In VirtualAgility Inc. v. Salesforce.com, Inc., No. 2014-1232 (July 10, 2014), the Federal Circuit issued its first opinion directed to the issue of when it is appropriate to grant a stay of a district court patent infringement lawsuit while a covered business method review proceeding (“CBM”) occurs. The case will have important ramifications for future cases in which motions to stay are filed for both CBMs and inter partes reviews (“IPRs”), including setting forth some principles that should be followed by attorneys and district courts in the analysis. We set forth some of those principles up front and discuss how they were specifically addressed by the Federal Circuit below:

Summary of Principles from VirtualAgility:

(1) To obtain a stay, it is typically important to file the motion early in the case, perhaps even before the PTAB has issued a decision on whether to institute the CBM or IPR, particularly because it is now clear that the status of the proceedings prong of the test is generally considered as of the time the motion is filed.

(2) If all asserted patent claims are included in an instituted CBM or IPR proceeding, this weighs heavily in favor of a stay and trumps the argument often set forth by patentees that the CBM or IPR will not simplify issues because the case will proceed if even one claim survives.

(3) Lawyers for the patentee can no longer (successfully) argue that a stay should be denied because the CBM or IPR will likely not result in a finding of invalidity. This is an improper collateral attack.

(4) A motion to amend patent claims in the CBM or IPR can be considered by the court and weighs in favor of a stay because the potentially changing claim language may complicate claim construction if a stay is not granted.

(5) The failure of the patentee to seek a preliminary injunction weighs in favor of a stay because its goes against an argument that the patentee will be prejudiced without a stay.

(6) Any delay by the patentee in filing suit weighs in favor of a stay because it also weighs against alleged prejudice absent a stay.

(7) Alleged loss of evidence due to witnesses’ ages will not be given much weight.

CBMs and IPRs

Since the America Invents Act’s (“AIA”), creation of IPRs and CBMs, these proceedings have become very popular with defendants in patent litigation, with over 2000 having been filed since they came into existence in September 2012. Both types of proceedings allow a party to challenge the validity of a patent before the Patent Trial & Appeal Board (“PTAB”), rather than in district court litigation. The proceedings have many similarities, although CBMs are limited to certain types of business method patents, and there are also some other important differences, such as different estoppel effects and the types of invalidity arguments that may be raised in each proceeding.

Typically, a defendant will file a petition with the PTAB requesting that the PTAB institute an IPR or CBM, and, contemporaneously therewith, the defendant will often file a motion with the district court to stay the district court litigation while the PTAB proceeding occurs. Part of the rationale for a stay is to avoid multiple proceedings that will be at least partially duplicative if done concurrently and to potentially save costs. Many district courts have ruled on such motions, granting many and denying some. In VirtualAgility, the Federal Circuit reversed a district court’s decision to deny a stay pending a CBM.

VirtualAgility

The relevant facts in VirtualAgility are mostly the dates in the respective proceedings. On May 24, 2013, four months after multiple defendants were sued for patent infringement, defendant Salesforce.com filed a CBM petition for review of all claims of the patent-in-suit. Days later, the defendants filed a motion to stay the litigation. In August 2013, the court held a discovery conference, setting an April 2014 claim construction hearing and a November 2014 jury selection date. In November 2013, the PTAB granted-in-part the CBM petition, finding that it was more likely than not that the claims were patent-ineligible under 35 U.S.C. § 101 and invalid under § 102 as anticipated by one prior art patent. The PTAB set a July 2014 trial date for the CBM.

In January 2014, the district court denied the motion to stay. The AIA sets forth a specific four factor test to be used when a court must decide whether to stay a case in view of a CBM: “(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.” AIA § 18(b)(1). A very similar test is typically applied by courts assessing whether to stay litigation pending an IPR, and therefore VirtualAgility will also be highly relevant to those cases, although the fourth factor set forth above is typically not included. See, e.g., Semiconductor Energy Lab. Co. v. Chimei Innolux Corp., No. 8:12-00021-JST, 2012 U.S. Dist. LEXIS 186322, *1 (C.D. Cal. Dec. 19, 2012).

In reversing the district court, the Federal Circuit found that the trial court misanalysed these factors:

Factor A (Simplification of Issues and Trial) and Factor D (Burden of Litigation): The district court determined that factor (A) was “essentially neutral, if not slightly against” granting a stay because it was not convinced that the PTAB’s cancellation of claims of the patent was “probable,” even though the PTAB had already found it more likely than not that the claims were invalid as part of its decision to institute the CBM. For factor (D), the district court determined that it “weigh[ed] only slightly in favor of a stay.” The Federal Circuit disagreed with the district court, determining that the first and fourth factors actually “strongly favor a stay in this case.”[1] The Federal Circuit found that the district court erred in performing its own analysis of whether the claims of the patent-in-suit would be held invalid in the CBM review, which was an “improper collateral attack on the PTAB’s decision to institute CBM review” and which would create “serious practical problems” if allowed to be part of the stay analysis. After setting aside this part of the district court’s analysis, according to the Federal Circuit, the remaining evidence “weighs heavily in favor of a stay.” The Federal Circuit found it highly significant that the PTAB had granted review of all asserted claims of the patent, which meant that “[t]his CBM review could dispose of the entire litigation: the ultimate simplification of issues.” Also, although it did not depend on this fact for its analysis, the Federal Circuit also found that VirtualAgility’s (“VA”) filing of a motion to amend the claims in the CBM further weighed in favor of a stay because a stay could potentially avoid unnecessary claim construction of what could be a moving target as claim language potentially was altered. The Federal Circuit acknowledged that the simplification argument would be stronger if Salesforce.com had not omitted two pieces of important prior art from the CBM, since the inclusion of those references could have entirely eliminated the trial court’s need to consider validity, but the Federal Circuit still found that the factor nonetheless weighed heavily in favor of a stay. (Unlike CBMs, the issue of what prior art is actually included in the petition is not relevant to consideration of a stay where there is a simultaneous IPR proceeding because an IPR petitioner is later estopped from asserting invalidity on grounds that were raised or could have been raised during the IPR.)

Factor B (Posture of the Case): The district court concluded that factor (B) weighed in favor of a stay because the parties had not yet filed their joint claim construction statement, the fact discovery deadline was six months away, and jury selection was not until November 2014. The Federal Circuit agreed, but also found that the district court did not weigh the factor sufficiently. In particular, the Federal Circuit explained that the district court incorrectly considered the case’s status at the time it ruled on the motion, rather than considering the case’s status at the time the motion to stay was filed. Although the Federal Circuit found that the district court did not err in waiting until after the PTAB instituted the CBM review to rule on the motion to stay, it held that the proper time for consideration in the context of the stage of the litigation factor was generally the time the motion was filed, although the date the CBM was instituted could also be taken into account. Under either date, the Federal Circuit determined that this factor “heavily favors” a stay.

Factor C (Prejudice to Plaintiff / Advantage to Defendants): The district court had determined that factor (C) weighed heavily in favor of denying the stay, reasoning that the parties were direct competitors and thus VA would suffer irreparable harm in lost market share and consumer goodwill if the enforcement of its patent rights was delayed. The district court also refused to weigh the fact that VA did not move for a preliminary injunction, finding that this was a litigation strategy it could not judge. The Federal Circuit found that the district court clearly erred in weighing the factor heavily against a stay and that instead, at most, the factor only weighed slightly against a stay. The Federal Circuit found that the alleged evidence that the parties were direct competitors was flawed but still credited the finding of loss of market share and consumer goodwill. However, the Federal Circuit determined that a stay would not be unduly prejudicial because VA would still eventually be able to collect money damages and a potential injunctive remedy if it succeeded in the litigation, and also that the failure to move for a preliminary injunction, while “not dispositive,” contradicted VA’s argument that it needs injunctive relief as soon as possible. Moreover, the Federal Circuit noted that VA waited nearly a year after the issuance of the patent before even filing suit. These facts weighed against VA’s argument that a stay would be unduly prejudicial.

The Federal Circuit also rejected VA’s allegation that the risk of witness loss could unduly prejudice it, finding that the witnesses’ ages of “over 60” and “over 70” were not so old to suggest the witnesses would become unavailable, and posed the funny question: “[s]ince when did 60 become so old?” Moreover, the Federal Circuit noted that, if necessary, there is a rule that would allow a deposition to be taken even when the case is otherwise stayed.

The Federal Circuit also found that a stay would not give the defendants any clear tactical advantage. Salesforce.com petitioned for the CBM and moved for a stay shortly after the litigation commenced. There was thus no evidence of a “dilatory motive.” Also, although the withholding of certain prior art references from the CBM, as Salesforce.com did, could sometimes give the movant a tactical advantage, Salesforce.com had legitimate reasons to withhold two important prior art references from the CBM. Salesforce.com’s withholding of the two important prior art references could be explained; one reference would require testimony from a live third party witness to explain, and with respect to the other withheld reference, the defendants were having difficulties obtaining evidence, and were taking steps to obtain judicial assistance from Canada. In view of the “weak” evidence of competition between the parties, the delay in filing the lawsuit and the failure to seek a preliminary injunction, the Federal Circuit found that factor (C) “[a]t best … weighs slightly against a stay.”

Application of Factors: Because three of the four factors weighed heavily in favor of a stay, the Federal Circuit held that the district court abused its discretion when it denied the stay.

Dissent: Judge Newman issued a strong dissent, arguing that the majority did not provide sufficient deference to the trial court and that there was no abuse of discretion. (It remains an open question whether the Federal Circuit should apply de novo or abuse of discretion review to the stay issue.)

The Federal Circuit’s analysis in VirtualAgility demonstrates that, to the extent district courts are not already, they should be particularly receptive to staying PTAB proceedings if the motion to stay is filed early in the case and all asserted claims of the patents-in-suit are part of the PTAB proceeding (or even just part of the petition). And if the plaintiff is a non-practicing entity, or even if the evidence of alleged competition between the parties is weak, the case against a stay becomes even weaker, particularly if no motion for a preliminary injunction is filed.

[1] The Federal Circuit actually first addressed two preliminary issues. It determined that: (1) it could consider the fact that after the motion to stay was decided by the district court, VirtualAgility filed proposed claim amendments in the CBM review; and (2) the first and fourth factors must be considered and weighed separately, even though there may be significant overlap in the arguments and facts related to each factor.

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