Blurred Lines: Third Circuit’s Lanham Act Attorneys’ Fees Analysis Follows Recent Supreme Court Ruling in Patent Case

The Court of Appeals for the Third Circuit recently decided that the U.S. Supreme Court’s April decision on attorneys’ fees in a patent case, Octane Fitness, LLC v. Icon Health & Fitness, Inc., should also be applied in trademark cases under the Lanham Act. See Fair Wind Sailing, Inc. v. Dempster, Nos. 13-3305 & 14-1572 (3d Cir. Sept. 4, 2014). Defendant Dempster had successfully moved to dismiss the action under Rule 12(b)(6) of the Federal Rules of Civil Procedure and was awarded its attorneys’ fees under § 35(a) of the Lanham Act and the Virgin Islands Code. Plaintiff Fair Wind Sailing appealed the fee award. The Third Circuit ultimately vacated the District Court’s fee award and remanded, instructing the court below to utilize an inquiry consistent with the Supreme Court’s decision in Octane Fitness.

By way of background, the Third Circuit had long applied a two-step inquiry with regards to attorneys’ fees under section 35(a), which statutorily permits attorneys’ fees in “exceptional” trademark cases, defined by case law to require both culpable conduct by the losing party and then “exceptional” circumstances. See Green v. Fornario, 486 F.3d 100, 103 (3d Cir. 2007). This inquiry was also consistent with the standard applied for attorneys’ fees in patent cases under precedent from the Court of Appeals for the Federal Circuit, which asked if the litigation was both “brought in subjective bad faith” and “objectively baseless.” See Brooks Furniture Mfg., Inc. v. Duailier Int’l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005). As we have previously discussed, at the end of last year, the Federal Circuit backed away from this heightened standard of the exceptionality, indicating that district courts should examine the totality of the circumstances. However, the Supreme Court went a step further.

In Octane Fitness, the Supreme Court rejected these high bars on attorneys’ fees, choosing instead to give the term “exceptional” a far broader sweep. Based on the plain meaning of the word, the Court explained 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.” Octane Fitness, 134 S.Ct. 1749, 1756 (2014). Many legal commentators have opined that the Supreme Court’s decision was a response to increased calls for patent troll legislation.

In Fair Wind Sailing, the Third Circuit noted the similarities between § 285 of the Patent Act and § 35(a) of the Lanham Act, as well as the congressional reference to § 285 when passing the Lanham provision. Fair Wind Sailing, Slip op. at 22-23. The Third Circuit also noted that the Supreme Court relied on a definition for “exceptional” drawn from a decision applying § 35(a) when discussing the meaning of the word as used in § 285. Id. at 23. From these indications, the Third Circuit concluded that it understood the Supreme Court’s “clear message” that its new definition in Octane Fitness for “exceptional” should also be applied in Lanham Act actions. Id.

It is worth noting that this is the second time this summer that the Third Circuit has issued a significant decision adjusting the standards in Lanham Act cases. In August, the Third Circuit held that plaintiffs seeking preliminary injunctive relief under the Lanham Act are no longer entitled to a presumption of irreparable harm, basing its decision on two Supreme Court decisions – Winter v. Natural Resources Defense Council in 2008 and eBay v. MercExchange in 2006. See Ferring Pharmaceuticals v. Watson Pharmaceuticals, No. 13-2290 (3d Cir. Aug. 26, 2014). Writing for the panel, Judge Chagares noted that, while a presumption of irreparable harm may be justified in false advertising claims due to the difficulty in properly quantifying damages, other trademark infringement cases can draw from the analytical framework found in the Supreme Court decisions to satisfy the equitable principles upon which an injunction is based.

The Third Circuit’s recent decisions highlight its willingness to apply evolving law from one area of intellectual property to another, particularly where the statutory language aligns. These decisions also emphasize the need for intellectual property litigators — irrespective of whether they focus their practice on patents, trademarks, or copyrights — to stay abreast of evolving jurisprudence relating to all types of intellectual property.

Gibbons will continue to monitor Third Circuit intellectual property cases to determine if these two recent decisions are the beginning of a trend.