April 21, 2014
Law360
Authored by Elizabeth A. Laughton and Jeffrey C. Totten
Accused as an infringer? Facing a demand letter? Or merely concerned about a competitor's patents? It is never too early to develop a strategy to challenge the validity of a problematic patent. The America Invents Act introduced three new post-grant proceedings for challenging the validity of issued patents before the U.S. Patent and Trademark Office. Each of these proceedings—inter partes review, post-grant review and covered business method review—are compatible with parallel litigation in the district courts. By managing the timing of the parallel proceedings, an accused infringer may increase its chances of negating a damages award in district court.
Parties using post-grant proceedings to challenge patentability have met with great success. Indeed, in 20 of the first 21 final written decisions in post-grant proceedings, all challenged claims have been found unpatentable.1 While some of this success may derive from the patents challenged, post-grant proceedings carry several benefits for one seeking to challenge a patent.
Unlike district court proceedings, an issued patent challenged under the AIA proceedings is no longer protected by the presumption of validity, thereby lowering the bar to a finding of unpatentability. In addition, the patent office applies the "broadest reasonable interpretation" in construing the challenged claims. This standard may encompass more prior art than that applied in the district court, thereby increasing the likelihood that a challenged claim is found unpatentable. And challengers may also prefer to present their case to the technically trained judges at the board as compared to a district court judge or a jury who, as generalists, may be less comfortable with complex technical arguments.
The speed of post-grant challenges also presents benefits for a party seeking to challenge a patent. Absent a finding that a case is "exceptional," the patent office will issue a final decision within 18 months from the filing of the requesting position (i.e., one year from institution).2
Because the new post-grant proceedings are much shorter than pre-AIA re-examination proceedings, some courts have cited the reasonable length of time that litigation could be stayed for the resolution of an IPR as counseling for a stay.3 The thumb is placed even more firmly on the scale in favor of a stay in the CBM context, with courts being required to consider whether a stay will reduce the burden of litigation and with the availability of an immediate appeal to the Federal Circuit in the event a stay is not granted.4
The relative speed of post-grant proceedings also raises the possibility of erasing a damages award in a co-pending litigation. In the Federal Circuit's July 2013 decision in Fresenius v. Baxter, the court held that the cancellation of challenged claims of U.S. Patent 5,247,434 (the '434 patent) after completion of ex parte re-examination proceedings and appeals extinguished the cause of action in a concurring district court proceeding.5 Upon the cancellation of the underlying claims, the Federal Circuit vacated the district court's unexecuted damages award.
This result arose from a long procedural history involving three different appeals to the Federal Circuit. Although this outcome is highly unusual in the re-examination context, where times to final decision are long, patent litigants may see an increasing number of such reversals of fortune under the new post-grant timelines—and should develop their litigation strategies accordingly.
A brief review of the facts and procedural history underlying the Fresenius decision illustrates how the relative timing of critical events resulted in the nullification of the damages award. In 2003, Fresenius filed a declaratory judgment action asserting, among other things, invalidity and noninfringement of certain claims of the '434 patent. In February of 2007, the district court held, pursuant to Baxter's motion for judgment as a matter of law, that Fresenius had failed to prove invalidity.
After an October 2007 jury trial on damages, Baxter was awarded damages for Fresenius' stipulated infringement, and in April of 2008, the district court awarded ongoing post-verdict royalties, as well as a permanent injunction, which it stayed. Both parties appealed to the Federal Circuit, which, in September 2009, affirmed the grant of JMOL of invalidity of the '434 patent and the determination of pre-verdict royalties, but vacated and remanded for a reconsideration of injunctive relief and a recalculation of post-verdict royalty rates.6
After further proceedings at the district court, the court issued a new damages ruling and entered final judgment for Baxter in March 2012. Both parties appealed various aspects of the damages award to the Federal Circuit, an appeal which ultimately resulted in the court's July 2013 decision. Notably, in May 2012, the district court granted Fresenius' motion to stay execution of the new judgment pending appeal and in doing so, rejected Baxter's argument that it was entitled to collect the 2007 judgment.
A parallel battle took place at the patent office. In October 2005, roughly two years after filing its declaratory judgment suit against Baxter, Fresenius requested ex parte re-examination of the '434 patent. In March 2010, the board affirmed the examiner's determination of invalidity of the claims at issue. Baxter appealed to the Federal Circuit, which affirmed the patent office's holding in a May 2012 decision.7 The court's mandate issued in November 2012, and Baxter did not petition for certiorari. In light of the mandate, the patent office terminated the re-examination and issued a certificate cancelling the claims at issue in April 2013.8
Thus, the patent office canceled the relevant claims of the '434 patent while the Federal Circuit was still considering the appeal from the 2012 district court judgment. The Federal Circuit held the cancellation of the claims must be given effect and, thus, no cause of action remained. Baxter argued that the cancellation of the claims could not be given effect in this particular case in light of the "final" September 2009 decision of the Federal Circuit on invalidity and the "final" 2007 damages award on prejudgment royalties.
The Federal Circuit agreed that a final judgment cannot be reopened in the later event of cancellation of claims, but sharpened the definition of a final judgment as ending the litigation on the merits and "leav[ing] nothing for the court to do but execute the judgment."9 Unfortunately for Baxter, the court did not find any of the prior judgments sufficiently final under this standard. As the amount of Baxter's damages award had yet to be determined, the Federal Circuit concluded that the intervening cancellation of claims operated to extinguish the damages award.
Baxter petitioned the U.S. Supreme Court for certiorari on March 5, 2014, but the Supreme Court has not yet ruled on the petition.
While Fresenius was decided in the re-examination context, its rationale extends to post-grant proceedings under the AIA. Thus, if the patent office cancels relevant claims at any time before a district court issues a judgment that "leaves nothing for the court to do but execute the judgment," such cancellation will operate to extinguish any unexecuted damages awards.
The Fresenius decision is striking, not simply because of its holding, but also due to the low likelihood of any such scenario in a pre-AIA context. Roughly seven and a half years elapsed between Fresenius' filing of the petition for re-examination to the cancellation of the claims at issue. This timeline is typical of ex parte re-examination proceedings; according to the patent office data from fiscal year 2012-2013, the average time from the filing of a request for ex parte re-examination, where an appeal is taken to the Federal Circuit, to the issuance of a notice of intent to issue re-examination certificate is about 6.2 years.10
The statistics for inter partes re-examination fare only slightly better, with an average time of about 5.6 years.11 Contrast these numbers with data on district court litigation, where median time to trial for patent litigations has held relatively steady at 2.5 years since 2005.12 And data provided by the Federal Circuit for FY 2013 show a median disposition time (from docketing date to decision date) of about one year (11.8 months) for cases originating from district courts (considered to be representative for amount of time to decide patent case).13
While these numbers provide only a rough analysis, they illustrate that overall, it would be more likely for a patent infringement litigation to proceed through final decision on appeal before a concurrently filed petition for re-examination would result in the cancellation of claims. Further accounting for the fact that concurrent petitions for re-examination are usually filed after litigation begins, the likelihood of winning the race to final decision through re-examination (as occurred in Fresenius) is not high.
This calculus changes, however, with the AIA's introduction of post-grant proceedings. By statute, the patent office must finish any post-grant proceedings within 18 months from the filing of the requesting position (i.e., one year from institution). Where claims are found unpatentable, the odds of a successful request resulting in the cancellation of claims before a final judgment is higher than in the re-examination context—even if the patent owner requests rehearing and then appeals to the Federal Circuit.
In contrast to the fairly predictable pace of AIA post-grant proceedings, litigation timelines can vary widely given the forum district, complexity of the case, and the vagaries of the presiding judge's docket. Appeals to the Federal Circuit also do not have a uniform time to decision, with appeal pendency depending on such factors as the court's docket and the authoring judge. Accordingly, accused infringers who have filed post-grant petitions for the patent office should litigate with one eye always fixed on the patent office timeline. Such a strategy would naturally encompass moving to stay co-pending district court proceedings in favor of the patent office proceedings.
An accused infringer may also contemplate other strategies to promote a Fresenius-type situation. Accused infringers may attempt to bifurcate damages from liability, further extending the district court timeline and increasing the potential for multiple appeals. And, as in Fresenius, litigators should consider asking for a stay of execution of adverse judgments pending the result of concurrent invalidity proceedings before the patent office. District courts have inherent authority to stay execution of judgments in view of patent office proceedings, and an argument that a cancellation of claims is forthcoming may persuade a court to enter such a stay.
On the patent office side, entities anticipating an infringement suit need not wait for service of the complaint to begin identifying the best prior art to assert in post-grant invalidity challenges. It is also worth noting that had the AIA post-grant proceedings been available when Fresenius challenged Baxter's patent in 2005, it would have been barred from pursuing an IPR by its decision to initiate a declaratory judgment action.14
Thus, accused infringers considering whether to initiate a declaratory judgment action must first decide whether they want to avail themselves of any post-grant proceedings, and potentially avail themselves of a Fresenius-type decision. Further, when choosing a forum in which to file suit, accused infringers should consider average patent-case pendency in that forum; it may be best to choose a forum with longer case pendency if the aim is to complete post-grant proceedings before the end of the litigation.
Notably, under 35 U.S.C. §§ 315(a)(2) and 325(a)(2), a party who files either an IPR or a PGR, respectively, and then later files a declaratory judgment may obtain an automatic stay of the district court litigation. Through these steps, an accused infringer may select a preferred forum, yet still stay the case. While a patent owner can dissolve the stay by filing a counterclaim of infringement or an infringement suit, the mere availability of this provision may make courts more willing to grant a discretionary stay, particularly in comparatively unhurried fora.
In sum, for accused infringers, taking measures to actively create circumstances like those in Fresenius is a way to insure against a potentially large patent infringement judgment. Patent litigants should be aware of this eventuality and factor this safeguard into their litigation strategy.
Endnotes
1 See Synopsys Inc. v. Mentor Graphics Corp., IPR2012-00042, Paper 60 (Feb. 19, 2014) (FWD) (three of 13 challenged claims survive).
2 35 U.S.C. § 316(a)(11); 35 U.S.C. § 326(a)(11).
3 See Softview LLC v. Apple Inc., No. 12-989, No. 10-389, at *2 (D. Del. Sept 4, 2013) (granting stay of litigation in view of IPR where court had previously declined to stay litigation in view of re-examination proceedings, in part, due to faster time to decision in IPR).
4 See AIA § 18(b).
5 Fresenius USA Inc. v. Baxter Int'l Inc., 721 F.3d 1330, 1347 (Fed. Cir. 2013).
6 Fresenius USA Inc. v. Baxter Int'l Inc., 582 F.3d 1288, 1291-92 (Fed. Cir. 2009).
7 In re Baxter Int'l Inc., 678 F.3d 1357, 1366 (Fed. Cir. 2012)
8 See Ex Parte Re-examination Certificate, U.S. Pat. No. 5,247,434 C1 (P.T.O. Apr. 30, 2013).
9 Fresenius, 721 F.3d at 1341.
10 Statistical Data from Central Re-examination Unit from Fiscal Years 2012-2013, Slide 7, available at http://www.uspto.gov/patents/stats/Reexamination_Information.jsp.
11 Id. at Slide 10.
12 PricewaterhouseCoopers, 2-13 Patent Litigation Study, available at link no longer available.
13 Federal Circuit data on time to disposition of merits appeals, available at link no longer available.
14 35 U.S.C. § 315(a)(1); 35 U. S. C. § 325(a)(1).
Originally printed in Law360 (www.law360.com). Reprinted with permission. 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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