July 11, 2014

Federal Circuit: Eastern District of Texas Should Have Stayed Litigation Pending USPTO Covered Business Method Review Proceeding

Covered Business Method Review (CBM) proceedings for challenging patents at the USPTO are more attractive than ever now that the Federal Circuit reversed an Eastern District of Texas judge’s denial of a motion to stay pending CBM review. Judge Newman, dissenting, characterized the Federal Circuit’s decision as “effectively creat[ing] a rule that stays of district court litigation pending CBM review must always be granted.” The case will undoubtedly be cited in support of every motion to stay litigation pending CBM review for the foreseeable future.

In January 2013, VirtualAgility Inc. (VirtualAgility) sued a host of companies in the U.S. District Court of the Eastern District of Texas for patent infringement. Five months later, (Salesforce), one of the defendants, filed a petition with the U.S. Patent & Trademark Office (USPTO) seeking Covered Business Method (CBM) review of VirtualAgility’s asserted patent, arguing that all of the patent’s claims were invalid.

Five days after filing the petition, all of the defendants in the litigation filed a motion to stay the district court proceedings pursuant to America Invents Act (AIA) § 18(b)(1). AIA § 18(b)(1) instructs a district court to consider four factors when deciding whether to grant a stay pending a CBM review:

1. whether a stay, or the denial thereof, will simplify the issues in question and streamline the trial;

2. whether discovery is complete and whether a trial date has been set;

3. whether a stay, or the denial thereof, would unduly prejudice the nonmoving party or present a clear tactical advantage for the moving party; and

4. whether a stay, or the denial thereof, will reduce the burden of litigation on the parties and on the court.

According to Sen. Charles Schumer (D-NY), the fourth factor “places a very heavy thumb on the scale in favor of a stay,” making it “nearly impossible to imagine a scenario in which a district court would not issue a stay.” 157 Cong. Rec. S1363-65 (daily ed. Mar. 8, 2011).

In November 2013, the PTAB instituted the CBM review of all claims of the asserted patent. Regardless, the Eastern District of Texas court denied the motion to stay the case pending CBM review.

Leaning heavily on the first factor, the district court analyzed the long prosecution history of the patent-in-suit, noting that it spanned over 12 years, during which time the PTO considered more than 60 patent and non-patent prior art references before eventually granting the patent. The court further undertook a detailed review of the PTAB’s decision to institute and said it was not convinced that the PTAB would cancel the claims at the end of the review.

As a result, the district court concluded that this factor did not favor a stay of the case. The district court also found that VirtualAgility and Salesforce were direct competitors, and a stay would likely prejudice VirtualAgility. Finally, the district court reviewed the fourth statutory factor, stating that “[h]ad Congress deemed [the burden of litigation factor] so overwhelming as to justify a stay in and of itself, the statute would have been written differently. Absent such a different statutory provision, relief from a burden inherent to all CBM reviews cannot reasonably serve as the sole basis for tipping the fourth factor in favor of granting a stay.”

Following the denial of the motion to stay, Salesforce took advantage of the new AIA immediate interlocutory appeal to the Federal Circuit for denial of a stay pending CBM review, and in February 2014, the Federal Circuit stayed the district court litigation pending its disposition of Salesforce’s motion to stay pending appeal.

The Federal Circuit decided the appeal on the merits on July 10. In its decision, the Federal Circuit held that the district court had “clearly erred” in finding that the first factor was neutral or slightly against a stay, and in finding that the fourth factor weighed only slightly in favor of a stay. It held that those two factors strongly favored a stay and that the district court improperly “reviewed” the PTAB’s determination that the claims of the asserted patent were more likely than not invalid, finding that such a review was an improper collateral attack on the PTAB’s institution decision.

Removing that improper review, the Federal Circuit found that the remaining evidence weighed heavily in favor of a stay. Specifically, the fact that the PTAB granted CBM review on all asserted claims on two separate alternative grounds was significant because the review could dispose of the entire litigation.

The Federal Circuit also found that the district court had erred in weighing the second factor, finding that it strongly favored a stay. The Federal Circuit held that generally, the status of the case at the time the motion to stay is filed was the relevant time to measure the stage of litigation. In this case, the litigation was in its infancy when the motion to stay was filed, and even considering the status of the litigation at the time the petition was instituted, the case was still in its early stages.

The Federal Circuit also found that the district court had erred in weighing the third factor, finding that although VirtualAgility and Salesforce were in the same business space, evidence of competition was weak and a stay would only delay, not diminish, monetary damages that VirtualAgility could recover. Finally, the Federal Circuit noted that the fact that VirtualAgility did not move for a preliminary injunction contradicted its argument that it needed permanent injunctive relief as soon as possible.

The litigation will now remain stayed pending the conclusion of the CBM review