Applying section 18(a)(1) of the America Invents Act (AIA) to an issue of first impression, a divided panel of the U.S. Court of Appeals for the Federal Circuit reversed a district court, ordering a stay of the district court litigation pending resolution of a post-grant CBM review proceeding before the Patent Trial and Appeal Board (PTAB).  VirtualAgility, Inc. v. Salesforce.com, Inc. et al., Case No. 14-1232 (Fed. Cir. July 10, 2014).  The Federal Circuit heard the appeal pursuant to the statute’s instruction that a party has an immediate interlocutory right to an appeal of the district court’s decision to grant or deny a decision pending review of the validity of the asserted claims under the Transitional Program for Covered Business Method Patents (CBM review).  AIA, § 18(b)(2)  The majority’s analysis of the factors considered when deciding whether to grant a stay will, going forward, make it more likely that the PTAB’s review of claims—especially when review is undertaken early—will result in a high incidence of district courts granting a stay of companion litigation pending the outcome of CBM review.

Background

VirtualAgility asserted its patent against a group of defendants.  Four months later, one of the defendants, Salesforce, filed a petition with the PTAB requesting CBM review of the asserted claims under 35 U.S.C. §§ 101, 102 and 103.  The defendants thereafter moved to stay the district court proceedings under § 18(a)(1) of the AIA.  While the motion to stay was pending, the PTAB granted-in-part the Salesforce petition, reasoning that the asserted claims were more likely than not patent-ineligible under § 101 and anticipated under § 102.  Several months later the district court denied Salesforce’s stay motion.  The district court was not convinced that, given the thorough U.S. Patent and Trademark Office examination memorialized in the prosecution history, the PTAB would find the claims directed to ineligible subject matter or anticipated.  In view of its lack of conviction that the PTAB would cancel some or all of the claims, the district court disagreed with defendants’ assertion that CBM review would simplify the issues in the case or would reduce the burden of litigation on the court and the parties.

The Federal Circuit Majority Opinion

The majority opinion, authored by Circuit Judge Kimberly Moore and joined by Circuit Judge Raymond Chen, declined to analyze one of the two issues argued on appeal, i.e., whether the standard of review should be de novo or abuse of discretion.  The defendants had petitioned the Federal Circuit to review the denial of the stay under the de novo standard while VirtualAgility contended that the district court’s decision was entitled to deference.  The Federal Circuit ultimately declined to resolve the dispute surrounding the standard of review, but did conclude that the district court’s analysis was legally erroneous under the higher abuse of discretion standard.

On the substantive issue of whether a stay should have been granted, the Federal Circuit focused on the four factors set forth in the AIA that, on balance, control whether a court should grant a stay:

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

The majority departed from the district court’s conclusion as to each of the four factors.  The majority clarified that the district court has “no role” in reviewing the PTAB’s determinations regarding claims that are subject to CBM review.  In effect, a district court’s contrary reading of the claims or prosecution history is not relevant under the AIA scheme.  Setting aside the district court’s independent assessment, the majority concluded that the PTAB’s patentability findings could simplify the issues in the case if claims were invalidated, and further, a stay of the district court proceedings would promote judicial economy.  The majority did not express any opinion as to whether it was preferable for a district court to rule on a motion to stay before or after the PTAB decided to conduct a CBM review, yet based on the facts of the case, agreed with the defendants that the PTAB’s intervention during the early stages of the litigation weighed in favor of a stay.  Lastly, the majority explained that while competition between the litigants can prejudice a patentee alleging infringement if the case is stayed, in this case there was no direct competition.  Acknowledging that evidence of direct competition was not required to analyze prejudice to the nonmoving party, the majority emphasized the totality of the circumstances—including VirtualAgility’s decision not to pursue a preliminary injunction—in concluding that the district court erred in finding that the patentee would be unduly prejudiced by a stay.  On remand, the district court was instructed to stay the litigation pending the outcome of the CBM review.

The Dissenting Opinion

In dissent, Circuit Judge Pauline Newman characterized the majority’s rationale as a “near automatic grant of litigation stays” that will add delay to resolution of disputes and intrudes upon the deference owed to a trial court to manage its docket.  Judge Newman analogized the issues in this case to those discussed by the Supreme Court of the United States in Highmark v. Allcare Health Mgmt. Sys., (IP Update, Vol. 17, No. 5), maintaining that the district court is best positioned to balance the interests of the parties and the court.  Taking each of the four factors the district court considered in turn, Judge Newman explained her view that the district court consistently applied relevant precedent and did not abuse its discretion.

Practice Note

The guidance provided in the majority decision seems to compel the grant of a motion to stay under the AIA in a multitude of post-grant review circumstances, especially when the patentee is a non-practicing entity and CBM review is instituted early in the case.  In cases where an accused infringer is considering filing a petition for some form of post-issuance review with the PTAB, parties are now well advised to do so as early as possible and before the district court has substantively invested resources in the litigation.