Rule 11 sanctions against an attorney may form a basis for an exceptional case finding. But the absence of Rule 11 sanctions does not mandate the opposite conclusion.
On August 6, 2012, in Highmark, Inc. v. Allcare Health Mgmt. Sys. Inc., the U.S. Court of Appeals for the Federal Circuit (Newman, Mayer, Dyk*) affirmed-in-part, reversed-in-part and remanded the district court's order finding this case exceptional under 35 U.S.C. § 285 and awarding Highmark almost $5.3 million in attorneys' fees and costs following a summary judgment that Highmark did not infringe U.S. Patent No. 5,301,105, which related to managed health care systems used to interconnect and integrate physicians, medical care facilities, patients, insurance companies, and financial institutions. The Federal Circuit stated:
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. First, a prevailing party must establish by clear and convincing evidence that the case is "exceptional." 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. 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. "[T]he amount of the attorney fees [awarded] depends on the extent to which the case is exceptional." There is no dispute that Highmark is the prevailing party in this litigation.
[A]bsent misconduct in the course of the litigation or in securing the patent, sanctions may be imposed against the patentee only if two separate criteria are satisfied: (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless. The requirement that the litigation be objectively baseless "does not depend on the state of mind of the [party] at the time the action was commenced, but rather requires an objective assessment of the merits." "To be objectively baseless, the infringement allegations must be such that no reasonable litigant could reasonably expect success on the merits."
Furthermore, even if the claim is objectively baseless, it must be shown that lack of objective foundation for the claim "was either known or so obvious that it should have been known" by the party asserting the claim. This is known as the subjective prong of the inquiry. This same objective/subjective standard applies for both patentees asserting claims of infringement and alleged infringers defending against claims of infringement. We have recently clarified that "the threshold objective prong . . . is a question of law based on underlying mixed questions of law and fact and is subject to de novo review." That determination must be made by the court as a matter of law rather than by the jury. We review the court's determination of objective reasonableness without deference since it is a question of law. With respect to the subjective prong, "there is a presumption that an assertion of infringement of a duly granted patent is made in good faith." Thus, the subjective prong [must] be established with clear and convincing evidence. Highmark contends that [the] objective reasonableness standard applies only with respect to the initial filing of the infringement counterclaim and does not apply to determining whether Allcare's continued litigation of baseless claims was frivolous. That is not correct. Rather, the objective prong requires a retrospective assessment of the merits of the entire litigation determined "based on the record ultimately made in the infringement proceedings." The question is whether, in light of that record, "no reasonable litigant could realistically expect success on the merits." The objective prong is a single backwards-looking inquiry into the reasonableness of the claims in light of the full record.
Similarly, in considering a party's subjective state of mind, we are "to take into account the totality of circumstances." Unlike the objective prong, which is a single retrospective look at the entire litigation, the subjective prong may suggest that a case initially brought in good faith may be continued in bad faith depending on developments during discovery and otherwise. However, we apply the objective/subjective standard on a claim by claim basis. Because the rationale for awarding fees against a patentee for the filing of frivolous claims is "to reimburse the alleged infringer for defending an action improperly brought," in these situations attorneys' fees can only be shifted insofar as each claim is found frivolous. Thus, here we will treat separately the finding that infringement claim based on claim 102 rendered the case exceptional and the finding that the infringement claim based on claim 52 rendered the case exceptional.
The district court found that Allcare's claim 102 infringement litigation warranted an exceptional case finding. We agree. . . . Allcare's infringement claims with respect to claim 102 were objectively unreasonable. Allcare also argues on appeal that its infringement allegations with respect to claim 102 do not warrant an exceptional case finding because they were not brought in subjective bad faith. A claim is brought in subjective bad faith if the objective unreasonableness of the claim "was either known or so obvious that it should have been known" by the patentee. That is clearly so here. Allcare knew or should have known that its allegation of infringement of claim 102 was unreasonable, and this is not a situation in which Allcare acted in good faith at the inception of the litigation, but because of later developments acted in bad faith in continuing the litigation. 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. But here, Allcare has made no such showing at any point in the litigation.
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 Allcare. 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. 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. We reach a different conclusion with respect to the claim 52 infringement claims because we conclude that Allcare's position was not objectively unreasonable. "[S]imply being wrong about claim construction should not subject a party to sanctions where the construction is not objectively baseless." This is not a case where the claim language was not subject to an alternate construction or where "the specification and prosecution history clearly refute [the patentee's] proposed claim construction." Allcare's argument with respect to this element was not "so unreasonable that no reasonable litigant could believe it would succeed."
Quite apart from the frivolity of the alleged infringement claims, an exceptional case finding can also be supported by litigation misconduct. "Litigation misconduct generally involves unethical or unprofessional conduct by a party or his attorneys during the course of adjudicative proceedings," and includes advancing frivolous arguments during the course of the litigation or otherwise prolonging litigation in bad faith. A finding of exceptionality based on litigation misconduct, however, usually does not support a full award of attorneys' fees. Instead, the fee award "must bear some relation to the extent of the misconduct," and compensate a party for the "extra legal effort to counteract the misconduct."
Here, in addition to determining that Allcare's overall infringement allegations were frivolous, the district court found the case exceptional based on three primary instances of alleged litigation misconduct: (1) asserting a frivolous position based on res judicata and collateral estoppel; (2) shifting the claim construction position throughout the course of the proceedings before the district court; and (3) making misrepresentations to the Western District of Pennsylvania in connection with a motion to transfer venue. None of these actions is sufficient to make this case exceptional under section 285.