Highmark, Inc. v. Allcare Health Management Systems, Inc.

Issues 

Is a district court’s finding that a patent suit is objectively baseless entitled to deference?

Oral argument: 
February 26, 2014

Respondent Allcare Health Management Systems, Inc., owns U.S. Patent No. 5,301,105, which covers a method of data entry and management used in the context of medical treatment. In 2002, Allcare notified Petitioner Highmark, Inc., a medical insurance provider, that Highmark was infringing on Allcare’s patent. Highmark sought a declaratory judgment of noninfringement; Allcare counterclaimed for infringement. After the district court granted summary judgment in Highmark’s favor, Highmark moved for an award under 35 U.S.C. § 285, which grants attorneys’ fees for “exceptional cases.” Though the district court granted the award for two of Allcare’s claims, the Federal Circuit Court of Appeals reviewed the claims de novo and reversed one of them. The Supreme Court granted certiorari to determine the scope of deference given to district courts to find “exceptional cases.” The ruling in this case, in tandem with another case before the Court, Octane Fitness, LLC v. Icon Health & Fitness, Inc., will impact how long and how readily litigants may pursue future patent cases.

Questions as Framed for the Court by the Parties 

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.

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Facts

Respondent Allcare Health Management Systems, Inc. (“Allcare”) owns U.S. Patent No. 5,301,105 (“the ’105 patent”), which covers a health management system that facilitates interactions among physicians, patients, employers, banks, and insurance companies. See Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 687 F.3d 1300, 1306 (Fed. Cir. 2012). Generally, the patent covers a method of determining, through the use of a data processor, whether further medical review is necessary before a physician approves a patient’s treatment. See id. Allcare commissioned a company, Seaport Surveys, to conduct telephone surveys to identify companies whose computer systems made them potential targets of litigation. See Brief for Petitioner, Highmark at 4.

Petitioner Highmark, Inc. (“Highmark”) is a non-profit Blue Cross Blue Shield Plan insurance provider. See Brief for Petitioner, Highmark at 5. In 2002, Allcare notified Highmark that it believed Highmark’s transaction processing system infringed on the ’105 patent. See id. Highmark filed suit against Allcare seeking declaratory relief from Allcare’s claims of infringement. See Highmark, 687 F.3d at 1307. Allcare counterclaimed, asserting infringement. See id.

Specifically at issue were Allcare’s patent claims: 52, which requires a physician to enter into a data processor the patient’s symptoms to identify tentatively whether further medical review is necessary before approving treatment; 53, which relies and expands upon 52; and 102, which requires an integrated interaction among patients and employers to determine appropriate treatment. See Highmark, 687 F.3d at 1306–07, 1312.

At trial, Highmark moved for summary judgment of noninfringement on all claims. See Highmark, 687 F.3d at 1307. Allcare did not oppose summary judgment on claim 102. See id. At the recommendation of a special master appointed by the court to resolve issues of claim construction, the district court granted summary judgment for Highmark on claims 52 and 53. See id.

With the appeal still pending, Highmark moved for an “exceptional case” finding under 35 U.S.C. § 285, which awards attorneys’ fees and expenses. See Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 687 F.3d 1300, 1307 (Fed. Cir. 2012). Additionally, Highmark moved for sanctions against Allcare’s attorneys under Rule 11. See id.

The district court found that claims 52 and 102 were frivolous and that Allcare’s attorneys had engaged in misconduct by asserting a frivolous position. See Highmark, 687 F.3d at 1308. Accordingly, the court awarded Highmark over $4 million in attorneys’ fees and over $200,000 in expenses; invoking its inherent power to impose sanctions, the court awarded an additional $375,400.05. See id.

Subsequently, Allcare’s attorneys withdrew from the case and moved to reconsider the Rule 11 sanctions, which the district court then vacated. See Highmark, 687 F.3d at 1308. Allcare moved to reconsider also the exceptional case finding and attorneys’ fees award under § 285, or alternatively, for the court to grant a new trial or evidentiary hearing, which the court denied. See id.

On appeal, the Federal Circuit Court considered only whether the district court erred in finding the case exceptional. See Highmark, 687 F.3d at 1308. The appellate court held that for a case to be exceptional, the claim must be (1) brought in “subjective bad faith” and (2) “objectively baseless”—which is a question of both law and fact and thus subject to de novo review. See id.

Without affording deference to the district court’s finding, the Federal Circuit affirmed that claim 102 warranted a finding of an exceptional case; however, the appellate court reversed the exceptional case finding for claim 52. See Highmark, 687 F.3d at 1319.  The Supreme Court granted certiorari to resolve the proper level of deference an appellate court should give to a district court when reviewing a district court’s finding of exceptional cases. See Brief for Respondent, Allcare at 1.

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Discussion

This case addresses scenarios where defendants in patent lawsuits seek monetary compensation for litigation they claim was frivolous. More specifically, this case will resolve how much deference appellate courts should give to district courts to determine whether compensation is appropriate. The Supreme Court’s ruling in this case should be read in conjunction with its ruling in Octane Fitness, LLC v. Icon Health & Fitness, Inc., which implicates a similar scenario.

At the heart of both Octane and Highmark is 35 U.S.C. § 285, which awards attorneys’ fees in “exceptional cases.” While Octane addresses the appropriate test to find an exceptional case, Highmark involves the scope of deference given to district courts to find one element of that test: “objective baselessness.” Petitioner Highmark argues that the Federal Circuit Court ought to have given deference to the district court’s finding. See Brief for Petitioner, Highmark at 3. Respondent Allcare claims that the appellate court rightly reviewed the claim de novo. See Brief for Respondent, Allcare at 2.

The Supreme Court’s ruling in both Octane and Highmark will impact the proliferation of patent litigation, particularly where the claims seem unconvincing. Specific to Highmark, the Court’s ruling will determine the reviewability of a district court’s finding—and thus, how easily a defendant may invoke § 285 to seek an award of attorneys’ fees and expenses.

STRUCTURAL ARGUMENT FOR DEFERENCE

Highmark argues that district courts are in the best position to determine whether a claim is objectively baseless. See Brief for Petitioner, Highmark at 15–16. Objective baselessness, according to Highmark, is an issue of litigation supervision, which is best suited for district courts to resolve. See id. at 18. The Blue Cross Blue Shield Association (“BCBSA”), of which Highmark is a member, agrees, adding that a district court would be “intimately familiar” with the entire proceedings. See Brief of Amicus Curiae Blue Cross Blue Shield Association, in Support of Petitioner at 6. Thus, according to BCBSA, de novo appellate review would give a “clean slate” to a party, undermining the district court’s purview over trial on the merits. See id. at 18.

Allcare counters that deference to district courts would produce variable results in patent litigation. See Brief for Respondent, Allcare at 43. Yet according to Allcare, Congress created the Federal Circuit to ensure consistency and uniformity in patent cases. See id. Allcare further contends that the consensus process of appellate review, in tandem with the experience of appellate judges, increases the likelihood of reaching a correct result. See id. at 44.

BCBSA maintains that a finding of objective baselessness is a fact-intensive issue. See Brief of Amicus Curiae Blue Cross Blue Shield Association, in Support of Petitioner at 15–16. In the view of BCBSA, such issues remain best suited for district courts. See id. Yahoo! Inc. and several other organizations agree, calling for an “abuse of discretion” standard for appellate review—where an appellate court reviews district court findings for abusing their discretion, but otherwise defers to the district courts. See Brief of Amicus Curiae Yahoo! Inc. et al., in Support of Petitioners at 31.

Allcare insists that objective baselessness is, like its centuries-old antecedent probable cause, a legal conclusion. See Brief for Respondent, Allcare at 2. Thus, Allcare argues that appellate courts are not bound to defer to a district court’s finding of objective baselessness. See id. at 48. Despite writing in support of neither side, Google Inc. and other organizations agree with Allcare that de novo review is appropriate. See Brief of Amicus Curiae Google Inc. et al., in Support of Neither Party at 21–22. According to these amici, the reviewability of questions of law, like objective baselessness, is critical to maintaining the balance between stopping infringement and preventing meritless claims of infringement. See id. at 1.

THE DETERRENCE OF UNNECESSARY PATENT LITIGATION

Highmark claims that de novo review would encourage litigants to drag out baseless litigation. See Brief for Petitioner, Highmark at 44. Highmark warns that these long processes are a costly burden to businesses. See id. at 45. The American Intellectual Property Law Association (“AIPLA”) argues similarly that de novo review may discourage district courts from exercising their authority under § 285 when their decisions may be reversed on appeal. See Brief of Amicus Curiae American Intellectual Property Law Association, in Support of Neither Side at 25–26. Ultimately, the AIPLA cautions that prevailing litigants will have to bear the costs of unreasonable litigation. See id.

Allcare counters that Highmark cannot demonstrate that a lack of deferential review encourages baseless litigation. See Brief for Respondent, Allcare at 62. Though Highmark warns that de novo review gives parties a way to reverse awards, Allcare argues that less deferential review also benefits parties whose awards were wrongly denied. See id. at 63. Moreover, Allcare claims that de novo review will help to ensure that findings of exceptional cases remains just that—exceptional. See id. at 64.

The Supreme Court’s ruling in this case will resolve the proper scope of deference given to district courts in assessing whether to grant awards under 35 U.S.C. § 285. That ruling, along with the ruling in Octane, will impact both how long and how readily litigants may pursue future patent cases.

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Analysis

Petitioner Highmark claims that the Federal Circuit Court of Appeals erred when it  reversed the United States District Court for the Northern District of Texas’ award of attorneys’ fees pursuant to 35 U.S.C. § 285 (“Section 285”) of the Patent Act after reviewing the district court’s decision under the de novo standard. See Brief for Petitioner, Highmark at 10–11, 13. Respondent Allcare argues that the Federal Circuit correctly applied de novo review and reached the correct conclusion when it reversed the district court’s award of attorneys’ fees. See Brief for Respondent, Allcare at 66–67.

First, Petitioner claims that two Supreme Court cases, Pierce v. Underwood (“Pierce”), and Cooter & Gell v. Hartmarx (“Cooter”), established that the proper standard of review for Section 285 attorneys’ fees awarded by a district court is deferential, and not the de novo standard that the Federal Circuit Court applied. See Brief for Petitioner at 13–15. Respondent Allcare, to the contrary, maintains that Supreme Court precedent provides that objective reasonableness is an issue of pure law that should be reviewed de novo. See Brief for Respondent at 36.

Second, Petitioner argues that, in view of other Supreme Court precedent, deferential review, not de novo, is warranted here. See Brief for Petitioner at 37–39. Specifically, Petitioner contends that under the Court’s precedent, deferential review is the proper standard for fee awards under the Civil Rights Attorney’s Fees Awards Act, the Copyright Act, discovery sanctions, and other similar fee awards. See id. at 38–39. Allcare, however, maintains that the cases Highmark relies on did not deal with standard of review, and thus they do not speak directly to the issue at hand. See Brief for Respondent at 58–59. To this end, Respondent argues that, when pleadings are found to be “frivolous” and thus meriting attorneys’ fees, it is not necessarily because of an unsubstantiated legal position, but rather because they “contained deliberate untruths and fabrications.” Id. at 59.

Finally, Petitioner argues that the recent explosion of patent litigation initiated by non-practicing entities, more commonly known as “patent trolls,” causes enormous harm to the economy, and that de novo review, while not a panacea, will help subdue frivolous suits brought by patent trolls, and best serve the underlying purposes of the Patent Act. See Brief for Petitioner at 44. Respondent Allcare claims that Highmark is unable to demonstrate any connection between the standard of review applicable here and the amount of baseless patent litigation. See Brief for Respondent at 62–63.

ARE PIERCE AND COOTER CONTROLLING PRECEDENT?

The petitioner claims that Pierce and Cooter control here because Section 285’s exceptional case standard and the “objective baseless” requirement for attorneys’ fees present a mixed question of fact and law, as did the “substantial justification” requirement in Pierce and “warranted by existing law” requirement in Cooter. See Brief for Petitioner at 15. Respondent Allcare claims that the Court’s rulings in Pierce and Cooter relied on express statutory language and a difficult mix of legal and factual conclusions in ruling that deferential review was warranted and that such considerations are not present here. See Brief for Respondent at 38–41. The objective baselessness inquiry, according to Highmark, will usually involve factual questions or legal questions influenced by factual questions. Highmark claims, however, that even if the inquiry contains purely factual questions, the proper standard of review for Section 285 sanctions is the deferential standard of review, as per the holdings in Pierce and Cooter. See Brief for Petitioner at 24. Highmark argues that the considerations present in Pierce and Cooter that lead the court to rule that deferential review was the proper standard are also present here. See id. at 15. Specifically, these considerations include the statutory text, consideration of the best-positioned decision-maker, efficiency costs, law-clarifying value, distortion of the appellate process, and discouragement of collateral appeals. See id. at 15, 16–18, 19, 20–23. 

Allcare argues that not only are these considerations not relevant here, but that because neither Pierce nor Cooter involved Section 285 attorneys’ fees, they do not control here. Brief for Respondent at 42–43. Indeed, Pierce dealt with a fee award under the Equal Access to Justice Act (“EAJA”) and Cooter with Rule 11 sanctions. Id. In Pierce, Allcare maintains, the Court ruled that de novo review was improper because it might strain appellate resources, whereas here the sheer size of Section 285 awards will likely be reason by itself to appeal, so Pierce’s conservation justification is irrelevant. Id. at 42. Additionally, Allcare notes that Cooter dealt with Rule 11 sanctions, and held that deferential review was the proper standard. Id. at 42–43. Allcare contends that the Court in Cooter reasoned that the district court’s familiarity with the “local bar’s litigation practices” meant it was “best situated” to assess whether Rule 11 sanctions are proper. Id. at 42. Here however, according to Allcare, the Federal Circuit was established for the specific purpose of ensuring certainty and accuracy in the development and application of patent law, so that court is best situated to assess whether Section 285 attorneys’ fees are warranted. Id. at 43.

SUPREME COURT PRECEDENT FOR ATTORNEYS’ FEES STANDARD OF REVIEW

Highmark maintains that the Supreme Court need look no further than Pierce and Cooter to determine that deferential review is the proper standard. See Brief for Petitioner at 37. However, according to Highmark, even if the Court does look further, the “broader landscape of standard-of-review cases” points to the conclusion that Section 285 exceptional-case findings fall within the line of cases reviewed deferentially, and have little in common with cases reviewed de novo. Id. Highmark argues that in the fee-shifting context for awards in copyright and patent cases, and discovery sanctions, the Court’s longstanding precedent on appellate review has been substantial deference review because of the district court’s superior understanding of the litigation. See id. at 38. Highmark acknowledges that a limited line of cases with mixed questions of fact and law hold that de novo review is the proper standard. Id. at 40. However, Highmark distinguishes these cases on three grounds from the one at hand. Highmark notes that these cases (1) generally involve constitutional considerations, (2) are not ancillary to the merits in the same sense as fee litigation, and (3) do not pose issues concerning the distortion of appellate process in the same way that Pierce and Cooter did. Id. Per Highmark’s argument, this case involves none of these concerns, and thus the proper standard of review is substantial deference to the district court’s decision. Id. 

Allcare, on the other hand, argues that the constitutional right of access to the courts favors de novo review. See Brief for Respondent at 45. Additionally, Allcare claims that fee awards under Section 285 remain a legal question subject to de novo review at the appellate stage, because there are no disputed facts. Id. at 60–61. 

POLICY CONSIDERATIONS AND THE RISE OF “PATENT TROLLS”

Highmark’s third argument for deferential review involves various policy considerations of recent patent litigation practice. Highmark claims that a de novo standard of review would empower patent trolls “to file, and drag out, baseless litigation.” See Brief for Petitioner at 44. Highmark continues that a majority of litigation costs are borne during discovery, before summary judgment can dispel meritless claims. Id. The trolls thus create a lock-up situation where, by carefully calculating the settlement fees they demand, defendants are driven by a perverse incentive, as it is cheaper to settle than defend a meritless claim to the summary judgment stage. Id. at 45–46. Highmark further indicates that statistics show that the economic losses to the economy as a result of such practices are extremely costly. See id. at 47. Additionally, Highmark claims that Congress’ intention in enacting the Patent Act was to encourage innovation, meaning that this practice is at complete odds with the underlying purpose of the statutory intent of Section 285. Id. at 48. Finally, the possibility of being punished for frivolous litigation by assigning defendant’s fees to the patent troll would dissuade a troll from pursuing a meritless suit. Id. 

Allcare claims that Highmark cannot adequately support this assertion, so this argument is irrelevant. See Brief for Respondent at 62. The petitioner argues that if a district court declines to impose fees, the decision is almost never reversed because the party seeking fees must prove a negative on appeal – that “there are no colorable legal arguments at all that could have supported the trolls’ claims.” Brief for Petitioner at 48–49. On the other hand, if the district court were to award attorneys’ fees, the trolls could undo this through the Federal Circuit’s approach simply through imagining a colorable legal argument that could have been, albeit was not, presented to the trial court. Id. Finally, Highmark claims that this is not simply a hypothetical case; it is actually what happened here. Id. Allcare claims that the chances of changing the district court’s decision are necessarily greater when a higher standard of deference applies, and that this works for both parties equally. See Brief for Respondent at 63. Thus, Highmark argues that the lower decision must be reversed to prevent patent trolls from pursuing frivolous lawsuits, demanding settlements, or having fee awards reversed by the Federal Circuit, and to best serve the underlying purposes of the Patent Act. Brief for Petitioner at 48.

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Conclusion

In this case, the Supreme Court will determine the proper amount of deference the district court’s exceptional-case finding ability is entitled to in the context of awarding attorneys’ fees pursuant to Section 285 of the Patent Act. The case has broad implications for the future of patent litigation, and, in particular, the appeals process and settlement negotiations. From a policy standpoint, the case may severely restrict the ability of non-practicing entities, or “patent trolls,” to demand payments of fees for patents that they hold but never seek to actually utilize or incorporate into products. Many high-profile tech companies write as amici to argue that this practice, in its current form, creates large market inefficiencies, enforces counter productivity in the market, and harms the expansion of new technology and hinders the open market on an expansive basis. Allcare claims, however, that the statistics behind these arguments bear weak causality to the conclusions supporters of the petitioner wish the Court to draw.

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Edited by 

Additional Resources 

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