December 24, 2013
LES Insights
By John C. Paul; D. Brian Kacedon; Aaron Gleaton Clay
Authored By Aaron V. Gleaton, D. Brian Kacedon, and John C. Paul
The America Invents Act has altered many areas of patent law, but perhaps one of the most significant changes has been the increased ability to challenge the validity of a patent in administrative proceeding before the U.S. Patent and Trademark Office ("USPTO"). While these proceedings were ostensibly intended to reduce litigation costs by providing for a non-judicial proceeding, it is not uncommon that such administrative proceedings occur in parallel with proceedings before U.S. courts. One challenge for the courts, however, is to determine the interplay between decisions of the USPTO and the court, particularly when those decisions conflict. These challenges are highlighted by a recent denial of rehearing in Fresenius USA v. Baxter International.1
This case concerned three patents owned by Baxter International related to a hemodialysis machine. The relevant claims taught the use of the machine with an integrated touchscreen interface. Fresenius USA, Inc., Baxter's competitor, filed a declaratory-judgment action in the Northern District of California, seeking an order declaring the patent claims invalid and not infringed. Baxter counterclaimed for infringement.
Fresenius stipulated to infringement, but a jury found the claims invalid as obvious or anticipated. The district court, however, held that Fresenius had not presented substantial evidence to support those findings. As a result, the district court entered judgment as a matter of law in favor of Baxter. After a later trial on damages, the jury awarded $14.266 million to Baxter for infringement. The district court entered that judgment as well as an injunction. In Fresenius's appeal, Fresenius I, the Federal Circuit affirmed the judgment of infringement on one patent but partially reversed, holding that two of the asserted patent's claims were invalid. The court therefore remanded the case to the district court to reconsider the scope of its injunction and post-verdict damages award in light of the new invalidity determinations.
Following this mandate, the district court reduced Baxter's postverdict royalties and ordered Fresenius to pay Baxter $14.266 million (plus interest) in prejudgment damages, $9.3 million (plus interest) in postverdict royalties on infringing machines, and additional royalties on related sales. Again, both parties appealed the district court's order and the district court stayed execution of its judgment pending appeal.
Meanwhile, at Fresenius's request and beginning during the district-court litigation, the PTO reexamined the relevant patent claims (those ultimately surviving invalidity during the first appeal). Before the district-court case went to a trial on damages (before the first appeal), the patent examiner made an initial determination that the patent claims would have been obvious in light of two prior-art references. Importantly, the claims before the PTO comprised all the remaining claims in the district-court litigation. Despite the parties' requests to stay the case pending reexamination, the district court determined that the uncertainty of the PTO's final determination did not warrant a stay.
The PTO Board of Patent Appeals and Interferences ultimately found the claims obvious and thus invalid—a decision affirmed by the Federal Circuit. The obviousness holding from the reexamination relied on two prior-art references that "were not squarely at issue" in the related district-court proceeding. Thus, on appeal (In re Baxter), the Federal Circuit held that the only remaining patent was invalid and did so while the parties were appealing damages from the reconsidered damages award (Fresenius II).
On appeal, the Federal Circuit held that the PTO's cancellation of claims was binding in the pending district-court case such that the district-court judgment then pending on appeal was rendered moot due to the nullification of claims. The court noted that final judgments could not be reopened but that remand in Fresenius I prevented the finality of the judgment, so it was still nonfinal when the Federal Circuit affirmed the PTO's cancellation of Baxter's claims in In re Baxter. In particular, the court found significant that its remand did not sufficiently end the dispute between the parties or "leave nothing for the court to do but execute the judgment"—instead the remand required reconsideration of damages issues.
Judge Newman dissented from the panel majority, challenging the constitutionality of the majority's holding by arguing that separation of powers precluded an administrative agency from superseding a judicial proceeding by stripping all effect from the district court's judgment and Federal Circuit's affirmance.
Following the court's July 2 decision, Baxter filed a combined petition for a panel rehearing and rehearing en banc (asking the full complement of active judges to review the decision by the three-judge panel). The court has now denied both requests. The concurring opinion and two dissenting opinions that accompanied the denial, however, illustrate the continued division in the Federal Circuit over the administrative nullification of Article III judgments.
The concurrence written by Judge Dyk, and joined by Judge Prost, directly responded to the dissents to the denial of rehearing, largely renewing the finality arguments made in the panel's majority decision. Specifically, Judge Dyk explained that Moffitt, Simmons, and Mendenhall compelled the result in this case because the district court's judgment was not sufficiently "final" to bar the preclusive effect of the Federal Circuit's nullification of the patents in In re Baxter in light of the court's remand to the district court on postverdict relief. Under Judge Dyk's view of the precedent, the court must distinguish between the preclusive effect of (1) the first appeal on later infringement proceedings and (2) the affirmed PTO decision on any infringement proceeding. While the first appeal may have affected another infringement case, the court determined that it did not have affect the PTO proceeding. After looking at the case law regarding preclusion effects in nonfinal cases, Judge Dyk concluded that the dissents' arguments simply contravened longstanding circuit and Supreme Court authority.
Judge O'Malley's dissent articulated a different understanding of the procedural posture of the case, which she argued compelled the opposite conclusion. Because the court's remand to the district court concerned only postverdict relief and not infringement, validity, or preverdict damages, Judge O'Malley viewed the district court's judgment as final in at least those respects. Highlighting that neither the district court nor the circuit itself could have disturbed those aspects of the judgment, Judge O'Malley argued that Baxter's entitlement to damages was final and thus immune from In re Baxter's preclusive effect.
Judge O'Malley also distinguished the facts of Fresenius from those of the cases cited by the panel majority and by Judge Dyk. Arguing that Baxter's right in the judgment vested by virtue of a calculation of preverdict damages and appellate review of that calculation, Judge O'Malley dismissed reliance on Simmons and Mendenhall because neither of those cases similarly involved an appeal from a judgment with a completed accounting. Judge O'Malley's dissent also took issue with what she viewed as a conflict with Bosch v. Pylon Manufacturing, in which the Federal Circuit applied a "liberal view" of finality to conclude that liability determinations are final for purposes of appeal even though damages and willfulness determinations remain pending.
As she had from the panel majority, Judge Newman dissented from the denial of rehearing, again pointing to constitutional concerns. First, Judge Newman argued that the panel's decision would destabilize the patent system by ignoring the rules of finality in patent disputes. In doing so, she observed, the court weakened the driving force of the patent system: the incentive for creating, developing, and commercializing new technology. Second, Judge Newman confronted Judge Dyk and Judge O'Malley's characterization of her position on the role of reexamination, arguing that she does not disfavor parallel proceedings in district court and the PTO, but rather opposes "routinely subjecting Article III judges to agency override." Judge Newman distinguished the Federal Circuit's approach from other circuits, which she characterized as respecting the rules of finality.
In light of Fresenius, a final PTO decision affirmed by the Federal Circuit is given effect in pending district-court cases so long as the judgment is not yet final. Thus, a district court's judgment on validity and infringement may, under certain circumstances, be superseded by the Federal Circuit's later affirmance of the PTO's invalidity decision.
This case illustrates the effect that PTO proceedings can have on parallel district-court litigation. Practitioners should remain aware that nonfinal district-court judgments could be superseded by a final administrative nullification of claims. This consideration grows in importance now that the AIA has provided additional avenues of postgrant review. The new inter partes review proceedings, for example, provide an accelerated review mechanism in which the PTO can reexamine and invalidate claims within twelve to eighteen months. With most district-court litigation extending beyond this period, an increasing number of invalidity determinations will have the potential to moot pending district-court disputes. Parties should carefully examine their litigation strategies when involved in parallel proceedings.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. 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.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. 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.
Lecture
Patent Protection for Software-Related Inventions in Europe and the USA Training Course
June 5, 2024
Hybrid
Due to international data regulations, we’ve updated our privacy policy. Click here to read our privacy policy in full.
We use cookies on this website to provide you with the best user experience. By accepting cookies, you agree to our use of cookies. Please note that if you opt not to accept or if you disable cookies, the “Your Finnegan” feature on this website will be disabled as well. For more information on how we use cookies, please see our Privacy Policy.
Finnegan is thrilled to announce the launch of our new blog, Ad Law Buzz, devoted solely to breaking news, developments, trends, and analysis in advertising law.