Hill v. McDonough

Petitioner Highmark claims that the Federal Circuit Court of Appeals erred when it reversed the United States District Court for the Northern District of Texas’ award of attorneys’ fees pursuant to 35 U.S.C. § 285 (“Section 285”) of the Patent Act after reviewing the district court’s decision under the de novo standard. Respondent Allcare argues that the Federal Circuit correctly applied de novo review and reached the correct conclusion when it reversed the district court’s award of attorneys’ fees.

First, Petitioner claims that two Supreme Court cases, Pierce v. Underwood (“Pierce”), and Cooter & Gell v. Hartmarx (“Cooter”), established that the proper standard of review for Section 285 attorneys’ fees awarded by a district court is deferential, and not the de novo standard that the Federal Circuit Court applied. Respondent Allcare, to the contrary, maintains that Supreme Court precedent provides that objective reasonableness is an issue of pure law that should be reviewed de novo.

Second, Petitioner argues that, in view of other Supreme Court precedent, deferential review, not de novo, is warranted here. Specifically, Petitioner contends that under the Court’s precedent, deferential review is the proper standard for fee awards under the Civil Rights Attorney’s Fees Awards Act, the Copyright Act, discovery sanctions, and other similar fee awards. Allcare, however, maintains that the cases Highmark relies on did not deal with standard of review, and thus they do not speak directly to the issue at hand. To this end, Respondent argues that, when pleadings are found to be “frivolous” and thus meriting attorneys’ fees, it is not necessarily because of an unsubstantiated legal position, but rather because they “contained deliberate untruths and fabrications.”

Finally, Petitioner argues that the recent explosion of patent litigation initiated by non-practicing entities, more commonly known as “patent trolls,” causes enormous harm to the economy, and that de novo review, while not a panacea, will help subdue frivolous suits brought by patent trolls, and best serve the underlying purposes of the Patent Act. Respondent Allcare claims that Highmark is unable to demonstrate any connection between the standard of review applicable here and the amount of baseless patent litigation.

ARE PIERCE AND COOTER CONTROLLING PRECEDENT?

The petitioner claims that Pierce and Cooter control here because Section 285’s exceptional case standard and the “objective baseless” requirement for attorneys’ fees present a mixed question of fact and law, as did the “substantial justification” requirement in Pierce and “warranted by existing law” requirement in Cooter. Respondent Allcare claims that the Court’s rulings in Pierce and Cooter relied on express statutory language and a difficult mix of legal and factual conclusions in ruling that deferential review was warranted and that such considerations are not present here. The objective baselessness inquiry, according to Highmark, will usually involve factual questions or legal questions influenced by factual questions. Highmark claims, however, that even if the inquiry contains purely factual questions, the proper standard of review for Section 285 sanctions is the deferential standard of review, as per the holdings in Pierce and Cooter. Highmark argues that the considerations present in Pierce and Cooter that lead the court to rule that deferential review was the proper standard are also present here. Specifically, these considerations include the statutory text, consideration of the best-positioned decision-maker, efficiency costs, law-clarifying value, distortion of the appellate process, and discouragement of collateral appeals.

Allcare argues that not only are these considerations not relevant here, but that because neither Pierce nor Cooter involved Section 285 attorneys’ fees, they do not control here. Indeed, Pierce dealt with a fee award under the Equal Access to Justice Act (“EAJA”) and Cooter with Rule 11 sanctions. In Pierce, Allcare maintains, the Court ruled that de novo review was improper because it might strain appellate resources, whereas here the sheer size of Section 285 awards will likely be reason by itself to appeal, so Pierce’s conservation justification is irrelevant. Additionally, Allcare notes that Cooter dealt with Rule 11 sanctions, and held that deferential review was the proper standard. Allcare contends that the Court in Cooter reasoned that the district court’s familiarity with the “local bar’s litigation practices” meant it was “best situated” to assess whether Rule 11 sanctions are proper. Here however, according to Allcare, the Federal Circuit was established for the specific purpose of ensuring certainty and accuracy in the development and application of patent law, so that court is best situated to assess whether Section 285 attorneys’ fees are warranted.

SUPREME COURT PRECEDENT FOR ATTORNEYS’ FEES STANDARD OF REVIEW

Highmark maintains that the Supreme Court need look no further than Pierce and Cooter to determine that deferential review is the proper standard. However, according to Highmark, even if the Court does look further, the “broader landscape of standard-of-review cases” points to the conclusion that Section 285 exceptional-case findings fall within the line of cases reviewed deferentially, and have little in common with cases reviewed de novo. Highmark argues that in the fee-shifting context for awards in copyright and patent cases, and discovery sanctions, the Court’s longstanding precedent on appellate review has been substantial deference review because of the district court’s superior understanding of the litigation. Highmark acknowledges that a limited line of cases with mixed questions of fact and law hold that de novo review is the proper standard. However, Highmark distinguishes these cases on three grounds from the one at hand. Highmark notes that these cases (1) generally involve constitutional considerations, (2) are not ancillary to the merits in the same sense as fee litigation, and (3) do not pose issues concerning the distortion of appellate process in the same way that Pierce and Cooter did. Per Highmark’s argument, this case involves none of these concerns, and thus the proper standard of review is substantial deference to the district court’s decision.

Allcare, on the other hand, argues that the constitutional right of access to the courts favors de novo review. Additionally, Allcare claims that fee awards under Section 285 remain a legal question subject to de novo review at the appellate stage, because there are no disputed facts.

POLICY CONSIDERATIONS AND THE RISE OF “PATENT TROLLS”

Highmark’s third argument for deferential review involves various policy considerations of recent patent litigation practice. Highmark claims that a de novo standard of review would empower patent trolls “to file, and drag out, baseless litigation.” Highmark continues that a majority of litigation costs are borne during discovery, before summary judgment can dispel meritless claims. The trolls thus create a lock-up situation where, by carefully calculating the settlement fees they demand, defendants are driven by a perverse incentive, as it is cheaper to settle than defend a meritless claim to the summary judgment stage. Highmark further indicates that statistics show that the economic losses to the economy as a result of such practices are extremely costly. Additionally, Highmark claims that Congress’ intention in enacting the Patent Act was to encourage innovation, meaning that this practice is at complete odds with the underlying purpose of the statutory intent of Section 285. Finally, the possibility of being punished for frivolous litigation by assigning defendant’s fees to the patent troll would dissuade a troll from pursuing a meritless suit.

Allcare claims that Highmark cannot adequately support this assertion, so this argument is irrelevant. The petitioner argues that if a district court declines to impose fees, the decision is almost never reversed because the party seeking fees must prove a negative on appeal – that “there are no colorable legal arguments at all that could have supported the trolls’ claims.” On the other hand, if the district court were to award attorneys’ fees, the trolls could undo this through the Federal Circuit’s approach simply through imagining a colorable legal argument that could have been, albeit was not, presented to the trial court. Finally, Highmark claims that this is not simply a hypothetical case; it is actually what happened here. Allcare claims that the chances of changing the district court’s decision are necessarily greater when a higher standard of deference applies, and that this works for both parties equally. Thus, Highmark argues that the lower decision must be reversed to prevent patent trolls from pursuing frivolous lawsuits, demanding settlements, or having fee awards reversed by the Federal Circuit, and to best serve the underlying purposes of the Patent Act.