On August 7, 2012, the Federal Circuit issued a decision (available here) in Highmark, Inc. v. Allcare Health Management Systems, Inc. Allcare (the patent owner) had appealed Judge Means’ exceptional case order (under 35 U.S.C. § 285) and award of attorney’s fees and costs. “The district court found the case exceptional because it concluded that Allcare had pursued frivolous infringement claims, asserted meritless legal positions during the course of the litigation, shifted its claim construction positions, and made misrepresentations in connection with a motion to transfer venue.” The Federal Circuit affirmed in part, reversed in part, and remanded the case.
Allcare had claimed that Highmark infringed claims 52, 53, and 102 of U.S. Patent No. 5,301,105, which “is directed to managed health care systems used to interconnect and integrate physicians, medical care facilities, patients, insurance companies, and financial institutions, particularly with respect to utilization review.” (citations and quotations omitted). (Highmark had filed a declaratory judgment lawsuit against Allcare in the Western District of Pennsylvania. After the case was transferred to the Northern District of Texas, Allcare counterclaimed for infringement of claims 52, 53, and 102.)
After claim construction, Highmark moved for summary judgment of non-infringement. Allcare did not oppose the motion with respect to claim 102 (and formally withdrew this claim), but opposed the motion with respect to claims 52 and 53. The district court granted summary judgment in Highmark’s favor regarding claims 52 and 53, and the Federal Circuit, on Allcare’s appeal, affirmed the district court’s judgment under Federal Circuit Rule 36 without a written opinion.
While that appeal was pending, Highmark “moved for an exceptional case finding with respect to Allcare and an award of attorneys’ fees and expenses under section 285[.]” Judge Means found the case exceptional, ruling that Allcare’s claims for infringement of claims 52 and 102 were frivolous. Additionally:
The court also found that Allcare engaged in litigation misconduct by asserting a frivolous position based on res judicata and collateral estoppel, shifting its claim construction position throughout the course of the proceedings before the district court, and making misrepresentations to the Western District of Pennsylvania in connection with a motion to transfer venue. After finding the case exceptional under section 285, the district court entered judgment awarding Highmark $4,694,727.40 in attorneys’ fees and $209,626.56 in expenses, and it also invoked its inherent power to impose sanctions and awarded $375,400.05 in expert fees and expenses. The district court did not determine how much of the monetary awards were attributable to each issue.
Allcare appealed the exceptional case finding. The Federal Circuit summarized the law on exceptional cases as follows:
Under 35 U.S.C. § 285, a “court in exceptional cases may award reasonable attorney fees to the prevailing party.” Once it is determined that the party seeking fees is a prevailing party, determining whether to award attorneys’ fees under 35 U.S.C. § 285 is a two-step process. First, a prevailing party must establish by clear and convincing evidence that the case is “exceptional.” An award of fees against a patentee can be made for a frivolous claim, inequitable conduct before the Patent and Trademark Office, or misconduct during litigation. Second, if the case is deemed exceptional, a court must determine whether an award of attorneys’ fees is appropriate and, if so, the amount of the award. [T]he amount of the attorney fees [awarded] depends on the extent to which the case is exceptional. (citations and quotations omitted).
There was no dispute that Highmark was the prevailing party. The Federal Circuit then considered the grounds relied on by the district in finding that the case was exceptional.
Frivolous Claims. The district court had found that Allcare’s claims against Highmark were frivolous. The Federal Circuit stated, with respect to frivolous claims:
It is established law under section 285 that absent misconduct in the course of the litigation or in securing the patent, sanctions may be imposed against the patentee only if two separate criteria are satisfied: (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless. The requirement that the litigation be objectively baseless does not depend on the state of mind of the [party] at the time the action was commenced, but rather requires an objective assessment of the merits. To be objectively baseless, the infringement allegations must be such that no reasonable litigant could reasonably expect success on the merits.
Furthermore, even if the claim is objectively baseless, it must be shown that lack of objective foundation for the claim was either known or so obvious that it should have been known by the party asserting the claim. This is known as the subjective prong of the inquiry. This same objective/subjective standard applies for both patentees asserting claims of infringement and alleged infringers defending against claims of infringement.
We have recently clarified that the threshold objective prong * * * is a question of law based on underlying mixed questions of law and fact and is subject to de novo review. That determination must be made by the court as a matter of law rather than by the jury. We review the court’s determination of objective reasonableness without deference since it is a question of law. With respect to the subjective prong, there is a presumption that an assertion of infringement of a duly granted patent is made in good faith. Thus, the subjective prong * * * must be established with clear and convincing evidence. We review factual findings as to subjective bad faith for clear error. . . . the objective prong requires a retrospective assessment of the merits of the entire litigation determined based on the record ultimately made in the infringement proceedings. The question is whether, in light of that record, no reasonable litigant could realistically expect success on the merits. The objective prong is a single backwards-looking inquiry into the reasonableness of the claims in light of the full record.
Similarly, in considering a party’s subjective state of mind, we are to take into account the totality of circumstances. Unlike the objective prong, which is a single retrospective look at the entire litigation, the subjective prong may suggest that a case initially brought in good faith may be continued in bad faith depending on developments during discovery and otherwise. . . .
[W]e apply the objective/subjective standard on a claim by claim basis. Because the rationale for awarding fees against a patentee for the filing of frivolous claims is to reimburse the alleged infringer for defending an action improperly brought, in these situations attorneys’ fees can only be shifted insofar as each claim is found frivolous.” (citations and quotations omitted).
Accordingly, the Federal Circuit analyzed whether Allcare’s “infringement claim based on claim 102 rendered the case exceptional and the finding that the infringement claim based on claim 52 rendered the case exceptional.” The Federal Circuit agreed with the district court that Allcare’s claim with respect to claim 102 warranted an exceptional case finding, holding that Allcare’s infringement claims with respect to claim 102 were “objectively unreasonable.”
Allcare argued on appeal that its infringement allegations regarding claim 102 did not warrant an exceptional case finding because they were not brought in “subjective bad faith.” The Federal Circuit disagreed. “A claim is brought in subjective bad faith if the objective unreasonableness of the claim was either known or so obvious that it should have been known by the patentee. That is clearly so here. Allcare knew or should have known that its allegation of infringement of claim 102 was unreasonable, and this is not a situation in which Allcare acted in good faith at the inception of the litigation, but because of later developments acted in bad faith in continuing the litigation.” (citations and quotations omitted). The Federal Circuit noted that, even where infringement allegations are objectively unreasonable, “a patentee may have reason to believe that its allegations are supportable so as to negate a finding of bad faith.” That was not the case here, however, as “Allcare has made no such showing at any point in the litigation.”
With respect to claim 52, the Federal Circuit held that Allcare’s position was not objectively unreasonable. Allcare’s claim construction position, while not correct, was not foreclosed by certain language in claim 52, and there was support in the patent’s specification for Allcare’s position. “[S]imply being wrong about claim construction should not subject a party to sanctions where the construction is not objectively baseless. This is not a case where the claim language was not subject to an alternate construction or where the specification and prosecution history clearly refute [the patentee’s] proposed claim construction. Allcare’s argument with respect to this element was not so unreasonable that no reasonable litigant could believe it would succeed.” (citations and quotations omitted). Because the burden was on Highmark to establish that, under Allcare’s alternative claim construction, the allegations of infringement were objectively unreasonable, and Highmark had not made this showing, Allcare’s infringement claim with respect to claim 52 was not objectively baseless. Accordingly, the Federal Circuit did not need to address whether Allcare acted in subjective bad faith. The Federal Circuit reversed the district court’s conclusion that Allcare’s claim 52 contentions supported an exceptional case finding.
Litigation Misconduct. Regarding litigation misconduct, the Federal Circuit stated:
[A]n exceptional case finding can also be supported by litigation misconduct. Litigation misconduct generally involves unethical or unprofessional conduct by a party or his attorneys during the course of adjudicative proceedings, and includes advancing frivolous arguments during the course of the litigation or otherwise prolonging litigation in bad faith. A finding of exceptionality based on litigation misconduct, however, usually does not support a full award of attorneys’ fees. Instead, the fee award must bear some relation to the extent of the misconduct, and compensate a party for the extra legal effort to counteract the[] misconduct[.]” (citations and quotations omitted).
The district court found litigation misconduct on account of three alleged instances of litigation misconduct: “(1) asserting a frivolous position based on res judicata and collateral estoppel; (2) shifting the claim construction position throughout the course of the proceedings before the district court; and (3) making misrepresentations to the Western District of Pennsylvania in connection with a motion to transfer venue.”
The Federal Circuit held that none of these actions was sufficient to subject Allcare to an exceptional case finding. Regarding the allegedly frivolous res judicata and collateral estoppel arguments, the Federal Circuit held that the arguments were not “objectively unreasonable at the time they were made” in light of the fact that the Supreme Court had not then disapproved of the “doctrine of preclusion by virtual representation.” (citations and quotations omitted). Therefore, at the time Allcare lodged the argument, it was not “wholly without merit.”
Regarding the alleged “shifting claim construction position,” the Federal Circuit found that Allcare’s “linguistic shifts in the proposed claim construction are insufficient to constitute litigation misconduct and an exceptional case finding. The constructions proffered by Allcare do not differ in substance.”
Regarding the alleged misrepresentations made by Allcare before the Western District of Pennsylvania relating to a motion to transfer venue, the Federal Circuit held that the district court (in the Northern District of Texas) erred by sanctioning conduct occurring before a different tribunal.
* * * * *
In summary, the Federal Circuit affirmed Judge Means’ finding that Allcare’s infringement allegations of claim 102 rendered the case exceptional, but reversed with respect to Judge Means’ finding that Allcare’s other claims and actions rendered the case exceptional. The Federal Circuit remanded the case, “[b]ecause the district court did not determine the amount of attorneys’ fees apportionable to each of the above issues[.]” On remand, the district court must “calculat[e] . . . attorneys’ fees based on the frivolity of the claim 102 allegations only.”
(Judge Mayer authored an interesting dissent that would have upheld the district court’s determination in its entirety, and also asserts that Allcare’s patent was invalid under Bilski because, according to Judge Mayer, it simply claims an abstract idea.)
Highmark is represented by Cynthia Kernick, James Martin, Kevin Katona, and Thomas Pohl, all of Reed Smith, LLP.
Allcare is represented by Donald Dunner and Erik Puknys, both of Finnegan, Henderson, Farabow, Garrett & Dunner, LLP; and Dan Boyd, of The Boyd Law Firm.