The Federal Circuit’s recent decision in Fresenius USA, Inc. v. Baxter Int’l, Inc., illustrates the potential value of challenging a patent's validity through administrative proceedings in the U.S. Patent & Trademark Office (USPTO), in parallel with pending federal litigation. The decision’s impact on patent litigation may be even more significant under the America Invents Act’s new USPTO patent review procedures, which have created more accelerated options to challenge the validity of a patent. 35 U.S.C. §§ 301-29 (2006).

After a long battle including multiple appeals, the validity of the patent in the Fresenius case had been upheld by the Court of Appeals of the Federal Circuit (CAFC), but the damages were not finalized and had been remanded. While in that procedural posture, a determination of patent invalidity, arising from a reexamination by the USPTO, was affirmed by the CAFC. The CAFC was then asked by Fresenius for a ruling dismissing the case, along with its holding of infringement, on the grounds that the federal case was not final, and that, during the cases' pendency, the patent had been invalidated, and, in essence, ceased to exist. The CAFC ruled in favor of Fresenius, holding that just because, as in this case, a final determination upholding patent validity had been made, so long as substantive aspects of the case remain pending, like a damages determination, then the decision is not final, and a final, affirmed administrative finding of invalidity acts to extinguish the pending patent case. Fresenius USA, Inc. v. Baxter Int’l, Inc., No. 2012-1334, -1335, 2013 U.S. App. LEXIS 13484 (Fed. Cir. July 2, 2013). 

The Fresenius Ruling: When Is a Court’s Final Ruling Sufficiently Final to Block USPTO Decisions?

The Fresenius decision arose from a patent owned by Baxter International, Inc. for a hemodialysis machine, a machine that filters toxins from the bloodstream in place of kidneys. In 2003, Fresenius USA, Inc. brought an action against Baxter for a declaratory judgment of non-infringement and invalidity with respect to Baxter’s patents. Baxter brought a counterclaim for infringement against Fresenius, and Fresenius later stipulated to infringement after the court constructed Baxter’s patent claims unfavorably to Fresenius. After the stipulation, Fresenius was left having to prove that Baxter’s patents were invalid in order to avoid liability for infringement. Fresenius filed for patent reexamination in the USPTO while the district court litigation was underway.

By February of 2007, the district court ruled that Baxter’s patent claims were valid and Fresenius was liable for infringement. Fresenius appealed the court’s ruling. Later that year, the USPTO ruled that Baxter’s patents were invalid after reexamination, and Baxter appealed the USPTO ruling. 

In 2009, the Federal Circuit affirmed the district court’s ruling that Baxter’s patents were "not invalid," but remanded the decision for the district court to determine Baxter’s remedy for patent infringement. In March of 2012, the district court awarded Baxter damages for infringement as well as millions of dollars in royalties on Fresenius’ infringing machines. Immediately after the court’s ruling on damages, Fresenius appealed the damages award, and the district court stayed execution of the judgment pending the outcome of the appeal. Months later in November of 2012, however, the Federal Circuit affirmed the USPTO’s ruling that Baxter’s patent was invalid, and the USPTO cancelled Baxter’s patent claims before the Federal Circuit could review the district court’s damage award.

During the appeal of the court’s damages award, Fresenius argued that because the USPTO cancelled Baxter’s patent claims, the federal courts could not impose a damages award against Fresenius for infringement since Baxter’s patent was now invalid, and the federal case had not been finally decided. Baxter, on the other hand, argued that the district court and Federal Circuit’s final judgment of validity barred the USPTO’s ruling of invalidity through the legal principle of res judicata, which prohibits parties from retrying the same claim in another forum. Thus, the issue arose whether a cancellation of patent claims in reexamination is binding in pending federal court litigation after the courts have issued a final judgment of patent validity.

The Federal Circuit first ruled that a federal court’s decision is only sufficiently final to prohibit a ruling on the same issue in the USPTO if all issues on the merits have been decided and there is “nothing for the court to do but execute the judgment.” Because the Federal Circuit had to resolve Fresenius and Baxter’s dispute over damages on appeal, the court still had to resolve issues in the case before a court could execute the judgment. Therefore, the Federal Circuit ruled that its prior ruling of validity was not sufficiently final to preclude a cancellation of Baxter’s patent claims in the USPTO. 

The Federal Circuit then ruled that its decision to bind a federal court to the USPTO’s decision did not violate the separation of powers under the United States Constitution. The court reasoned that a violation of the separation of powers occurs if the executive or legislative branch retroactively compels a case to be reopened. Here, the case was not reopened since the Federal Circuit had yet to issue a final mandate ending the case. Moreover, the Court ruled that an appellate court must apply the laws in effect at the time it renders its decision. The law in effect at the time of the appeal was that Baxter’s patent claims had been cancelled and were no longer valid.

Judge Newman dissented arguing that the Federal Circuit’s decision to bind the courts to the USPTO’s reexamination decision violated the separation of powers under the Constitution. She reasoned that it is a violation of the Constitution for the executive branch to exercise judicial power by annulling a final judgment in federal court, and the Federal Circuit’s ruling allowed just that by making the USPTO’s decision binding after a federal court had already issued a final judgment on the patent’s validity. She also argued that the Federal Circuit’s decision was contrary to the law of res judicata and ran afoul of judicial policy favoring the finality of decisions after the issues in that decision had been fully litigated by both parties, as was the case in Baxter and Fresenius’ disagreement over the validity of Baxter’s patents.

Patent Litigation Strategy For Patent Holders and Accused Infringers After Fresenius

  1. Patent Holders

Fresenius allows accused infringers to prevail in the court system by having the USPTO invalidate a patent before the courts have issued a final judgment and relief for patent infringement. The America Invents Act has increased the number of procedures available to accused infringers for invalidating patents, and has shortened the time to decision for certain of these procedures. Thus, the Fresenius decision requires patent holders to be aware of these new procedures and the timing of USPTO decisions from these procedures in relation to the timing of federal court decisions.

One option available to a patent holder is to stay federal court proceedings while the USPTO reexamines a patent’s validity so that the patent holder avoids any costly litigation that could be wasted if the USPTO invalidates its patent claims. Federal courts, however, will not always stay court proceedings while the USPTO reexamines a patent. The decision to stay court proceedings lies within a judge’s discretion, and courts balance three factors when determining whether to grant a stay: “(1) whether a stay would unduly prejudice or present a clear tactical disadvantage to the non-moving party; (2) whether a stay will simplify the issues in question and trial of the case; and (3) whether discovery is complete and whether a trial date has been set.” First Am. Title Ins. Co. v. Maclaren, L.L.C., C.A. No. 10-cv-363 (GMS), 2012 WL 769601, at *4 (D. Del. Mar. 9, 2012).

Another option is for a patent holder to secure a final ruling on the merits and damages as soon as possible so that the accused infringer does not have enough time to challenge the patent’s validity in the USPTO while a final judgment is pending. A patent holder may be able to achieve this goal by either delaying USPTO proceedings, by expediting federal court proceedings, or both. The ability to delay a USPTO proceeding depends on the type of proceeding, such as post-grant review, inter partes review, or ex parte reexamination. With respect to inter-partes review, for example, the USPTO must issue a decision within one year from the date the USPTO instituted review. 35 U.S.C. § 326(a)(11). A patent holder may delay the institution of post-grant review, however, by filing a preliminary response as late as possible since the USPTO does not have to decide whether to institute post-grant review until three months from the date of the preliminary response. Id. § 324(c). A patent holder may also appeal a decision of the USPTO to the Federal Circuit, which can further delay a final decision from the USPTO. Id. § 329. Familiarity with USPTO practice is crucial in the post-Fresenius legal landscape, since delaying USPTO proceedings could mean saving a patent from being invalidated and forfeiting any victory in federal court that is awaiting a decision on appeal. 

Along with familiarity of USPTO procedure, patent holders should have a heightened awareness about litigation strategies that will delay a final judgment and therefore increase the chances that the opposing party can have the USPTO invalidate the patent and erase any victories in federal court. For example, a bifurcated trial may delay a final judgment on damages and give the accused infringer more time to invalidate the patent through USPTO procedures.

  1. Accused Infringers

In cases where significant federal litigation is proceeding in parallel with related administrative review(s) in the USPTO, the Fresenius decision may give accused infringers more opportunity to  avoid liability for infringement, since, depending on timing of the parallel proceedings, accused infringers may have two chances to achieve invalidity of a patent in time to escape a holding of infringement—one chance in federal court, of course, but another chance in the USPTO, the latter opportunity potentially being more readily "in time" to effect the corresponding federal case.

Accused infringers likewise need to be aware of the new USPTO procedures under the America Invents Act. For accused infringers, Fresenius increases the importance of promptly filing an action in the USPTO to initiate post-grant review, inter partes review, or ex parte reexamination, so that a final decision in the court system does not issue before USPTO proceedings have concluded. As noted above, USPTO proceedings may take longer to complete if the accused infringer delays instituting the USPTO proceeding or responding to requests for information from the USPTO.

Accused infringers may also consider applying for a stay so that they do not waste resources defending a costly lawsuit against a patent holder whose patent may be invalidated by the USPTO.

One caveat to all parties, however, is the need to consider the rules for estoppel in availing oneself of administrative proceedings before the USPTO. See, e.g. 35 U.S.C. § 315(e). A USPTO ruling that a patent is valid after post-grant review or inter partes review generally will estop the accused party from bringing the same grounds for invalidity in a civil action claiming invalidity of the same patent. Id. § 315(e)(2); id. §  325(e)(2). A USPTO ruling that a patent is valid after an ex parte reexamination, however, does not bar an accused infringer from arguing invalidity in federal court. Id. §§ 301-306 (containing no statutory estoppel provisions that would bar a claim in federal court that was already argued during USPTO proceedings that resulted in a final decision). Thus, while Fresenius was a favorable ruling for accused infringers, accused infringers must tread carefully in the USPTO and fully understand the effect of estoppel from using such USPTO procedures.