Case Alert -- Federal Circuit Reverses District Court Denying Stay Pending Covered Business Method Review

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On July 10, 2014, the Federal Circuit issued an opinion in VirtualAgility Inc. v. Salesforce.com, Inc., in which it reversed the district court’s order denying Salesforce’s motion to stay the district court suit pending post-grant review under the Transitional Program for Covered Business Method Patents (“CBM review”). No. 2014-1232, slip op. at 2 [hereinafter Fed. Cir. Op.]. Baker Botts has appeared on behalf of one of the defendants in this litigation both on appeal and at the district court level.

In January 2013, VirtualAgility sued Salesforce.com (“Salesforce”) and several of its customers for patent infringement in the Eastern District of Texas. Id. Salesforce filed a petition with the Patent Trial and Appeal Board (“PTAB”) for CBM review of all claims of the asserted patent. Id. at 2-3. Salesforce subsequently filed a motion to stay the district court suit pending post-grant review pursuant to § 18(b)(1) of the America Invents Act (“AIA”). Id. at 3. In November 2013, the PTAB granted Salesforce’s petition, concluding that “all claims of the [asserted] patent . . . are more likely than not patent ineligible under 35 U.S.C. § 101 and invalid under § 102.” Id. After the PTAB instituted the CBM review, the district court denied Salesforce’s motion to stay. VirtualAgility, Inc. v. Salesforce.com, Inc., 13-CV-00111, 2014 WL 94371 (E.D. Tex. Jan. 9, 2014) [hereinafter District Court Order].

Section 18(b)(1) of the AIA instructs district courts to consider the following factors when deciding whether to grant a stay pending a CBM 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.

The district court concluded that factor A, which relates to simplification of the issues, was “essentially neutral, if not slightly against granting a stay.” District Court Order, at *5. The district court undertook its own analysis and disagreed with the PTAB’s conclusion that all claims of the asserted patent are more likely than not patent ineligible or invalid, explaining that, “[g]iven the thoroughness of the PTO’s prior examination of the [asserted patent],” there is “substantial uncertainty” that some of all of the claims would be canceled during post-grant review. Id. at *3, *5. Similarly, the district court concluded that factor D, which relates to reducing the burden of litigation, “weigh[ed] only slightly in favor of a stay” because there was only a “limited possibility” that some or all of the claims would be canceled during post-grant review. Id. at *8. The Federal Circuit, on the other hand, held that both factors “strongly favor a stay.” The Federal Circuit explained that the district court’s conclusion with respect to these factors “was based predominantly on [an] improper review of whether the PTAB was correct in its determination that the claims of the [asserted] patent were more likely than not invalid.” Id. at *13. Because “the PTAB expressly determined that all of the claims are more likely than not unpatentable,” the post-grant review proceedings “could dispose of the entire litigation: the ultimate simplification of the issues.” Id.

With respect to factor B, which relates to the progress of the litigation, the district court concluded that the timing favored granting a stay because the parties had not yet filed their joint claim construction statement, and although some discovery had occurred, the deadline to complete fact discovery was more than six months away. District Court Order at *5. Nevertheless, the district court concluded that “the benefits of a stay at this relatively early stage of the proceedings” were outweighed by the other factors. Id. The Federal Circuit also discussed the proper time frame to measure the progress of the litigation. Fed. Cir. Op. at 15. The Federal Circuit explained that “[w]hile district courts should generally consider ‘whether discovery is complete and whether a trial date has been set’ as of the date of the stay motion,” the district court may also take “into account the stage of litigation as of the date that [post-grant] review was granted.” Id. at 18 n.6. The Federal Circuit concluded that, in this case, at either point in time the litigation “was still in its infancy, which favors granting the stay.” Id. at 19.

The district court concluded that factor C, which relates to undue prejudice and tactical advantage, “weighed heavily against a stay.” District Court Order at *7. The court explained that, because VirtualAgility and Salesforce are competitors, VirtualAgility would be unduly prejudiced by the delay in enforcing its patent rights. Id. at *5-7. The district court did not, however, address whether granting a stay would provide a clear tactical advantage to Salesforce. With respect to undue prejudice, the Federal Circuit concluded that, although “competition between parties can weigh in favor of finding undue prejudice,” there was “no evidence in [the] record that [VirtualAgility and Salesforce] ever competed.” Id. With respect to tactical advantage, Federal Circuit explained that, “[i]n some circumstances, a defendant’s decision to save key pieces of prior art for district court litigation in case its CBM challenge fails would weigh against a stay.” Id. at 24. For example, “[e]ven though the ‘splitting’ of prior art is allowed by statute in the sense that litigation estoppel does not attach to art that could have been, but was not, raised in CBM review, such behavior can still give the movant a clear tactical advantage.” Id. at 25. The Federal Circuit also recognized that “it may not be necessary, or even prudent, in some situations,” to include all known prior art in a CBM petition. Id. at 25 n.8. The Federal Circuit concluded that Salesforce’s decision not to include certain prior art in its petition did not establish a clear tactical advantage because “at the time Salesforce filed its CBM petition, it did not have the evidence necessary to include [that prior art].” Id. Thus, the Federal Circuit concluded that, “at best, this factor weighs slightly against a stay.” Id. at 21.

Because three of the four factors weigh heavily in favor of a stay and only one factor weighs, at best, slightly in favor of denying a stay, the Federal Circuit concluded that “the district court abused its discretion when it denied the stay.” Id. at 26.

Topics:  Covered Business Method Patents, Motion To Stay, Patent Trial and Appeal Board, Patents, Post-Grant Review, Prior Art

Published In: Civil Procedure Updates, Civil Remedies Updates, Intellectual Property Updates, Science, Computers & Technology Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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