This week, the U.S. Court of Appeals for the Ninth Circuit joined a majority of appellate courts that have rejected rigid tests for attorneys’-fees awards in favor of flexible discretion at the district court level.  The Ninth Circuit’s pre-Octane Fitness rulings provided a safe-harbor for litigants: fees were only to be awarded in instances of “malicious, fraudulent, deliberate or willful” infringement or where a frivolous case was brought or maintained in bad faith.  That standard has been discarded and replaced by a different, more general test that asks whether the case stands out in terms of its strength or unreasonableness in the way it was litigated.

In SunEarth, Inc. v. Sun Earth Solar Power Co., Ltd., the Ninth Circuit agreed to rehear en banc a May panel ruling that affirmed a district court’s refusal to award attorneys’ fees sought by Plaintiff and prevailing party SunEarth. On reconsideration, the full Ninth Circuit concluded that the U.S. Supreme Court’s ruling in Octane Fitness v. Icon Health and Fitness altered the fee analysis under the Lanham Act, vacating the panel decision.

While Octane Fitness didn’t involve trademarks, the Lanham Act and the Patent Act share a parallel and identical fee provision.  Interpreting those provisions in tandem, the Ninth Circuit relied on the Supreme Court’s interpretation of the Patent Act’s fee provision in Octane Fitness to analyze how courts should determine fee requests under the Lanham Act’s attorneys’-fees provision.

The Ninth Circuit’s decision is balanced—it does not expressly favor trademark holders or accused infringers.  The SunEarth ruling simply returns discretion to district courts to determine whether a case is “exceptional,” guided by the Supreme Court’s admonition in Octane Fitness 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.

The burden of proof has also been lessened.  The Ninth Circuit determined that Octane Fitness overruled the previous requirement that a party provide clear-and-convincing evidence before an award of fees.  The Court instead embraced the more lenient preponderance-of-the-evidence standard.

 De novo review of fee awards, rejected by the Supreme Court’s ruling in in Highmark v. Allcare Health, was also retired in SunEarth.  District Court fee awards will now be reviewed under the more liberal abuse-of-discretion standard on appeal.

The ruling remands the case back to a trial judge for a reconsideration of the attorneys’-fees issue.

Practical Takeaways from SunEarth:

• Octane’s totality-of-the-circumstances standard is applied by the majority of appellate courts. The Third, Fourth, Fifth, and Six, and Ninth Circuits now all employ the more liberal totality-of-the-circumstances approach to attorneys’ fees awards. Only the Second and Seventh Circuits have applied earlier case law to Lanham Act fee disputes post-Octane Fitness. The Sunearth decision makes it more likely that other appellate courts of appeal will, pardon the pun, follow suit, but whether the Supreme Court will support with this importation of patent-law principles to trademark cases remains unknown.  As courts sort out the repercussions of Octane Fitness on trademark, trade dress, and unfair-competition litigation, parties may push for the Supreme Court to clarify the attorneys’-fees standard under the Lanham Act once and for all.

• “Exceptionality” for the purposes of fee awards will vary from case to case, leading to more litigation. An “exceptional case” is no longer limited to circumstances of “malicious, fraudulent, deliberate or willful” infringement or where the litigation is frivolous, unreasonable, vexatious, or pursued in bad faith.  A totality-of-the-circumstances test often leads to longer litigation since parties are incentivized to seek free reimbursement or to avoid additional costs.

• Attorneys’-fee awards aren’t necessarily more likely. Almost two years after Octane Fitness, data show an increase in the number of fee requests made, but the success rates of those requests have remained fairly consistent, with the exception of a few districts.  While SunEarth can be expected to result in a greater frequency of fee requests in the Ninth Circuit, an increase in court approval of those requests is speculation.

• Attorneys’-fee awards will be harder to challenge on appeal. The application of an abuse-of-discretion standard of review for fee awards in trademark cases insulates a district court’s ruling on appeal unless the award is clearly unreasonable.

The effect of SunEarth on trademark fee awards in the Ninth Circuit is yet untested, but courts’ importation of Octane Fitness to the fee analysis merits review and re-evaluation of internal procedures to ensure that your company can avoid or overcome willful-infringement allegations.  Sheppard Mullin’s award-winning IP group provides comprehensive risk analysis to help our clients understand and minimize potential exposure to fee awards.