Federal Circuit Weighs in on Stay in View of Covered Business Method Review

14516149_sThe first few decisions from the Federal Circuit are starting to trickle in and are sure to bring more upheaval to Patent Office post-grant procedures. In Versata Software, Inc., et al. v. Callidus Software, Inc., the Court reversed the District of Delaware’s decision not to stay pending litigation in view of a Covered Business Method Review (CBM). A look at the Court’s analysis is instructive as a guide for successful motions to stay in CBM proceedings.

The underlying litigation was brought by Versata against Callidus on July 19, 2012, asserting infringement of three patents. Soon thereafter, Versata filed a motion to transfer and a motion to dismiss. Seven months later, in May 2013, the district court denied those motions. In response Callidus answered and counterclaimed, and also informed Versata that it would be filing a petition seeking CBM with the Patent Office. In August 2013, Callidus filed a first set of CBM petitions, challenging all of the claims of one of the patents-at-issue, and select claims of the other patents (Versata had not yet identified the asserted claims in the litigation). Simultaneously, Callidus sought a stay of the litigation.

In response, the district court ruled that it would not consider the motion until the PTAB made its decision whether to institute CBM review. In March 2014, the PTAB instituted CBM review finding all challenged claims more likely than not directed to unpatentable subject matter under 35 USC § 101. Callidus renewed its motion to stay, but the court only granted that motion relative to the one patent against which Callidus had challenged all claims, denying the petition relative to the other two patents where only select claims were challenged. Callidus filed a motion for interlocutory appeal.

The Federal Circuit began its analysis by addressing Section 18 of the AIA, wherein four factors are listed that a district court should consider in deciding whether to grant a stay:

(A) whether a stay, or the denial thereof, will simplify the issues in question and streamline the trial;
(B) whether discovery is complete and whether a trial date has been set;
(C) whether a stay, or the denial thereof, would unduly prejudice the nonmoving party or present a clear tactical advantage for the moving party; and
(D) whether a stay, or the denial thereof, will reduce the burden of litigation on the parties and on the court.

The Court then noted that, while district court decisions on motions to stay are usually reviewed for an abuse of discretion, the AIA provides the Federal Circuit with authority “to conduct more searching review of decisions to stay pending CBM review.” Decision at 4. In conducting that “more searching review,” the Court considered all four factors listed above:

Simplification: The Court disagreed with the district court’s seeming categorical rule that if any asserted claims are not also challenged in the CBM, the factor weighs against a stay. It is not necessary, however, for the CBM to simplify all issues to warrant a stay. Instead, the Court held that “a proper simplification analysis would look to what would be resolved by CBM review versus what would remain.” Decision at 7.

Discovery: Given that discovery was not complete and the trial date was scheduled for seven months after the PTAB was expected to rule, the Court held that this factor “strongly favors a stay.”

Undue Prejudice: The Court quickly dispatched with the district court’s ruling that Versata would suffer undue prejudice because of Calldus’ “improper tactics.” The Court did not find a basis for a conclusion that the filing of a motion to dismiss and transfer was improper and, further, given that Callidus was willing to stay the entire litigation, including its claims against Versata, there was no undue prejudice.

Reduced Burden of Litigation: While the district court found that Callidus’ filing of preliminary motions increased the burden of litigation, the Court found that this was clear error. “The correct test is one that focuses prospectively on the impact of the stay on the litigation, not on the past actions of the parties.” Decision at 13 (emphasis in original).

In the end, the Federal Circuit reversed the decision not to stay and, at the same time, continued the early flow of valuable guidance regarding post-grant proceedings.

Federal Circuit affirms PTAB in Inter Partes Reexamination

As the first-filed Inter Partes Review proceedings begin to advance down their respective paths, it will be some time before we have the benefit of learning from the PTAB’s final written decisions, let alone Federal Circuit review.  In the meantime, it will be instructive to follow the appeals of inter partes reexaminations to learn how the Federal Circuit will treat decisions of the PTAB (formerly the Board of Patent Appeals and Interferences).

One such Federal Circuit decision was handed down on December 27, 2012 in C.W. Zumbiel Co., v. Kappos, (Reexamination No. 95/000,077).  The underlying patent in this reexamination proceeding, US Patent No. 6,715,639, is directed to a box that holds containers, like soda cans.  The figures of the ‘639 patent disclose the familiar, elongated soda cardboard box that can hold a 12-pack of soda, but also has a perforated flap that can be opened or torn off the box to expose the cans of soda.

ZumbielIn 2004, inter partes reexamination of the ‘639 patent was requested and, ultimately, the examiner rejected numerous claims as obvious, but also confirmed the patentability of several claims.  The patent owner appealed this determination to the Board, and the Board found additional claims to be unpatentable, but confirmed the validity of several claims.  Subsequently, appeal was taken to the Federal Circuit.

The Federal Circuit began its analysis by articulating its standard of review – the legal determination of obviousness is to be reviewed de novo, and the underlying factual findings are reviewed for substantial evidence.  Then, in a very detailed analysis, but reminiscent of opinions reviewing an obviousness determination from a district court, the Federal Circuit affirmed the non-obviousness and obviousness findings by the Board.

Along the way, the Federal Circuit reiterated several legal principles that are worth recounting, if only for understanding the significant similarity between this analysis and that provided in review of district court litigation.  First, the decision remarked that “[a]lthough the PTO gives claims the broadest reasonable interpretation consistent with the written description…claim construction by the PTO is a question of law that we review de novo…”  Opinion at 18 (the Federal Circuit then went on to agree with the Board’s claim construction).  Second, the Court rejected the patent challenger’s obviousness argument by pointing out that the proffered references teach away from the suggested combination (the prior art taught that the perforation line should be higher than 1/2 of a can height, but less than the full can height; the claimed invention required a perforation line between the first and second container).  Third, the Federal Circuit found that the preamble was limiting based upon the fact that the claim depends on it for antecedent basis (“containers” recited in the claim body depend on “plurality of containers” from the preamble).

In the end, because the Federal Circuit agreed with the Board’s obviousness and non-obviousness determinations in the underlying inter partes reexamination, the Board’s decision was affirmed.

Inter Partes Review Possible Where Patent Found Valid at District Court

In a case that will impact the role of Inter Partes Review and Post Grant Review at the Patent Office, the Federal Circuit issued a precedential order denying a petition for rehearing en banc in the case of In re Baxter, Int’l Inc (Fed. Cir. 2011-1073) (originally reported at 678 F.3d 1357).  The concurring opinion of Judge O’Malley (with which Judges Rader and Linn joined) sought to clarify an issue raised by the dissent (Newman, J.) relating to whether an administrative action can nullify a judicial order.  Specifically, Judge O’Malley wanted to clarify that nothing in the underlying ruling prevents the Patent Office from reviewing the validity of a patent, even if a district court has previously found the patent is not invalid.  “A judgment in favor of a patent holder in the face of an invalidity defense or counterclaim merely means that the patent challenger has failed to carry its burden of establishing invalidity by clear and convincing evidence in that particular case- premised on the evidence presented there.” Id.at 2. It is also instructive to note that the Court found that a later review of a patent before the Patent Office is undertaken based on the particular evidence before the PTO, and with a lower burden of proof (preponderance of the evidence).

Importantly, however, the Federal Circuit clarified, and the PTO conceded, that a later finding of invalidity of a patent by the Patent Office (i.e., in an Inter Partes Review) does nothing to alter a prior judicial decision against a specific patent challenger.  For example, if Defendant is found to infringe a patent, but that patent is later deemed invalid, principles of res judicata prevent that Defendant from removing the burden of its loss in federal court.

While the Baxter case was decided in the context of reexamination, there is nothing in the Federal Circuit’s order that would suggest that the holding does not also apply to Inter Partes Review and/or Post Grant Review.  Merely because a patent was found not invalid at the district court level does not prevent that same patent from being subject to Inter Partes Review or Post Grant Review.  That is not to say, however, that the defendant who loses in that district court case can reverse that federal court determination by prevailing at the PTAB.