Last week the Federal Circuit reversed the decision by  Judge Gilstrap of E.D. Texas to proceed with litigation, rather than stay the litigation pending the U.S. Patent Trial and Appeal Board (“PTAB”) review of the asserted patents under the Transitional Program for Covered Business Method Patents (“CBM”).  This is the first time the Federal Circuit has ruled on a post-AIA interlocutory appeal on a motion to stay pending CBM, providing initial insight into how the court may treat these reviews moving forward. We note that this appeal was made under AIA § 18(b)(2), which deals only with stay requests pending CBM,  and does not bear directly on stays pending IPR, which are addressed in separate sections of the AIA (e.g., §§ 315, 325).

Background

In January 2013, VirtualAgility filed suit in E.D. Texas asserting that Salesforce.com, Dell, Kimberly-Clark, Bank of America, FedEx, and a host of other defendants infringe U.S. Patent No. 8,095,413. A few months later, on May 24, 2013, Salesforce.com sought CBM review in the the PTAB of all claims of the ’413 patent. Salesforce argued that the claims are directed to a “covered business method” within the meaning of the AIA and warranted CBM review as the claims were likely invalid for patentability and prior art grounds under 35 U.S.C. 101, 102, and 103.  A few days later, on May 29, 2013, the Defendants filed a motion to stay the litigation proceedings pending the outcome of the CBM proceedings.  Although the CBM statutory estoppel provision applied only to the CBM petitioner Salesforce, the other Defendants agreed to the same scope of estoppel if the stay were granted.

While Defendants’ motion to stay was pending, the district court continued with the litigation, setting dates for claim construction and jury selection. In November 2013, the Patent Office granted-in-part Salesforce’s petition for CBM review, concluding that the claims of the ’413 patent are directed to a business method and are more likely than not patent-ineligible under Section 101 and invalid under Section 102 in view of a single patent reference. A few months later, in January 2014, the district court denied defendants’ motion to stay.

Defendants then filed an interlocutory appeal to the Federal Circuit, requested and received a temporary stay order of the litigation pending appeal.

The Majority Opinion

The Federal Circuit reviewed the AIA statutory stay provision where district courts are to consider four factors when determining whether to stay district court litigation pending CMB review: (1) whether the stay will simplify the issues and streamline the trial; (2) whether discovery is complete and a trial date set; (3) potential undue prejudice to the nonmovant or tactical advantage to the requestor; and (4) whether the stay will reduce the burden of litigation on the parties and the court. The AIA provides immediate interlocutory appeal from a district court’s decision to grant or deny a stay “to ensure consistent application of established precedent” and such review “may be de novo,” which majority suggests varies significantly from the pre-AIA “abuse of discretion” standard.  But the Federal Circuit did not decide what the standard of review would be, finding reversal would proper even under the abuse of discretion standard that is more deferential to the district court’s decision.

Simplification of the Issues. On review, the Federal Circuit concluded that factors (1) and (4) strongly favored a stay.  The district court was “not convinced” that the CBM would result in cancelled claims.  But the Federal Circuit ruled that “[t]he district court erred as a matter of law to the extent that it decided to ‘review’ the PTAB’s determination,” because under AIA “district courts have no role in reviewing” the PTAB’s determination.  To allow such a collateral attack on the PTAB’s decision to institute CBM review “would create serious practical problems.”  Congress made CBM more difficult to obtain than reexamination and “clearly did not intend district court to hold mini-trials reviewing the PTAB’s decision on the merits of CBM review.”  This same concern applies to the PTAB’s determination whether the patent qualifies for CBM review as a “covered business method patent.”

Importantly, although CBM may be granted if “it is more likely than not that at least 1 of the claims challenged … is unpatentable,” in this case the PTAB determined “that all of the claims are more likely than not unpatentable.” (emphasis in original). Thus PTAB review “could dispose of the entire litigation: the ultimate simplification of issues.”  This “heavily” favors a stay.  This is the case even though the petitioner Salesforce decided “to save two pieces of its important prior art for district court proceedings,” because CBM review was granted for the only patent-in-suit in which the PTAB determined that “more likely than not” all patent claims will be canceled.  But the Federal Circuit indicated this could give a tactical advantage to Defendants that should be under the third factor.

Timing. Reviewing factor (2), the Federal Circuit found that the procedural timing — the early stages of litigation — heavily favored a stay and “that it was not error for the district court to wait until the PTAB made its decision to institute CBM review before it ruled on the motion.”  Although the district court need not “freeze” the litigation before the PTAB makes its decision whether to institute a CBM proceeding, it should “expeditiously resolve the stay motion” after the PTAB makes that decision.  The Federal Circuit stated that, “[g]enerally, the time of the motion is the relevant time to measure the stage of litigation,” but the district court may “tak[e] into account the stage of litigation as of the date that CBM review was granted.”

Prejudice and Tactical Advantage. The district court found the third factor weighed heavily against a stay given “credible evidence” that some parties were direct competitors who would be harmed by delayed adjudication. Although agreeing that “competition between parties can weigh in favor of finding undue prejudice,” the Federal Circuit found a stay would not diminish the monetary damages to which a successful plaintiff is entitled — “it only delays realization of those damages and delays any potential injunctive relief.” Finding VirtualAgility had not sought a preliminary injunction and would not suffer irreparable harm as a result of the stay, the Federal Circuit found this factor weighed slightly against a stay.

Although a decision to hold back from CBM review certain prior art can give a tactical advantage that weighs against a stay, in this case Saleforce adequately explained why it did not have sufficient evidence to raise the withheld prior art references at the time it filed the petition for CBM review.  Defendants had explained this difficulty as follows:

Defendants responded that Salesforce did not include Oracle Projects in the CBM petition because it is “a proprietary software system, not strictly a printed publication of the type typically considered by the PTO,” and would require testimony from “live third party witnesses at trial.”  Defendants also indicated that they had difficulties in obtaining evidence in connection with another piece of prior art “of particular importance” not used in CBM review, “Tecskor product,” necessitating a letter of requires for international judicial assistance from Canada from the district court.

Balancing the factors. The Federal Circuit found three of the four factors weighed in favor of staying the litigation and reversed the district court’s decision with instructions to grant the stay.

Judge Newman’s Dissent

In dissent, Judge Newman points to a district court’s discretionary authority to manage its own docket and balance equitable factors.  The majority failed to identify an abuse of discretion or acknowledge “the deference owed to a trial judge in rulings on matters of equity and the balance of interests.”  The AIA permits, but does not require, a district court to stay earlier-filed litigation pending post-grant patent review. The dissent cautions that the ruling “effectively creates a rule that stays of district court litigation pending CBM review must always be granted.”

But the decision of whether or not to stay an infringement action “is consigned to the discretion of the judge” and the district court in this case found a stay inappropriate after it “carefully considered” the traditional stay factors set forth in AIA Section 18(b). Whereas appellate review of a district court’s decision to grant or deny a stay may be reviewed de novo, Judge Newman writes that a trial judge’s determination warrants appellate respect:

The panel majority has imposed greater rigor on “stay” considerations than the statute warrants. Postgrant review in the PTO is a useful tool, but the principle of post-grant review does not require elimination of judicial discretion to proceed with pending litigation.