IOENGINE Ruling Helps Clarify the Application of Collateral Estoppel to PTAB Decisions of Invalidity

Holding

In IOENGINE, LLC v. PayPal Holdings, Inc., Judge William C. Bryson, sitting by designation in the United States District Court of the District of Delaware, rejected the application of collateral estoppel to Plaintiff’s, IOENGINE, LLC’s (“IOENGINE”), arguments related to a PTAB decision invalidating some, but not all, of the claims asserted in the litigation.[1]

Background

IOENGINE sued defendant PayPal Holdings, Inc. (“PayPal”) for infringing claims of two patents.[2] PayPal filed an IPR petition challenging each asserted claim.[3] The PTAB invalidated all but three of the challenged claims, and the three remaining claims depended from invalidated claims.[4] IOENGINE then asserted five new dependent claims in the litigation, bringing the total claims in the litigation to eight.[5]

Before the district court, PayPal argued that IOENGINE was collaterally estopped from arguing that subject matter in the already invalidated independent claims was absent from PayPal’s cited prior art because the PTAB already decided that issue.[6]

Collateral estoppel, or issue preclusion, normally applies if the party seeking estoppel can prove (1) the identical issue was already decided, (2) the issue was actually litigated, (3) the prior determination was needed to make a decision in the previous litigation, and (4) the party estoppel is sought against was fully represented in the previous litigation.[7]

Decision

Largely, the outcome of the case depended on the analysis of XY, LLC v. Trans Ova Genetics, L.C. (“XY appeal”).[8] XY, LLC’s (“XY”) patents disclose devices and methods for sorting X- and Y-chromosome-bearing sperm cells.[9] Prior to the appeal, XY licensed its patented technology to Inguran, LLC (“Inguran”), which used the technology to make and sell sorted semen.[10] Trans Ova Genetics, L.C. (“Trans Ova”) was a purchaser of sorted semen from Inguran but grew disappointed in its quality, so Trans Ova sought to license XY’s technology itself.[11] Trans Ova and XY entered a licensing agreement, but a few years later, Inguran acquired XY and sought to terminate the agreement with Trans Ova.[12]

The parties unsuccessfully attempted to negotiate a resolution to the dispute.[13] To support its position that the agreement was never terminated, Trans Ova continued to make payments during the negotiations, although XY declined all but one of the payments.[14] Later, XY sued for breach of contract and patent infringement.[15] Trans Ova counterclaimed, asserting patent invalidity, antitrust violations, and breach of contract.[16] The court found both parties liable for breach of contract, found Trans Ova willfully infringed XY’s patents, and found XY’s claims were not invalid.[17] Most relevant to the IOENGINE case, is Trans Ova’s appeal from the district court’s decision on patent infringement and patent invalidity in the XY appeal.[18]

Importantly, earlier on the same day as the XY appeal, the Federal Circuit heard an appeal (“ABS appeal”) from a final written decision of the PTAB, holding one of the claims in the XY appeal invalid.[19] XY and Trans Ova knew about the ABS appeal and agreed that the Court’s affirmance of the PTAB’s decision would result in the application of collateral estoppel.[20] In the ABS appeal, the Federal Circuit affirmed the PTAB’s decision of invalidly.[21]

As a result, the Federal Circuit in the XY appeal determined XY was collaterally estopped from making arguments about the validity of the invalidated claim.[22] The Court reasoned that a defendant accused of patent infringement should not have to continue defending against infringement of claims that were deemed invalid.[23] It also noted that collateral estoppel applies in pending litigation when the PTAB or a district court has affirmed a finding of invalidity, notwithstanding the differing standards.[24] So, the Federal Circuit did not address the validity of the invalidated patent and dismissed the appeal of that issue as moot.[25]

In the IOENGINE case, PayPal argued that collateral estoppel should apply.[26] Specifically, PayPal relied on the XY appeal for support that PTAB decisions on invalidity should be given collateral estoppel effect, notwithstanding differing standards of proof between the PTAB and the district court.[27] PayPal asserted that collateral estoppel can still apply even when proceedings have different standards of proof.[28]

Judge Bryson ruled that collateral estoppel did not apply, rejecting PayPal’s analysis of the XY appeal.[29] He focused on the first element of collateral estoppel and found that the issues were not identical.[30] So, Judge Bryson declined to give collateral estoppel effect to the PTAB decision.[31] Judge Bryson reasoned that the independent and dependent claims were separate issues despite the dependent claims including all elements of the already-invalidated independent claims.[32]

In making this decision, Judge Bryson noted that, when the burden of proof on an issue in the prior proceeding is lower than the burden of proof on the same issue in a second proceeding, collateral estoppel cannot apply.[33] PayPal had to show invalidity at the PTAB by a preponderance of the evidence, whereas it had to meet the higher clear and convincing standard to invalidate claims in district court.[34]

Judge Bryson rejected PayPal’s analysis of the XY appeal.[35] He found that reading the XY appeal as PayPal does would mean the Federal Circuit implicitly created an exception to the existing rule that prohibits the application of collateral estoppel from a previous decision applying a lower standard of proof.[36]

Split in Authority

Judge Bryson’s analysis of the XY appeal highlights a growing split of authority regarding when collateral estoppel applies in instances involving final PTAB decisions.[37] Judge Bryson rejected PayPal’s interpretation that PTAB decisions on invalidity should generally have collateral estoppel effect in future litigation surrounding the same claims, but he acknowledged that other courts have read the XY appeal differently.[38]

Some courts that follow PayPal’s analysis of the XY appeal include the U.S. District Court for the District of Delaware, the U.S. District Court for the Northern District of California, the U.S. District Court for the District of Massachusetts, and the U.S. District Court for the Northern District of Illinois.[39]

Specifically, in M2M Solutions LLC v. Sierra Wireless Am., Inc., the District of Delaware relied on the XY appeal to apply collateral estoppel to PTAB decisions on invalidity despite the existence of differing burdens of proof.[40] Similarly, in Cisco Systems, Inc. v. Capella Photonics, Inc., the Northern District of California rejected the argument that the less stringent standard of proof in PTAB decisions does not preclude a district court from hearing the invalidity issue.[41] In Intell. Ventures I, LLC v. Lenovo Grp. Ltd., the District of Massachusetts reads the XY appeal more broadly than Judge Bryson, holding that the affirmance of a PTAB decision of invalidity allows for an assertion of collateral estoppel on all district court litigation having to do with the same patent.[42] The Court also emphasized that the claims at issue in the IPR proceeding and the district court litigation need not be identical, so long as the differences would not have a material impact on a ruling of invalidity.[43] Likewise, in Fellowes, Inc. v. Acco Brands Corp., the Northern District of Illinois held that differing legal standards do not preclude the application of collateral estoppel.[44] Once again, the Court relied on the XY appeal in making this determination.[45]

Takeaways

This case marks a breaking away from the broader application of the XY appeal and a return to the traditional rule that collateral estoppel does not apply where the party seeking preclusion has a higher burden of proof for invalidity in the district court litigation than they did in the IPR proceeding. The case raises the question of the true scope of the Federal Circuit’s decision in the XY appeal. Judge Bryson, sitting by designation, may have foreshadowed this scope.

[1] 607 F. Supp. 3d 464 (D. Del. 2022).

[2] Id. at 476.

[3] Id. at 487.

[4] Id. at 487-88.

[5] Id.

[6] Id. at 488.

[7] Id.; Jean Alexander Cosms., Inc. v. L’Oreal USA, Inc., 458 F.3d 244, 249 (3d Cir. 2006).

[8] IOENGINE, 607 F. Supp. at 489-91; 890 F.3d 1282 (Fed. Cir. 2018).

[9] XY, 890 F.3d at 1286.

[10] Id. at 1287.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id. at 1285, 1287.

[17] Id. at 1285-86.

[18] XY, 890 F.3d at 1286-87.

[19] Id. at 1294; XY, LLC v. ABS Glob., Inc., Appeal No. 16-2228, XY, 890 F.3d at 1285-87 (P.T.A.B. May, 23 2018).

[20] IOENGINE, 607 F. Supp. at 490; XY, 890 F.3d at 1295.

[21] XY, 890 F.3d at 1294.

[22] Id. at 1294-95.

[23] Id. at 1294.

[24] Id.

[25] Id. at 1295.

[26] IOENGINE, 607 F. Supp. 3d at 489.

[27] Id.

[28] Id. at 489-90.

[29] Id. at 491.

[30] See id.

[31] Id.

[32] See id. at 489.

[33] See id. at 488-89; 6 Robert A. Matthews, Jr., Annotated Patent Digest §38:28 (2023).

[34] Id. at 489.

[35] Id. at 490-91.

[36] Id. at 491.

[37] Id.

[38] Id.

[39] See id.; No. 14-cv-01102-RGA, 2021 U.S. Dist. LEXIS 21357 (D. Del. Mar. 31, 2021); No. 20-cv-01858-EMC, 2020 WL 7227153 (N.D. Cal. Dec. 8, 2020); 370 F. Supp. 3d 251 (D. Mass. 2019); No. 10 cv 7587, 2019 WL 1762910 (N.D. Ill. Apr. 22, 2019).

[40] M2M, 2021 U.S. Dist. LEXIS 21357, at *6-8.

[41] Cisco, 2020 WL 7227153, at *3.

[42] Lenovo, 370 F. Supp. 3d at 255-56.

[43] Id.; Ohio Willow Wood Co. v. Alps S., LLC, 735 F.3d 1333, 1342 (Fed. Cir. 2013).

[44] Fellowes, 2019 WL 1762910, at *6.

[45] Id.