WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court yesterday held that an appellate court “should review all aspects” of a district court’s decision to award attorney fees under Section 285 of the Patent Act under an “abuse-of-discretion” standard (Highmark Inc. v. Allcare Health Management Systems, Inc., No. 12-1163, U.S. Sup.; See 3/3/14, Page 4) [lexis.com subscribers may access Supreme Court briefs and the opinion for this case].
In a unanimous ruling written by Justice Sonia Sotomayor, the Supreme Court cited its same-day holding in Octane Fitness LLC v. ICON Health & Fitness Inc. (No. 12-1184, U.S. Sup.; See 3/3/14, Page 6) [an enhanced version of this opinion is available to lexis.com subscribers], which counsels that the word “exceptional” in Section 285 should be interpreted in accordance with its ordinary meaning.
“Our holding in Octane settles this case: Because § 285 commits the determination whether a case is ‘exceptional’ to the discretion of the district court, that decision is to be reviewed on appeal for abuse of discretion,” the Supreme Court held.
At issue in the dispute is an August 2012 ruling by the Federal Circuit U.S. Court of Appeals that partially vacated a $4.6 million attorney fee award in favor of petitioner Highmark Inc. on grounds that none of the instances of litigation misconduct relied on by a Texas federal judge separately warranted an exceptional case finding. 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 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.
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 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. Oral arguments were held Feb. 26.
Vacating and remanding, the Supreme Court began by noting that — traditionally, pursuant to Pierce v. Underwood, 487 U.S. 552, 558 (1988) [enhanced version] — decisions on questions of law are subject to de novo review, decisions on questions of fact are reviewed for clear error and decisions on matters of discretion are reviewed for an abuse of discretion. In light of Octane, “the determination whether a case is ‘exceptional’ under §285 is a matter of discretion,” according to the Supreme Court. To that end, as in Pierce, the text of the Patent Act suggests “some deference” to a district court upon appeal, the Supreme Court ruled. What’s more, pursuant to Pierce, “the district court is ‘better positioned’ to decide whether a case is exceptional . . . because it lives with the case over a prolonged period of time.’”
“We therefore hold that an appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district court’s §285 determination. Although questions of law may in some cases be relevant to the §285 inquiry, that inquiry generally is, at heart, ‘rooted in factual determinations,’” the Supreme Court ruled, citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990) [enhanced version].
“The judgment of the United States Court of Appeals for the Federal Circuit is vacated, and the case is remanded for further proceedings consistent with this opinion,” the Supreme Court added.
Highmark is represented by Neal K. 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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