A California district court granted a stay of a patent infringement lawsuit pending an inter partes review of the patent at the U.S. Patent and Trademark Office for a party that was not participating in the Patent Office proceeding on the condition that the party agree to the same estoppel conditions that would apply to the IPR participants, namely agreeing not to relitigate validity issues that were actually raised or reasonably could have been raised in the IPR.
In an effort to streamline the patent system and reduce litigation costs, the America Invents Act ("AIA") created a new procedure at the U.S. Patent and Trademark Office ("PTO") known as Inter Partes Review ("IPR") that allows patents to be challenged at the PTO under certain theories including lack of novelty or obviousness of the claimed invention. In order to institute an IPR, the challenger must show a reasonable likelihood of prevailing on at least one of the patent claims being challenged. If any claims of the patent survive the IPR, however, the challenger will be estopped from asserting in litigation any invalidity defenses it raised or reasonably could have raised at the PTO in the IPR proceeding.
If a patent is the subject of a pending infringement lawsuit, the AIA requires that the accused infringer file any IPR within one year of being sued for infringement. Assuming the IPR is timely filed and the PTO decides to hear the IPR, the court where the lawsuit is pending may then stay the progress of its litigation proceedings to await the outcome of the decision of the PTO on the IPR. Given the estoppel provisions that apply to IPR participants, a court may determine that it is reasonable to stay litigation involving IPR participants in order to simplify the issues for the court. A recent decision of the U.S. District Court for the Northern District of California, however, addressed how these provisions could apply to an accused infringer who was not a party to an IPR but who sought a stay based on the filing of an IPR by a third party.
In October 2012, Evolutionary1 sued nine companies for alleged patent infringement: Millenial Media, Apple, Twitter, Facebook, Groupon, LivingSocial, FourSquare Labs, Yelp, and Sprint Nextel in the U.S. District Court for the Eastern District of Texas. In October 2013, after the Texas court ordered the case transferred to the Northern District of California, four of the nine defendants filed IPR petitions at the PTO, challenging the asserted patents. The PTO granted the IPR petition relating to one of the asserted patents and denied it relating to the second asserted patent. Though not a party to the IPR proceedings, Millenial asked the district court to stay its proceedings pending the outcome of the IPR proceedings filed at the PTO by the other defendants. The other eight defendants requested and were granted stays on the basis of the IPR petitions.
The Evolutionary Decision
The court used a three-factor test to determine whether to grant a stay of its proceedings: "(1) whether discovery is complete and whether a trial date has been set; (2) whether a stay will simplify the issues in question and trial of the case; and (3) whether a stay would unduly prejudice or present a clear tactical disadvantage to the non-moving party." Telemac Corp. v. Teledigital, Inc., 450 F. Supp. 2d 1107, 1111 (N.D. Cal. 2006) (citation omitted). The party seeking the stay bears the burden of showing the need for the stay.
In assessing the first factor, the court considered the progress of the litigation, taking into account whether discovery had been completed and whether a trial date had been scheduled. Millenial argued that the case was still "in its very early stage," pointing out that the case schedule had not been determined, fact discovery had not been completed, and no trial date had been set, among other reasons. On the other hand, Evolutionary emphasized the considerable time it had spent in preparing infringement contentions, producing documents, and serving interrogatories on Millenial. Ultimately, the court sided with Millenial, agreeing that the case was still in its early stages. While acknowledging the time and effort Evolutionary had spent on the case, the court noted that proportionally most of the work of the case had not yet been completed.
The court next considered the second factor, "whether a stay will simplify the issues in question and trial of the case." According to Evolutionary, IPR proceedings often result in preservation of at least some of the original claims and, therefore, a stay, regardless of the outcome of the IPR proceeding, would not simplify the issues of the case. In response, Millenial asserted that an IPR proceeding did not need to resolve all or most of the issues of the case; rather, to justify the stay, the IPR proceeding needs to simplify only some of the issues. In deciding this factor, the court again agreed with Millenial's reasoning, stating that an IPR proceeding need not resolve every issue to justify granting a stay so long as the IPR simplifies at least some of the issues. Further, the court stated, even if the IPR proceeding does not result in cancelled or modified claims, the court receives the benefit of the PTO's technical analysis of the patent claims, which streamlines both the costs and efforts invested in the case.
While on the whole accepting Millenial's argument on the second factor, the court conditioned its acceptance. Evolutionary, the court noted, had persuasively argued that the stay would not result in a streamlined case without an estoppel requirement. Since Millenial was not a party to the IPR proceeding, under the relevant statute, Millenial was not estopped from relitigating the same issues that were raised or could be raised in an IPR proceeding. Thus, if Millenial were permitted to relitigate the issues, the IPR proceeding would not simplify the case. Therefore, the court conditioned the stay on Millenial's agreement to bind itself as if it had been a party to the IPR proceeding.
Addressing the third factor, the court considered whether Evolutionary would be unduly prejudiced or suffer a clear tactical disadvantage by a stay. According to Evolutionary, it would suffer undue prejudice for two reasons: (1) Millenial's motion to stay was a dilatory tactic and (2) a stay would cause spoliation of critical evidence. First, addressing the dilatory-tactic argument, the court stated that both the IPR petitioners and Millenial had acted within their statutory rights: the IPR petitioners had filed within the one year of the filing of the complaint and Millenial had filed its motion to stay within five months of Evolutionary's serving its infringement contentions, which courts consider a reasonable amount of time. Second, the court dismissed Evolutionary's spoliation argument as speculative. In the court's view, Evolutionary's argument that, over time, source code relevant to the case could be altered and that knowledge relating to the source code might be lost was "[s]peculation . . . insufficient to demonstrate undue prejudice." Therefore, the court found, the third factor also weighed in favor of a stay.
Strategy and Conclusion
In this case, the court agreed to stay its proceedings until the IPR was resolved at the PTO for a litigant who was not also a party to the IPR. However, the court required the litigant to agree not to relitigate validity issues that were raised or reasonably could have been raised in the IPR - the same estoppel that limits IPR participants from relitigating such issues. This case illustrates that courts may conditionally grant stays pending an IPR even if the party requesting a stay is not also a party to the IPR. It also illustrates the balance that must be made between the desire to have a case stayed and the potential estoppel effects of an IPR. And it further illustrates the balance that must be made between taking advantage of the work of others who challenge a patent in a collateral proceeding at the PTO while not incurring the cost of that proceeding, and not having control of that challenge but being bound by its result.