Rule 11 sanctions are always a black mark on a firm’s good name, no matter how trivial the monetary consequences. So when Fort Worth, Texas, federal district court Judge Terry Means imposed sanctions on McKool Smith and Sidley Austin, finding them liable for pursuing frivolous claims on behalf of a patent holding company called Allcare Health Management Systems, McKool and Sidley took the matter quite seriously indeed, even though Means demanded just $5,000 from McKool and $2,500 from Sidley. McKool hired Finnegan, Henderson, Farabow, Garrett & Dunner and Sidley brought in Baker Botts to get the sanctions overturned.
Last week their efforts succeeded. Means agreed, in a 52-page order, to vacate sanctions against McKool, Sidley and two other firms that had represented Allcare in patent infringement litigation against Highmark Inc., a health insurance company. “It was a very regrettable situation,” Mike McKool told us. “This was the first time, to my knowledge, that I or my law firm was ever accused of misconduct.”
Means did not vacate his finding that Allcare owes Highmark attorney fees under the “extraordinary case” rule. Highmark’s lawyers at Reed Smith have submitted a fee petition requesting $5.2 million in attorney and expert fees and $222,730 in expenses.
Perhaps the most remarkable part of the Allcare Rule 11 story is that Means hit Allcare’s four law firms — McKool; Sidley; Hill, Kertscher, & Wharton; and Bracket & Ellis — with sanctions even though Highmark did not specifically request them. Instead, the focus of Highmark’s motion for an extraordinary case ruling focused on Allcare itself, which Highmark described as “a patent troll that uses litigation as a sword to attack healthcare-related companies and, with no risk to itself, potentially raises the cost of healthcare even though it has not made a single contribution.”
Highmark filed the motion after winning a declaratory judgment ruling that it doesn’t infringe Allcare’s patent on health care management software. It argued that Allcare threatened it with unfounded litigation without conducting adequate pre-suit investigation, engaged in deceptive practices to identify targets, forum shopped, and prolonged the case against Highmark after it was clearly a loser.
Means agreed that Allcare’s lawyers didn’t conduct adequate investigation and that they continued to assert infringement counterclaims after a Markman ruling knocked them out. And though Highmark didn’t ask for Rule 11 sanctions against the lawyers, he fined Allcare’s lead counsel, Hill Kertscher, $25,000 and hit the three other firms with smaller penalties. “Allcare performed a poor prefiling investigation of its allegations, with no apparent investigation by counsel,” he concluded. “Thereafter, Allcare maintained its allegations after they were shown to be meritless, advanced meritless defenses, and needlessly complicated claim construction.”
But on the law firms’ motions for reconsideration, the judge reversed himself. The Hill firm, he found, was clearly lead counsel in the case, so Sidley, McKool and Bracket & Ellis didn’t deserve sanctions for relying on Hill’s representations. The case against the Hill firm was a closer call, Means found, but he decided to “err on the side of caution, given the potentially harsh side-effects upon reputation, client retention, and livelihood that court-imposed sanctions can have and vacate the imposition of sanctions against Hill.”
McKool told us he was glad to see the sanctions reversed. “I couldn’t believe they were imposed,” he said. “We were only hired for the specific purpose of trying the case and dealing with damages. We didn’t have anything to do with the investigation.” Moreover, he said, Means gave Allcare’s law firms no notice that he was even considering sanctions before he imposed them. “We were like, ‘Where does this come from?’” McKool said.
Highmark counsel Cynthia Kernick of Reed Smith declined our request for comment. We left a message with V. Bryan Medlock Jr., who was involved in the case for Sidley (and has since left the firm), but didn’t hear back. Sidley’s counsel in the sanctions case, Timothy Durst of Baker Botts, also didn’t return our call.
This article first appeared on The Am Law Litigation Daily blog on AmericanLawyer.com.