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Issue Preclusion Does Not Require the PTO to Adopt the Claim Construction of a District Court Where the PTO Was Not a Party to that District Court Action

06-1599
August 22, 2007

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Last Month at the Federal Circuit - September 2007

Judges: Michel, Mayer, Dyk (author)

[Appealed from: Board]

In In re Trans Texas Holdings Corp., Nos. 06-1599, -1600 (Fed. Cir. Aug. 22, 2007), the Federal Circuit affirmed the Board, holding that the Board did not err in finding that all claims of U.S. Patent Nos. 5,832,461 (“the ’461 patent”) and 6,052,673 (“the ’673 patent”) would have been obvious over the prior art.

Trans Texas Holdings Corporation (“Trans Texas”) is the assignee of the ’461 and ’673 patents. The ’673 patent is a continuation of the ’461 patent. The specifications of the two patents, which are nearly identical, describe a system of inflationadjusted deposit and loan accounts. By adjusting the interest paid on deposit accounts or received on loan accounts, to compensate for inflation, the patented system purports to insulate the value of assets from inflationary fluctuations. In addition, the patented system seeks to match, or “hedge,” any increased interest a financial institution must pay to depositors as a result of inflation adjustments with the increased inflation-adjusted interest payments it receives from borrowers, thereby providing stability to the financial institution.

Each of the independent claims of the ’461 patent includes a limitation that requires adjusting an account in a manner “responsive to the rate of inflation,” which the specification defines as “directly responsive to a market indicator of prior actual inflation and it is not meant to include the market’s expectation of future inflation.” Slip op. at 2. Similarly, each of the independent claims of the ’673 patent includes a limitation that requires adjusting an account “as a function of a rate of inflation” or an account that pays the depositor a rate of return on funds “based on a rate of inflation.” Id. at 4-5. In this case, Trans Texas treated the terms “responsive to the rate of inflation” in the ’461 patent and “as a function of a rate of inflation” and “based on a rate of inflation” in the ’673 patent, as equivalent and focused on the “responsive to the rate of inflation” limitation.

Trans Texas requested reexamination of the ’461 and ’673 patents. The PTO granted its requests and initiated reexamination. During the reexamination proceedings, Trans Texas urged that the PTO was bound by a claim construction rendered in an earlier district court infringement proceeding to which the PTO was not a party. The PTO did not agree and rejected all claims of the ’461 and ’673 patents as obvious over prior art. Trans Texas appealed to the Board, which affirmed. In so doing, the Board rejected Trans Texas’s arguments that issue preclusion bound the Board to apply the district court’s claim construction and that, even apart from issue preclusion, the claims required such a construction. Trans Texas appealed.

On appeal, the Federal Circuit first addressed the issue of whether the Board erred in construing the claims of the ’461 and ’673 patents. Trans Texas argued that the Board should have given preclusive effect to the district court’s construction, which construed “responsive to the rate of inflation” to mean “directly responsive to a market indicator of prior actual inflation and is not meant to include the market’s expectation of future inflation.” Id. at 10. Trans Texas noted that the district court also construed this term to require a “continuous, one-to-one correlation with the inflation rate.” Id.

In rejecting Trans Texas’s argument, the Federal Circuit noted that traditionally, issue preclusion also known as collateral estoppel, applied only where the same parties to an earlier proceeding were involved in later litigation involving the same issue. It recognized that more modern decisions in some circumstances apply issue preclusion even where the parties to the subsequent suit are not the same. The Court noted that it is the latter doctrine, which is known as nonmutual collateral estoppel, that is at issue in this case.

The Court explained that its case law has identified four prerequisites to the application of issue preclusion: (1) identity of the issues in the prior proceeding; (2) the issues were actually litigated; (3) the determination of the issues was necessary to the resulting judgment; and (4) the party defending against preclusion had a full and fair opportunity to litigate the issues. Applying these four prerequisites, the Court noted that the PTO, as the party against whom the earlier decision is asserted, thus must have been accorded a full and fair opportunity to litigate that issue in the earlier case. The Court observed that the PTO was not even a party to the earlier district court litigation and, thus, cannot be bound by its outcome.

The Court noted that it has never applied issue preclusion against a nonparty to the first action. Recognizing this general rule, Trans Texas argued that it somehow represented the PTO’s interests in the earlier district court action. The Court also rejected this argument, noting that the presumption that nonparties are not bound by a judgment can only be rebutted in limited circumstances, such as when the nonparty was in privity with a party, has interests that are derivative from a party, or participated in an active and controlling way in the litigation. In this case, noted the Court, the PTO’s interests were not represented in the earlier litigation, even though Trans Texas there urged that the district court reject the construction that the court adopted.

Trans Texas alternatively argued that the Board erroneously rejected its proposed claim construction and that the claims required continuous, one-to-one inflation adjustments. Understanding this argument as requiring that for every increase in the reported rate of inflation, there must be an immediate and equal inflation
adjustment, the Federal Circuit rejected this argument as well. The Court noted that “[c]laims are given ‘their broadest reasonable interpretation, consistent with the specification, in reexamination proceedings.’” Id. at 14 (citation omitted). It observed that there was nothing in the specification or the prosecution history that requires an immediate inflation adjustment every time the rate of inflation increases. The Court was not persuaded by Trans Texas’s argument that immediate responsiveness is the only construction consistent with the specification because each of the examples in the ’461 patent requires adjustment on a one-to-one basis. The Court found that even if the examples were so limited, Trans Texas’s arguments conflicted with its decision in Phillips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005) (en banc), in that it is improper to confine the claims to the embodiments found in the specification.

The Court, relying on Phillips, then noted that dictionary definitions are also pertinent. The Court observed that the dictionary definition of “directly” confirms that the specification’s requirement that the adjustment be “directly responsive” to a market indicator does not require that an inflation adjustment occur immediately after any increase in the reported rate of inflation. It observed that while some definitions define “directly” as “simultaneously and exactly or equally” or “immediately,” other definitions define it as “after a little” or “in a little while.” In view of the latter definitions, the Court concluded that the broadest reasonable interpretation of “directly responsive” is not limited to situations in which the inflation adjustment occurs immediately after an increase in the reported rate of inflation. Accordingly, the Court found that theBoard did not err in concluding that the broadest reasonable interpretation of the term “responsive to the rate of inflation” is not limited to a continuous one-to-one relationship.

The Federal Circuit next turned to the Board’s obviousness determination and concluded that the Board had not erred in holding that all of the claims of the ’461 and ’673 patents would have been obvious over the prior art. Accordingly, it affirmed the Board’s obviousness determination.