1. 1 1 Firm Logo American Intellectual Property Law Association ATTORNEY FEES FOR EXCEPTIONAL CASES, OCTANE FITNESS AND HIGHMARK STEVEN F. MEYER AIPLA IP in Japan Committee October 21-22, 2014 1 773381

2. 2 2 Firm Logo Supreme Court: Octane Fitness v. ICON Health 2 773381

3. 3 3 Firm Logo 35 U.S.C. §285 (“Attorney Fees”) “The Court in exceptional cases may award reasonable attorney fees to the prevailing party.” 773381 3

4. 4 4 Firm Logo Two-Part “Exceptional Case” Standard Under Federal Circuit’s Brooks Furniture (2005) District court must determine whether the prevailing party has established by clear and convincing evidence that the case is “exceptional”. District courts have awarded attorney’s fees only when a party has: –Asserted A Frivolous Claim –Engaged In Inequitable Conduct Before Patent Office –Engaged In Misconduct During Litigation If case is deemed “exceptional”, the district court must determine whether an award of attorneys’ fees is appropriate and, if so, the amount of the award. 4 773381

5. 5 5 Firm Logo Two-Part “Exceptional Case” Standard Under Federal Circuit’s Brooks Furniture (2005 ) In the absence of litigation misconduct or fraud in securing the patent, for a prevailing accused infringer, a case is exceptional only if it is (1) “objectively baseless” and (2) “brought in the subjective bad faith” by the patentee. To be objectively baseless, “the infringement allegations must be such that no reasonable litigant could reasonably expect success on the merits.” For subjective bad faith, it must be shown that the lack of objective foundation for the claim “was either known or so obvious that it should have been known” by the patentee. Citing Professional Real Estate Investors v. Columbia Pictures Indus., 508 U.S. 49, 60-61 (1993) (defining elements of antitrust-based “sham litigation” counterclaim) [“PRE”] 5 773381

6. 6 6 Firm Logo Octane Fitness: Asserted Patent’s Disclosure Stroke rail (66) is attached to the frame in 3 places: to forward end of a foot rail (72, 50) to a rotatable crank arm (90) connected to an axle via a pin (76) mounted in a C-shaped channel (84) 773381 6

7. 7 7 Firm Logo ICON Health v. Octane Fitness 1.An exercise apparatus comprising: * * * (c)a pair of stroke rails each having a first end and an opposing second end, the second end of each stoke rail being hingedly attached to the first end of a corresponding foot rail; (d)means for connecting each stroke rail to the frame such that linear reciprocating displacement of the first end of each stroke rail results in displacement of the second end of each stroke rail in a substantially elliptical path; …. 7 773381

8. 8 8 Firm Logo Octane Fitness: Claim Construction (c) a pair of stroke rails each having a first end and opposing second end, the second end of each stroke rail being hingedly attached to the first end of a corresponding foot rail. 773381 8 First End Second End

9. 9 9 Firm Logo Octane Fitness: Claim Construction (d) means for connecting each stroke rail to the frame such that linear reciprocating displacement of the first end of each stroke rail results in displacement of the second end of each stroke rail in a substantially elliptical path. Function: “Ordinary meaning”; rejected Icon’s proposed construction of “linear reciprocating displacement” which did not require “movement along a linear path”. 773381 9

10. 10 Firm Logo Octane Fitness: Claim Construction (d) means for connecting each stroke rail to the frame such that linear reciprocating displacement of the first end of each stroke rail results in displacement of the second end of each stroke rail in a substantially elliptical path. Corresponding Structure: C-shaped channel 84 and pin structure 76, as well as crank arm structure 90. 773381 10

11. 11 Firm Logo Octane Fitness v. Icon Health & Fitness The district court concluded that the “means for connecting” and “stroke rail” limitations were absent in the accused machines, and granted summary judgment of non- infringement. 773381 11

12. 12 Firm Logo Octane Fitness v. Icon Health & Fitness Reasons For Summary Judgment of Non-Infringement: Claim limitation (d): –no evidence of linear reciprocating displacement –slight arc is not equivalent to movement in straight line Claim limitation (c) : –no single part of Octane’s linkage extends from a foot rail to the frame; cannot consist of multiple parts –no equivalence because Icon hasn’t shown that a hypothetical claim wouldn’t encompass prior art. 2011 WL 2457914 at **8-12. 773381 12

13. 13 Firm Logo Octane Fitness v. Icon Health & Fitness Notable Conduct “Icon argues that the first end of the stroke rail undergoes linear reciprocating displacement, relying on a portion of Dr. Rasty’s report which uses the rejected construction. Because it is based on an erroneous claim construction, Dr. Rasty’s opinion on this point is not admissible.”. “Given the exclusion of Dr. Rasty’s opinion on this point, there is no evidence that any part of Octane’s machines undergoes linear reciprocating displacement.” 2011 WL 2457914 at *9. 773381 13

14. 14 Firm Logo Octane Fitness v. Icon Health & Fitness Octane Moves For Attorneys Fees Under Brooks Furniture Octane argued that suit was objectively baseless because the Court rejected Icon’s arguments that: 1.several elements of Octane’s machines collectively comprised a “stroke rail” which “extends from a foot rail to a frame”; 2.“linear reciprocating displacement” did not require movement in a linear path; and 3.several elements of Octane’s machines infringed the ‘710 patent. 2011 WL 3900975 at *2. 773381 14

15. 15 Firm Logo Octane Fitness v. Icon Health & Fitness Octane Moves For Attorneys Fees Under Brooks Furniture As evidence of bad faith, Octane points to: 1.an email exchange between two Icon sales executives suggesting that the litigation was undertaken as a matter of commercial strategy; and 2.the fact that Icon is a bigger company which never commercialized the ‘710 patent. 2011 WL 3900975 at *4. 773381 15

16. 16 Firm Logo Octane Fitness v. Icon Health & Fitness District Court denied motion for attorney’s fees: –“While Icon’s arguments on claim construction and infringement proved to be unpersuasive, the arguments are not objectively baseless.” See 2011 WL 3900975 at *3. –Email that litigation was undertaken as a matter of commercial strategy and the fact that Icon is a bigger company which never commercialized the asserted patent, is not clear and convincing evidence of bad faith. See 2011 WL 3900975 at *4. Federal Circuit: “[W]e have reviewed the record and conclude that the court did not err in denying Octane’s motion to find the case exceptional. We have no reason to revisit the settled standard for exceptionality.” Slip Op. (Oct. 24, 2012) at p. 15. 16 773381

17. 17 Firm Logo Octane Fitness v. Icon Health & Fitness Supreme Court: “The question before us is whether the Brooks Furniture framework is consistent with the statutory text. We hold that it is not.” 17 773381 Octane Fitness, 134 S. Ct. 1749, 1752-53 (2014).

18. 18 Firm Logo Octane Fitness v. Icon Health & Fitness Supreme Court: Background on 35 U.S.C. §285 “For three decades after the enactment of§285, courts applied it … in a discretionary manner, assessing various factors to determine whether a given case was sufficiently ‘exceptional’ to warrant a fee award.” “In the two decades that followed [the creation of Federal Circuit in 1982], the Federal Circuit, like the regional circuits before it, instructed district courts to consider the totality of the circumstances when making fee determinations under §285.” In 2005, “Federal Circuit abandoned that holistic, equitable approach in favor of a more rigid and mechanical formulation”, citing Brooks Furniture. Octane Fitness, 134 S.Ct. at 1753-54. 18 773381

19. 19 Firm Logo Octane Fitness v. Icon Health & Fitness Supreme Court: Abrogating Brooks Furniture “In Brooks Furniture, the Federal Circuit imported the PRE standard [i.e., sham exception to the Noerr- Pennington doctrine of antitrust law] into §285.” “But the PRE standard finds no roots in the text of §285, and it makes little sense in the context of determining whether a case is so ‘exceptional’ as to justify an aware of attorney’s fees in patent litigation.” Octane Fitness, 134 S.Ct. at 1757. 19 773381

20. 20 Firm Logo Octane Fitness v. Icon Health & Fitness Supreme Court: Abrogating Brooks Furniture “[W]e reject the Federal Circuit’s requirement that patent litigants establish their entitlement to fees under §285 by ‘clear and convincing evidence’”. “We have not interpreted comparable fee-shifting statutes to require proof of entitlement to fees by clear and convincing evidence.” “[N]othing in §285 justifies such a high standard of proof.” “[P]atent infringement litigation has always been governed by a preponderance of the evidence standard.” Octane Fitness, 134 S.Ct. at 1758. 20 773381

21. 21 Firm Logo Octane Fitness v. Icon Health & Fitness Supreme Court: Construing 35 U.S.C. §285 The text of §285 “imposes one and only one constraing on district courts’ discretion to award attorney’s fees in patent litigation: The power is reserved for ‘exceptional’ cases.” “The Patent Act does not define ‘exceptional,’ so we will construe it ‘in accordance with its ordinary meaning’.” –“uncommon” –“rare” –“not ordinary” Octane Fitness, 134 S.Ct. at 1755-56. 21 773381

22. 22 Firm Logo Octane Fitness v. Icon Health & Fitness Supreme Court: Construing 35 U.S.C. §285 “We hold, then, that an ‘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.” Octane Fitness, 134 S.Ct. at 1756. 22 773381

23. 23 Firm Logo Octane Fitness v. Icon Health & Fitness Federal Circuit, On Remand From Supreme Court “We remand that issue to the district court for application in the first instance of the new standard whether, under the totality of the circumstances, this case ‘stands out from others with respect to the substantive strength’ of ICON’s litigation position or was litigated in an unreasonable manner.” 23 Slip Op. (Aug. 26, 2014) at p. 7. 773381

24. 24 Firm Logo Supreme Court: Highmark v. Allcare Health 24 773381

25. 25 Firm Logo Highmark, Inc. v. Allcare Health Management Sys District Court awarded accused infringer Highmark $4,694,727.40 in attorney fees. “Allcare’s actions align with the sort of conduct that gives the term ‘patent troll’ its negative connotation.” Federal Circuit affirmed district court’s finding that assertion of claim 102 was exceptional and reversed for claims 52 and 53. Federal Circuit stated standard of review for two-part test under §285: –“objectively baseless”: de novo review (question of law), citing Bard Peripheral Vascular, Inc. v. W.L. Gore and Associates, Inc., 682 F.3d 1003 (Fed. Cir. 2012) (applying 35 U.S.C. §284) –“subjective bad faith”: review for clear error (question of fact) 773381 25

26. 26 Firm Logo Highmark, Inc. v. Allcare Health Management Sys. Supreme Court: “Our holding in Octane settles this case: Because§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.” “We therefore hold that an appellate court should apply an abuse- of-discretion standard in reviewing all aspects of a district court’s §285 determination.” Highmark, 134 S.Ct. 1744, 1748-49. 773381 26

27. 27 Firm Logo Highmark, Inc. v. Allcare Health Management Sys. Supreme Court: “And as in our prior cases involving similar determinations, the exceptional-case determination is to be reviewed only for abuse of discretion.” Abuse of discretion standard for appellate review of fee awards under Equal Access to Justice Act, 28 U.S.C. §2412(d). See Pierce v. Underwood, 487 U.S. 552 (1988). Abuse of discretion standard for appellate review of “all aspects” of a district court’s decision to impose sanctions under Rule 11 (Fed. R. Civ. P.). See Cooter & Gell v. Hartmarx, 496 U.S. 384, 401- 05 (1990). Highmark, 134 S.Ct. at 1748. 773381 27

28. 28 Firm Logo Highmark, Inc. v. Allcare Health Management Sys. Federal Circuit, On Remand From Supreme Court “Upon careful consideration, we vacate the district court’s award of attorney fees and remand for reconsideration under the new standard articulated in Octane. The district court need not revisit its finding with respect to claim 102, which we previously upheld under the stricter standards then prevailing and which Allcare now concedes. In all other respects, the district court is free to weigh any matter properly included in an exceptional case determination under §285.” 28 Highmark, Inc. v. Allcare Health Management Systems, Inc. (No. 11-1219) (Decided: September 5, 2014) at p. 5. 773381

29. 29 Firm Logo Thanks for your attention! Questions? Steven F. Meyer Partner Locke Lord LLP 3 World Financial Center New York, NY 10281 +1-212.415.8535 SMeyer@Lockelord.com 29 773381