By Andrew Williams —

As we indicated last week, the Supreme Court will hear arguments next week in two cases involving the Attorney Fees provision at 35 U.S.C. § 285.  That section provides that a district court may award reasonable attorney fees to a prevailing party "in exceptional cases."  The Octane Fitness case, which we previewed last week, will address what the standard is for determining when a particular case is "exceptional."  Specifically, the Court will be reviewing the standard articulated by the Federal Circuit, which provided that a case is only exceptional when "both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless," absent misconduct in litigation or in securing the patent.  See Brooks Furniture Mfg. v. Dutailier, Inc., 393 F.3d 1378 (Fed. Cir. 2005).  The second case, Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., will address the level of deference that the lower court's determination is entitled to on appeal.  The question presented in that case is: 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.

To be clear, even though it is only the standard of review of the objective prong of an "exception-case" determination that is at issue, it result could also impact the level of deference for subjective-prong determinations as well.  According to the reasoning found in the Federal Circuit's Highmark opinion, there are three standards of review for an award of attorney fees in a patent case.  First, the objective prong is entitled to de novo review because it is purely an issue of law.  Second, the subjective "bad-faith" prong is mainly factual, and therefore entitled to review for clear error.  Finally, if the case is exceptional, the awarding of fees is reviewed under an abuse-of-discretion standard.  Therefore, in the Highmark case, because the Federal Circuit was reviewing the "objectively baseless" prong, it reviewed the lower court's determination de novo.  But, Highmark is seeking a unitary abuse-of-discretion standard for § 285 fee awards, even though there are both questions of law and fact that the lower court must decide.

Highmark's primary argument is that two Supreme Court cases, Pierce v. Underwood, 487 U.S. 552 (1988) and Cooter & Gell v. Hartmarx, 496 U.S. 384 (1990), dictate the higher standard in patent cases.  In response, Allcare mainly points to the Supreme Court case of Professional Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49 (1993) ("PRE") as controlling, which is the same case the Federal Circuit relied upon in devising the two-part test in Brooks Furniture.  It is also the same case the Federal Circuit cited in support of the decision rendered below.

With regard to the facts of this case, Allcare is the owner of U.S. Patent No. 5,301,105 ("the '105 patent"), which is directed to "managed health care systems" used by insurance companies to interact with providers.  The patent discloses two embodiments of the invention, a "diagnostic" system and a "utilization-review" system.  The former involves inputting a patient's symptoms, and the system prepares a list of possible medical conditions.  The latter involves inputting both symptoms and the proposed treatment into the system, and if the treatment is considered to be potentially inappropriate for the symptoms, it is flagged for "utilization review."  This review allows the insurance company to determine if a payment should be made.  Highmark used a system that incorporates "utilization review," so the determinative issue at the district court was whether the claims of the '105 patent covered this embodiment.  After a special master assisted the court in construing the claims and in determining that Highmark should be granted summary judgment of non-infringement, the court adopted the reports without substantial change, thereby disposing of the case.  When the merit case was on appeal, Highmark moved for an exceptional case finding pursuant to § 285, which the court granted on the papers and awarded fees.

The Federal Circuit affirmed the merit appeal.  However, in response to Allcare's appeal of the exceptional-case determination, the court reversed the lower court's determination as to all claims except the assertion of claim 102 (the determination as to this single claim was remanded to the district court).  The judges on the panel, and indeed the entire court, were almost evenly split on the issue of deference.  The majority opinion, authored by Judge Dyk, relied heavily on the PRE case to hold that the objective-baselessness standard is an issue of law to be reviewed de novo.  However, Judge Mayer dissented, citing to cases like Pierce and Cooter and articulating arguments echoed later in Highmark's merit brief.  Highmark petitioned for a panel rehearing and for a rehearing en banc, both of which were denied.  The denial indicated that the poll for en banc review was "requested, taken, and failed," but five of the twelve judges either wrote or joined dissents, expressing disagreement with the panel's determination.  Judge Mayer did not participate in the decision, but if he had, the court would have been evenly split.  Needless to say, this is not a clear-cut case.

In its merit brief to the Supreme Court, Highmark relied heavily on the Pierce and Cooter cases.  Pierce involved the proper standard of review for fee awards under the Equal Access to Justice Act ("EAJA").  This statute provides an award of fees upon a finding that the United States' position was not "substantially justified."  This was defined as the position having no "reasonable basis in both law and fact," which was equated to the § 285 "objectively baseless" prong.  The Court in Pierce reasoned that "sound judicial administration" dictated a standard for the "substantial-justification" finding of abuse of discretion.  Cooter involved the determination of the standard of review for the imposition of Rule 11 sanctions.  The Court in that case concluded that all aspects of the decision, even the legal conclusions, should be reviewed under a unitary, abuse-of-discretion standard.

Highmark applied the reasoning used by the Supreme Court in those two cases to explain why the same result is required here.  First, the statutory text suggests discretion, because it uses the word "may," and "exceptional" cases denote case-by-case judgments best left for the decision of the district court judge.  This argument appears to the miss the mark, however, because no one denied that the actual award of fees is properly reviewed for abuse of discretion.  Rather, the "question presented" related only to the objectively baseless prong.  Next, Highmark pointed out that the district court judge is the best-positioned decision maker.  It is somewhat curious that it would highlight this factor, because the lower court judge appeared to relegate a significant portion of the case to the special master.  Highmark also pointed to the efficiencies associated with deference to the lower court, because the objective-baselessness inquiry "requires appellate courts to have intimate familiarity with the entire progression of a case."  However, the Federal Circuit addressed this concern below, pointing out that review of a case for an award of attorney fees is usually the second time the facts of the case are in front of them, the first being during the merit review.  Therefore, this concern might be overblown.  Highmark continued, explaining that the fact-intensive nature of these decisions would result in very little law-clarifying value, as it would be difficult to formulate a rule for the various case-by-case determinations.  Highmark concluded that the Federal Circuit's holding would distort the appellate process and would not discourage collateral appeals.  In sum, Highmark's position was that the factors as articulated in Pierce and Cooter require that a unitary abuse-of-discretion standard is necessary in the review of § 285 decisions.

On the other hand, Allcare focused extensively on the PRE decision, explaining why it was more appropriately analogous.  First, Allcare pointed out that "[t]he 'objective-reasonableness' standard derives from the concept of 'probable cause.'"  As PRE explained, "'[p]robable cause to institute civil proceedings requires no more than a 'reasonabl[e] belie[f] that there is a chance that [a] claim may be held valid upon adjudication.'"  Brief for Respondent, at 23 (citing PRE, 508 U.S. at 62-63).  And, "the question of whether a given set of facts justified bringing suit is ultimately a legal question."  Id.  Allcare relied on the fact that there are no facts in dispute in this case, which then reduces the question to a pure issue of law.  However, Allcare did point out that in all such cases, there will never be facts in dispute, because the relevant facts make up the record of the case.  The parties' positions in filing and maintaining patent infringement lawsuit, therefore, will not be in dispute (so the argument goes).

In the end, this case appears to come down to whether the Supreme Court will find that the Pierce and Cooter cases are more in line with § 285 determinations, or whether the Court will look to the reasoning articulated in PRE.  The Court's decision in Octane Fitness could also be a factor, because a change in the standard for determining exceptional cases could affect the standard of review.  Of course, both sides pointed out why their position would still survive regardless of the outcome of Octane Fitness.

Finally, as with any case dealing with the shifting of attorney fees, Highmark and some of the amicus curiae brought up the public policy argument against so-called "patent trolls." (Interestingly, the amicus briefs were fairly evenly split between supporting Highmark, supporting Allcare, and supporting neither party).  However, Allcare criticized this attempt at appealing to public sentiment as having no substance, because Highmark could not support its assertion that a change in the standard of review for decisions on attorney fees would reduce the incentive for non-practicing patent assertion entities to file infringement lawsuits.  In its reply brief, Highmark concedes that "a deferential review standard will not solve these problems."  Reply Brief for Petitioner, at 23.  But, Highmark did point out that the de novo standard gives so-called "trolls" "a second bite at the apple," giving them the incentive to fight on.  In the end, Highmark's appeal to anti-troll sentiment seems misplaced, because a causal connection between the problem and the requested deferential standard of review appears to be lacking.