How not to defer.

Last month, Blawgletter pointed out that the Supreme Court had granted review in a case that may curb the Federal Circuit. We noted:

A rule that has applied in patent cases since 1998 may go the way of Chevy Cobalt ignition switches.

"Deference, I Don't Have to Show You any Stinkin' Deference" riffed on a line from The Treasure of the Sierra Madre (1948), in which Gold Hat, posing as a Mexican Federale, says "Badges, I don't have to show you any stinkin' badges."

The post reports on the latest in a long line of Federal Circuit rulings in which the court has taken the view that it can — must — review decisions about "claim construction" in patent cases de novo.

The Supreme Court today granted certiorari in Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc., No. 13-854 (U.S. Mar. 31, 2014). The cert. petition poses this question:

Whether a district court’s factual finding in support of its construction of a patent claim term may be reviewed de novo, as the Federal Circuit requires (and as the panel explicitly did in this case), or only for clear error, as Federal Rule of Civil Procedure 52(a) requires.

You can see the SCOTUSblog page on Teva here.

What does it mean? Requiring the Federal Circuit to defer to district courts' rulings on claim construction issues that involve factual disputes would give more certainty to the results of trial court proceedings and lower the risks and costs of litigating patent cases.

We said a couple of weeks ago that "Blawgletter expects that the Supreme Court will take up the issue soon, maybe next Term. It should."

It did.

Today the Court curbed the Federal Circuit in another area — awards of fees to prevailing parties in "exceptional" patent cases. A finding that a case qualifies as an exceptional one permits but does not require the district court to make the losing party pay the other side's attorneys' fees. See 35 U.S.C. 285 ("The court in exceptional cases may award reasonable attorney fees to the prevailing party.") (with our emphasis).

Fee-shifting.

Since 2005, the court of appeal that handles practically all appeals in patent cases had felt free to overrule district courts' determinations of "exceptional" status without paying much heed to the lowers courts' discretionary calls. The court also required proof by clear and convincing evidence rather than by the more lenient preponderance of the evidence test.

In two cases, the Court ended the Federal Circuit's reign of too-often finding error.

In Octane Fitness, LLC v. ICON Health & Fitness, Inc., No. 12-1184 (U.S. Apr. 29, 2014), the Court unanimously held that "an 'exceptional' case is simply one that stands out from others with respect to the substantive strength of the 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." Id. at 7-8. No longer do you have to prove almost the equivalent of sanctionable conduct.

The Court also ordered the Federal Circuit to apply the preponderance standard — not the much tougher clear and convincing test — for proof of exceptional status. Id. at 11-12.

In Highmark Inc. v. Allcare Health Mgmt. Syst., Inc., No. 12-1163 (U.S. Apr. 29, 2014), the Court (again 9-0) ruled that the Federal Circuit must apply the "abuse-of-discretion" test for all "exceptional" case status determinations. The Federal Circuit must therefore defer to district courts' determinations so long as they don't abuse their discretion in viewing the case as an exceptional one.

Does it matter? For "patent trolls"?

Both cases will likely lead to more fee-shifting awards by district courts and fewer reversals of those awards by the Federal Circuit. That matters in that it gives — some would say keeps — power in the trial court to reward or punish bad conduct.

Some people have quickly asserted that the Court's rulings spell bad news for "patent trolls" — companies that own patent portfolios but don't make anything with them, preferring instead to sue firms that do "practice" the inventions. But those not-very-smart folks should think again.

Many such non-practicing entities – a less hateful term — own high-quality patents. When they prevail, they now have a better chance of getting not only a reasonable royalty award and maybe an injunction but also millions of dollars in attorneys' fees.

Watch out infringers — it'll cost you even more now.