Patent ruling may slow frivolous suits

Highmark Inc. and businesses everywhere scored a victory against “patent trolls” on Tuesday, when the U.S. Supreme Court found that an appeals court did not have the right to pick apart a $5 million legal fee reimbursement award that was assessed by a lower court.

The ruling improves the chances that Highmark will eventually recover some legal fees from the defendant, a Texas firm that claimed to have owned the patent rights to a computer-based medical review system. In so ruling, the Supreme Court also said that the current legal threshold that must be met to allow “fee-shifting” — that is, requiring the loser to pay the winner’s legal fees in a patent case — is too high.

The 9-year-old federal stan-

dard says that courts may shift legal fees from the winner to the loser only in “exceptional” cases, defined as those that are both “objectively baseless” and “brought in subjective bad faith.” On Tuesday, the Supreme Court said that such a ruling “is unduly rigid and inconsistent” with today’s patent law system, and that those seeking compensation can collect if either condition is met, rather than both.

In the Highmark case, the court deferred to the wisdom of the trial court in arriving at such a determination; in a related case also decided Tuesday, the Supreme Court sought to rein in the circuit court’s influence over such cases and awards.

“District court judges are the ones who actually have an understanding whether or not the case, as brought, has merit,” said Cindy Kernick, partner at Reed Smith, which has represented Highmark from the beginning of this case.

The circuit court “can’t do a de novo review,” re-examining the entire claims construction process, she said. “What they have to do is look at [the totality of] what the judge did, and see if he abused discretion,” Ms. Kernick said Tuesday.

In a ruling issued in 2012, the U.S. Court of Appeals for the Federal Circuit ruled that a Texas-based health management systems company, called Allcare, must pay Highmark Inc.’s legal bills, accumulated as the health insurer fended off Allcare’s patent infringement suit. But in affirming the ruling, the circuit court said also remanded the case back to the district trial judge, asking him to explain and recalculate the $5 million fee, with the majority saying it wasn’t convinced that Allcare had engaged in litigation misconduct.

In Tuesday’s decision, the U.S. Supreme Court said that the circuit court could weigh in on whether the trial judge “abused his discretion” in arriving at the award, but that it couldn’t reconsider the case on its own, conducting a “de novo” (in English, “from the beginning”) review.

“The practical [effect] is if a district judge now decides that litigation is abusive, [the] circuit can’t really do anything about it,” said Ronald Mann, professor of law at Columbia University, an expert in commercial law.

Under the old standard, it was nearly “impossible to [win] fees and expect to get it affirmed on appeal,” Mr. Mann said. “The standard is much lower now.”

While this case (Highmark Inc. v. Allcare Health Management Systems) — and its fraternal twin, Octane Fitness v. Icon Health and Fitness — hinged on procedural grounds, on a higher level both dealt with patent litigation, and the ease with which those accused of violating patents can, in certain “exceptional” cases, recover attorneys fees from those making the meritless allegations.

In Octane, justices considered whether the circuit court’s own two-pronged test for determining how and when fees may be awarded rides roughshod over the trial court.

In Highmark, the chief legal question was more a matter of deference — that is, should an appellate court defer to trial court’s judgment that a patent suit was baseless, or can it arrive at a different conclusion? In the Highmark case, justices remanded the case back to the circuit court, telling the court it could review the case solely to see if District Judge Terry Means abused his discretion.

If the circuit court finds no abuse, “the fee will stand,” Ms. Kernick said.

The fee stems from a running battle between Highmark and Allcare that dates to 2002, when Allcare sent a letter to Highmark, accusing the insurer of violating Allcare’s U.S. Patent No. 5,301,105, which gives Allcare intellectual rights to “a fully integrated and comprehensive health care system that includes the integrated interconnection and interaction of the patient, health care provider,” and other related institutions.

Knowing that Allcare had previously sued 26 companies for infringement, Highmark brought a declaratory judgment action against Allcare, seeking a finding of non-infringement, and Allcare counterclaimed, asserting that the companies’ computerized information-management systems infringed the Allcare patent.

Highmark, in its court filings, called Allcare “a patent troll that uses litigation as a sword to attack health care-related companies and, with no risk to itself, potentially raises the cost of health care even though it has not made a single contribution.”

It ultimately won its case, and set about trying to collect fees. In its fee motion, Highmark said it had wasted 16,019 attorney hours working on its case over seven years.

“The historical difficulty facing an accused infringer trying to recover expended legal fees is common knowledge to patent trolls,” Ms. Kernick said. Because it’s so difficult to collect fees, patent trolls roll the dice in asserting infringement, knowing that a target may be willing to pay hundreds of thousands of dollars to avoid the risk of a lawsuit that will cost millions of dollars and a decade to resolve.

“Trolls are costing the economy” $30 billion annually, Ms. Kernick said. Knowing that they might have to cover another party’s fees might now discourage them from filing frivolous suits.

“Patent trolls” — people and attorneys who send out letters to hundreds of companies, large and small, accusing them of violating marginally valid patents and demanding cash compensation — received a lot of the headlines when these cases were argued, but the rulings go beyond the so-called trolls. Both Octane and Icon Health are legitimate companies, said Jim Singer, partner and patent attorney with Fox Rothschild LLP in Pittsburgh.

“That did not involve a patent troll at all. That was one competitor suing another,” over the design of an elliptical machine system, Mr. Singer said.

“These cases are going to make [all] patent-holders take a deep breath, and take a little closer look at the accused patent” violator before suing, he said.

They “need to make sure they have a very strong case.”

In a statement, Highmark said that “we are pleased with the result of case [and feel] the outcome will discourage future cases brought by patent trolls.”

By making it easier for winners to collect from losers, the Tuesday ruling may allow Congress to move ahead on its own patent-reform package, because the “loser pays” provision was the most contentious piece of the original draft of the legislation.