Federal Circuit Panel Splits on Standard of Review for Litigation Misconduct

In Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., __ F.3d __ (Fed. Cir. Aug. 7, 2012), a divided panel remanded for further proceedings the district court's award of attorneys' fees against an unsucessful patentee based upon assertion of frivolous infringement claims and litigation misconduct.  The case is noteworthy for a few reasons.

First, the facts.

The patentee asserted infringement of several claims out of the 102 claims in the '105 patent, including claims 52, 53, and 102.  The patent generally related to a method of determining whether a review of proposed treatment as part of health care reimbursement by an insurer was needed, and a way to preven tpayment until the treatment has been approved.  The district court granted the accused infringer's motion for summary judgment of non-infringement as to all three claims, and in fact the accused infringer did not oppose summary judgment on claim 102.  

While that decision was on appeal (and before it was affirmed under Fed. Cir. R. 36), the accused infringer moved the court to find the case exceptional, and also moved for Rule 11 sanctions.  The district court found it exceptional and found violations of Rule 11, and awarded about $5.2 million in fees and expenses.  The lawyers then withdrew from representing the patentee, based upon conflicts of interest, and moved seperately to reconsider the Rule 11 sanctions; the district court heard additional evidence from those attorneys, and then vacated the Rule 11 sanctions against the attorneys. Meanwhile, the patentee sought reconsideration of the exceptional case finding against it, but that was denied.  (The appellate court decision does not specify what the conflict was, but reading between the lines it may have been that the attorneys believed the client had not disclosed information to them.  From the opinion, it appears that Rule 11 sanctions had been imposed solely on the attorneys, not the client.)

On appeal, the Federal Circuit split, 2-1. The majority opinion by Judge Dyk (with Judge Newman, dissenting in part was Judge Mayer) stated that for a patentee's suit to be frivolous in terms of Section 285, both (1) the litigation had to have been brought in bad faith and (2) the litigation had to have been objectively baseless.  Both prongs had to be satisfied as to each asserted claim, and so determination of an exceptional case finding was made on a claim-by-claim basis.

With respect to the subjective bad faith prong, the court was in apparent agreement that it required proof of clear and convincing evidence of subject bad faith, which were reviewed for clear error.

With respect to the second prong, the disagreement between Judge Mayer and the panel majority centered on the standard of review for the second prong.  The panel majority emphasized that objective baselessness was a question of law based on underlying mixed questions of law and fact, and so was subject to de novo review, citing Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc., __ F.3d __ , 2012 WL 2149495 (Fed. Cir. June 14, 2012).   Judge Mayer, in contrast, argued that Bard had incorrectly applied the de novo standard of review to this question, when it had in fact been subject to the highly deferential "clear error" standard.  He wrote that "Bard was simply wrong…."   In its response to his argument, the panel majority viewed Judge Mayer's reading of Bard as inconsistent with Supreme Court precedent interpreting the sham litigation exception to the First Amendment, including Professional Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 US 49 (1993), and that deference was otherwise unwarranted due to policy reasons.

With respect to the merits, the focus of the appellate court decision was the assertion of claim 102.  In full, that claim provided (with the key language in the preamble emphasized):

A method of managing an integrated health care management system having input means, payment means and memory storage comprising:

(a) storing through said input means into said memory storage personal health profile data for each of a predetermined plurality of persons;

(b)storing into said memory storage symptoms and treatment data for each of a predetermined plurality of health profiles and problems;

(c) storing in said memory storage criteria for identifying treatments requiring utilization review;

(d) storing in said memory storage criteria for identifying treatments requiring second opinions;

(e) entering into said system information iden- tifying a proposed medical treatment for one of said plurality of persons;

(f)identifying whether or not said pro- posed medical treatment requires utilization review; and

(g) preventing said system from approving payment for said proposed medical treatment if said proposed medical treatment requires utilization review until such utilization review has been conducted.

The court reasoned that the preamble was limiting because the limitations in the claim body (such as "said system" in elements (e) and (g) could derive their antecedent basis solely from the preamble.  It further noted statements in the prosecution history that supported this construction, and noted that the patentee had agreed with this construction in litigation.

However, there was no plausible argument that this claim was infringed, and that fact seemed undisputed.  As a result, the court found the assertion objectively baseless.

With respect to subjective bad faith, the court concluded that there was no showing that, though it had lost, the "allegations are supportable so as to negate a finding of bad faith."  While "an adequate pre-filing investigation may negate a claim of bad faith," the district court had found that this did not occur; however, the majority stated that because the patentee had engaged in bad faith conduct from the inception, "because it knew or should have known that the allegation of infringement of claim 102 was frivolous — we need not examine the pre-filing investigation."  Further, it rejected the argument that the fact that the district court had vacated the Rule 11 sanctions was inconsistent with the exceptional case finding, stating that "a lack of sanctions against attorneys is not itself a ground for barring sanctions against a client."  Without explanation, the majority stated that the evidence that had led to vacatur of the Rule 11 sanctions "had no bearing on the interpretation of claim 102" or the patentee's knowledge of infringement.

With respect to claim 52, the court reached the opposite conclusion, finding that the patentee's construction, which would have led to infringement, was not "so unreasonable that no reasonable litigant coudl believe it woudl succeed."  Thus, the accused ifnringer failed to show that "under this alternative claim construction, the allegations of accused infringement were objectively unreasonable."

Turning to litigation misconduct as a basis to affirm the award, the court analyzed the three instances relied on by the district court, and found each one insufficient to justify the award because the accused infringer failed to show that any were objectively unreasonable when made.  While two of these are fact-specific, one instance was "shifting claim construction" with respect to one element of claim 52.  The court set out the different constructions proffered by the patentee, but reasoned that they were "linguistic shifts" which did not "differ in substance," and so constituted "minor word variations" that also may have been caused by the intervening Federal Circuit decision in Phillips.

As a result, the district court's finding that assertion of claim 102 rendered the case exceptional, but remanded for the district court "for a calculation of attorneys' fees based on the frivolity of claim 102 allegations only."

What's the case mean?

Clearly, careful consideration of infringement is required.  Assertion of even one non-infringed claim can result in some fee-shifting.  A party who drops infringement claims late in a case, such as here when faced with a motion for summary judgment, will likely face a motion to shift some fees, for example.

The case also illustrates the need for careful documentation of pre-suit investigation. While the award here did not turn on pre-filing investigation, the attorneys were able to avoid the Rule 11 sanctions based upon their presentation of evidence concerning pre-suit investigation.

Finally, with respect to the issue on which the panel divided — the standard of review and the question of whether objective reasonableness was reviewed for clear error or under the de novo standard — there are lessons for both sides.  On appeal, the victor in a fee shifting case must be prepared to withstand de novo review, and to do so on a claim-by-claim basis.  This renders appeals more expensive, and when a fee award is part of the merits on appeal, makes it difficult as a matter of space and writing to effectively address all issues.  

As for who was right about the standard of review, stay tuned.


About David

Professor of Law, Mercer University School of Law. Formerly Of Counsel, Taylor English Duma, LLP and in 2012-13, judicial clerk to Chief Judge Rader.