Due to “Apparent Loophole” in Statutory Framework, District Court Permits Invalidity Challenge that Does Not Foreclose Later IPR

Akin Gump Strauss Hauer & Feld LLP

When bringing a lawsuit for a declaratory judgment of non-infringement of a patent, careful pleading may allow plaintiffs to avoid the restrictions against later seeking inter partes review (IPR) of that patent, while also litigating patent invalidity in district court. This was the approach followed by a declaratory judgment (DJ) plaintiff in a recent spat with a patentee.

Epic Games originally filed a complaint for declaratory judgment of non-infringement—but not of invalidity—challenging several of Acceleration Bay’s patents. After Acceleration Bay filed its counterclaims of patent infringement, Epic Games filed counterclaims-in-reply seeking declaratory judgment of patent invalidity (of the same patents that were the subject of the original complaint). Acceleration Bay moved to strike Epic Games’ invalidity counterclaims-in-reply. Acceleration Bay argued that allowing Epic Games’ invalidity counterclaims-in-reply would be an end-run around the rules governing the availability of IPRs.

In analyzing the motion to strike, the court noted that there are two statutes that prevent an accused infringer from taking a “second bite at the apple” after challenging the validity of a patent at the district court. First, under 35 U.S.C. § 315(a)(1), no IPR may be instituted if, prior to filing its petition, the petitioner sought a declaratory judgment of invalidity of the challenged patent. Second, under 35 U.S.C. § 315(b), no IPR may be instituted if the petition was filed more than one year after the petitioner (or a real party-in-interest or privy) was served with a complaint alleging infringement of the challenged patent.

In analyzing the issues, the court noted that Section 315(a)(3) states that a counterclaim challenging the validity of a patent claim “does not constitute a civil action challenging the validity of a claim of a patent” for purpose of Section 315(a)(1). The court also noted the Patent Trial and Appeal Board (PTAB) has held that counterclaims-in-reply are not subject to the bar under § 315(a)(3) because they are not “civil actions” challenging validity. See Canfield Scientific, Inc. v. Melanoscan, LLC, IPR2017-02125 Paper 15, 2018 WL 1628565, at *2-3 (PTAB Mar. 30, 2018).

Ultimately, the court allowed Epic Games’ invalidity counterclaims-in-reply. The court reasoned that striking them would be futile because the court was going to hear the invalidity challenges through Epic Games’ affirmative defenses anyway.

In its penultimate paragraph, the court explicitly recognized that by allowing the invalidity counterclaims-in-reply, Epic Games was able to take advantage of an “apparent loophole” left by the statutory scheme governing IPRs. The court stated that “unlike a patent infringement defendant (which cannot bring an IPR more than one year after being sued) or a declaratory judgment plaintiff seeking a judgment of invalidity (which cannot seek an IPR at all), a declaratory judgment counterclaimant faces no apparent restrictions on seeking an IPR.”  According to the court, this result could, in theory, allow a declaratory judgment counterclaimant to fully litigate the issue of patent validity in the district court, lose on the issue, and then seek a “redo” before the PTAB “while being subject to no estoppel or time limit whatsoever.”  The court recognized that this result cannot be reconciled with the clear congressional intent to limit the availability of IPRs to litigants, but that issue is “one for Congress to resolve.”

Practice Tip:  Potential infringers who wish to litigate validity in district court—while keeping intact their ability to challenge patentability at the PTAB—should consider seeking first a declaratory judgment of non-infringement. If that case proceeds, the patent holder will have to file a counterclaim of infringement or lose its ability to bring such a claim.  That will allow the declaratory judgment plaintiff to litigate validity either through affirmative defenses in its answer to that compulsory counterclaim, or through declaratory judgment counterclaims-in-reply, neither of which—according to this district court decision—should foreclose a later petition for IPR.

Epic Games, Inc. v. Acceleration Bay LLC, 4-19-cv-04133 (N.D. Cal. Apr. 1, 2020)

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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