Magistrate Recommends Narrow Interpretation of Inter Partes Review Estoppel Provision

Earlier this month, in Biscotti Inc. v. Microsoft Corp., U.S. Magistrate Judge Roy S. Payne of the U.S. District Court for the Eastern District of Texas issued a Report and Recommendation on two motions related to Microsoft's invalidity defenses to Biscotti's infringement action.  In particular, Magistrate Judge Payne recommended that Plaintiff's Motion for Summary Judgment of Improper Incorporation by Reference be denied and that Plaintiff Biscotti Inc.'s Motion For Summary Judgment of Estoppel of Defendant Microsoft's Invalidity Art and Theories Based on a Final Written Decision in Microsoft's Inter Partes Review Petitions be granted-in-part.  This post addresses the recommendation regarding Biscotti's second motion ("IPR Estoppel Motion"), which concerns the extent to which Microsoft's IPR challenge of the patent at issue in the district court litigation should estop Microsoft from raising certain invalidity defenses at trial.

Magistrate Judge Payne's Recommendation is related to a patent dispute initiated by Biscotti, which filed suit against Microsoft, alleging that Microsoft's Xbox One and related services, including Xbox Live, infringed Biscotti's U.S. Patent No. 8,144,182.  After Biscotti filed suit against Microsoft, Microsoft petitioned the Patent Trial and Appeal Board for inter partes review of the '182 patent.  The District Court stayed the infringement action pending the IPR, and the PTAB instituted IPR on 31 of the 53 claims in the '182 patent, declining to institute IPR on the remaining 22 claims.  Microsoft responded to the denial of IPR on the 22 remaining claims by filing three additional IPR petitions (bringing the total of Microsoft's IPR petitions challenging the '182 patent to six), but the PTAB refused to join the latter three petitions to the first three petitions, finding the latter three petitions to be time-barred.  The PTAB ultimately upheld the patentability of the 31 claims for which IPR was instituted, and the District Court lifted its stay and scheduled trial to begin next month.  Biscotti moved for partial summary judgment on the two matters related to Microsoft's invalidity defenses.

Citing 35 U.S.C. § 315(e)(2), Magistrate Judge Payne notes that "[a]fter a final IPR decision from the PTAB, 'the real party in interest or privy of the petitioner' is barred from later asserting in district court that a claim challenged in IPR is 'invalid on any ground that the petitioner raised or reasonably could have raised during that inter partes review.'"  Magistrate Judge Payne also notes that "[t]he legislative history of this provision suggests that Congress intended to prevent the same party from challenging the validity of the same patent twice, at least based on patents or printed publications that the PTAB considered."

According to the Recommendation, two Federal Circuit decisions have more narrowly interpreted the IPR estoppel provisions:  Shaw Industries Group, Inc. v. Automated Creel Systems, Inc., 817 F.3d 1293 (Fed. Cir. 2016), and HP Inc. v. MPHJ Technology Inv., LLC, 817 F.3d 1339 (Fed. Cir. 2016).  In Shaw, the Federal Circuit denied a petition for writ of mandamus to instruct the PTAB to reevaluate a redundancy decision, but indicated that the PTAB's redundancy decision would not have resulted in estoppel because the petitioner could not have raised a redundant ground during the IPR.  In HP, the Federal Circuit determined that grounds that are not instituted for redundancy do not become a part of the IPR.  The Recommendation observes that:

Shaw and HP can be read in different ways.  The broad interpretation suggests that any ground not raised during post-institution IPR proceedings—regardless of whether that ground was included in the petition or not—is exempt from estoppel.  This interpretation follows from the Federal Circuit's discussion of the text of the estoppel provisions.  Namely, the phrase "during that inter partes review" in § 315(e), according to Shaw, suggests that if a ground of unpatentability was not raised in the post-institution phase of the IPR proceeding, estoppel does not apply . . . .  Although it is not clear from § 315(e)'s text that "inter partes review" necessarily includes only the post-institution portion of the IPR, as opposed to also including the petition phase, some courts appear to have literally applied the Federal Circuit's discussion in Shaw and exempted any ground from § 315(e) not raised during the post-institution phase of the IPR.

However, the Recommendation cites a Western District of Wisconsin case, Douglas Dynamics, LLC v. Meyer Prod. LLC, which also observes that "Shaw’s narrow view of § 315(e) estoppel undermines the purported efficiency of IPR, [and that u]nder this approach, IPR is not an alternative to litigating validity in the district court, it is an additional step in the process."  The Wisconsin court notes that the Douglas Dynamics case had been filed in December 2014, set for trial in September 2016, and then returned to court in April 2017, and "it is not at all clear that the issues have been meaningfully narrowed [as a result of inter partes review]."  According to the Recommendation, "[t]he same could be said of this case, which was filed in 2013, and after Microsoft's entirely unsuccessful IPR campaign involving six different IPR petitions, Microsoft has returned to the Court in 2017 hoping to continue litigating invalidity arguments similar to those that it litigated (and lost) at the PTAB."

Returning to the ways in which Shaw and HP can be read, the Recommendation notes that a "narrower interpretation is that only grounds raised in a petition but not instituted for procedural reasons (such as redundancy) are exempt from estoppel," which the Recommendation states would be "consistent with due process—if the petitioner tries to raise a ground but is precluded from further pursuing that ground during subsequent IPR proceedings solely because of PTAB procedures, then the petitioner should not be barred from asserting the merits of that same ground in a later PTAB or district court proceeding."  The Recommendation indicates, however, that "[i]f . . . the petitioner simply does not include a prior art reference in the petition that reasonably could have been included, the petitioner should be estopped from asserting that reference in a subsequent proceeding" (citing Douglas Dynamics, which states that "[i]f the defendant pursues the IPR option, it cannot expect to hold a second-string invalidity case in reserve in case the IPR does not go defendant's way").  Magistrate Judge Payne therefore recommends that the narrow view of Shaw and HP be adopted, noting that "the Court reads Shaw and HP to exempt an IPR petitioner from § 315(e)'s estoppel provision only if the PTAB precludes the petitioner from raising a ground during the IPR proceeding for purely procedural reasons, such as redundancy."

In the context of the instant case, Magistrate Judge Payne recommends that because the PTAB instituted IPR of claim 36 of the '182 patent under § 103(a) based on the combination of Kenoyer, Briere, and Hurley, Microsoft should be estopped from asserting the combination of Kenoyer and Briere as a basis for obviousness at trial because Microsoft raised or could have raised that combination during IPR proceedings.  Magistrate Judge Payne also recommends that Microsoft should be estopped from asserting Kenoyer alone as a basis for finding claim 36 obvious because Kenoyer is a subset of Kenoyer, Briere, and Hurley.  With respect to Microsoft's use of certain systems as prior art to the asserted claims, the Recommendation notes that IPR is limited to invalidity grounds "that could be raised under section 102 or 103 and only on the basis of prior art consisting of patents or printed publications," and therefore, suggests that it is possible that Microsoft could not have raised a prior art "system" during IPR proceedings.  However, if it turns out that "Microsoft's purported system prior art relies on or is based on patents or printed publications that Microsoft would otherwise be estopped from pursuing at trial, e.g., patents or printed publications that a 'skilled searcher conducting a diligent search reasonably could have been expected to discover,' then Microsoft should be estopped from presenting those patents and printed publications at trial."

Biscotti Inc. v. Microsoft Corp. (E.D. Tex. 2017)
Report and Recommendation Magistrate Judge Payne