Commercial Litigation and Arbitration

Sanctions — Reasonable Prefiling Investigation May Negate Bad Faith — Misconduct in Another Court Sanctionable Only If It Is in Direct Defiance of Sanctioning Court — Relationship between Rule 11 and 35 U.S.C. § 285

Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 2012 U.S. App. LEXIS 16450 (Fed Cir. Aug. 7, 2012):

Allcare Health Management Systems, Inc. ("Allcare") appeals from an order of the United States District Court for the Northern District of Texas finding this case exceptional under 35 U.S.C. § 285 and awarding attorneys' fees and costs to Highmark, Inc. ("Highmark"). See Highmark, Inc. v. Allcare Health Mgmt. Sys. Inc. ("Exceptional Case Order"), 706 F. Supp. 2d 713, 738 (N.D. Tex. 2010). The district court found the case exceptional because it concluded that Allcare had pursued frivolous infringement claims, asserted meritless legal positions during the course of the litigation, shifted its claim construction positions, and made misrepresentations in connection with a motion to transfer venue. We affirm in part, reverse in part, and remand. ***

Highmark, a Pennsylvania insurance company, filed suit against Allcare in the Western District of Pennsylvania seeking a declaratory judgment of non-infringement, 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. During the course of the case, the district court appointed a special master***>

Highmark moved for summary judgment of non-infringement. While Allcare opposed Highmark's motion with respect to claims 52 and 53, it did not oppose the motion with regard to claim 102 and formally withdrew the infringement allegations with respect to that claim. The district court reappointed the special master, who recommended that summary judgment of non-infringement of claims 52 and 53 be granted. ***

***Highmark moved for an exceptional case finding with respect to Allcare and an award of attorneys' fees and expenses under section 285 and for sanctions against Allcare's attorneys under Rule 11 of the Federal Rules of Civil Procedure.

After reviewing the record, the district court found the case exceptional and that Allcare's attorneys had violated Rule 11. Exceptional Case Order, 706 F. Supp. 2d at 738-39. The court based both its exceptional case finding and the Rule 11 sanctions on the same conduct. The court found that Allcare's claims for infringement of claims 52 and 102 were frivolous. The court also found that Allcare engaged in litigation misconduct by asserting a frivolous position based on res judicata and collateral estoppel, shifting its claim construction position throughout the course of the proceedings before the district court, and making misrepresentations to the Western District of Pennsylvania in connection with a motion to transfer venue. After finding the case exceptional under section 285, the district court entered judgment awarding High-mark $4,694,727.40 in attorneys' fees and $209,626.56 in expenses, and it also invoked its inherent power to impose sanctions and awarded $375,400.05 in expert fees and expenses. The district court did not determine how much of the monetary awards were attributable to each issue.

Shortly after the district court's exceptional case finding and judgment awarding fees and expenses, Allcare's attorneys withdrew from the case based on conflicts of interest and separately moved for reconsideration of the Rule 11 sanctions. To support the motions for reconsideration, the attorneys provided additional evidence concerning their representation of Allcare. Based on these filings, the district court vacated the Rule 11 sanctions against the attorneys. After the court vacated the attorney sanctions, Allcare moved to reconsider the exceptional case finding and the judgment awarding attorneys' fees, or in the alternative to grant a new trial or hold an evidentiary hearing. This motion was denied. Allcare timely appealed. We have jurisdiction pursuant to 28 U.S.C. § 1295(a).


Under 35 U.S.C. § 285, a "court in exceptional cases may award reasonable attorney fees to the prevailing party." Once it is determined that the party seeking fees is a prevailing party, determining whether to award attorneys' fees under 35 U.S.C. § 285 is a two-step process. Forest Labs., Inc. v. Abbott Labs., 339 F.3d 1324, 1327-28 (Fed. Cir. 2003). First, a prevailing party must establish by clear and convincing evidence that the case is "exceptional." Id. at 1327. An award of fees against a patentee can be made for a frivolous claim, inequitable conduct before the Patent and Trademark Office, or misconduct during litigation. Beckman Instruments, Inc. v. LKB Produkter AB, 892 F.2d 1547, 1551 (Fed. Cir. 1989). Second, if the case is deemed exceptional, a court must determine whether an award of attorneys' fees is appropriate and, if so, the amount of the award. Forest Labs., 339 F.3d at 1328. "[T]he amount of the attorney fees [awarded] depends on the extent to which the case is exceptional." Special Devices, Inc. v. OEA, Inc., 269 F.3d 1340, 1344 (Fed. Cir. 2001).***

To be sure, even where infringement allegations are objectively unreasonable, a patentee may have reason to believe that its allegations are supportable so as to negate a finding of bad faith.

Footnote 4. Thus, for example, an adequate pre-filing investigation may negate a claim of bad faith. The district court here found that Allcare did not conduct an adequate prefiling investigation. Since we have concluded that Allcare engaged in bad faith 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 prefiling investigation. Furthermore, apart from the section 285 inquiry, failure to conduct an adequate pre-filing investigation, in some circumstances, independently supports an award of attorneys' fees under Rule 11. See Hoffmann-La Roche Inc. v. Invamed Inc., 213 F.3d 1359, 1363 (Fed. Cir. 2000). Here, the district court did not sanction Allcare under Rule 11 for its failure to conduct an adequate pre-filing investigation.


Allcare also argues that the district court's vacating sanctions against Allcare's attorneys is inconsistent with the district court's exceptional case finding against All-care. This is incorrect. A lack of sanctions against attorneys is not in itself a ground for barring sanctions against a client. Rule 11 sanctions against an attorney may form a basis for an exceptional case finding. See Brooks Furniture, 393 F.3d at 1381 ("A case may be deemed exceptional when there has been some material inappropriate conduct related to the matter in litigation, such as . . . conduct that violates Fed. R. Civ. P. 11 . . . ."). But the absence of Rule 11 sanctions does not mandate the opposite conclusion. Allcare also contends that new evidence brought up during the reconsideration of Rule 11 sanctions mandates reversal of the exceptional case finding. However, the additional evidence relied on by the district court in vacating the Rule 11 sanctions had no bearing on the interpretation of claim 102 or Allcare's knowledge of whether Highmark's systems were infringing. The district court thus did not clearly err in concluding that Allcare's allegations of infringement of claim 102 warranted an exceptional case finding. ***

Because we conclude that Allcare's allegations of infringement of claim 52 were not objectively baseless, we need not reach the question of whether Allcare acted in subjective bad faith. ***We therefore reverse the district court's conclusion that Allcare's allegations of infringement of claim 52 support an exceptional case finding.

Footnote 6. Highmark appears to argue that an exceptional case finding is justified here because Allcare failed to make an adequate pre-filing investigation as required by Rule 11. Our cases have not always been clear as to whether the failure to make an adequate pre-filing investigation under Rule 11 can support an exceptional case finding when the Brooks Furniture test has not been satisfied, and it would be a most unusual case in which the infringement case was objectively reasonable but the pre-filing investigation was unreasonable. We need not decide whether such a finding with respect to the pre-filing investigation could ever support an exceptional case finding because the district court made no finding of a Rule 11 violation with respect to Allcare as opposed to its attorneys, and the Rule 11 violation found with respect to the Allcare attorneys was vacated. As we read the district court opinion, sanctions here were based on a finding that Allcare's claim construction was frivolous, and were not based on any finding that Allcare failed to investigate whether under its proposed claim construction Highmark infringed.


Finally, the district court found that misrepresentations made before the Western District of Pennsylvania in connection with a motion to transfer venue supported an exceptional case finding. ***

The district court erred in finding the case exceptional based on these representations. As recognized by the district court in vacating Rule 11 sanctions against the attorneys, "if any court were to issue sanctions based on the [transfer] motion, it would be most appropriate for the Western District of Pennsylvania to do so." Opinion and Order Reconsidering and Vacating Sanctions, Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., No. 4:03-CV-1384-Y, slip op. at 41 (N.D. Tex. Aug. 9, 2010). Indeed, a court generally should sanction "conduct beyond that occurring in trial [only] when a party engages in bad-faith conduct which is in direct defiance of the sanctioning court." FDIC v. Maxxam, Inc., 523 F.3d 566, 591 (5th Cir. 2008) (internal quotation marks omitted); see also Chambers v. NASCO, Inc., 501 U.S. 32, 57 (1991). The district court offered no justification for sanctioning conduct before a different tribunal. On appeal, Highmark likewise offered no authority for the issuance of sanctions for conduct that occurs solely before another tribunal. Thus, these supposed misrepresentations do not support an exceptional case finding.

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