Standard of Review For Objective Reasonableness Argued at Supreme Court

Standard of Review For Objective Reasonableness Argued at Supreme Court

 WASHINGTON, D.C. — (Mealey’s) The question of whether review of an award of attorney fees is entitled to deference is now before the U.S. Supreme Court, following Feb. 26 oral arguments in a dispute over a patented method for reviewing health care claims (Highmark Inc. v. Allcare Health Management Systems, Inc., No. 12-1163, U.S. Sup.; See 2/18/14, Page 33).

Attorney Neal K. Katyal, representing petitioner Highmark Inc., urged the Supreme Court to reverse an August 2012 Federal Circuit U.S. Court of Appeals ruling that partially vacated a $4.6 million attorney fee award on grounds that none of the instances of litigation misconduct relied on by a Texas federal judge separately warranted an exceptional case finding.

Case Transferred

Respondent Allcare Health Management Systems Inc. owns U.S. patent No. 5,301,105, which is directed to managed health care systems and is used in “utilization review” to determine whether a health insurer should approve a treatment for a patient.  The method prevents authorization and payment until the appropriateness of the treatment has been determined and the treatment has been approved.  In 2002, Allcare sent a letter to Highmark, a managed care provider, asserting that Highmark’s Navinet system infringed. The accused system allows information to be entered about customers’ proposed medical procedures to obtain preauthorization and confirm whether a procedure is to be covered through Highmark's managed care plans.

Highmark sued Allcare in the U.S. District Court for the Western District of Pennsylvania, seeking a declaratory judgment of noninfringement, invalidity and unenforceability of all claims of the ‘105 patent.  After the case was transferred to the Northern District of Texas, Allcare counterclaimed for infringement, asserting infringement of claims 52, 53 and 102.  The District Court’s appointed special master issued a claim construction report, and Highmark moved for summary judgment of noninfringement.  Allcare opposed the motion with respect to claims 52 and 53 but did not oppose the motion with regard to claim 102 and withdrew the infringement allegations with respect to that claim.  The special master then recommended granting Highmark summary judgment of noninfringement of claims 52 and 53.

The District Court adopted the special master’s recommendations and entered final judgment of noninfringement in favor of Highmark.  Allcare appealed to the Federal Circuit, which in 2009 affirmed without a written opinion.  While the Federal Circuit appeal was pending, Highmark moved for an exceptional case finding with respect to Allcare and an award of attorney fees and expenses under Section 285 of the Patent Act and for sanctions against Allcare’s attorneys under Federal Rule of Civil Procedure 11.  The District Court found the case exceptional and found that Allcare’s attorneys had violated Rule 11.  Additionally, the court found that Allcare’s claims for infringement of claims 52 and 102 were frivolous and that Allcare engaged in litigation misconduct by asserting a frivolous position based on res judicata and collateral estoppel, by shifting its claim construction position throughout the proceedings and by making misrepresentations to the Western District of Pennsylvania in connection with the motion to transfer venue.

Rehearing Denied

The District Court awarded Highmark $4,694,727.40 in attorney fees and $209,626.56 in expenses based on its finding that the case is “exceptional” under Section 285.  The court also awarded $35,000 in Rule 11 sanctions against Allcare’s counsel.  Allcare’s attorneys then withdrew from the case based on conflicts of interest and separately moved for reconsideration of the Rule 11 sanctions, providing additional evidence about their representation of Allcare.  Based on the evidence, the District Court vacated the Rule 11 sanctions against the attorneys.  After the District Court denied Allcare’s motion to reconsider the exceptional case finding and judgment awarding attorney fees or, in the alternative, to grant a new trial or hold an evidentiary hearing, Allcare appealed to the Federal Circuit, which in August 2012 reversed the exceptional case finding in part in a divided opinion.  The panel majority, after de novo review, affirmed the exceptional case finding for Allcare’s claim 102 infringement litigation but reversed the exceptional case finding as to claim 52 on grounds that Allcare’s construction was not objectively baseless.  The majority, holding that none of the instances of litigation misconduct found by the District Court separately warranted an exceptional case finding, remanded the case for a calculation of attorney fees based only on the frivolity of the claim 102 allegations.

After the Federal Circuit denied rehearing en banc, Highmark filed a petition for certiorari with the Supreme Court, presenting the following question: “Whether a district court's exceptional-case finding under 35 U.S.C. § 285, based on its judgment that a suit is objectively baseless, is entitled to deference.”

‘Measuring The Delta’

Answering in the affirmative, Katyal told the Supreme Court the Federal Circuit erred on three fronts.  “First, this court has already held that a unitary abuse of discretion standard should be applied.  . . .  Second, the text of the Act, and in particular its key words — may and exceptional cases — imbued district courts with discretion.  And, third, the other factors this Court has looked to such as a lack of law clarifying benefits, the positioning of the decision maker, efficiency in avoiding distortion cut in favor of unitary abuse of discretion review,” Katyal argued.

Justice Elena Kagan then asked Katyal why a district court’s claim construction would be subject to de novo review but the same court’s assessment of the reasonableness of a plaintiff’s proffered claim construction should be entitled to deference.  “Is the main thing the judge [is] doing when it says that a claim construction is unreasonable is essentially measuring the delta between the actual the correct claim construction and the mistaken claim construction? Doesn’t that, itself, seem to be a question of law?” she asked.

In response, Katyal opined that “this is not a claim construction dispute.”

“This is actually a dispute about infringement and their inability to come up with any theory whatsoever for why there was an infringement violation.  . . .  If you give clever appellate lawyers . . . the ability to go to the court of appeals and repackage what were essentially factual claims and claim they’re legal, here claim construction, then you're going to waste an enormous amount of time and resources of the Federal Circuit as they seek to disaggregate:  is this really, truly factual or is this really legal,” Katyal warned.

Pierce, Cooter Cited

Brian H. Fletcher, representing the United States as amicus curiae for Highmark, told the Supreme Court that “a district court’s application to the particular facts of a case before it ought to be reviewed under a unitary abuse of discretion standard.”  Such an approach is “consistent” with the Supreme Court’s “repeated statements that decisions about the supervision of litigation ought to be reviewed under a deferential standard.” according to Fletcher. 

“And in this particular context, it's also supported by the text and history of Section 285, by 60 years of consistent appellate practice, and by the same sorts of practical considerations that led this Court to adopt a similar approach to very similar questions in” Pierce v. Underwood 487 U.S. 552 [1987]) and Cooter & Gell v. Hartmax Corp. (496 U.S. 384 [1990]), Fletcher continued.

No Perfect Answer

Lastly Donald R. Dunner, representing Allcare, said that Pierce and Cooter actually lend support to the respondent.  Furthermore, Dunner maintained that contrary to Katyal’s claims, “the issue was, is, and always [has been] a claim construction issue” and noted that the petitioners “concede that claim construction issues are reviewed de novo.”

Urging the Supreme Court to focus its analysis on Scott v. Harris (550 U.S. 372 [2007]), which “says expressly that objective reasonableness is a pure issue of law reviewed de novo when it’s separated from its factual components,” Dunner opined that although “factual components are reviewed deferentially . . . when you’ve got a legal issue the best court situated to deal with the legal issue” is the Federal Circuit. 

“I’m not saying we have a perfect answer because there’s not a perfect answer on our side, there’s not a perfect answer on their side. But there’s a best answer, and I suggest that the best answer is to let the legal issues decided by the Court that gets tons of patent issues, that has a lot more experience, as Justice [Samuel] Alito mentioned in one of the points that he made, rather than district court judges who may get a few cases, may get a lot of cases, depending what district you’re in,” he continued.

Justice Sonia Sotomayor expressed skepticism, however, asking Dunner, “[W]hy should this objective reasonableness be considered a pure question of law?”

“Because it’s not about right or wrong and legal answer; it’s about behavior during litigation,” she added.

Counsel

Highmark is represented by Katyal, Dominic F. Perella, David M. Ginn, R. Craig Kitchen, Amanda K. Rice and Jonathan D. Shaub of Hogan Lovells in Washington and Cynthia E. Kernick, James C. Martin and Thomas M. Pohl of Reed Smith in Pittsburgh.

Donald R. Dunner, Don O. Burley, Jason W. Melvin and Cora R. Holt of Finnegan, Henderson, Farabow, Garrett & Dunner in Washington and Erik R. Puknys of the firm’s Palo Alto, Calif., office represent Allcare.

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