What has happened?
On February 6, 2009, the Federal Circuit granted permission in Shire LLC v. Sandoz for Sandoz to prosecute an interlocutory appeal of a District Court’s Markman ruling under 28 U.S.C. § 1292(b). The Federal Circuit’s unusual exercise of its discretion is likely to address a question that has long been of interest to patent litigants, especially those that face patent infringement claims respecting patents that have previously been litigated: whether, and to what extent, a prior court's claim construction of a patent asserted in a later action should be given preclusive effect under concepts of collateral estoppel? In granting the application for interlocutory appeal, the Federal Circuit noted that it had not decided the issue and that three district courts had previously reached differing results. See, e.g., TM Patents, L.P. v. International Business Machines. Corporation, 72 F. Supp. 2d 370, 377 (S.D.N.Y. 1999) (giving collateral estoppel effect to earlier claim construction); Kollmorgen Corp. v. Yaskawa Elec. Corp., 147 F. Supp. 2d 464, 469 (W.D. Va. 2001) (denying collateral estoppel effect to earlier claim construction); and Graco Children’s Products, Inc. v. Regalo International, LLC, 77 F. Supp. 2d 660, 663 (E.D. Pa. 1999) (denying collateral estoppel effect to earlier claim construction).
The District Court in TM Patents set forth the basic principles of collateral estoppel:
Collateral estoppel forecloses litigants from contesting matters that were actually litigated and decided in a previous action. See Blonder-Tongue Lab. Inc. v. University of Illinois Foundation, 402 U.S. 313, 329, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971). Four elements must be met for collateral estoppel to apply. First, the issues raised in both proceedings must be identical. Second, the relevant issues must have actually been litigated and decided in the prior proceeding. Third, the party to be estopped must have had a full and fair opportunity to litigate the issues in that prior proceeding. And fourth, resolution of the issues must have been necessary to support a valid and final judgment on the merits. See Central Hudson Gas & Elec. Corp. v. Empresa Naviera Santa, 56 F.3d 359, 368 (2d Cir.1995).
Id. at 375. There, the District Court concluded that all the criteria for the application of collateral estoppel had been met and adopted the prior court’s claim constructions, precluding relitigation of the issues. One observation that court made in determining to apply collateral estoppel claim preclusion will surely ring true to experienced patent litigants and litigators:
Indeed, so final is a Markman ruling that one could make a strong case for routinely certifying an interlocutory appeal to the Federal Circuit, pursuant to 28 U.S.C. § 1292(b), following such determinations. Given the frequency with which the Federal Circuit overrules District Court judges on issues of claim interpretation, such appeals would save millions of dollars and thousands of hours of trial time based on patent constructions that turn out to be erroneous.
Id., at 377, fn 1. By granting the application for interlocutory appeal in Sandoz, the Federal Circuit will address a question that has the potential of raising the stakes in any patent litigation where the action is one of a series of patent enforcement actions.
The reasons that District Courts have given for denying preclusive effects of earlier rulings implicate other policy concerns; and though these reasons have intellectual integrity, they compel a balancing against the values of finality, and uniformity of result that lie at the heart of claim preclusion doctrines. To understand the tension between the competing positions on the application of collateral estoppel, it is important to understand the factual context of the considerations. In each of these three cases, there had been a settlement following the claim construction ruling, indeed following a trial. Each settlement, however, had occurred before there was a completed appeal.
The Kollmorgen court expressed succinctly its reasoning to decline application of claim preclusion in these circumstances because the opportunity for appellate review of the claim construction had been foreclosed by settlement. Recognizing that the promotion of settlements is a value esteemed by courts, the court observed:
Surely no judicial scholar would argue the Supreme Court's interests in uniformity is mutually exclusive to an interest in a proper patent claim construction. Further, the Supreme Court's interest in uniformity also stemmed from Congress' creation of the Federal Circuit as the exclusive appellate court for patent cases. See id.(citing H.R. REP. NO. 97-312, pp. 20-23 (1981)). The Court appeared to value the role of the Federal Circuit as the final interpreter of patent claim construction. Accordingly, this Court believes Markman supports the promotion of uniformity, yet it does not stand for the blanketed adoption of patent constructions without first undergoing the Federal Circuit's rigorous review.
Id. at 468. These considerations also prompted the court to conclude that collateral estoppel effect to prior rulings where there had been no appellate review would have a “chilling effect” on the potential of settlement.
The lines are fairly well drawn in this controversy: should a patentee that had a full and fair opportunity to litigate a claim construction issue in an earlier case be permitted to relitigate the issues of claim construction on identical patents simply because it has chosen to settle an earlier case before the completion of appellate review. Or, should the fact that there was a full and fair litigation of the issue earlier conclude the claim construction questions. This is consistent, for example, with the Restatement (Second) of Judgments §13, comment e (1980), which states that “[a] judgment may be final in a res judicata sense as to part of an action although the litigation continues as to the rest.”
Sandoz thus presents the Federal Circuit with an opportunity to exercise its supervisory authority over the substance of patent litigation to enforce a uniform rule as to the application of collateral estoppel in patent cases, with affirmative and socially desirable policy issues in nominal conflict.
Under the current regime of claim construction, the prudent litigant may reasonably conclude that collateral estoppel will not bar relitigation of a claim construction issue if the Federal Circuit has not ruled on claim construction. This gives a patentee incentive to settle an action before an appellate decision if the claim construction is not to its liking, knowing that although it may have to deal with the fact of the earlier, unfavorable ruling as a matter of advocacy, but not of claim preclusion, it will likely be able to revisit the claim construction issue before a different court with a different adversary. If, however, the reasoning of TM Patents, which found that a fully litigated claim construction merited “finality” in the res judicata sense, prevails, to afford preclusive effect to an earlier claim construction, a District Court’s claim construction would achieve a level of deference that is likely to alter the calculus of settlement considerations in future patent cases where the enforcement action is envisioned to be one of many. Predictions of how the Federal Circuit is likely to decide an issue are exercises in speculation, but what can be said is that the unusual step of granting interlocutory appeal on this issue reflects a deep seated concern about the issue and its effect on the uniformity of decision respecting claim construction.