Denying motions for panel rehearing and rehearing en banc, the U.S. Court of Appeals for the Federal Circuit, in a sharply divided seven-to-five ruling, maintained the de novo standard of review for the analysis of objective unreasonableness in exceptional case determinations pursuant to 35 U.S.C § 285.  Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., Case No. 11-1219 (Fed. Cir., Dec. 6, 2012) (per curiam) (Dyk, J., concurring, joined by Newman, J.) (Moore, J., dissenting; joined by O’Malley, J.; Reyna, J. and Wallach, J.) (Reyna, J., dissenting, joined by Moore, J.; O’Malley; J. and Wallach, J.; Rader, C.J, joining in parts I-III of the dissent). 

The lower court found that defendant Highmark did not infringe Allcare’s patent, found that Allcare’s infringement allegations were an exceptional case and awarded attorneys’ fees.  In the original panel decision, the Federal Circuit concluded that since there was at least on claim made by the patent owner that was not baseless, the case (as a whole) was not exceptional under § 251.  (IP Update, Vol. 15, No. 9).  In that panel decision Judge Mayer voiced a dissent arguing that a more differential standard review should apply to the district court determination.  He would have affirmed the exceptional case award of the district court.  In considering the appellants en banc petitions, a divided Federal Circuit declined to conduct an en banc review of whether district court rulings, finding that a party brought an “objectively baseless” claim are entitled deference on appeal thereby leaving the rule of the Federal Circuit that a district court’s finding that a case is “exceptional,” based on a determination of objective unreasonableness, should be reviewed de novo

In a concurring opinion, Judge Dyk, joined by Judge Newman, noted that the standard for determining an exceptional case under § 285 required a determination that the position of the sanctioned party is objectively unreasonable and asserted in subjective bad faith.  The concurring opinion, relying upon the Supreme Court’s decision in PRE, stated that the prior panel’s finding that the objective reasonableness standard was a question of law to be reviewed de novo was correct and should not be reheard.

Judge Reyna, in dissent, argued that imposing de novo review for sanctions determinations was contrary to prior Federal Circuit precedent.  The dissent relied upon Supreme Court precedent that dealt with the award of attorneys’ fees under Rule 11 and the Equal Access to Justice Act (EAJA).  The concurring opinion rejected this argument for five reasons.

First, the concurring opinion looking to the language of § 285, and relying on a change in the language of the statute § 285, argues that the statute did not mandate deference to the district court’s discretion on questions of law.  Second, the concurring opinion notes that the relevant policy considerations behind § 285 are quite different from those involved in the EAJA and Rule 11, explaining that Rule 11 is designated to deters abusive litigation practices while § 285 is a primarily compensatory provision.  Third, unlike Rule 11 or the EAJA, the concurrence argues that an exceptional case findings under § 285 frequently involves extraordinarily large awards warranting more scrutiny by the appellate court.  Fourth, the decision to award attorneys’ fees under § 285 is based on the entire case, not merely events at the time of the filing of the complaint or pleading, as is the case for Rule 11.  Fifth, appeals of exceptional case findings typically come to this the Federal Circuit either after an appeal that resolved the merits, or in an appeal that also involves review of the merits, so that they will typically not require a significant investment of appellate energy to determine if, under a correct understanding of the law, a litigant was objectively reasonable.  Finally, the concurring opinion noted that the Federal Circuit brings to the table useful experience, noting that the Federal Circuit sees far more patent cases than any district court and is well positioned to recognize exceptional cases.

The concurring opinion concluded that de novo appellate review of the objectively reasonableness prong will assure uniformity in the treatment of patent litigation, while “district courts will continue to play an important role in determining whether the subjective good faith prong of the applicability has been satisfied.” 

In her dissent, Judge Moore also argues that deference should be afforded to the district court in its determination of objective reasonableness:  “There is simply no reason to believe that we, as an appellate tribunal spending just thirty minutes with the attorneys and having a limited record and knowledge of the events taking place in the proceeding below, are in a better position than the trial judge to decide objective baselessness.”

In his dissent, Judge Reyna argued that the panel opinion, as it relates to review of § 285 determinations, adopted an “erroneous approach that disregards binding precedent,” in violation of principles of stare decisis.