In re Baxter International, Inc. (Fed. Cir. 2012)

[author: Kevin E. Noonan]

BaxterIn a dissent from the Federal Circuit's affirmance of a Board determination of obviousness, Judge Newman raises a jurisdictional and separation-of-powers argument in In re Baxter International, Inc. that is destined to be decided by the Supreme Court.  Specifically, what power does the U.S. Patent and Trademark Office have to determine that a patent is invalid in a re-examination concluded after the Federal Circuit determines that the patent is not invalid after challenge during patent infringement litigation on the same grounds and over the same prior art?

The case involved ex parte re-examination of U.S. Patent No. 5,247,434 under Re-examination Control No. 90/007,751.  The technology was related to hemodialysis machines used to treat patients having impaired kidney function.  The patent claimed a hemodialysis apparatus having an interface that controlled several biological parameters:

26. A hemodialysis machine comprising:
    (a) means for controlling a dialysate parameter selected from a group consisting of dialysate temperature and dialysate concentration, and means for delivering the dialysate to a dialysate compartment of a hemodialyzer; and
    (b) a user/machine interface operably coupled to said dialysate-delivery means, the user/machine interface comprising a touch screen adapted to display an indicium correspond- ing to a parameter pertinent to operation of the hemodialysis machine for performing hemodialysis and to permit the user, by touching the indicium, to cause a change in the parameter.

Dependent claims recited additional specific features.

Patent litigation previously ensued between Baxter and a competitor, Fresenius, which filed a declaratory judgment action of invalidity asserting obviousness over several references (including manuals used with prior art hemodialysis machines (the CMS 08 Manual and the Cobe C3 Manual) and a prior art machine (the Seratron System)).  The District Court overruled a jury verdict of obviousness, granting Baxter judgment as a matter of law that Fresenius had not established obviousness by clear and convincing evidence.  In the appeal of that judgment, Fresenius USA, Inc. v. Baxter Int'l, Inc., 582 F.3d 1288, 1299 (Fed. Cir. 2009), the Federal Circuit affirmed, finding not only that Fresenius had "failed to present any evidence -- let alone substantial evidence -- that the structure corresponding to the means for delivering dialysate limitation [in claim 26], or an equivalent thereof, existed in the prior art."

At the same time ("in parallel"), Fresenius had instituted the ex parte re-examination, submitting the same art to the USPTO that it had produced at trial.  The Examiner found claims 26-31 of the '434 patent obvious over the combination of the CMS 08 Manual, the Sarns 9000 Manual, and U.S. Patent No. 4,370,983 (claims 26-29 and 31), or with the addition of U.S. Patent No. 4,710,166 (for claim 30).  The Federal Circuit's earlier decision on the appeal of the District Court decision came down after final rejection by the Examiner but before a decision from the Board, and the Director ordered the Board to consider the Federal Circuit's decision when deciding whether to affirm the Examiner.  The Board did affirm, and with regard to the earlier Federal Circuit decision decided that it was not bound by that decision for two reasons.  First, the standard of review of the Examiner's rejection was whether the claims were obvious by a preponderance of the evidence, as opposed to the clear-and-convincing standard at trial, and second, the claims are given their broadest reasonable meaning before the Patent Office, rather than a meaning limited by the plain meaning, disclosure in the specification, and prosecution history that district courts and the Federal Circuit use when construing claims.  Phillips v. AWH Corp., 415 F.3d 1303, 1315–17 (Fed. Cir. 2005) (en banc).  The Board then affirmed the factual findings and underlying legal conclusion of obviousness.

Federal Circuit SealThe Federal Circuit majority affirmed, in a decision by Judge Lourie joined by Judge Moore.  The opinion begins by noting the "limited" scope of review available to the Court in view of its implementation of the Supreme Court's decision in Dickinson v. Zurko.  For obviousness, the Court reviews the factual bases for the Board's decision for substantial evidence (which is where "a reasonable mind might accept the evidence to support the finding"), and while the legal conclusion is reviewed de novo, the Court recognizes that the factual determinations are often almost if not completely dispositive.  The Court's decision to affirm the Board's obviousness determination was based almost entirely on its finding that the Board's decision was supported by substantial evidence (albeit it also determined that Baxter had waived certain arguments relating to claim 30 and the "means for delivering an anticoagulant").

Turning to the significance of the District Court's decision and the Federal Circuit's upholding that decision, the majority "rejected" Baxter's arguments relating to the treatment that decision was afforded by the Board.  First, the opinion states that the Board did consider the Court's earlier decision but disagreed with it.  "More fundamentally," however, the majority recognized the differing standards of proof and evidence that attach in a re-examination in contrast to a proceeding before the Patent Office, and thus the two tribunals can "quite correctly come to different conclusions," quoting In re Swanson, 540 F.3d 1368, 1377 (Fed. Cir. 2008) for the proposition.  The opinion also emphasized that a judicial opinion against an invalidity challenge does not prove a patent valid but on the contrary just establishes (re-establishes, actually) that the patent has not been shown to be invalid.  Accordingly, the majority uses this distinction to rationalize its contrary decision regarding obviousness as determined during the reexamination.  Put succinctly:

This case thus illustrates the distinction between a reexamination and a district court proceeding.  In Fresenius, we upheld the district court's grant of judgment as a matter of law because the patent challenger failed to meet its burden to prove invalidity by clear and convincing evidence -- it "failed to present any evidence . . . that the structure corresponding to the means for delivering dialysate limitation [in claim 26], or an equivalent thereof, existed in the prior art" and did not identify "the structure in the specification that corresponds to the means for delivering dialysate" or compare the identified structure to those structures present in the prior art.  Fresenius, 582 F.3d at 1299.  Ultimately, we concluded that the clear and convincing burden of proof in the "means plus function" context "cannot be carried without clearly identifying the corresponding structure in the prior art."  Id. at 1300.

In contrast, during the reexamination, the examiner sufficiently identified the corresponding structure recited in the '434 patent and identified the structures in the prior art such that a reasonable person might accept that evidence to support a finding that claim 26 is not patentable under a preponderance of the evidence standard of proof.  Moreover, in addition to relying on the CMS 08 Manual, the examiner based those rejections on prior art references that were not squarely at issue during the trial on the invalidity issues, such as Lichtenstein and Thompson.  See Fresenius, 2007 WL 518804, at *7–8 (discussing the Cobe C3 Manual, the CMS 08 Manual, the Sarns 9000, and the Seratron System).  Thus, because the two proceedings necessarily applied different burdens of proof and relied on different records, the PTO did not err in failing to provide the detailed explanation now sought by Baxter as to why the PTO came to a different determination than the court system in the Fresenius litigation.

The majority also addressed the question of whether "erroneously elevating a decision by the PTO over a decision by a federal district court, which decision has been affirmed by this court" by citing some "additional comments."  These include that Congress has established the re-examination procedure to permit these disparate determinations.  Here, the opinion suggests that this may be due in part to assertion of different art that may raise "new issues" based in new prior art, which indeed happened here.  And the opinion concludes with the majority's own determination that the claims are obvious in view of the cited art.

In her dissent, Judge Newman raises an issue not extensively considered by the majority, what she characterizes as "the agency's nullification of [the Federal Circuit's] final decision" entered previously.  This not only "violates [] the constitutional plan" but "also violates the rules of litigation repose as well as the rules of estoppel and preclusion -- for the issue of validity, the evidence, and the parties in interest are the same in this agency reexamination as in the finally resolved litigation."  Continuing, she writes that:

No authority, no theory, no law or history, permits administrative nullification of a final judicial decision.  No concept of government authorizes an administrative agency to override or disregard the final judgment of a court.  Judicial rulings are not advisory; they are obligatory.

For these propositions she cites (wisely) to extensive Supreme Court precedent.  From San Remo Hotel, L.P. v. City & County of San Francisco, 545 U.S. 323 (2005):

The general rule implemented by the full faith and credit statute -- that parties should not be permitted to relitigate issues that have been resolved by courts of competent jurisdiction -- predates the Republic.  It "has found its way into every system of jurisprudence, not only from its obvious fitness and propriety, but because without it, an end could never be put to litigation."

From Southern Pacific Railroad v. United States, 168 U.S. 1 (1897):

This general rule [i.e., the rule of finality of judicial determinations] is demanded by the very object for which civil courts have been established, which is to secure the peace and repose of society by the settlement of matters capable of judicial determination.  Its enforcement is essential to the maintenance of social order; for the aid of judicial tribunals would not be invoked for the vindication of rights of person and property if, as between parties and their privies, conclusiveness did not attend the judgments of such tribunals in respect of all matters properly put in issue, and actually determined by them.

From Plaut v. Spendthrift Farm, Inc., 514 U.S. 211 (1995):

The record of history shows that the Framers crafted this charter of the judicial department with an expressed understanding that it gives the Federal Judiciary the power, not merely to rule on cases, but to decide them, subject to review only by superior courts in the Article III hierarchy -- with an understanding, in short, that "a judgment conclusively resolves the case" because "a 'Judicial Power' is one to render dispositive judgments."

(citing 7th Circuit Court Judge Easterbrook, Presidential Review, 40 Case W. Res. L. Rev. 905, 926 (1990)).

In the face of this precedent, Judge Newman argues that the Court "continues to authorize the Patent and Trademark Office to 'revise, overturn, and refuse full faith and credit' to final judgments of the courts, in the words of Chicago & Southern Airlines, 333 U.S. at 114."  This action contravenes the "law of the case" doctrine, which "promotes the finality and efficiency of the judicial process by protecting against the agitation of settled issues," citing Christianson v. Colt Industries, Inc., 486 U.S. 800, 815–16 (1988), a doctrine previously recognized by the Federal Circuit (e.g., in Suel v. Secretary of Health & Human Services, 192 F.3d 981, 984–85 (Fed. Cir. 1999), and Perkin-Elmer Corp. v. Computervision Corp., 732 F.2d 888, 900 (Fed. Cir. 1984)).

And Judge Newman rejects the distinction recognized by the majority, that different forums may impose different requirements, citing Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 401 (1981) for the rule that "a final judicial determination controls the issue in all forums."  These principles are important for legal repose, wherein "res judicata and collateral estoppel relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication," quoting Allen v. McCurry, 449 U.S. 90, 94 (1980).  "A patent that has been adjudicated to be valid cannot be invalidated by administrative action, any more than a patent adjudicated to be invalid can be restored to life by administrative action," Judge Newman writes.

Congressional action in enacting the re-examination statute is not to the contrary, and Congress "did not purport to violate the constitutional strictures governing finality of judicial process," the judge writes, reminding the majority that "[t]he possibilities for vexation and abuse were perceived from the initiation of reexamination" and discounting claims by then Commissioner Diamond in testimony to the House and Senate that "the statute contained various safeguards and 'carefully protects patent owners from reexamination proceedings brought for harassment or spite.'"  Hearings on H.R. 6933, 6934, 3806 & 215, Industrial Innovation & Patent & Copyright Law Amendments, House Comm. on the Judiciary, 96th Cong., 2d Sess. 594 (1980).  These fears have come to fruition, according to her dissent:

Today, reexamination is part of the tactical armory of litigators.  However, throughout this history, including the current legislative proposals to make reexamination more useful as a less costly alternative to litigation, we have uncovered no suggestion that reexamination is intended to deprive a final judgment of the full faith and credit attendant upon final judgments.  We have found no hint that reexamination of the question of patentability is intended to override judicial resolution of the question of patentability.  Nor would such legislation be contemplated, for "Article III, §1 safeguards the role of the Judicial Branch in our tripartite system by barring congressional attempts 'to transfer jurisdiction [to non-Article III tribunals] for the purpose of emasculating' constitutional courts, and thereby preventing 'the encroachment or aggrandizement of one branch at the expense of the other,'" citing Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833, 850 (1986).

And in this case Judge Newman finds yet another reason for the Court not to defer to the agency's determination, because the basis for rejection, obviousness, is a matter of law.  In her view, "[e]ven if the Federal Circuit were believed to have erred in its prior decision, the mechanism for correcting an unjust decision is by judicial reopening, not by administrative disregard," citing Christianson at 817.

Congress clearly intended for re-examination to provide an alternative to costly litigation, not an adjunct, and there is little evidence that Congress contemplated the uses to which re-examination is put today (inter partes as well as ex parte).  Judge Newman's dissent raises separation of powers questions as well as questions of judicial integrity, and unless the Court is inclined to reverse its decision to defer to the USPTO in cases such as this one (either by the panel or en banc), it is likely that the Supreme Court will once again have the occasion to review (and if Judge Newman is right, overrule) how the Federal Circuit has interpreted U.S. patent law.  And in this case, such correction may in fact be necessary.

In re Baxter International, Inc. (Fed. Cir. 2012)
Panel: Circuit Judges Newman, Lourie, and Moore
Opinion for the court by Circuit Judge Lourie; dissenting opinion by Circuit Judge Newman