First published in LES Insights

Abstract

The America Invents Act's patent-review proceedings, such as Covered Business Method (CBM) review, are an increasingly used litigation strategy to defend against a charge of patent infringement. Often, institution of such a proceeding will be accompanied by a request to stay any litigation pending the outcome of the Patent Office's review. In deciding whether to enter a stay, one factor courts consider is whether a stay will simplify issues in the case and streamline trial. Recently, the Court of Appeals for the Federal Circuit rejected a district court's categorical rule that stays are disfavored unless the CBM review includes all asserted claims, noting that "[s]tays can be warranted even when a CBM proceeding does not address all asserted patents, claims, or invalidity defenses." As a result, this case provides more flexibility and an opportunity for accused infringers to develop and implement a more strategic approach to defending themselves against patent infringement claims. In particular, they may have the opportunity to challenge some selected patent claims in the patent office and stay the court proceedings as to the other claims while reserving the ability to subsequently challenge other claims in the court without estoppel from the patent office challenge.

The America Invents Act ("AIA") identifies four factors that a district court should consider when a party asks a court to stay patent-infringement litigation until the patent office completes a covered business method ("CBM") review: (1) whether a stay will simplify the issues and streamline the trial, (2) whether discovery is complete and a trial date is set, (3) whether there will be undue prejudice to the nonmoving party or a clear tactical advantage to the moving party, and (4) whether a stay will reduce the burden on the court and the parties. Recently, the Federal Circuit explained that applying a categorical rule to factor (1) based on whether all patent claims are subject to CBM review is inappropriate, because stays may be warranted even if the CBM review does not address all asserted patents, claims, or invalidity defenses. The proper analysis instead balances what issues the CBM review would resolve and what issues would remain. In Versata Software, Inc. v. Callidus Software, Inc.,1 the Federal Circuit reversed the district court's denial of a stay pending CBM review of two patents, finding that although the CBM review only raised one invalidity defense and initially did not include all patent claims, all four factors weighed in favor of a stay.

Background

Versata Software, Inc., Versata Development Group, Inc., and Versata, Inc. sued Callidus Software, Inc., alleging infringement of three U.S. patents. With its answer, Callidus filed counterclaims, asserting its own patents. Callidus then filed a petition for CBM review with the Patent Office, challenging every claim of one of Versata's patents and only certain claims of the other two patents. Callidus also sought to stay the district court proceedings pending the CBM review. Callidus also filed a second set of petitions with the Patent Office, challenging the remaining claims of Versata's patents, but the Patent Office did not institute CBM review on those claims until after the district court decided the motion to stay. In both of its petitions, Callidus raised only one basis for invalidity for all the patent claims: whether the subject matter of the three patents was eligible for patent protection. The district court granted a stay only as to the one patent on which Callidus challenged every patent claim in its first petition and denied the stay on the other two patents. Callidus appealed.

The Decision

On appeal, the Federal Circuit considered each of the four statutory factors and reversed the district court's decision to deny the request to stay the patent-infringement litigation.

The Federal Circuit first considered whether a stay would simplify the issues and streamline the trial. Rejecting the district court's "categorical rule" that failing to challenge all asserted claims warrants denial of a stay, the Federal Circuit explained that a stay can be warranted even when CBM review does not address all asserted patents, claims, or invalidity defenses. A proper simplification analysis should assess what issues would be resolved by CBM review versus what issues would remain. Applying this analysis, the Federal Circuit noted that all of the patent claims were undergoing CBM review because the Patent Office subsequently instituted review on Callidus's second petition. The Federal Circuit acknowledged that Callidus's motion to stay would be strengthened if it had included more than one invalidity basis in its petitions. The Federal Circuit explained, however, that the statute explicitly allows a petitioner to raise one invalidity defense in CBM review without invoking estoppel as to other defenses in litigation. Balancing these interests, the Court concluded that the first factor strongly favored a stay.

Turning to the second factor, the Federal Circuit reiterated that the date when the movant files the motion to stay is the relevant time to assess this factor. The factor favored a stay because fact discovery was ongoing and no depositions had yet occurred.

Turning to the third factor, the Court observed that the district court did not make factual findings on whether Versata would suffer undue prejudice and thus declined to consider whether either party would be unduly prejudiced. The Federal Circuit did, however, reject the district court's conclusion that Callidus sought a tactical advantage through its stay request by intending to proceed on its counterclaims while denying Versata the same opportunity. The record showed that Callidus sought to stay the entire litigation. The Federal Circuit further explained that "generic concerns," such as "stale evidence, faded memories, and lost documents," without more, cannot justify a conclusion of undue prejudice. Because the record did not suggest any undue prejudice to Versata or clear tactical advantage to Callidus, the Federal Circuit found this factor strongly favored a stay.

Finally, the Federal Circuit considered whether a stay would reduce the burden of litigation. The district court found that Callidus's preliminary motions to dismiss and stay the litigation increased the burden of litigation and thus found the factor did not support a stay. The Federal Circuit rejected that analysis, which it characterized as "evaluating the burden-of-litigation factor exclusively through [a] backward-looking lens." According to the Federal Circuit, the analysis should focus prospectively on the stay's potential impact on the litigation, not on the parties' past actions. Because a stay could relieve the parties and the district court of having to expend substantial resources on claim construction, noninfringement, and invalidity analyses, the Federal Circuit concluded that this factor also strongly favored a stay.

Finding all four factors favored a stay, the Federal Circuit reversed the district court's denial of Callidus's motion to stay.

Strategy and Conclusion

This case shows that categorical rules should not be applied when assessing whether to stay a litigation pending CBM review. For example, although a CBM review may implicate only a subset of asserted claims or one invalidity argument compared to those raised in a copending litigation, the factors, on balance, may still favor staying the litigation pending CBM review. As a result, this case provides more flexibility and an opportunity for accused infringers to develop and implement a more strategic approach to defending themselves against patent infringement claims. In particular, they may have the opportunity to challenge some selected patent claims in the patent office and stay the court proceedings as to the other claims while reserving the ability to subsequently challenge other claims in the court without estoppel from the patent office challenge.