Fresenius USA, Inc., et al. v. Baxter International, Inc., et al., 2013 WL 3305736, 107 U.S.P.Q.2d 1365 (Fed. Cir. July 2, 2013)

In July, the Federal Circuit held that under the reexamination statute (35 U.S.C. § 307(b)), the PTO’s cancellation of claims terminated a pending district court infringement case, even where the Federal Circuit had already affirmed the district court’s finding of validity and infringement. The case concerns a dispute between Baxter International, Inc. -- owner of U.S. Patent No. 5,247,434, which addresses hemodialysis machines (HDMs), and Fresenius USA, Inc., which makes HDMs. HDMs function in the place of kidneys to cleanse blood of toxins.

Procedural Development

In 2003, Fresenius sued Baxter seeking declaratory judgment that the ‘434 patent was invalid and not infringed. Baxter counterclaimed for infringement of the ‘434 and two other patents. In the initial trial, the jury found the ‘434 patent claims obvious, but in February 2007 the district court granted JMOL for Baxter, finding the claims not invalid. In an October 2007 damages trial (Fresenius had stipulated to infringement), the jury awarded $14 million to Baxter for infringement of the three asserted patents. In April 2008, the district court entered a permanent injunction, which it stayed, and awarded Baxter post-verdict royalties on infringing HDMs and related disposables. Both parties appealed.

In its first decision in this saga, in 2009, the Federal Circuit affirmed the trial court’s rejection of the invalidity defense as to the ‘434 patent (it reversed the trial court as to the other two patents), and remanded the case for the trial court to reconsider its injunction and post-verdict damages. Fresenius USA, Inc. v. Baxter Int'l, Inc., 582 F.3d 1288, 1304 (Fed. Cir. 2009)("Fresenius I"). In 2011 and early 2012, the district court addressed the damages issues. (The permanent injunction issue dropped away because the ‘434 patent expired in April 2011.) On March 16, 2012, the trial court entered final judgment in favor of Baxter for damages. Fresenius appealed and Baxter cross-appealed.

Previously, in 2005, after suit was filed but before the first trial, the PTO accepted Fresenius’s request for ex parte reexamination of the ‘434 patent. In December 2007, the examiner found all asserted claims invalid as obvious, based on prior art that had not been before the initial examiner. In March 2010, the BPAI affirmed. (The trial court refused a stay or other relief based on the reexam.) Baxter appealed, and on May 17, 2012, two months after the district court entered final judgment in favor of Baxter in the infringement case, the Federal Circuit affirmed the invalidity finding. In re Baxter Int'l, Inc., 678 F.3d 1357, 1360 (Fed. Cir. 2012).

As noted, both parties appealed the district court’s March 2012 judgment in favor of Baxter, leading to the Federal Circuit’s third decision in July 2013; the court ruled that, in light of the cancellation of the claims of the ‘434 patent, and given that the infringement suit remained pending before it, Baxter no longer had a cause of action. The Federal Circuit vacated the district court’s judgment and instructed it to dismiss the case.

Court’s Analysis

In reaching its decision that cancellation of the asserted ‘434 patent’s claims eliminated Baxter’s cause of action, the Federal Circuit first reviewed the reissue statute, 35 U.S.C. § 252, and noted that it is well-established that when a claim is cancelled pursuant to reissue, pending suits based on that claim fall, citing Moffitt v. Garr, 66 U.S. 273 (1861). The court quoted Moffitt’s analogy to lawsuits resting on an act of Congress that "fall with a repeal of [the statute]" and the Supreme Court’s statement that lawsuits "depend upon the patent existing at the time they were commenced, and unless it exists, and is in force at the time of trial and judgment, the suits fail." See 66 U.S. at 283.

The Federal Circuit further cited the ex parte reexamination statutes, 35 U.S.C. §§ 301-307, and the statutory requirement that the PTO cancel a claim that is finally determined to be unpatentable, 35 U.S.C. § 307(a). The Court noted that, in Section 307(b), Congress made the limits on enforcement of reissued claims in Section 252 applicable to reexamined claims. Based on the language and legislative history of the reexamination statute, the court found that, as with reissues, Congress expected reexamination to proceed concurrently with litigation, and that cancellation of claims during reexamination would be binding in concurrent infringement litigation. The court cited In Slip Track Systems, Inc. v. Metal Lite, Inc., 159 F.3d 1337 (Fed. Cir. 1998), which held that cancellation of claims during reexamination precluded the continuation of an interference suit involving those claims.

Baxter did not contest these principles but argued they did not apply because the invalidity defenses had been decided in its favor by the trial court and the Federal Circuit’s 2009 decision, and that judgment was final and binding on the parties so that Fresenius could not re-litigate the issues. The Federal Circuit agreed that a cancellation of claims on reexamination would not affect a final damages judgment, again quoting the Supreme Court's decision in Moffitt that "[i]t is a mistake to suppose ... that ... moneys recovered on judgments in suits ... might be recovered back [after a patent is cancelled]. The title to these moneys does not depend upon the patent, but upon ... the judgment of the court," 66 U.S. at 283. The court also cited In Re Swanson, 540 F.3d 1368, 1379 n.5 (noting that "an attempt to reopen a final federal court judgment of infringement on the basis of a reexamination finding of invalidity might raise constitutional problems"). But the court distinguished between different definitions of finality and ruled that the judgment in Baxter’s case was not final for these purposes.

First, the court ruled, while the district court’s 2007 judgment was final for purposes of the initial appeal, and "that judgment might have been given preclusive effect in another infringement case between these parties, it was not sufficiently final to preclude application of the intervening final judgment in In re Baxter, and in any event, we set the district court’s judgment aside in the first appeal in infringement case." Nor was the Federal Circuit’s decision on the initial appeal, affirming the trial court’s rejection of Fresenius’s invalidity defense, final: "To rise to that level, the litigation must be entirely concluded so that [the] cause of action [against the infringer] was merged into a final judgment ... one that ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment,’" quoting Mendenhall v. Barber-Greene Co., 26 F.3d 1573, 1580 (1994).

The court found that its remand to the trial court in Fresenius I did not end the controversy, or leave "nothing for the court to do but execute the judgment." "To the contrary, we left several aspects of the district court's original judgment unresolved, including royalties on infringing machines, royalties on related disposables, and injunctive relief." Citing the Restatement (2d) of Judgments §13(b)(1982), the court held that "it is well-established that where the scope of relief remains to be determined, there is no final judgment binding the parties (or the court)."It does not matter that its prior, "interim" decision in 2009 was also on invalidity, the court held, citing the Supreme Court’s decision in Simmons Co. v. Grier Bros. Co., 258 U.S. 82 (1922).

Simmons concerned a situation where the Third Circuit on an earlier appeal had found the claim at issue invalid because it had been broadened on reissue. The mandate instructed the district court to modify its decree accordingly and to award the infringer costs. The suit remained pending in the district court for an accounting of damages for unfair competition. While the case was pending, the Supreme Court held in another case involving the same patent that the reissued claim was not invalid -- that it had not been broadened on reissue, directly contrary to the Third Circuit’s ruling. The district court vacated the invalidity judgment it had entered based on the Third Circuit’s decision and awarded the patentee damages and an injunction, which decision was appealed. On this second appeal, the Third Circuit reversed, holding that the intervening Supreme Court decision did not affect the patentee’s rights.

The Supreme Court reversed the Third Circuit, holding that it had no basis for refusing to give effect to the Supreme Court’s intervening decision, because the mandate had not ended the case. The Supreme Court explained that "a final decree [is] one that finally adjudicates upon the entire merits, leaving nothing further to be done except the execution of it." 258 U.S. at 88. Because "[t]he suit was still pending ... [i]t was eminently proper that the decree in the present suit should be made to conform to [the intervening Supreme Court] decision." Id. at 91.

The Federal Circuit also relied upon Marconi Wireless Tel. Co. v. United States, 320 U.S. 1 (1943), and its "virtually identical" decision in Mendenhall, supra., 26 F.3d at 1573. In Marconi Wireless, the Supreme Court held that an interlocutory decision of the trial court on validity and infringement, while appealable, was not final until the conclusion of the accounting, and that the court could, at any time prior to entry of final judgment after the accounting, reconsider any part of its decision and reopen any part of the case. 320 U.S. at 47-48. In Mendenhall, supra., 26 F.3d at 1573, the Federal Circuit held that a decision finding a patent not invalid but remanding for further damages proceedings is not a final judgment.

Mendenhall had asserted its patents in concurrent suits against two alleged infringers, Cedarapids and Astec. The Astec verdict was that the patents were not invalid. The Federal Circuit affirmed on appeal, but remanded for determination of damages and other issues. In the Cedarapids suit, while Astec was pending on remand, the asserted patents were ruled invalid. In the appeal of that judgment, the Federal Circuit affirmed the ruling that the patents were invalid. Cert was denied and that judgment became final.

Astec then moved in the former case to vacate the unfavorable liability judgment, but the district court denied the motion. On appeal, Astec argued that the Cedarapids decision barred Mendenhall from recovering for infringement, because its patents had been invalidated, but Mendenhall argued the Federal Circuit’s affirmance and mandate in the first Astec appeal should control. The question, according to the Federal Circuit, was whether Astec could assert a "defense which arose subsequently"; the subsequent invalidation of the asserted patents was a distinct issue not yet considered on appeal. The prior mandate in Astec, the court found, did not rule that the patents were valid, only that Astec had failed to establish the merits of its defenses. Because there had been no final judgment in the Astec case, the court found it was not barred from applying the Cedarapids judgment to the pending appeal.

In Fresenius, the Federal Circuit, again citing Moffitt, rejected Baxter’s argument that Mendenhall should be limited to cases in which the patent was invalidated by a district court instead of the PTO, and also rejected the argument that enforcing the PTO’s ruling in the litigation would violate separation of powers principles. The latter would only be an issue, the court held, if the judgment were final. The court stated that a decision would only be final in this sense upon the issuance of its mandate. "We have held that a new statute enacted even after a final decision on appeal is applicable in a pending case, so long as our mandate ending the litigation has not yet issued", the court held, citing GPX Int'l Tire Corp. v. United States, 678 F.3d 1308, 1312 (Fed. Cir. 2012), and noting that its sister circuits have done likewise. In sum, the court held, the Supreme Court's decision in Simmons and the Federal Circuit’s decision in Mendenhall explicitly teach that an interim decision in one suit cannot prevail over a final judgment on the same issue in another suit.

In a lengthy dissent, Judge Newman opined that the first appellate ruling in this saga was sufficiently final, citing, inter alia, collateral estoppel principles, and that the decision did violate separation of powers principles.

The lesson of Fresenius: consider seeking reexamination when sued for infringement. The PTO’s cancellation of claims will be given effect in a pending infringement action – even if the Federal Circuit has already affirmed a district court finding of patent validity– so long as the decision is not sufficiently final.