When is a patent claim so outrageous that attorney’s fees must be awarded?

The American judicial system has long held to a general principle that each party in a dispute should pay for its own legal fees, win or lose.

But when is a lawsuit—in particular, a patent lawsuit—so egregious that an exception should be made? And which judges are best suited to make that decision? That's the question that the US Supreme Court will grapple with on Wednesday as it hears two related cases: Octane Fitness v. Icon Health and Fitness and Highmark v. Allcare Management Systems.

The cases come at a time when Congress is also grappling with the concept of fee-shifting in patent cases. A bill passed by the House of Representatives, dubbed the Innovation Act, would create fee-shifting in many, if not most, patent cases; the proposal will be debated by the Senate this year.

Only one of the four parties arguing Wednesday, Allcare Management, is a "patent assertion entity," or "patent troll." But the issue of widespread "troll" lawsuits looms large in the background, overshadowing these two cases and the other three patent cases the high court will hear this year.

Both cases involve defendants who prevailed over patent-holders but didn't get what they wanted from the US Court of Appeals for the Federal Circuit, the court that handles all patent appeals. In Octane Fitness, the defendant didn't get a fee award; the company is arguing that the Federal Circuit's standard for such awards is an impossible one to meet and must be changed.

In Highmark, a health insurance company quashed a patent troll and was awarded fees after many years of litigation. The judge in that case described Allcare as displaying "the sort of conduct that gives the term 'patent troll' a negative connotation." Despite Allcare's bad behavior, the award was mostly overturned by the US Court of Appeals for the Federal Circuit. Now Highmark is arguing that the Federal Circuit should give more deference to trial court judges in matters of fee awards.

The Octane Fitness case is the more closely watched one of the two since it's the one that could actually change the standard for fees.

High Octane

"We are suing Octane," wrote the vice president of one of Icon's brands shortly after the suit was filed. "Not only are we coming out with a great product to go after them, but [we're] throwing a lawsuit on top of that."

"Old patent we had for a long time that was sitting on the shelf," the exec, Pat McGinnis, wrote in a later e-mail. "They are just looking for royalties."

McGinnis surely came to regret writing those e-mails, which Octane wasted no time in bringing to the high court's attention—they're on page three of the company's petition.

Octane Fitness was founded in 2004, selling high-end elliptical machines, mostly to health clubs. Four years after it was founded, the company was sued for patent infringement by Icon Health and Fitness, an industry giant with a habit of suing smaller competitors.

Octane didn't back down. The company was really too small to afford patent litigation, but it was in the unusual situation of having insurance against a patent lawsuit, brought from an IP insurance company. The case was litigated, and Octane won. The insurance policy covered (and continues to cover) Octane's defense bill, which ran to $1.3 million by the time it won its case on summary judgment.

Not only did Octane win, it found McGinnis' e-mails, suggesting the patents were used simply to gain a competitive edge, even though they weren't very valuable to Icon. The patents described an elliptical machine that had some straight-line movement, which Octane's machines do not have. Octane had licensed a different patent for its machines; the technology described in the Icon patent used in the lawsuit wasn't ever put in a product, according to Octane Fitness lawyer Rudy Telscher.

"They invent something, it doesn't work, they don't bring it to market—and then say our machine is somehow covered by their patent," he said.

To Octane's attorneys, the e-mails looked like a smoking gun; Icon had simply "filed suit as a way to hamper a smaller competitor." Icon argued that the e-mails were stray comments by a low-level exec. In any case, the e-mails weren't enough to convince the district court judge that the case was an "exceptional" one that warranted legal fees. The Federal Circuit rule is that a lawsuit must be "objectively baseless," with clear and convincing evidence of "subjective bad faith."

In the words of the judge in the Octane case, for a case to be exceptional, "the plaintiff's case must have no objective foundation, and the plaintiff must actually know this." The Federal Circuit also found that Octane's win wasn't fee-worthy.

Octane went ahead and asked the Supreme Court to change the rule. The current standard is "near-impossible for an accused infringer to meet no matter the unreasonableness of the litigation" and "serves as no deterrent to the assertion of spurious claims."

"If you're trying to get a district court judge, looking at complex patent documents and opposing expert reports, to find that someone's case has zero merit and was brought in bad faith—that's an impossible standard," Telscher said in an interview with Ars. "You've got to show that the plaintiff brought a 'zero merit' case, and they knew that's what they were doing."

In Telscher's view, the Federal Circuit has read in requirements that aren't in the law. Instead, district courts should consider "the totality of the circumstances," he said. "When there are facts that suggest abuse of the patent system, that should be considered. The court should act to prevent gross injustice to a defendant."

That's important, because costs mount quickly in patent cases. In Octane's case, it had to get through discovery and claim construction before the judge allowed it to file the motion that ultimately won the case.

"At that point, we had spent $1.3 million, and that's only because we have Midwestern rates," said Telscher. The company has now spent about $2 million, which is still below average for a patent case.

The Octane case could affect the decision-making of other small companies involved in tough patent fights. "Imagine a small company—if you make less than $10 million a year, and you've got the prospect of spending $2 million on a patent case—that can put you under," said Telscher. Without the insurance policy, Octane wouldn't have been able to defend itself.

An Icon Health and Fitness spokesperson declined to comment on the case. In Icon's opposition brief, the company says the courts followed the correct legal standard. Icon also urges the court not to let the noise of the "patent troll" debate influence the outcome of the case. "If Congress wants to craft a different rule for trolls or other non-practicing entities, it of course may attempt to do so," write Icon's lawyers, noting the patent reform bill now being debated in a footnote. "But the Court should not do it for Congress."

Allies in tech and government

In the Octane Fitness case, more than a dozen amicus briefs have been filed, and not a single one supports Icon's position that the fee standards are fine as-is. The tech groups asking for a lower burden in fee-shifting include organizations like the Computer and Communications Industry Association and the Business Software Alliance (BSA). Another brief supporting Octane is signed by several tech companies that are favorite troll targets, including Google, Facebook, HTC, Intel, LinkedIn, Newegg, Netflix, Verizon, and Vizio. Apple filed a separate brief emphasizing how it has been pounded by troll lawsuits in the last few years. Even a brief filed by a New York IP lawyers' group—not an organization likely to see patent debates the same way as Internet companies—supports some changes to the standard.