Thursday 27 November 2014

Federal Circuit Rules That Trial Court Should Stay Infringement Case Pending AIA Review

The Leahy-Smith America Invents Act established three new procedures for post-grant administrative patent challenges: inter partes review, post-grant review, and review under the transitional program for covered business method patents (“CBM”). One yet-unresolved issue concerning these administrative proceedings is their relation to, and coordination with, parallel federal court proceedings, such as infringement and declaratory judgment actions.

In a recent case, the U.S. Court of Appeals for the Federal Circuit ruled that a district court erred by not staying a pending infringement action while the defendant pursued a parallel CBM proceeding challenging the patents in suit on the grounds that the claimed inventions were not eligible under 35 U.S.C. § 101. Versata Software, Inc. v. Callidus Software, Inc., No. 2014-1468 (Fed. Cir. Nov. 20, 2014).

In September, 2012, Versata sued Callidus in the U.S. District Court for the District Delaware, alleging that Callidus infringed three patents. Callidus moved to transfer the case and also moved to dismiss the case. The district court denied both motions in May 2013. Callidus then filed a counterclaim alleging that Versata infringed three Callidus patents, and advised the district court that it planned to seek CBM review of the Versata patents. It filed a petition for review with the USPTO in August 2013 and sought a stay of the district court litigation. The district court deferred ruling on the stay motion until the USPTO acted on the pending petitions for review. In the interim, the court scheduled a Markman claim construction hearing and a 2015 trial date. After the USPTO granted the petition for review, the district court granted a stay as to one Versata patent, but not the two other patents asserted by Versata. Callidus appealed to the Federal Circuit.

On appeal, the Federal Circuit ruled that the district court erred in not granting a stay as to all three Versata patents, and that the denial was both an abuse of discretion and violated the AIA’s “more searching review” standard for stay motions. The Federal Circuit opinion approved the court’s earlier discussion of the consideration affecting stays in VirtualAgility Inc. v., Inc., 759 F.3d 1307 (Fed. Cir. 2014).

The AIA sets forth four factors for the district court to consider in deciding whether to stay litigation pending AIA review:
(A) whether a stay, or the denial thereof, will simplify the issues in question and streamline the trial; 
(B) whether discovery is complete and whether a trial date has been set; 
(C) whether a stay, or the denial thereof, would unduly prejudice the nonmoving party or present a clear tactical advantage for the moving party; and 
(D) whether a stay, or the denial thereof, will reduce the burden of litigation on the parties and on the court.

AIA § 18(b)(1). The Federal Circuit ruled that the district court erred in evaluating each of the four factors.

First, the district court erred by seemingly creating a “categorical rule” that an AIA proceeding will not simplify issues unless it covers all of the claims asserted in the lawsuit. The appeals court noted that:
But this type of categorical rule is inappropriate. Stays can be warranted even when a CBM proceeding does not address all asserted patents, claims, or invalidity defenses. Certainly this simplification factor weighs more strongly in favor of a stay when all of the litigated claims are undergoing CBM review. But there can still be a simplification of the issues when only some, but not all, of the claims asserted in litigation are challenged in a CBM review.
 Slip op. at 6. Among the factors that the district court should consider in evaluating this point are a comparison of the issues that the review would resolve versus the issues that would remain, the number of claims in suit included in the review, and the range of invalidity issues included in the review.

On the second factor, whether discovery is complete and a trial date has been set, the Federal Circuit also ruled that the district court erred. First, it noted that the district court must evaluate not just whether key litigation dates have been set, but how much more work remains to be done in the litigation before the trial date. In addition, this determination generally should be made at the time the motion for stay was filed. Given that the parties had not completed fact discovery, no deposition had taken place, and no expert discovery had been completed, the appeals court found that this factor strongly supported a stay.

The appeals court also disagreed with the district court that Callidus’s motion for stay would give it a tactical advantage, or unduly prejudice Versata. It noted that Callidus was seeking a stay of the entire litigation, including its infringement counterclaims. In addition, although the district court noted that Callidus’s motions to dismiss and transfer venue were considerations, apparently because the district court considered them to be vexatious, the Federal Circuit noted that parties have a right to file nonfrivolous motions relating to venue and challenging pleadings.

Finally, the Federal Circuit ruled that the district court misapplied the fourth factor, the reduced burden of litigation. The district court considered Callidus’s tactic of filing preliminary motions, noting that they actually increased the burden of litigation. The appeals court ruled that in evaluating this factor, however, 
[T]he district court clearly erred in evaluating the burden-of-litigation factor exclusively through this backward-looking lens. The correct test is one that focuses prospectively on the impact of the stay on the litigation, not on the past actions of the parties. When framed appropriately, it becomes clear that a stay will indeed reduce the future burdens of litigation.
 Slip op. at 13 (citations omitted). The court also observed that “simplification analysis under the first factor often points in the same direction as reducing the burden of litigation under the fourth factor.” Id. at 14.

As a result, the district court abused its discretion in denying Callidus’s request for a stay pending the CBM review proceeding. The Federal Circuit reversed and remanded with instructions to grant a stay.

The entire opinion is available HERE.

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