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Category: Fees as Sanctions / Bad Faith

Attorney Fee Awards in the Lanham Act

January 19, 2017

A recent law firm blog post, “Attorney Fees Awards in Lanham Act,” by James Bikoff and Holly James of Smith Gambrell & Russell LLP in Washington, DC report on attorney on attorney fee awards under the Lanham Act.  This was posted with permission.  The article reads:

On October 24, 2016 the Ninth Circuit joined the Third, Fourth, Fifth and Sixth Circuits in applying the fee-shifting ruling of Octane Fitness LLC v ICON Health & Fitness Inc, 134 S Ct 1749 (2014), to a Lanham Act case – SunEarth Inc v Sun Earth Solar Power Co, DC 4:11-cv-04991-CW (9th Cir 2016).

The 2014 Supreme Court decision in Octane Fitness overturned the Federal Circuit’s standard for determining when a case is “exceptional” under 35 USC §285, adopting a flexible “totality of the circumstances” analysis and lowering the standard of proof to establish entitlement of fees from “clear and convincing evidence” to a “preponderance of the evidence”.  While Octane Fitness was a patent law decision, the Lanham Act and Patent Act both limit the award of attorney fees to “exceptional” cases.  The SunEarth decision brings the total to five circuits that have held that the Octane Fitness standard should apply for determining an “exceptional” case brought pursuant to the Lanham Act.

Previously, attorney fees were awarded only where there was “malicious, fraudulent, deliberate or willful” infringement.  Now district courts in the Third, Fourth, Fifth, Sixth and Ninth Circuits can exercise their discretion in awarding attorney fees based on a flexible “totality of the circumstances” analysis.  In determining whether an award of attorney fees is warranted, the court may consider a number of factors including frivolousness, motivation, objective unreasonableness and the need to advance considerations of compensation and deterrence.

In addition, in SunEarth the court held that attorney fees awards granted pursuant to the Lanham Act should be reviewed for abuse of discretion, overruling precedent that mandated de novo review.  This decision aligns with another patent law decision by the Supreme Court – Highmark Inc v Allcare Health Mgmt Sys Inc, 134 S Ct 1744 (2014), in which the court held that attorney fees awards under the Patent Act should be reviewed under the deferential “abuse of discretion” standard.

This recent decision by the Ninth Circuit is in line with the trend of the circuit courts to apply interpretations of the Patent Act to counterpart provisions in the Lanham Act.  As the Supreme Court has taken a more flexible, deferential approach to the award of attorney fees under the Patent Act, trademark litigants will also be able to benefit from the less burdensome requirements for obtaining and maintaining an award of attorney fees in Lanham Act cases.

While district courts within the Eighth, Tenth and Eleventh Circuits have applied the Octane Fitness decision to Lanham Act cases, the Second and Seventh Circuits continue to use a traditional analysis – see Point 4 Data Corp v Tri-State Surgical Supply & Equip, Case 11-CV-726 (EDNY September 10 2015) and Burford v Accounting Practice Sales Inc, 786 F.3d 582 (7th Cir 2015).  Notably, there may soon be a shift in the Second Circuit as Tri-State has appealed the district court’s decision denying attorney fees and is urging the Court of Appeals for the Second Circuit to apply Octane Fitness, see Point 4 Data Corp v Tri-State Surgical Supply & Equip, Case 15-3212 (2nd Cir).

Florida Supreme Court: Insurer Required to Pay Legal Fees

November 14, 2016

A recent Daily Business Review story, “Florida Supreme Court Says Insurer Required to Foot Legal Fees,” reports that the Florida Supreme Court said a property insurer must pay the attorney fees of a homeowner who successfully challenged the company's contention that her home was not damaged by a sinkhole.

The court, in a 6-1 ruling in a Marion County case, sided with homeowner Kathy Johnson, who filed a claim in 2010 with Omega Insurance Co. because of extensive damage that included cracks in walls and separations between walls and ceilings.  The justices pointed to a need for policyholders to be able to recoup legal fees if they successfully fight insurance companies over claims.

"The need for fee and cost reimbursement in the realm of insurance litigation is deeply rooted in public policy.  Namely, the Legislature recognized that it was essential to 'level the playing field' between the economically advantaged and sophisticated insurance companies and the individual citizen," said the majority opinion, written by Justice R. Fred Lewis and joined fully by Chief Justice Jorge Labarga and Justices Barbara Pariente, Peggy Quince and James E.C. Perry.

"Most assuredly, the average policyholder has neither the finances nor the expertise to single-handedly take on an insurance carrier," Lewis said.  "Without the funds necessary to compete with an insurance carrier, often a concerned policyholder's only means to take protective action is to hire that expertise in the form of legal counsel.  Counsel then have the ability and knowledge to hire an independent engineer or other expert to prepare a report that either confirms or denies the policyholder's view of the cause of damages.  For this reason, the Legislature recognized that an insured is not made whole when an insurer simply grants the previously denied benefits without fees."

The legal dispute began after Omega Insurance hired a consulting firm that said the damage to Johnson's home was not caused by a sinkhole.  Johnson retained a law firm, which in turn hired a consultant who concluded a sinkhole was responsible.

Johnson filed a breach-of-contract lawsuit against Omega.  After another consulting firm said the damage was caused by a sinkhole, Omega agreed to pay for repairs, which totaled $213,465, according to the Supreme Court ruling.  Johnson then sought to require the insurer to pay her attorney fees.

A circuit judge ruled that the insurer should pay the legal fees, but the Fifth District Court of Appeal disagreed.  It said the insurer could only be forced to pay the fees if it initially denied the claim in "bad faith."

The Supreme Court's 27-page majority opinion overturned that ruling.  "We cannot, as the [appeals] court below held and Omega requests here, discourage insureds from seeking to correct the incorrect denials of valid claims and allow insurers to deny benefits to which insureds are entitled without ramifications," the opinion said.  "Johnson proceeded with the only action that a non-expert claimant in conflict with a major insurance company could take: She retained counsel and thus obtained access to an independent expert."

Ninth Circuit Eases Fee Entitlement Standard in Trademark Litigation

October 27, 2016

A recent The Recorder story, “Appeals Court Eases Standard for Attorney Fees in Trademark Cases,” reports that ruling en banc without argument, the court unanimously adopted the “totality of the circumstances” test that the U.S. Supreme Court set for awarding fees in patent cases. SunEarth v. Sun Earth Solar Power comes just five months after the three-judge panel issued its opinion in the case.

The decision means SunEarth Inc., a Fontana-based manufacturer of solar water heaters, will get another crack at trying to recover fees for winning an injunction against Chinese solar panel maker Sun Earth Solar Power Co.  U.S. District Judge Claudia Wilken of the Northern District of California enjoined Sun Earth Solar Power from using the Sun Earth mark in the United States, but declined to award fees, finding that Sun Earth’s conduct was unintentional and in some cases necessary to satisfy U.S. Customs requirements.

The Lanham Act and Patent Act use identical language for awarding attorney fees.  They state simply that “the court in exceptional cases may award reasonable attorney fees to the prevailing party.”  Previously, the U.S. Court of Appeals for the Ninth Circuit required that a plaintiff show a defendant engaged in “malicious, fraudulent, deliberate or willful” infringement.  But the Supreme Court said in a 2014 patent case, Octane Fitness v. Icon Health and Fitness, that an exceptional case is simply one that stands out from others.

The high court said that means district judges should consider the totality of the circumstances when considering a fee request, including frivolousness, motivation, objective unreasonableness and the occasional need to advance compensation and deterrence.  “The standard that we had adopted previously was quite a bit more strict than the totality of the circumstances,” Judge Jay Bybee said at the panel argument last May.  “The [Supreme] Court lowered the bar quite a bit.”

But because another Ninth Circuit panel applied the circuit’s old standard after Octane Fitness was issued, the Ninth Circuit had to convene en banc to change its law and align it with the Supreme Court.  According to the ruling, the Third, Fourth, Fifth and Sixth circuits also have adopted the Octane Fitness fee-shifting formula for trademark cases.  The Second and Seventh have stuck with their previous standards.

The Ninth Circuit also said in the ruling that it will review trademark fee awards more deferentially, pursuant to the Highmark companion case to Octane Fitness.  The ruling is a win, at least for now, for Stephen Mosier of Hayes Soloway.  James Foster of Hayes Messina Gilman & Hayes argued to the panel for Sun Earth Solar Power.

IP litigator Lawrence Townsend of Owen, Wickersham & Erickson, who’s not involved in the case, said the court is clearly easing the standard for awarding attorney fees.  But still, no one should expect them in garden variety trademark cases.  “It’s still a high bar,” he said.  “It’s not like the prevailing party ‘shall be awarded’ attorneys fees.”

The Ninth Circuit panel that heard SunEarth back in May seemed to suggest as much in its opinion.  “Given the district court’s findings,” the court stated, “we have little doubt that this case is unexceptional even under Octane Fitness‘s totality of the circumstances test.”

Florida Justices Say Insurer Must Pay Legal Fees

October 3, 2016

A recent CBS Miami story, “Justices Say Insurer Required to Foot Legal Fees,” reports that the Florida Supreme Court said a property insurer must pay the attorneys’ fees of a homeowner who successfully challenged the company’s contention that her home was not damaged by a sinkhole.

The court, in a 6-1 ruling in a Marion County case, sided with homeowner Kathy Johnson, who filed a claim in 2010 with Omega Insurance Co. because of extensive damage that included cracks in walls and separations between walls and ceilings.  Justices pointed to a need for policyholders to be able to recoup legal fees if they successfully fight insurance companies over claims.

“The need for fee and cost reimbursement in the realm of insurance litigation is deeply rooted in public policy.  Namely, the Legislature recognized that it was essential to ‘level the playing field’ between the economically advantaged and sophisticated insurance companies and the individual citizen,” said the majority opinion, written by Justice R. Fred Lewis and joined fully by Chief Justice Jorge Labarga and justices Barbara Pariente, Peggy Quince and James E.C. Perry.

“Most assuredly, the average policyholder has neither the finances nor the expertise to single-handedly take on an insurance carrier.  Without the funds necessary to compete with an insurance carrier, often a concerned policyholder’s only means to take protective action is to hire that expertise in the form of legal counsel.  Counsel then have the ability and knowledge to hire an independent engineer or other expert to prepare a report that either confirms or denies the policyholder’s view of the cause of damages.  For this reason, the Legislature recognized that an insured is not made whole when an insurer simply grants the previously denied benefits without fees.”

The legal dispute began after Omega Insurance hired a consulting firm that said the damage to Johnson’s home was not caused by a sinkhole.  Johnson retained a law firm, which in turn hired a consultant who concluded a sinkhole was responsible.

Johnson filed a breach-of-contract lawsuit against Omega.  After another consulting firm said the damage was caused by a sinkhole, Omega agreed to pay for repairs, which totaled $213,465, according to the Supreme Court ruling.  Johnson then sought to require the insurer to pay her attorneys’ fees.

A circuit judge ruled that the insurer should pay the legal fees, but the 5th District Court of Appeal disagreed.  It said the insurer could only be forced to pay the fees if it initially denied the claim in “bad faith.”

The Supreme Court’s 27-page majority opinion overturned that ruling.  “We cannot, as the (appeals) court below held and Omega requests here, discourage insureds from seeking to correct the incorrect denials of valid claims and allow insurers to deny benefits to which insureds are entitled without ramifications,” the opinion said.  “Johnson proceeded with the only action that a non-expert claimant in conflict with a major insurance company could take:  She retained counsel and thus obtained access to an independent expert.”

Supreme Court Revisits Attorney Fee Standards

September 2, 2016

A recent New York Law Journal article, “Supreme Court Revisits Attorney Fee Standards,” by Robert W. Clarida and Robert J. Bernstein report on awarding attorney fees in copyright cases.  This article originally appeared in the New York Law Journal on August 17, 2016 and has been posted with permission.  The article reads:

Not many copyright cases ever make it to the Supreme Court, and even fewer—in fact, none—merit the court's attention twice on separate issues.  That, at least, was the verdict of history until recently, when Kirtsaeng v. John Wiley & Sons (hereafter Kirtsaeng II) earned a previously unprecedented second trip to the high court for review of the standards for awarding attorney fees to prevailing parties in copyright cases under 17 U.S.C. §505.

The dispute at issue in Kirtsaeng II had first reached the Supreme Court in 2013 on a fascinating and unsettled question about the territorial reach of the first sale doctrine, as to which petitioner Supap Kirtsaeng prevailed in a sharply divided 6-3 ruling.  On remand from that decision, Kirtsaeng argued in the Southern District that he should recover over $2 million in attorney fees, despite the reasonableness of his adversary in opposing him, because the case clarified a close and important legal issue and thereby advanced the purposes of the Copyright Act.

The Southern District denied Kirtsaeng's request, primarily on the basis that respondent Wiley's legal and factual positions in the litigation, though unsuccessful, had been "objectively reasonable."  The U.S. Court of Appeals for the Second Circuit affirmed in 2015.  The Supreme Court granted certiorari to "resolve the disagreement in the lower courts about how to address an application for attorney's fees in a copyright case."

The Court's Ruling

Justice Elena Kagan, writing for a unanimous Court, began by noting that the parties were in substantial agreement about the basic principles governing fee awards under the Copyright Act.  In the court's 1994 Fogerty v. Fantasy Inc. decision, it held that fee awards were always discretionary and not to be granted as a matter of course.  Fogerty also established that prevailing plaintiffs and prevailing defendants must be treated no differently: Defendants should be "encouraged to litigate meritorious copyright defenses to the same extent that plaintiffs are encouraged to litigate meritorious claims of infringement."

The Fogerty court further stated in a footnote that several nonexclusive factors should be considered, i.e., "frivolousness, motivation, objective unreasonableness and the need in particular circumstances to advance considerations of compensation and deterrence."  Neither party in Kirtsaeng disputed these teachings of Fogerty but simply differed, in Justice Kagan's words, as to "what else we should say to the district courts," to guide them in exercising the discretion that Fogerty so clearly established.

The weighing and balancing of nonexclusive factors cannot be wholly unconstrained, and the overall goal of a fee award must be to advance the purposes of the Copyright Act, by encouraging parties to pursue meritorious claims and defenses.  Beyond that, the court concluded that "[t]he contested issue is whether giving substantial weight to the objective unreasonableness of a losing party's litigating position—or, alternatively, to a lawsuit's role in settling significant and uncertain legal issues—will predictably encourage such useful copyright litigation."

The court observed that when a litigant, whether plaintiff or defendant, is clearly correct, "the likelihood that he will recover fees from the opposing (i.e., unreasonable) party gives him an incentive to litigate the case all the way to the end."  Conversely, however, "when a person, again whether plaintiff or defendant, has an unreasonable litigating position the likelihood that he will have to pay two sets of fees discourages legal action."  In this way, focusing on objective unreasonableness advances the policy goals of the Copyright Act.  This was essentially the argument adopted by the Second Circuit and advanced by respondent Wiley in the Supreme Court.

Kirtsaeng's position, as articulated by the Supreme Court, was that litigation of close cases can "help ensure that the boundaries of copyright law are demarcated as clearly as possible, thus advancing the public interest in creative work."  The court did not dispute that the prospect of a fee award might encourage a party to stay with a difficult and otherwise unremunerative case, or that the litigation of such cases could clarify the boundaries of the law for the benefit of all, as indeed it did in Kirtsaeng's case.  But the court "cannot agree that fee-shifting will necessarily, or even usually, encourage parties to litigate those cases to judgment."

'Two-Edged Sword'

For Justice Kagan, the Kirtsaeng approach cannot be relied upon consistently to advance copyright policy because fee awards are a "two-edged sword," enhancing the reward for victory but also increasing the cost of defeat, and "the hallmark of hard cases is that no party can be confident if he will win or lose."  Therefore, any given litigant might just as easily be discouraged from staying with a hard case that could clarify copyright law, if that litigant were risk-averse.

The prospect of a fee award "would (by definition) raise the stakes of such suits; but whether those higher stakes would provide an incentive—or instead a disincentive—to litigate hinges on a party's attitude toward risk."  In support, the court cited to a 1973 law review article by Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit, "An Economic Approach to Legal Procedure and Judicial Administration," which posited that a fee award would "make the expected value of litigation less for risk-averse litigants."

And a party's attitude toward risk is an individual psychological variable having nothing to do with the issues in a copyright case.  Justice Kagan cited conflicting remarks in prior Supreme Court cases regarding the risk tolerance of litigants before observing that a party's idiosyncratic risk tolerance or risk-aversion "could just as easily discourage as encourage parties to pursue the kinds of suits that meaningfully clarify copyright law."  So a fee award to the prevailing party in a close case, regardless of the "objective reasonableness" of its adversary, could make a risk-seeking litigant more likely to proceed, but could actually chill such behavior for a risk-averse litigant, "and Kirtsaengoffers no reason to think that serious gamblers predominate."

The court illustrated the inherent unpredictability of such an approach in a lengthy footnote:

Imagine you are Kirtsaeng at a key moment in his case, say, when deciding whether to petition this Court for certiorari.  And suppose (as Kirtsaeng now wishes) that the prevailing party in a hard and important case—like this one—will probably get a fee award.  Does that make you more likely to file, because you will recoup your own fees if you win?  Or less likely to file, because you will foot Wiley's bills if you lose?  Here are some answers to choose from (recalling that you cannot confidently predict which way the Court will rule): (A) Six of one, half a dozen of the other. (B) Depends if I'm feeling lucky that day. (C) Less likely—this is getting scary, who knows how much money Wiley will spend on Supreme Court lawyers? (D) More likely—the higher the stakes, the greater the rush.  Only if lots of people answer (D) will Kirtsaeng's standard work in the way advertised.  Maybe.  But then again, maybe not.

By contrast, the Wiley approach, emphasizing the objective reasonableness of the non-prevailing party's position, both encourages parties with strong legal positions to stand on their rights and deters those with weak ones from proceeding with litigation:

The holder of a copyright that has obviously been infringed has good reason to bring and maintain a suit even if the damages at stake are small; and likewise, a person defending against a patently meritless copyright claim has every incentive to keep fighting, no matter that attorney's fees in a protracted suit might be as or more costly than a settlement.

Conversely, when a person (again, whether plaintiff or defendant) has an unreasonable litigating position, the likelihood that he will have to pay two sets of fees discourages legal action.  The copyright holder with no reasonable infringement claim has good reason not to bring suit in the first instance (knowing he cannot force a settlement and will have to proceed to judgment); and the infringer with no reasonable defense has every reason to give in quickly, before each side's litigation costs mount.  All of those results promote the Copyright Act's purposes, by enhancing the probability that both creators and users (i.e., potential plaintiffs and defendants) will enjoy the substantive rights the statute provides.

In addition, the court found that the Wiley position's stress on objective reasonableness was also more administrable, because the reasonableness of the parties' positions would necessarily have been considered carefully by the court in reaching its decision on the merits.  The "precedent-setting, law-clarifying value" of the case, however, might not be apparent until long after the case is over: "District courts are not accustomed to evaluating in real time either the jurisprudential or on-the-ground import of their rulings."  By focusing on the objective reasonableness of the parties' factual and legal positions in the case, courts can better avoid having each fee motion turn into a "second major litigation."

The court was also careful to end its opinion, however, with an admonition to the lower courts that objective reasonableness "can be only an important factor in assessing fee applications—not the controlling one."  And here the court faulted the fee proceedings in Kirtsaeng for having "raised serious questions about how fee-shifting actually operates in the Second Circuit."  Although the Second Circuit's framing of the inquiry was not incorrect in calling for the court to give "substantial weight" to the losing party's reasonableness, "the Court of Appeals' language at times suggests that a finding of reasonableness raises a presumption against granting fees…and that goes too far."  The court continued, "[s]till more, the district courts in the Second Circuit appear to have overly learned the Court of Appeals' lesson, turning 'substantial' into more nearly 'dispositive' weight."

Accordingly, even though the Supreme Court adopted Wiley's position as to the main "contested issue," it vacated and remanded the denial of Kirtsaeng's fee application to "ensure that the court will evaluate the motion consistent with the analysis we have set out—giving substantial weight to the reasonableness of Wiley's litigating position, but also taking into account all relevant factors."

Conclusion

The opinion in Kirtsaeng II does not represent a departure of any kind from Fogerty, but rather seeks to provide additional guidance to lower courts in their discretionary determination on attorney fee awards.  In particular, Kirtsaeng II seeks to discourage any tendency to automatically award fees based on any one factor—"objective unreasonableness"—notwithstanding its important role in the analysis.  And although Kirtsaeng lost his principal argument, he won reversal and the chance to fight another day for his fee award in this long-running and still-unfinished case.  Perhaps a Kirtsaeng III will not be necessary.

Robert W. Clarida is a partner at Reitler Kailas & Rosenblatt, LLC in New York.  He has extensive experience in all aspects of copyright law and has litigated a number of high-profile copyright matters and significant appeals in several Circuits.  Bob speaks and writes frequently on copyright issues, is the author of the treatise COPYRIGHT LAW DESKBOOK (BNA 2009), and co-authors the regular copyright law column in the New York Law Journal.  He also teaches a seminar on emerging intellectual property issues at Columbia Law School and is the past chair of the Copyright and Literary Property Law Committee of the Association of the Bar of the City of New York.  He earned his J.D. in 1993 from Columbia University, where he was a Harlan Fiske Stone scholar, after earning a Ph.D. in music composition from SUNY Stony Brook in 1987, and receiving a Fulbright fellowship to the Musicology Institute of Gothenburg University, Sweden. 

Robert J. Bernstein practices law in New York City in The Law Office of Robert J. Bernstein, focusing on copyright, trademark and entertainment law, and related litigation and mediation.  He is a frequent author and lecturer on copyright law and litigation, an Honorary Trustee and past President of the Copyright Society of the U.S.A., and formerly served as Chairman of the Copyright Law Committee of the American Intellectual Property Law Association and as a member of its Board of Directors.  Mr. Bernstein has also served as a mediator in copyright and trademark disputes and on the Panel of Neutrals/Trademark Mediators of the International Trademark Association.