Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc.

687 F.3d 1300

104 U.S.P.Q.2d 1046

HIGHMARK, INC., Plaintiff–Appellee,

v.ALLCARE HEALTH MANAGEMENT SYSTEMS, INC., Defendant–Appellant.

No. 2011–1219.

United States Court of Appeals, Federal Circuit.

Aug. 7, 2012.

Cynthia E. Kernick, Reed Smith, LLP, of Pittsburgh, PA, argued for plaintiff-appellee. With her on the brief were James C. Martin, Kevin S. Katona and Thomas M. Pohl.

Donald R. Dunner, Finnegan, Henderson, Farabow, Garrett & Dunnerr, LLP, of Washington, DC, argued for defendant-appellant. With him on the brief were Erik R. Puknys, of Palo Alto, CA. Of counsel on the brief was Dan S. Boyd, The Boyd Law Firm, P.C., of Dallas, TX.

Before NEWMAN, MAYER, and DYK, Circuit Judges.

Opinion for the court filed by Circuit Judge DYK. Dissenting in part opinion filed by Circuit Judge MAYER.

DYK, Circuit Judge.

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.

Background

I

Allcare owns U.S. Patent No. 5,301,105 (“the '105 patent”), which is directed to “managed health care systems” used to interconnect and integrate physicians, medical care facilities, patients, insurance companies, and financial institutions, '105 Patent col. 1 ll. 4–11, particularly with respect to utilization review. In health care, “utilization review” is the process of determining whether a health insurer should approve a particular treatment for a patient. In general, the patent's claims cover a method of determining whether utilization review is necessary in a particular instance, and whether a recommended treatment is appropriate. If utilization review is required, the method prevents authorization and payment until the appropriateness of the treatment has been determined and the treatment has been approved.

At issue in this case are claims 52, 53, and 102. Independent claim 52 recites:

A method of managing a comprehensive health care management system utilizing a data processor, data bank memories, input means and payment means comprising:

(a) entering into said data processor data identifying each of a predetermined plurality or persons;

(b) entering into one of said data bank memories an identification of predetermined procedures requiring utilization review;

(c) entering through said input means into said data processor data symbolic of patient symptoms for tentatively identifying a proposed mode of treatment and, when said proposed mode of treatment includes one of said predetermined procedures requiring utilization review, producing indicia indicative thereof; and

(d) preventing payment therefor by said payment means until said utilization review has been obtained and data indicative thereof has been entered into said system.

'105 patent col. 21 ll. 22–41. Claim 53 depends from claim 52 and claims the additional step of producing some sort of indicia when the proposed mode of treatment includes ancillary services, such as by pharmacists, prosthesis providers, dentists, and the like. '105 patent col. 21 ll. 43–49, col. 14 ll. 35–38. Independent claim 102 recites:

A method of managing an integrated health care management system having input means, payment means and memory storage comprising:

(a) storing through said input means into said memory storage personal health profile data for each of a predetermined plurality of persons;

(b) storing into said memory storage symptoms and treatment data for each of a predetermined plurality of health profiles and problems;

(c) storing in said memory storage criteria for identifying treatments requiring utilization review; (d) storing in said memory storage criteria for identifying treatments requiring second opinions;

(e) entering into said system information identifying a proposed medical treatment for one of said plurality of persons;

(f) identifying whether or not said proposed medical treatment requires utilization review; and

(g) preventing said system from approving payment for said proposed medical treatment if said proposed medical treatment requires utilization review until such utilization review has been conducted.

'105 patent col. 28 ll. 8–30.

II

Highmark, a Pennsylvania insurance company, filed suit against Allcare in the Western District of Pennsylvania seeking a declaratory judgment of noninfringement, 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 to resolve issues of claim construction, including various limitations in claims 52 and 102. These claim construction disputes are described below. The special master issued a claim construction report, Special Master's Report and Recommended Decisions on Claim Construction (“ Claim Construction Report ”), Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., No. 4:03–CV–1384–Y (N.D.Tex. Dec. 20, 2006), which the district court adopted, Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., No. 4:03–CV–1384–Y, 2007 WL 6457158 (N.D.Tex. Mar. 23, 2007).

Highmark moved for summary judgment of noninfringement. 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 noninfringement of claims 52 and 53 be granted. Special Master's Report and Recommended Decisions on Summary Judgment Motions (“ Summary Judgment Report ”), Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., No. 4:03–CV–1384–Y, slip op. at 15 (N.D.Tex. Apr. 25, 2008). The district court adopted the special master's recommendations, Amended Order Adopting Findings and Recommendations of Special Master, Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., No. 4:03–CV–1384–Y, 2008 WL 4137959 (N.D.Tex. Sept. 2, 2008), and entered final judgment of noninfringement in favor of Highmark, Amended Final Judgment, Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., No. 4:03–CV–1384–Y (N.D.Tex. Oct. 15, 2008). Allcare appealed. On July 13, 2009, this court affirmed the district court's judgment under Federal Circuit Rule 36 without a written opinion. Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 329 Fed.Appx. 280 (Fed.Cir.2009).

While the previous appeal was pending before this court, 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 exceptionalcase 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 Highmark $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).

Discussion

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)....