On July 2, 2013, a divided Federal Circuit panel issued a remarkable decision. It vacated Baxter’s patent infringement judgment and an award of $14.3 million in pre-verdict damages that already had been reviewed and affirmed by the Federal Circuit.i There was no en banc review or certiorari from the Supreme Court that compelled this reversal of fortune; those requests had been denied. Judge Dyk and Judge Prost ruled that a subsequent decision to invalidate the patent claims following reexamination by the USPTO, a decision affirmed by a different divided Federal Circuit panel, required dismissal of the “still-pending” patent infringement litigation.

The patent infringement litigation was still pending at the time the USPTO invalidated the patent claims, but only for resolution of two open issues, the scope of the original injunction and the amount of the post-verdict infringement royalty. Those two issues had been remanded to the district court following the first appeal. Judge Newman’s 34-page dissent, castigating the majority’s refusal to grant collateral estoppel effect to the patent infringement judgment and pre-verdict damages award, is the opening salvo in what likely will be a formal en banc review to explore the cross-currents of collateral estoppel in a new age of patent challenges at the USPTO.

Baxter’s $14 Million Patent Infringement Judgment on the ‘434 Patent Claims

In 2003, Fresenius USA, Inc. (Fresenius) brought a declaratory judgment action against Baxter International, Inc. (Baxter) alleging, inter alia, that claims 26-31 of U.S. Patent No. 5,247,434 (‘434 patent) directed to a hemodialysis machine were invalid and not infringed. Baxter counterclaimed for infringement. In February 2007, the district court granted Baxter’s motion for judgment as a matter of law, finding that Fresenius had failed to present sufficient evidence to the jury to meet its burden of proving the ‘434 patent claims invalid by clear and convincing evidence.ii A jury later awarded Baxter $14.3 million in damages for Fresenius’ infringement of the ‘434 patent claims, and the district court entered judgment for Baxter in November 2007. In March 2008, the district court entered a permanent injunction to take effect on January 1, 2009 and ordered Fresenius to pay a 10% running royalty on any infringing machines sold before January 1, 2009.

Fresenius appealed the judgment that the ‘434 patent claims were not invalid, the permanent injunction, and the post-verdict royalty amount but not the ‘434 infringement judgment or the amount of the pre-verdict damages award. On September 10, 2009, the Federal Circuit (Judges Newman, Gajarsa, and Dyk) affirmed the judgment that Fresenius had failed to meet its burden of proving the ‘434 patent claims invalid, reversed on two other unrelated patents, and vacated and remanded the issues of the scope of the permanent injunction and post-verdict royalty amount for further consideration by the district court. Petitions for rehearing, rehearing en banc, and for certiorari were denied.iii

Meanwhile, Fresenius had earlier filed a request for ex parte reexamination of the ‘434 patent claims. The Examiner rejected the claims over newly presented prior art, and the Board of Patent Appeals and Interferences affirmed the rejection in March 2010.iv Baxter appealed to the Federal Circuit, who affirmed the USPTO’s rejection of the claims on May 17, 2012.v

On March 16, 2012, after motion practice and an evidentiary hearing on the amount of the post-verdict royalty, the district court entered judgment for Baxter and ordered Fresenius to pay Baxter $14.3 million plus interest in pre-verdict damages and post-verdict royalties of $9.3 million. There was no injunction because the ‘434 patent had expired. The district court agreed to stay execution of the damages judgment pending appeal. Fresenius appealed arguing that the intervening USPTO reexamination decision eliminated Baxter’s “pending” cause of action for patent infringement.

The central issue on appeal was whether the district court’s original 2007 patent infringement judgment was sufficiently “final” to preclude Fresenius from challenging Baxter’s demand to execute on the judgment, in spite of the later-invalidated patent claims. Judge Dyk and Judge Newman clashed mightily on the question of finality of judgments, while also implicating issues of collateral estoppel (issue preclusion), res judicata (claim preclusion), retroactive application of judgments, and the limits of an Article III court’s powers of equity. A close analysis suggests three separate questions that need to be answered in a manner consistent with settled precedent.

Was Fresenius Precluded From Challenging the ‘434 Patent Claims in a USPTO Reexamination Proceeding, as suggested by Judge Newman?

Judge Newman offered a constitutional separation of powers argument to support the premise that “[t]he PTO can neither invalidate, nor revive, a patent whose validity the court has adjudicated.”vi The Federal Circuit, however, had rejected this argument during Baxter’s appeal of the USPTO reexamination decision invalidating the ‘434 patent claims for obviousness. In the In re Baxter decision, Judge Lourie and Judge Moore, over Judge Newman’s dissent, cited well-settled Federal Circuit precedent to emphasize that even when a patent challenger in district court fails to prove invalidity by clear and convincing evidence, “the court will not find the patent “valid,” only that ‘the patent challenger did not carry the burden of establishing invalidity in the particular case before the court…. Congress has provided for a reexamination system that permits challenges to patents by third parties, even those who have lost in prior judicial proceedings.’”vii

Judges O’Malley, Rader, and Linn weighed-in to like effect by concurring in the court’s denial of Baxter’s request for rehearing or rehearing en banc, emphasizing that “despite a final court judgment reaching a contrary conclusion … the PTO is free to conclude that the patent is, indeed, invalid. That proposition is an unremarkable one.”viii As we mentioned in last month’s Client Advisory, the ex parte reexamination statute does not contain any estoppel provisions. The lower burden of proof, absence of a presumption of validity, and broadest reasonable interpretation of claims standard also support the conclusion that issue preclusion (collateral estoppel) and claim preclusion (res judicata) will not bar an unsuccessful district court patent challenger from filing and maintaining a separate patent challenge at the USPTO. The old inter partes reexamination statute expressly precluded such patent challenges, but this is not the case for ex parte reexamination, inter partes review, or post-grant review, which means that Fresenius’ successful reexamination challenge will stand.

Was the District Court’s 2007 Patent Infringement Judgment “Final” for Purposes of Preclusion?

Judge Dyk argued for the majority that the district court’s 2007 patent infringement judgment was still “pending,” and not sufficiently “final,” to prevent the PTO final judgment of invalidity from having preemptive effect. Relying on the Federal Circuit’s seminal decision in Mendenhall v. Barber-Greene, he reasoned that to be “final,” the “‘litigation must be entirely concluded so that …[it] leaves nothing for the court to do but execute the judgment.’”ix It appears, however, that the majority misapplied the law governing finality of judgments for purposes of preclusion. Mendenhall, and the Supreme Court cases cited in support by the majority, all involved interlocutory appeals from district court decisions that were, by definition, not final. Finality is measured from the time the district court enters judgment disposing of all the issues such that the case is ripe for execution and/or appeal. The losing party may appeal but also must move for a stay of execution of the final judgment in the hope of obtaining a reversal on appeal. The analysis of professors Wright, Miller, and Cooper is instructive:

If the appellate court terminates the case by final rulings as to some matters only, preclusion is limited to the matter actually resolved by the appellate court, whether it terminated the case on terms that left it unnecessary to resolve other matters or affirmed on some grounds and vacated or reversed on others. There is no preclusion as to the matters vacated or reversed, unless further proceedings on remand lead to a new judgment that expands the scope of preclusion. While proceedings on remand continue, the claim-preclusion effects of the partially completed proceedings may be confused.x

Once a district court enters final judgment disposing of the entire case, those matters affirmed on appeal are entitled to preclusive final effect, even after remand for consideration of other matters. Thus, the finality of the district court’s 2007 patent infringement judgment, affirmed on appeal with petitions for rehearing and certiorari denied in 2009, was not affected by the remand on other issues or the 2010 USPTO invalidity decision.

Judge Newman argued quite convincingly, citing chapter, verse, and well-settled Supreme Court and Circuit Courts of Appeal precedent regarding the finality of judgments, that “[t]he Federal Circuit’s final judgment in 2009 was not ‘an interim appellate decision on invalidity;’ it was the final decision of validity and infringement.”xi Judge O’Malley’s earlier concurrence, in the denial of en banc review of the USPTO’s reexamination decision, also spoke to the res judicata effect of a court judgment pre-dating a reexamination proceeding: “These conclusions do not mean, however, that, when the PTO does act in the context of a reexamination proceeding, its conclusion can alter the binding effect of a prior judgment in a judicial proceeding. They cannot, and the PTO concedes as much….”xii The strong weight of precedent suggests that the 2007 patent infringement judgment was final for purposes of preclusion.

Did the Majority Improperly Apply the ‘434 Patent Invalidity Judgment Retroactively in an Attempt to Relieve Fresenius from Paying Damages under the 2007 Patent Infringement Judgment?

The general rule against retroactive application of a new court decision applies to previously adjudicated final court decisions; it does not apply to pending, non-final civil actions.xiii If the district court’s 2007 patent infringement judgment was final for purposes of preclusion, then retroactive application of the judgment invalidating the ‘434 patent claims would be impermissible. But did the majority improperly apply that decision retroactively in an attempt to provide relief to Fresenius?

In Mendenhall, Judge Nies noted that “[t]he rule against disturbing a final judgment is not an aboslute bar in any event,” citing to Fed. R. Civ. P. 60(b). Rule 60(b)(5), for example, permits the court to relieve a litigant from a final judgment when “… it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable,” which would prevent Baxter from maintaining an injunction against Fresenius or collecting damages after the ‘434 patent claims were invalidated.xiv The earlier $14.3 million pre-verdict judgment, however, would still be enforceable.

Rule 60(b)(6) provides a catchall exception sounding purely in equity for “any other reason that justifies relief.” Does this rule allow a court to relieve a party such as Fresenius from the demands of an earlier final judgment, when it later turns out that the patent owner should not have had patent rights to assert in the first place? The competing interests of recognizing final judgments and preserving judicial repose versus the public interest in preventing unwarranted enforcement of invalid property rights are both highly compelling. The exquisite tension of determining the appropriate remedy in such circumstances is exemplified in the Supreme Court case of Reed v. Allen.xv

Reed v. Allen involved competing claims to real property rights based on the construction of a decedent’s will. In an interpleader action to determine rights to collect rents on the property, petitioner received a favorable judgment from the trial court, which the respondent appealed. Petitioner subsequently brought an action for ejectment of respondent from the property and received a favorable judgment, which respondent did not appeal. When the appellate court reversed the petitioner’s earlier judgment in the interpleader action, respondent brought his own ejectment action to regain possession of the property. The majority found the judgment in the petitioner’s ejectment action final and applied res judicata to preclude respondent from regaining possession of the property, even though the earlier final judgment “may have been given for wrong reasons or has been subsequently reversed.”xvi 

A powerful dissent by Justice Cardozo, joined by Justice Brandeis and Stone, sought to extricate the respondent “caught in a mesh of procedural complexities” and to provide restitution of the respondent’s property rights. “The remedy in its essence … is for the recovery of benefits that in good conscience may no longer be retained. ‘It is one of the equitable powers inherent in every court of justice, so long as it retains control of the subject matter and of the parties, to correct that which has been wrongfully done by virtue of it process.’”xvii “The entry of a second judgment, instead of being a circumstance fastening the rivets of injustice, was merely an additional reason why the rivets should be broken.”xviii The facts of Fresenius II, however, are distinct from those highlighted by Justice Cardozo's dissent in Reed v. Allen,the essence of which was later captured in Rule 60(b)(5).

We await the anticipated en banc review of the majority’s decision to see how the cross-currents of collateral estoppel play out in this new age of patent challenges at the USPTO.