Even in its initial stages, patent infringement allegations can disrupt business and cast a brooding shadow of protracted litigation. Being mindful, certain scenarios and procedural events may help alleviate these challenges and decrease costs. Specifically, with increasing frequency parties are seeking reexamination of asserted patents by the PTO and moving to stay litigations pending such reexamination. This phenomenon brings with it a flurry of pleading considerations for parties including which claims a party should plead and when.
The Legal Landscape
The PTO recently reported that since patent reexamination first became available in 1981, it has received 9,382 reexamination requests, over 1,100 of which came in 2007 and early 2008.16 Reexamination requests have become an increasingly popular weapon for accused infringers who believe they have prior art that invalidates or narrows the patent claims asserted against them. The popularity of reexamination requests can be attributed to the fact that 13 percent of reexaminations have resulted in cancellation of all claims and just under 60 percent have resulted in some change to the claims.17 Accused infringers also stand to delay litigation: the average pendency of an ex parte reexamination is more than two years (24.3 months).
To take advantage of this lengthy delay, accused infringers may file motions to stay the litigation pending reexamination. Both the Northern District of California and Eastern District of Texas have articulated a three-part test for whether to grant a stay of the action pending reexamination.18 Notably, these courts consider: (1) whether the litigation is in its early or late stages, looking at how much discovery has been taken and whether a trial date has been set or dispositive motions have been filed; (2) whether a stay will simplify the issues and streamline the litigation; and (3) whether a stay would unduly prejudice or tactically disadvantage the non-moving party, such as when the court finds evidence of delay tactics on the part of the party moving for a stay.19
With respect to the second factor, many courts analyze whether claims unrelated to the patent infringement claim are present in the action. The rationale is that it does not make sense to stay the litigation – or at least the entire litigation – if any non-patent-related claims remained that needed to be adjudicated and that would not benefit from the PTO’s guidance and expertise.20
Litigants may be able to affect the likelihood of a stay by choosing to assert or withhold claims unrelated to the patent infringement claim. This raises another consideration. Failure to assert unrelated claims could result in waiver, particularly where the other claims are “compulsory” because they arise out of the same occurrence or series of occurrences.21 On the other hand, litigants could choose to add unrelated claims at a later date, relying on the courts’ liberal policy of permitting parties to amend their pleadings. See Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995); Carson v. Polley, 689 F.2d 562, 584 (5th Cir. 1982). These pleading and waiver rules can have undesirable effects in the context of a party seeking to stay the litigation pending reexamination of a patent.
As a hypothetical situation, Party A, who owns the 123 patent, wants to sue its competitor Party B for infringement. Party A wants to bring suit in district court in either the Northern District of California or the Eastern District of Texas, two of the most popular venues for patent actions that share very similar patent local rules. At this point, both parties – and, of course, their respective counsel – need to be aware of certain rules and pitfalls before proceeding.
Party A’s Perspective
As the plaintiff, Party A typically will want to assert in the same lawsuit all causes of action it has against Party B besides the cause of action for infringement of the 123 patent. If it does not, Party A risks waiving noninfringement claims that arise out of the same occurrence or series of occurrences. But what about claims not necessarily so closely tied to the events constituting the alleged infringement? Depending on the facts, these noninfringement claims might range from breach of contract (e.g., of a license agreement) to statutory or common law unfair competition (particularly if Party B is a competitor in the same industry). The answer depends on certain strategic considerations in light of the above rules.
For example, suppose Party A knows (perhaps from pre-litigation communications) that Party B has prior art that provides a basis for a reexamination request. Party A can properly assume that Party B will file a reexamination request that could eventually precipitate a motion by Party B to stay Party A’s litigation pending reexamination of the 123 patent. Suppose also that Party A has additional state law claims that are ancillary to its claim of infringement of the 123 patent, such as common law unfair competition and violations of California’s Unfair Competition Law.22 If Party A anticipates Party B seeking reexamination and moving to stay pending this reexamination, Party A must decide whether to plead its state law claims at this time.
Thus, if Party A’s primary goal is to assert and protect its patent rights in an expeditious manner, Party A may choose to plead as many ancillary or noninfringement claims in this lawsuit as it has against Party B to improve its chances of defeating a motion to stay. The need to adjudicate such unrelated claims would weigh strongly against a stay of the entire action.23 Conversely, if Party A has no real desire to get entangled in federal litigation but files suit against Party B for other reasons – such as to apply pressure on Party B to settle and take a license on the 123 patent – the opposite reasoning makes more sense. Party A then would have an incentive not to allege ancillary claims in this lawsuit before any motion to stay, and could separate its claims and allege them in an independent action in state court. Alternatively, Party A could attempt to wait until after the court decides a motion to stay before seeking leave to amend its complaint to plead in these unrelated claims. This approach is a bit more risky, however, as a court may very well view this as dilatory tactics or gamesmanship.
Party B’s Perspective
Party B faces a similar tension when it comes time to serve its answer and counterclaims. Assume here, too, that Party B has prior art it believes would change, if not eliminate, the claims of the 123 patent that Party A is asserting. An accused infringer like Party B will not want to expend resources defending against claims that might be altered to the point that they do not read on Party B’s accused products, or stricken entirely. Party B’s interest is, thus, to delay or stay Party A’s lawsuit. Yet Party B must also consider which counterclaims to plead. For compulsory counterclaims, the course of action is fairly clear as the Federal Rules of Civil Procedure requires Party B to state all of its compulsory counterclaims in its answer to avoid waiver of these counterclaims.24 In a traditional patent litigation, such counterclaims will seek declarations of noninfringement and/or invalidity of the 123 patent.
Party B may also have other counterclaims that are not related to the alleged infringement (e.g., for antitrust violations). Party B’s objective of delaying this action would be best served by not pleading these counterclaims before moving to stay the litigation pending reexamination. The presence of these additional, unrelated counterclaims would likely hurt Party B’s chances on a motion to stay.25
Party B, nevertheless, might be precluded from seeking leave to later amend – for example, after an unsuccessful motion to stay – to add its additional, noninfringement-related counterclaims. While leave to amend should be given freely,26 courts are likely to view such a tactic – withholding counterclaims just for the purpose of securing a stay of the litigation pending reexamination – unfavorably as “bad faith,” a recognized ground for denying leave to amend.27 As a result, Party B appears to face a much more pronounced conflict between its objectives of delaying the litigation and its obligations to timely plead its counterclaims.
As the above hypothetical illustrates, pleading rules and the standards governing motions to stay litigation pending reexamination can lead to conflicting considerations depending on a party’s goals and objectives. The savvy litigant will tailor its strategy accordingly. If the old adage that “knowledge is power” rings true, knowing the above rules and how they interact can provide parties with a leg-up on patent litigation – even before the complaint is served.