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In Dissent, Judge Newman Questions PTO Reexamination After Judicial Determination of Patent Validity

December 15, 2011

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Last Month at the Federal Circuit - January 2012

Judges: Newman (dissenting), Prost (author), O'Malley

[Appealed from: Board]

In In re Construction Equipment Co., No. 10-1507 (Fed. Cir. Dec. 8, 2011), the Federal Circuit affirmed the Board’s conclusion, following reexamination proceedings, that the patent claims-at-issue were obvious over the prior art. Construction Equipment Company (“CEC”) is the owner of U.S. Patent No. 5,234,564 (“the ’564 patent”), which is directed to a vehicle for screening rocks and plant matter based on size from, for example, soil or dirt at a construction site.

Following a request for ex parte reexamination of several claims of the ’564 patent, the PTO found that the request raised a substantial new question of patentability and began reexamination proceedings. The Court noted that CEC claimed that the request was initiated by Powerscreen International Distribution Ltd. (“Powerscreen”), against whom CEC had previously asserted the ’564 patent and had obtained an injunction against further infringement. By the end of reexamination, all of the claims-at-issue stood rejected by the examiner as obvious under 35 U.S.C. § 103 in view of the various references cited in the reexamination request. CEC appealed to the Board, which generally affirmed the examiner’s rejections.

On appeal, the Court found no error of either fact or law in the Board’s analysis. The Court agreed with the Board that every limitation of each claim was found in one or another of the available references. The Court further agreed that one of ordinary skill in the art would have been able to combine the available references in such a way as to practice the alleged invention of each claim, and that such a person would have had a reason to make such combinations. The Court therefore concluded that CEC’s alleged invention consisted entirely of combining known elements into a machine that, while possibly new, was nevertheless obvious and therefore unpatentable.

Judge Newman dissented, noting that the PTO’s reexamination decision addressed the same issue that the Court had finally adjudicated eleven years ago, when the Court affirmed a district court’s ruling of nonobviousness of the ’564 patent based on some of the same references cited in the reexamination request. Judge Newman therefore found that CEC’s reexamination appeal raised several fundamental questions: “[I]s a final adjudication, after trial and decision in the district court, and appeal and final judgment in the Federal Circuit, truly final? Or is it an inconsequential detour along the administrative path to a contrary result? Although final decisions of courts of last resort are preclusive within the courts, is the administrative agency excused?” Newman Dissent at 1.

Judge Newman expressed concern that, in this case, there had already been a final disposition of the issue of validity in Article III courts. As Judge Newman explained, the plan of the U.S. Constitution places the judicial power in the courts, whose judgments are not thereafter subject to revision or rejection, and that neither the legislative nor the executive branch has the authority to revise judicial determinations. Thus, revision by an agency of a district court’s order would render the previous judgment by the district court “merely advisory” and thus in violation of the Constitution. Id. at 4. Accordingly, Judge Newman concluded that the previous judgment of the Federal Circuit, on the same issue that was taken to the PTO for reexamination, should not be “merely advisory.” Id. Moreover, Judge Newman found that the issue was not waived because waiver is inapplicable to significant questions of general impact or of great public concern, including those affecting the integrity of judgments and the separation of powers.

In dissent, Judge Newman also found that the principles of litigation repose are violated by the reopening in an administrative agency of issues that were litigated to finality in judicial proceedings. According to Judge Newman, the rules of res judicata and issue preclusion were relevant in this case, because reexamination was requested by Powerscreen, who had been the defendant in the prior district court ruling, the appellant in the prior Federal Circuit appeal, and the petitioner for certiorari.

As Judge Newman explained, under res judicata, a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action. In addition, when an issue has been litigated and judgment entered in a court of last resort, the underlying rationale of the doctrine of issue preclusion is that a party who has litigated an issue and lost should be bound by that decision and cannot demand that the issue be decided over again. Moreover, according to Judge Newman, the fundamentals of judicial authority and administrative obligation are not subject to the vagaries of shifts in the burden or standard of proof in nonjudicial forums, and a lower standard of proof in an administrative agency cannot override the finality of judicial adjudication. Thus, Judge Newman concluded that, because the question of obviousness had already been finally decided, Powerscreen should have been precluded from reopening the same issue in another forum. Furthermore, Judge Newman found that the issue was not waived because waiver is inapplicable against issues of res judicata and issue preclusion, for preclusion principles serve the powerful public and private interests of finality in judicial proceedings and the avoidance of inconsistent results.

Judge Newman further explained that the reexamination statute seeks to replace or reduce the expense and encumbrance of litigation, but when the same issue has already been litigated and finally adjudicated, interested persons should be able to rely on the judicial decision. According to Judge Newman, throughout the legislative adjustments to reexamination, no one suggested that reexamination in the PTO could override a final judicial decision, and such an unconstitutional act would not have been contemplated by Congress, and is improperly endorsed by the Court.

Judge Newman also observed that precedent warns against hindsight combination, whereby disparate elements are fitted into the template of the new device with the guidance of the patentee. According to Judge Newman, the majority’s decision “present[s] a classical illustration of judicial hindsight to construct a machine that was not previously known, a machine that achieved commercial success because it provided previously unavailable advantages.” Id. at 12. Judge Newman therefore concluded that the majority did not apply the correct analytic criteria in its obviousness analysis.

In a footnote, the majority noted that it was “unpersuaded” by the dissent’s contention that the Court should hold the reexamination proceedings unconstitutional, or barred by considerations of res judicata or issue preclusion. Slip op. at 5 n.3. Initially, the majority explained that federal appellate courts have a well-established practice of declining to take up arguments not timely made by the parties, and found that the notion that the reexamination was ipso facto unlawful was neither briefed nor argued by any party at any stage of the case.

In addition, the majority disagreed that either constitutional principles or the common law doctrines of claim or issue preclusion would bar reexamination of the ’564 patent, finding In re Swanson, 540 F.3d 1368 (Fed. Cir. 2008), to be highly instructive. According to the majority, in Swanson, the Federal Circuit found no error in the PTO’s holding that reexamination could be instituted on the strength of a reference that the requesting party had unsuccessfully asserted as prior art in litigation involving the same patent, even where the Federal Circuit had affirmed the district court’s judgment of validity. As the majority explained, the Swanson court’s judgment was not incompatible with the examiner’s rejection of claims on reexamination because the district court’s judgment was not that the patent was valid per se, but that the accused infringer had failed to carry his burden to prove it invalid. Thus, there was no contradiction between the affirmed litigation judgment and the examiner’s rejection during reexamination. The majority therefore found no reason why Swanson would not control this case because, in both cases, the reexamination was initiated by a party that had previously failed to prove the patent invalid in litigation. Moreover, the majority found that the reexamination involved numerous references, combinations, and even claims not treated by the district court.

Finally, the majority found that the dissent’s suggestion—that a finding that a patent is not invalid in one proceeding against one party would bar any other validity challenge—would be a dramatic expansion of the concept of nonmutual offensive collateral estoppel. The Court therefore declined to adopt a rule for patent cases that is inconsistent with all other governing law regarding collateral estoppel.

Thus, the Court affirmed the Board’s conclusion that the patent claims-at-issue were obvious over the prior art.

Summary authored by Eric K. Chiu, M.D., Esq.