Patent owner Versata wins $391 million infringement judgment against SAP; PTAB then knocks out Versata patent claims in first Covered Business Method Post-Grant Review final decision.

The USPTO’s Patent Trial and Appeal Board (PTAB) made a big splash on June 11, 2013 with its first final written decision under the new Covered Business Method Post-Grant Review procedure established by the America Invents Act. Six weeks after the Federal Circuit affirmed Versata’s $391 million patent infringement judgment against SAP, the PTAB invalidated Versata’s patent claims under 35 U.S.C. § 101 for claiming patent-ineligible abstract ideas. i The PTAB staunchly defended the USPTO’s broadest reasonable interpretation standard for claim construction, rejected Versata’s argument that stare decisis bound the PTAB to adopt a district court’s earlier claim construction (not appealed to the Federal Circuit), agreed with SAP’s § 101 analysis, and set the stage for a renewed Federal Circuit debate of the res judicata/collateral estoppel effect of the patent infringement judgment, previewed last year in In re Baxter International, 678 F.3d 1357 (Fed. Cir.), reh’g denied, 698 F.3d 1349 (Fed. Cir. 2012).

Versata’s $391 Million Patent Infringement Judgment

Versata sued SAP for infringement of U.S. Patent No. 6,553,350 (“’350 patent”) in the Eastern District of Texas in 2007. The ‘350 patent claims a method and apparatus relating to computer-based pricing of products offered to purchasing organizations. The claims require, in particular, “a hierarchy of organizational groups” (the purchasing organizations or customers), a “hierarchy of product groups” (the products being sold), and “pricing information” or “pricing adjustments,” which distinguished Versata’s system from prior art pricing systems.

SAP defended on grounds of non-infringement, failure to disclose the best mode of carrying out the invention, and inequitable conduct. The trial court construed the claims and limited “pricing information” and “pricing adjustments” to so-called denormalized numbers (a variable price adjustment number that depends upon the pricing operation being performed), finding that the patent specification consistently emphasized “denormalized” as a distinguishing feature of “this invention” over the prior art. ii The case was tried to a jury in August 2009. SAP apparently did not present any evidence or argument on issues of patent ineligibility under 35 U.S.C. § 101, anticipation under § 102, or obviousness under § 103. The jury returned a verdict of patent infringement and determined that Versata was entitled to substantial lost profits and reasonable royalty damages. The trial court rejected SAP’s inequitable conduct defense and entered final judgment in September 2011 awarding Versata damages and prejudgment interest in the amount of $391 million and a permanent injunction.

SAP appealed and challenged the noninfringement judgment, the damages award, and the scope of the injunction. SAP did not appeal the district court’s claim construction or the jury’s rejection of the best mode defense. On May 1, 2013, the Federal Circuit affirmed the infringement judgment and damages award and vacated and remanded the permanent injunction as overbroad.iii

SAP’s Covered Business Method Petition Challenging Versata’s Patent Claims

On September 16, 2012, during the pendency of SAP’s appeal, SAP filed the first Covered Business Method Post-Grant Review petition under the America Invents Act challenging claims 17 and 26-29 of the ‘350 patent. SAP raised the issues of patent ineligibility under 35 U.S.C. § 101, anticipation under § 102, and invalidity under § 112 paragraphs 1 and 2. The PTAB instituted a trial proceeding on the grounds of §§ 101 and 102 on January 9, 2013. SAP waived its anticipation argument to expedite the proceeding. On April 17, 2013 the PTAB heard oral argument on the merits of SAP’s § 101 challenge.

On June 11, 2013, the PTAB issued its first final written decision under the Covered Business Method Post-Grant Review procedure – nine months from petition filing to final decision – reflecting the speed that can be achieved in these new PTAB trial proceedings. The PTAB adopted the district court’s construction for two of three claim terms in dispute. The PTAB, however, departed from the district court’s specification-based decision to limit “pricing adjustments” to denormalized numbers and instead applied the broadest reasonable interpretation standard to include both normalized (fixed) and denormalized (variable) pricing adjustments.

The PTAB rejected Versata’s argument that stare decisis bound the PTAB to adopt the district court’s claim construction, and it laid out the history, policy rationale and legal basis for applying the broadest reasonable interpretation of the claim standard rather than the district court civil litigation standard. The PTAB’s position - that broadest reasonable interpretation applies when proceeding under post-grant review because the patent owner has the opportunity and obligation to amend claims to remove any ambiguities - is no surprise; it is based on “at least a century” of USPTO practice and legal precedent. It also was the subject of substantial comment during the USPTO’s rule making process and addressed in the final rules published on August 14, 2012.iv There is even draft legislation pending in the House of Representatives proposing to compel the PTAB to construe a patent claim during inter partes and post-grant review “as such claim has been or would be [construed] in a civil action …,v” which further confirms that the PTAB is not so bound.

More interesting is how practitioners can decipher claim construction differences in view of the USPTO’s position that “… a claim of an unexpired patent will be given its broadest reasonable construction in light of the specification …. This means that the words of the claim will be given their plain meaning unless the plain meaning is inconsistent with the specification. In re Zletz, 893 F.2d 319, 321 (Fed. Cir. 1989).”vi One observation is that the PTAB may well construe the plain meaning of a claim phrase more broadly than a district court, even if statements made in the specification or prosecution history appear to limit claim scope. This is what happened in SAP’s post-grant review proceeding.

Will the Infringement Decision Have Res Judicata Effect or Impact Review of the PTAB’s Invalidity Decision?

SAP has asked the Federal Circuit to stay the injunction and damages award pending review of the PTAB decision in order to “avoid inconsistent rulings.” Last year’s Federal Circuit opinions in Baxter presage a renewed and vigorous debate on whether the Federal Circuit’s infringement decision and the PTAB’s invalidity decision are in conflict.

In Baxter, Fresenius filed a declaratory judgment action and a contemporaneous request for ex parte reexamination seeking to invalidate two of Baxter’s hemodialysis patents. Fresenius failed to prove that the claims of one of the patents were invalid by clear and convincing evidence, and the Federal Circuit affirmed that district court judgment. The Board of Patent Appeals and Interferences (predecessor to the PTAB) later invalidated the claims of that patent after ex parte reexamination, determining that the Board was not bound by the Federal Circuit’s earlier decision. The Federal Circuit affirmed the Board’s invalidity decision, noted the lower burden of proof in reexamination proceedings, and cited Federal Circuit case law to reject the application of collateral estoppel and res judicata. vii Judge Newman dissented from the denial of rehearing en banc and argued that the doctrine of res judicata and finality of judgments precluded the unsuccessful federal court patent challenger from raising the same patent invalidity issues, on the same available evidence, in a later USPTO proceeding.

The ex parte reexamination statute states that: “Any person at any time may file a request for reexamination by the Office of any claim of a patent on the basis of any prior art cited ….”. viii The ex parte reexamination statute does not contain any estoppel provisions. The statutory language and different administrative review standards of the USPTO support the Baxter majority’s view that civil action-based collateral estoppel should not apply in later ex parte reexamination proceedings.

The statutory collateral estoppel provisions for inter partes and post-grant review do not appear to apply to earlier civil actions. The statute expressly precludes only an unsuccessful inter partes or post-grant review petitioner from challenging the same patent claims - “on any ground that the petitioner raised or reasonably could have raised” - in a later civil action, USPTO proceeding, or ITC proceeding. ix This contrasts markedly with the old inter partes reexamination collateral estoppel provision, which expressly precluded an unsuccessful federal court litigant from filing a later request for inter partes reexamination of the same patent claims, subject only to the traditional common law exception for newly discovered prior art previously unavailable to the requester and the USPTO.x

Questions for the Federal Circuit

Do res judicata and collateral estoppel apply in inter partes or post-grant review proceedings when a civil action upholding patent validity goes to judgment first? Did Congress intend to allow an unsuccessful federal court patent challenger to use inter partes and post-grant review in a subsequent challenge to the same patent claims, even on the same grounds and evidence available in the earlier civil action? Do Judge Newman’s arguments emphasizing the finality of judgments between the same parties on the same issues and evidence, in the absence of fraud or previously unavailable evidence, carry greater weight in an inter partes or post-grant review proceeding than in ex parte reexamination? Should it matter that SAP did not raise patent ineligibility, anticipation, or obviousness defenses during the earlier federal court litigation? The answers to these questions are not simple, and the Federal Circuit opinion will be well worth watching.