On April 1, 2010, Judge Terry Means of the United States Federal District Court for the Northern District of Texas issued a ruling in Highmark, Inc. v. Allcare Health Management Systems, Inc., which is sure to capture the attention of patent litigators and patent owners. In a 52 page opinion Judge Means found the case an exceptional case for purposes of awarding attorneys fees under 35 USC 285, found that Rule 11 sanctions were appropriate and fined the attorneys involved and their law firms. The complete lack of investigation by the patent owner, the continued pursuit of infringement claims even after the patent owner’s deposition testimony admitted there was no infringement and persistent frivolous defenses painted this patent troll into a corner. On top of that, Judge Means determined that the attorneys for the patent owner misrepresented facts to the Western District of Pennsylvania in order to get a transfer to the Northern District of Texas. I wonder if this decision was handed down on April Fools Day for a reason? Nevertheless, watch out patent world if Rule 11 starts to grow teeth!
Allcare is a Virginia corporation but with its principal place of business in Fort Worth, Texas. Allcare’s business is the licensing of intellectual-property assets, which seems to roughly translate into them being a non-practicing entity, which is sometimes referred to by the pejorative term “patent troll.” In fact, as you read on you will see that the district court characterized what Allcare was doing as “trolling.” In any event, among the assets handled by Allcare is U.S. Patent No. 5,301,105. After conducting a survey of various healthcare management and insurance companies, Allcare decided to file suit against 24 companies in four separate suits asserting that the companies’ computerized information-management systems infringed the ‘105 patent.
Highmark was among the companies surveyed by Allcare. In April 2002, Allcare’s vice president of licensing, Robert Shelton, wrote a letter to Highmark stating that Allcare believed Highmark’s system infringed the ‘105 patent, requesting that Highmark consider purchasing a license to the ‘105 patent, and raising the potential for litigation if Highmark refused. Allcare sent additional letters to Highmark, encouraging Highmark to purchase a license, threatening litigation,
and warning Highmark of the “substantial damages” Allcare would pursue, as well as the high costs of litigation. Ultimately, Highmark did not obtain a license and having tired of the threats filed a Motion for Declaratory Judgment in the United States Federal District Court for the Western District of Pennsylvania. In response, Allcare filed a counterclaim alleging patent infringement and the case was successfully transferred to its home turf in Northern Texas.
Highmark’s chief complaints were: (1) that the only pre-filing investigation performed prior to bringing infringement counter-claims was done by an individual who was not a patent attorney, and in fact was not any kind of attorney, but rather a layman; (2) even after Allcare’s own expert admitted during deposition that there was not infringement Allcare continued to press the matter; and (3) Allcare rose and continued to press frivolous defenses. There were also various charges of vexatious litigation as well.
Allcare insisted that its counsel, Stephen Hill, provided an element-by-element explanation for its allegation of infringement , but these charts were initially prepared for a different litigation (i.e., Trigon litigation). Allcare and Hill attempted to argue that adequate pre-litigation investigation in the Trigon litigation was adequate to qualify for sufficient pre-litigation investigation against Highmark because they perceived similarity between the Trigon system and that of Highmark.That, of course, was not going to win the day, and ultimately did not. However, Hill also explained that he spoke with experts to confirm his determination of infringement. In fact, Hill described Allcare’s pre-filing investigation of its claims against Highmark as involving “discussions with technical experts . . . who authored an expert report in Trigon addressing one or more aspects of patent.”
So why hand over claim charts from a completely different litigation? Allcare argued that Highmark requests encompassed such documents and according to Allcare’s briefing and evidence the charts were “annotated to take into consideration the technical documents which Highmark withheld until after discovery began in this case.” Highmark pointed out, and Judge Means agreed, that something was not exactly right about that argument because it would have required Allcare to have annotated the claims charts using information Allcare had not yet received from Highmark through discovery. So suffice it to say that the District Court noticed that the story they were being told by Allcare didn’t match the facts or time line. Thus, I think it is appropriate to observe that the District Court time and time again thought Allcare and its attorneys were stretching the truth, misrepresenting things to the court and perhaps even making things up outright.
Highmark also pointed out that while Hill claims to have conferred with experts regarding his pre-filing infringement analysis, experts were not consulted regarding Highmark’s system until after Allcare’s counterclaims were filed. Hill’s factual statements not withstanding, invoices submitted by Dr. Holland to counsel for Allcare indicate that his earliest involvement in this case was in September 2004, well after Allcare had filed its answer and counterclaims. Other invoices indicate that Allcare’s remaining experts were not involved in this case prior to Allcare’s filing of its counterclaims. Judge Means observed that Hill’s general assurances could not overcome the lack of any evidence of his specific efforts in investigating infringement prior to filing. So once again the evidence, or lack thereof, seemed to paint a picture extremely unfavorable to Allcare.
In an attempt to explain away the lack of evidence Allcare did attempt to explain that it did not provide Highmark with notes or documents verifying Hill’s pre-filing investigation because such things would reflect Hill’s opinions and thought process and are, therefore, privileged. This, however, was deemed unpersuasive because Allcare failed to list documents related to Hill’s analysis on its privilege log. Moreover, Allcare asserted Hill’s analysis as a defense to Highmark’s motion for attorneys’ fees, therefore, waiving the attorney-client privilege in regard to the issue of its pre-filing investigation.
Without any proof of investigation by Hill, Allcare’s pre-litigation investigation, if any, rested upon whatever work Shelton engaged in as he attempted to arrange licensing deals with alleged infringers. In fact, the district court explained that it was highly probable that the only pre-filing assessment of the Seaport Survey responses was performed by Shelton, which was an abdication of the responsibility for assessing the merit of a potential allegation of infringement. Such an abdication fell short of what Rule 11 requires.
Not to be deterred, Allcare insisted that Shelton’s investigative efforts alone were enough to stave off attorneys’ fees and sanctions. In doing so, it insists that Shelton was qualified for the work he performed– interpreting the Seaport Survey results, researching Highmark’s system, and evaluating infringement–and was properly supervised. Highmark complained that Shelton is not qualified to perform a pre-filing investigation because he is neither an engineer nor a patent lawyer. Allcare counters that, as Allcare’s vice president of licensing, Shelton is experienced in patent matters. He is also the named inventor on two U.S. patents related to healthcare technology. Unfortunately for Allcare the charts prepared by Shelton addressed only the validity of the ‘105 patent in light of prior art, not whether the ‘105 patent was infringed by Highmark’s system. This aside, the district court explained that Rule 11 still requires the attorney representing the client to file pleadings only after reasonable inquiry. So nothing Shelton did or could have done would have satisfied this responsibility placed squarely on trial counsel.
Once again, not to be deterred by the ensuing beat down, Allcare pointed out that their infringement allegations were contained in counter-claims, which had to be filed relatively quickly. They pointed to a case from the Northern District of California — Polarity, Inc. v. Diversified Techs., Inc., No. C-06-0646 EMC, 2006 U.S. Dist. LEXIS 89802, at *14-15 (N.D. Cal. Nov. 29, 2006) — that took into consideration the fact that the alleged infringer initiated litigation, thus pressing the patentee to take responsive action. This was not persuasive in the eyes of Judge Means because of the history between the parties. Specifically, after suggesting Highmark consider taking a license the parties communicated for a year back and forth. Only after it became clear that Allcare was bent on pursuing its allegations of infringement did
Highmark file its declaratory-judgment action. Thus, there was ample time to investigate and Judge Means explained:
[I]t would not be unfair to suggest that a patentee have a reasonable basis for believing a potential target has infringed before it makes its first demand that the target purchase a license to use the invention or face the probability of an expensive infringement suit. If Allcare had investigated Highmark’s system sufficiently to have such a reasonable basis, Allcare would not have been in an untenable position when it was served with Highmark’s suit. Allcare had only to marshal for its counsel all the knowledge it had that supported a reasonable and good-faith demand on Highmark, its target turned plaintiff. But if Allcare was caught flat-footed by Highmark’s preemptive suit, it was not because Highmark acted hastily or unduly aggressively but because Allcare had not done its homework when it began trolling for dollars and threatening litigation almost a year before Highmark filed its suit.
And there it is, the dreaded characterization of Allcare as a patent troll. If you couldn’t see the handwriting on the wall by this point in the decision you were probably blind, but once there was talk of trolling you knew it wasn’t going to get any better for Allcare.
In fact, if you can believe it, the opinion continued to get worse for Allcare. Here are the remaining highlights:
- Allcare was given a chance to inspect Highmark’s system in April 2004, and would have realized that the counterclaims for infringement were frivolous. Notwithstanding, Allcare never inspected the Highmark system and never explained its failure to inspect.
- Allcare should have realized that its infringement counterclaims were frivolous because Allcare’s own expert, Dr. Holland, conceded in his August 2007 deposition that Highmark’s system did not infringe the ‘105 patent. Notwithstanding, Allcare maintained its allegations of infringement of claim until February 6, 2008.
- Allcare seemed to acknowledge in its papers and arguments that it pursued meritless allegations as insurance or leverage in relation to the opposing party’s contentions.
- Allcare’s knew that defenses it raised were without merit but nevertheless asserted them and thereby unnecessarily increased the issues and costs associated with the litigation.
Judge Means determined after reviewing the record of the case as a whole, that there was no pre-filing investigation of Allcare’s counterclaims performed by an attorney, let alone a patent attorney, and that alone justified sanctions under Rule 11. Similarly, Judge Means explained that the pattern of conduct, by clear and convincing evidence, established that the case was an exceptional case within the meaning of 35 USC 285, thereby entitling Highmark to attorneys fees.
Finally, with respect to sanctions, the district court handed out the following sanctions, with the monetary penalties to be paid into the registry of the Court:
- $25,000 against Steven Hill and Hill, Kertscher, & Wharton, LLP;
- $5,000 against Mike McKool Jr., Christopher Harrington, Luke McLeroy, and R. Darryl Burke and McKool Smith;
- $2,500 against V. Bryan Medlock and Sidley Austin, LLP; and $2,500 against Joseph F. Cleveland and Bracket & Ellis.
The case is not over though. Highmark has 30 days from April 1, 2010, within which to submit its request for attorneys fees.
I don’t know whether Allcare will appeal to the Federal Circuit, but patent litigators and in particular patent trolls who employ bullying tactics should stand up and take notice. It seems to me that a case could be made out that this pattern, which displayed careless disregard to whether there was infringement in the first place and which was a part of a broader plan to obtain licensing revenue from everyone could have been viewed as patent misuse. Patent misuse is not an affirmative claim, but maybe it should be. Whether there was patent misuse here or not, Highmark faired very well. But you might want to consider bringing patent misuse defenses when dealing with a troll if the facts will support it. That would be one way to strike at the heart of the patent in question, resulting in an unenforceable patent at least until the taint of the conduct is removed.