and is available for both patent owners and accused infringers, it is interesting to note that in all five of the biotechnology cases I found in which the court awarded attorney fees, the prevailing party was the accused infringer. In four out of the five cases, the award was based on the objective baselessness of the patent owner's allegation of infringement, while in Gilead v. Merck it was based more on the egregious misconduct of an in-house patent attorney in the procurement of the patents and in his testimony during the course of the litigation. In recent years, there have been proposals in Congress for legislation that would address the perceived “patent troll” problem by requiring certain disfavored patent owners, i.e., non-practicing entities (NPEs) or patent assertion entities (PAEs), to pay the attorney fees of a prevailing accused infringer. 20 One of the criticisms of this approach is that it is unfairly one-sided, in that an award of attorney fees is not available for a prevailing patent owner. Octane Fitness would seem to have rendered this approach unnecessary, as illustrated by the recent success of patent owners in securing an award of attorney fees in cases such as Novartis v. Webvention Holdings and Classen Immunotherapies v. Biogen Idec.