District Court Abused Discretion in Denying Stay Pending Covered Business Method Review: Federal Circuit | Practical Law

District Court Abused Discretion in Denying Stay Pending Covered Business Method Review: Federal Circuit | Practical Law

In VirtualAgility, Inc. v. Salesforce.com, Inc., the US Court of Appeals for the Federal Circuit held that the US District Court for the Eastern District of Texas abused its discretion in denying the accused infringers' motion to stay the litigation pending Covered Business Method (CBM) post grant review of the asserted patent before the Patent Trial and Appeal Board (PTAB) under the Leahy-Smith America Invents Act (AIA).

District Court Abused Discretion in Denying Stay Pending Covered Business Method Review: Federal Circuit

by Practical Law Intellectual Property & Technology
Published on 11 Jul 2014 • USA (National/Federal)
In VirtualAgility, Inc. v. Salesforce.com, Inc., the US Court of Appeals for the Federal Circuit held that the US District Court for the Eastern District of Texas abused its discretion in denying the accused infringers' motion to stay the litigation pending Covered Business Method (CBM) post grant review of the asserted patent before the Patent Trial and Appeal Board (PTAB) under the Leahy-Smith America Invents Act (AIA).
On July 10, 2014 in VirtualAgility, Inc. v. Salesforce.com, Inc., the US Court of Appeals for the Federal Circuit held that the US District Court for the Eastern District of Texas abused its discretion in denying the accused infringers' motion to stay the litigation pending Covered Business Method (CBM) post grant review of the asserted patent (No. 2014-1232, (Fed. Cir. July 10, 2014)). Notably, in reversing, the Federal Circuit held that:
  • The district court misapplied the four-factor test for deciding whether to stay a case pending CBM review under Section 18(b)(1) of the America Invents Act (AIA). Properly considered, the factors weigh heavily in favor of a stay.
  • Courts must consider each of the four stay factors individually. The district court improperly combined its analysis of stay factor one (simplification of issues for trial) and stay factor four (reduction of litigation burden).
  • The Federal Circuit could consider on appeal the patent owner's Motion to Amend the asserted patent claims in the CBM proceeding even though the patent owner moved to amend after the district court ruled on the motion to stay.
  • The district court erred as a matter of law to the extent it reviewed the Patent Trial and Appeal Board's (PTAB) decision to institute CBM review as part of its stay analysis. Permitting courts to do this would be an improper collateral attack on the PTAB's decision to institute CBM review.

Background

In January 2013, VirtualAgility, Inc. sued several defendants in the US District Court for the Eastern District of Texas for infringing its US Patent No. 8,095,413 ('413 patent) directed to cloud computing systems. In May 2013, Salesforce.com, Inc. ("Salesforce") petitioned the PTAB for CBM review of all claims of the '413 patent. Shortly after Salesforce's CBM petition, the defendants moved to stay the Texas litigation under AIA § 18(b)(1), which instructs district courts to consider these four factors when deciding whether to stay a case pending CBM review of an asserted patent:
  • Whether a stay will simplify case issues and streamline the trial.
  • Whether discovery is complete and a trial date is set.
  • Whether a stay would unduly prejudice the patent owner or provide a clear tactical advantage to the accused infringer.
  • Whether a stay will reduce litigation burdens on the parties or court.
In August 2013, while the stay motion was pending, the district court issued a discovery order and set a November 2014 trial date. In November 2013, the PTAB instituted CBM review of all claims of the '413 patent and issued its own scheduling order with a July 2014 trial date.
The district court denied the defendants' motion to stay pending CBM review in January 2014. The defendants then filed an interlocutory appeal of that decision and a separate motion to stay pending appeal, which the Federal Circuit granted. Significantly, while defendants' appeal motions were pending, VirtualAgility filed a contingent Motion to Amend the '413 patent claims if the PTAB found them unpatentable in the CBM proceeding.

Outcome

A split Federal Circuit panel held that the district court abused its discretion in denying defendants' motion to stay pending CBM review of the asserted patent.

Standard of Review

The court first considered the parties' dispute concerning the standard of review of stay decisions under the AIA. The accused infringers urged de novo review and Virtual Agility urged abuse of discretion review. The court noted that:
  • AIA § 18(b)(2) provides that Federal Circuit review of district court stay decisions "may be de novo," which is the only review standard mentioned in the statute.
  • Prior to the AIA, district court decisions on motions to stay pending USPTO proceedings generally were not appealable and, if so, the Federal Circuit reviewed them under an abuse of discretion standard.
The court declined to resolve the proper standard of review, however, because it determined that reversal was appropriate under either standard.

The Four Stay Factors

The Federal Circuit then reviewed the district court's analysis of the four AIA Section 18(b)(1) stay factors and held that the district court abused its discretion in denying the stay. The court made the following determinations:
  • Simplification of Issues. The district court erred in ruling that this factor was essentially neutral or weighed slightly against granting a stay because, based on its review of the asserted patent's prosecution history, it was "not convinced" the PTAB would cancel all of the claims in the CBM review. The Federal Circuit determined that this factor actually weighed heavily in favor of a stay because:
    • in instituting CBM review of all asserted claims on two alternative grounds, the PTAB determined that the claims are "more likely than not" unpatentable, which, if so determined, would dispose of the lawsuit;
    • it is not appropriate for a district court to review the PTAB's institution decision in determining whether to stay; and
    • the patent owner's motion to amend the asserted claims further suggests that resolution of the CBM review may simplify the case issues.
  • Whether Discovery is Complete and Trial is Set. The district court correctly found that this factor favored a stay because the parties had not yet filed their joint claim construction statement, the deadline for completing fact discovery was six months away and the trial was not scheduled until November, 2014. The district court did not err by waiting until the PTAB made its institution decision to decide the motion to stay, though district courts generally consider this factor at the time the motion is filed.
  • Undue Prejudice. The district court erred in finding that undue prejudice to the patent owner weighed heavily against granting a stay because:
    • the record showed little evidence of direct competition between VirtualAgility and the defendants; and
    • VirtualAgility's failure to move for a preliminary injunction contradicted its claim that it would be prejudiced by a stay.
  • Reduction of Litigation Burden. The district court erred in holding that the fourth factor weighed only slightly in favor of a stay. While holding that factors one and four must be considered separately, the Federal Circuit acknowledged that there is overlap between the two factors and that this factor weighed heavily in favor of a stay for the same reasons as stay factor one.

The Dissent

Judge Newman dissented on the basis that:
  • The majority opinion overrode the purpose of AIA Section 18(b)(1), under which staying a district court litigation pending CBM review is permissive, not mandatory, and within the discretion of the district court judge.
  • Courts should be given wide discretionary authority to manage their cases.
  • The district court correctly recognized that the litigation may not be simplified if an asserted claim survives CBM review.

Practical Implications

The decision should support accused infringers' motions to stay litigation pending CBM review. The court's holding that a district court should not review the PTAB's institution decision or the merits of the CBM review in deciding whether to grant a stay is particularly significant. This should simplify motions to stay and provide support for AIA § 18(b)(1) stay factors one and four, particularly if the CBM review covers all asserted patent claims and is based on multiple unpatentability grounds.