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Withdrawal of Rule 11 Sanctions Against an Attorney Does Not Preclude an Exceptional Case Finding Under 35 U.S.C. § 285

August 07, 2012

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Last Month at the Federal Circuit - September 2012

Judges: Newman, Mayer (dissenting-in-part), Dyk (author)

[Appealed from: N.D. Tex., Judge Means]

In Highmark, Inc. v. Allcare Health Management Systems, Inc., No. 11-1219 (Fed. Cir. Aug. 7, 2012), the Federal Circuit affirmed-in-part, reversed-in-part, and remanded the district court’s exceptional case finding under 35 U.S.C. § 285 and award of attorneys’ fees and costs to Highmark, Inc. (“Highmark”).

Allcare Health Management Systems, Inc. (“Allcare”) owns U.S. Patent No. 5,301,105 (“the ’105 patent”), directed to methods of managing health care systems that interconnect and integrate physicians, medical care facilities, patients, insurance companies, and financial institutions under a utilization review process. Highmark sued Allcare, seeking a DJ of noninfringement, invalidity, and unenforceability of all claims of the ’105 patent, and Allcare counterclaimed for infringement. Highmark moved for SJ of noninfringement, and the district court found that Highmark did not infringe. Allcare appealed, and the Federal Circuit affirmed the judgment without written opinion.

During the pendency of the appeal, Highmark moved for an exceptional case finding, an award of attorneys’ fees and expenses under 35 U.S.C. § 285 against Allcare, and for sanctions against Allcare’s attorneys under Fed. R. Civ. P. 11. The district court found that the case was exceptional and that Allcare’s attorneys had violated Rule 11. Specifically, the district court found that Allcare’s claims for infringement of claims 52 and 102 of the ’105 patent were frivolous, and that Allcare had engaged in litigation misconduct by asserting a frivolous position based on res judicata and collateral estoppel. The district court later vacated the Rule 11 sanctions against Allcare’s attorneys but maintained the exceptional case finding and the award of attorneys’ fees against Allcare.

As an initial matter on appeal, the Court rejected Highmark’s argument that the objective reasonableness standard applies only with respect to the initial filing of the counterclaim and not to the continued litigation of that claim. “The objective prong is a single backwards-looking inquiry into the reasonableness of the claims in light of the full record.” Slip op. at 12 (citing iLOR, LLC v. Google, Inc., 631 F.3d 1372, 1377-78 (Fed. Cir. 2011)). The Court noted that the subjective prong similarly takes into account the totality of the 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.” Id. (citing Computer Docking Station Corp. v. Dell, Inc., 519 F.3d 1366, 1380 (Fed. Cir. 2008)).

The Court addressed the two asserted claims separately, finding that Allcare’s assertion of claim 102 warranted an exceptional case finding but that its assertion of claim 52 did not. Regarding claim 102, the Court found that Allcare’s infringement claims were objectively unreasonable. The Court noted that Allcare had taken a contradictory position earlier in the case by agreeing that the preamble was limiting, that Allcare’s own expert conceded during a deposition that “[t]here was also no plausible argument that Highmark’s method involved the interconnection and interaction of patients and employers as was required by claim 102,” and that “Allcare ha[d] not even argued that Highmark’s method included such interaction.” Id. at 15-16. The Court rejected Allcare’s argument with regard to subjective bad faith, finding that “Allcare knew or should have known that its allegation of infringement of claim 102 was unreasonable . . . .” Id. at 16. The Court also rejected Allcare’s argument that the district court’s vacating sanctions against Allcare’s attorneys was inconsistent with the exceptional case finding. The Court held that while “Rule 11 sanctions against an attorney may form a basis for an exceptional case finding,” “the absence of [such] sanctions does not mandate the opposite conclusion.” Id. at 17.

Regarding claim 52, however, the Court held that Allcare’s position was not objectively unreasonable, specifically finding that Allcare’s claim construction position was supported by the patent specification. “[S]imply being wrong about claim construction should not subject a party to sanctions where the construction is not objectively baseless.” Id. at 20 (quoting iLOR, 631 F.3d at 1380). The Court noted that because it concluded that Allcare’s allegations with regard to claim 52 were not objectively baseless, it need not reach the question of whether Allcare acted in subjective bad faith.

The Court also disagreed with the district court’s exceptional case finding on the basis of three instances of alleged 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. First, the Court found that Allcare’s brief assertion based on claim preclusion did not warrant an exceptional case finding, because it promptly withdrew that position after concluding it would be unsuccessful. Second, the Court found that Allcare’s different claim construction positions changed only the wording used and did not differ in substance. Finally, the Court found that the district court erred in its exceptional case finding based on representations Allcare made about personal jurisdiction before the Western District of Pennsylvania, stating that neither Highmark nor the district court provided authority or justification for sanctioning conduct before another tribunal.

Judge Mayer dissented-in-part, contending that the Court erred in not granting deference to the district court’s finding that the infringement claims asserted by a litigant at trial were objectively unreasonable. In Judge Mayer’s view, there is no basis for overturning the trial court’s determination of frivolousness when applying the highly deferential standard of review. Thus, Judge Mayer would affirm the district court’s award of attorneys’ fees and expenses in its entirety.

Summary authored by Kimberly D. Braslow, Ph.D., student associate at Finnegan.