December 2014
CIPA Journal
By Anthony C. Tridico, Ph.D.; Erin M. Sommers, Ph.D.; Cara Regan
Authored by Cara Regan Lasswell, Anthony C. Tridico, Ph. D. and Erin M. Sommers, Ph.D.
The America Invents Act requires district courts to consider four statutory factors when deciding whether to stay patent litigation pending covered business method (CBM) review of those same patents in the U.S. Patent and Trademark Office (USPTO). The Federal Circuit's November decision in Versata Software, Inc. v. Callidus Software, Inc.1 marks the third appellate case2 to analyze these four factors and the second overturning a district court's refusal to stay litigation.3 Although the Federal Circuit refrained from setting forth a clear standard for appellate review in Versata, it provided guidance to courts and litigants regarding what relevant facts and factors favor a stay.
CBM review offers an adversarial post-grant review procedure administered by the USPTO. Available only for qualifying patents, CBM review requires a petitioner to prove, as a threshold matter, that the patent at issue claims a covered business method4—essentially a method or apparatus for data processing or similar operations—rather than a technological invention.
Unlike other post-grant review procedures in the USPTO, only parties sued for or charged with infringement may file a CBM petition.5 This statutory framework triggers a high likelihood of parallel proceedings for patents covering business methods. As a result, the ability to stay district court litigation is especially advantageous for alleged infringers, where CBM review provides an opportunity to invalidate the allegedly infringed patent in a forum that may be far friendlier than the district courts. As of November 1, 2014 no instituted claims have survived CBM review.6 And in most cases, the Board institutes trial against at least some claims, generally reducing issues in parallel litigation. Through November 30, 2014, the Board has declined to institute only forty-three CBM petitions. The petitioner's procedural failures (e.g., late responses) rather than a substantive finding about the claims' validity accounted for ten of the forty-three denials.7
Unsurprisingly, alleged infringers have taken advantage of CBM review, with the number of petitions filed growing markedly in the past three years. Fifteen petitions were filed in 2012, eighty-nine were filed in 2013, and ninety-six have been filed in 2014.8
The vast majority of these petitions arose from pending litigations—only two petitioners relied on threats of suit for standing.9 The statute creating CBM review requires district courts to decide whether to institute a stay in co-pending litigation during review if a party requests one.10 Since inception, district courts have stayed cases during CBM review, a process that takes roughly one year.11 The statute requires a district court to balance four factors when considering a request to stay: whether a stay will simplify the case, whether discovery is complete, whether a stay will prejudice the non-moving party, and whether a stay will reduce litigation burdens.12 There is little consensus among district courts on how to apply these factors. Some courts have demonstrated a willingness to stay cases even before the Board has instituted review,13 while some have seemed reluctant to stay at all.14 To settle the issue well before the final disposition on the merits, the AIA provides for interlocutory review of decisions granting or denying motions to stay, but does not explicitly state what standard—abuse of discretion or de novo review—the Federal Circuit should apply.15
In Versata Software, Inc. v. Callidus Software, Inc., the Federal Circuit recently decided an interlocutory appeal of a decision to stay under the AIA. The case began in the District of Delaware, where Versata Software sued Callidus Software alleging infringement of three of Versata's patents.16 Callidus countered by asserting three of its own patents and by petitioning the patent office for review of all three patents.17 This first round of petitions, filed in August 2013, covered all independent claims of the patents, but omitted dependent claims of two patents.18 Callidus moved for a stay pending a Board decision, but the district court chose not to consider the motion until the Board instituted review.19
As the court and the parties awaited the Board's institution decision, the litigation progressed. The district court determined the case schedule and Versata identified the claims it would assert, some of which were not implicated by Callidus's first petitions for CBM review.20
In March 2014, the Board instituted review on each challenged claim from Callidus's August 2013 CBM petitions. Callidus promptly filed additional petitions addressing the remaining claims asserted by Versata in the district court. Callidus also renewed its motion to stay the litigation in view of the now-instituted CBMs.21 In May 2014, the court granted Callidus's motion in part, staying the case with respect to a single patent that was challenged on all claims before the USPTO. The litigation would otherwise advance on the two remaining asserted patents, though both were implicated in other instituted CBMs.22 Callidus appealed, and during the pendency of the appeal, the Board instituted review of Callidus's remaining CBM petitions, covering all of Versata's asserted claims in the litigation.23
On appeal, the Federal Circuit reversed the district court's decision and ordered it to grant the motion to stay with respect to all asserted patents.24 In its reasoning, the Court identified the district court's missteps and built on its prior analysis in Benefit Funding Sys. LLC v. Advance Am. Cash Advance Centers Inc. and VirtualAgility Inc. v. Salesforce.com, Inc.
Notably absent from the decision in Versata is a clear standard for how the Federal Circuit should review district courts' AIA decisions on stays. The AIA, while mandating that the Federal Circuit "shall review the district court's decision to ensure consistent application of established precedent, and such review may be de novo," leaves open the exact standard of review the Court must apply.25 Outside the AIA CBM context, for example, the Federal Circuit reviews a district court's decision to stay under a more deferential abuse of discretion standard.26 This is in direct conflict with the AIA's requirement that the Federal Circuit "ensure consistent application of established precedent," which may include using the less deferential de novo review standard.27
The Federal Circuit has twice before side-stepped the issue. In VirtualAgility, the Federal Circuit explicitly refused to decide the issue.28 Later, in Benefit Funding, the Court provided slightly more clarity, stating that statutory review of CBM stays was "more searching" than the traditional abuse of discretion review.29 But the Court determined that even under the traditional abuse of discretion standard, the stay in Benefit Funding had been properly granted, and did not conduct a full de novo review.30
Following its earlier decisions, the Federal Circuit has once again shied away from establishing a clear bright-line standard. In Versata, the Federal Circuit appeared to apply de novo review by conducting its own analysis of the facts and applying the four-factor test. But the Federal Circuit ultimately concluded that even under the abuse of discretion standard, the district court's decision was incorrect.31 Thus, Versata leaves open whether the Federal Circuit will ever conduct a full de novo review in a CBM stay case.
Though the Versata decision fails to determine what standard of review the Court will apply going forward, the Federal Circuit provided valuable guidance to district courts and litigants regarding what facts and factors point toward a stay.
Considering the first factor, the district court decided that a stay would not simplify the issues for trial because the Board, at that time, had instituted review on only some of the asserted claims.32 This rationale appears to be supported by both Benefit Funding and VirtualAgility, where, in contrast, all of the asserted claims were subjected to CBM review.33 In those cases, the Federal Circuit relied on the complete overlap of claims to determine that the first factor weighed in favor of a stay. But in Versata, the Federal Circuit went even further, indicating that the mere fact that only some claims are subject to Board review does not prevent a stay outright. The Court cautioned, however, that just because some claims are up for USPTO review does not immediately tip the scales in favor of a stay.34 Rather, the Court found, a proper analysis of the first factor delves into what issues will be resolved by CBM review and what remains.35 Considering those underlying issues, the Federal Circuit concluded that for Callidus, the issues would largely be resolved by CBM review and would streamline if not outright negate the district court litigation.36
The Federal Circuit also concluded that the fact that Callidus raised only some of its invalidity contentions in the CBM petitions, leaving others solely for the litigation, did not bar the stay.37 This determination mirrors the Court's logic in VirtualAgility, where it found that despite the alleged infringer's decision to place some prior art before only the district court, the first factor still favored a stay.38 Unlike in other post-grant review proceedings, the AIA specifically allows petitioners to raise different invalidity grounds before the Board and the district courts, and as a consequence the Federal Circuit has concluded that the decision to do so does not bar a stay.39
Versata makes clear that a petition addressing all asserted claims40 and all asserted grounds41 tips the first factor more heavily in favor of a stay. Defendants may also benefit from challenging all independent claims. In Versata, the Court relied on the fact that the Board had instituted review of all challenged claims, taking judicial notice of that intervening fact, but pointed out that even when the district court decided the motion, all independent claims faced Board review.42 Thus, the district court must examine the relationship between the claims and grounds reviewed and those asserted when deciding whether to stay a case. And potential CBM petitioners may want to consider addressing—at the very least—all of the asserted independent claims to push the first factor toward a stay.
Considering the second factor, whether discovery is complete and whether a trial date has been set, the Federal Circuit confirmed that a district court must analyze what "remains to be done in [the] litigation."43 In general, the Federal Circuit noted, this analysis focuses on the state of litigation when the motion to stay is filed, with the important caveat that the district court may await the Board's institution decision, and may consider developments prior to institution.44 In Versata, discovery began between the motion's filing and the first institution decision, but neither Versata nor Callidus had deposed any witnesses, and neither had filed expert reports or taken expert depositions.45 Thus, the case had not advanced much between Callidus's filing of its motion to stay and the Board's institution decision on Callidus's first petitions. Because the remaining burdens and expense of "completing both fact and expert discovery, resolving summary judgment motions, completing the Markman process, and preparing for trial," the Federal Circuit found that the facts underlying the second factor favored a stay.46
In this confirmation of Virtual Agility, the Federal Circuit constrained the ability of district courts to hold a motion to stay in abeyance, allowing a case to reach critical mass before deciding the issue. District courts may postpone their decision to stay until the Board institutes review, but the state of the litigation is evaluated without regard to the time of decision.47 For potential CBM petitioners, this means, perhaps, that is may be advantageous to request a stay pending the Board's institution decision. Patentees seeking to undermine a stay may want to ensure that the pace of litigation keeps moving forward, attempting to complete fact discovery well in advance of any Board institution decision.
Considering the third factor, the Federal Circuit found the district court had again erred: first, by mistaking Callidus's position—the defendant had moved to stay the entire case, not just Versata's claims—and second, by relying on Callidus's motions practice to decide that Callidus would be unfairly advantaged by a stay.48 But the Federal Circuit concluded that unless the movant's motions are frivolous or otherwise improper, they cannot form a basis to deny a further motion to stay.49
The Court's discussion of this point builds on VirtualAgility. In that case, the Court explained that irreparable harm (of the type supporting a preliminary injunction), delay in filing the case, and the age and health of witnesses could all be considered in determining undue prejudice.50 Similarly, delay in filing a CBM petition or a defendant's choice to save key pieces of prior art as insurance against a failed CBM challenge might represent an unfair tactical advantage.51 But no such circumstances were present in Versata, and the Federal Circuit found this third factor also favored a stay. Generalized complaints of "stale evidence, faded memories, and lost documents" failed to tip the scales back toward Versata's position.52
Finally, the Court discussed the fourth factor. The district court had relied on Callidus's past tactics and motions practice—including motions to transfer venue and to dismiss the complaint for failure to state a claim—to decide this factor weighed against a stay,53 but the Federal Circuit disagreed, noting the proper analysis looks forward.54 Though the Court conceded that a district court may consider its own familiarity with the patents at issue,55 the past actions of the parties have no bearing on this factor. Advancing its analysis from Virtual Agility, the Court reminded litigants that the first- and fourth-factor analysis often point "in the same direction."56 Because the CBM review would conclusively decide claim construction and invalidity issues on all claims, a stay avoided duplicative expenses for the parties and the courts.57 With that note, the Federal Circuit reversed the district court on all four points, and remanded the case with instructions to grant the stay.58
Although the Federal Circuit has not yet explicitly set forth a standard for review of a decision to stay, its analysis in Versata illuminates how it views the four-factor test. Versata explains that even where all claims and grounds are not before the Board, a stay remains available to the petitioner, and affirms that a court must examine the state of litigation at the time of the motion, though it may consider events occurring prior to the institution decision. Versata also establishes that the parties' past motion practice, unless frivolous or otherwise improper, has no bearing on a decision to stay. In conjunction with VirtualAgility, and Benefit Funding, Versata provides valuable guidance for courts and practitioners as the number of petitions filed, and the number of cases stayed, continues to grow.
Endnotes
1 No. 2014-1468, 2014 WL 6480522 (Fed. Cir. Nov. 20, 2014).
2 See VirtualAgility Inc. v. Salesforce.com, Inc., 759 F.3d 1307 (Fed. Cir. 2014); Benefit Funding Sys. LLC v. Advance Am. Cash Advance Centers Inc., 767 F.3d 1383 (Fed. Cir. 2014).
3 VirtualAgility overturned the decision of the Eastern District of Texas, but Benefit Funding, affirms the District of Delaware's decision to stay. VirtualAgility, 759 F.3d at 1320; Benefit Funding, 767 F.3d at 1387.
4 The statute defines a covered business method as a "patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service." America Invents Act, Public L. No. 112-29 § 18(d)(1) [hereinafter AIA § 18].
5 AIA § 18(a)(1)(B).
6 Finnegan, Claim and Case Disposition, America Invents Act (Nov. 1, 2014) http://www.aiablog.com/claim-and-case-disposition.
7 See United States Patent and Trademark Office, Patent Review Processing System, Search/Browse Proceedings (November 30, 2014), https://ptabtrials.uspto.gov/ (providing access to all petitions).
8 See id.
9 See CBM2013-00048 and CBM2014-00155.
10 AIA § 18(b)(1).
11 Finnegan, Timing, America Invents Act (Nov. 1, 2014).
12 AIA § 18(b)(1)(A-D).
13 See, e.g., SightSound Techs. LLC v. Apple Inc., No. 2:11-cv-01292-DWA, 2013 WL 2457284 (W.D. Pa. Jun. 6, 2013).
14See, e.g., VirtualAgility, Inc. v. Salesforce.com, Inc., No. 2:13-CV-00011-JRG, 2014 WL 94371, at *1 (E.D. Tex. Jan. 9, 2014) rev'd, 759 F.3d 1307 (Fed. Cir. 2014).
15 AIA § 18(b)(2) ("The United States Court of Appeals for the Federal Circuit shall review the district court's decision to ensure consistent application of established precedent, and such review may be de novo.").
16 Versata, 2014 WL 6480552 at *1.
17 Id.
18 Id.
19 Id.
20 Id.
21 Id.
22 Id. at *2.
23 Id. at *2.
24 Id. at *7.
25 AIA § 18(b)(2) (emphasis added).
26 See VirtualAgility, 759 F.3d at 1309-10 (discussing the issue).
27 AIA § 18(b)(2).
28 VirtualAgility, 759 F.3d at 1310 ("Nothing in this opinion should be read as deciding the standard of review applicable to the ultimate stay decision or the individual factors. We leave it to a future case to resolve what Congress meant when it indicated that our 'review may be de novo.'").
29 Benefit Funding, 767 F.3d at 1385.
30 Id. at 1387.
31 Versata, 2014 WL 6480552 at *2.
32 Id. at *2.
33 VirtualAgility, 759 F.3d at 1308-09; Benefit Funding, 767 F.3d at 1384.
34 Versata, 2014 WL 6480522 at n. 3.
35 Id. at *3.
36 Id.("We agree with Callidus, on the facts here, that a stay will simplify the issues and streamline trial, and this factor weighs in favor of a stay.").
37 Id. at *4.
38 VirtualAgility, 759 F.3d at 1314. In addition, the VirtualAgility court chastised the district court for improperly considering whether the Board's decision to institute review was correct. Id. at 1313. The Court confirmed this point in Benefit Funding, where it reiterated that the merits of the institution decision could not be reviewed by the district courts. Benefit Funding, 767 F.3d at 1386.
39 Versata, 2014 WL 6480522 at *4.
40 Id.at *3.
41 Id. at *4.
42 Id. at *3. Notably, the Federal Circuit also relied on intervening facts in VirtualAgility, taking judicial notice of the fact that the patentee had filed an intervening motion to amend claims before the Board. VirtualAgility, 759 F.3d at 1313.
43 Versata, 2014 WL 6480522 at *4.
44 Id. at *5.
45 Id.
46 Id.
47 Id. at *5.
48 Id. at *5-6.
49 Id. at *6.
50 VirtualAgility, 759 F.3d at 1318-19.
51 Id. at 1320.
52 Versata, 2014 WL 6480522 at n. 6.
53 Id at *6.
54 Id.
55 Id. at n. 7.
56 Id. at *6.
57 Id. at *6.
58 Id. at *7.
Originally printed in CIPA Journal. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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