Last month, the Federal Circuit addressed the question of “whether, under the reexamination statute, the cancellation of claims by the PTO is binding in pending district court infringement litigation.” Fresenius USA, Inc. v. Baxter Int’l, Inc., 2013 U.S. App. LEXIS 13484, at *13 (Fed. Cir. July 2, 2013). The Federal Circuit interpreted the reexamination statute to have a binding effect on concurrent litigation, and thus terminated a pending litigation where the same patent claims were cancelled during reexamination. Id. at *43. Accordingly here, the Federal Circuit held that the PTO’s invalidity decisions trump the prior district court ruling.

In this case, Fresenius filed suit seeking declaratory judgment of invalidity and non-infringement of three of Baxter’s patents relating to hemodialysis machines. Baxter counterclaimed for infringement. A jury found the relevant claims of each of the three patents invalid. However, the District Court granted Baxter’s motion for judgment as a matter of law (“JMOL”), finding that Fresenius had not presented sufficient evidence to support the jury’s invalidity verdict. Following the trial on damages, the jury awarded Baxter $14.266 million and the District Court entered a permanent injunction.

On appeal, the Federal Circuit reversed the District Court’s JMOL ruling in regard to asserted claims of two of the patents, but affirmed the District Court’s finding in regard to the asserted claims of the third patent (i.e., the “claims at issue”). The Federal Circuit also vacated the District Court’s injunction and royalty awards and remanded to the District Court to revise or reconsider the injunction and royalty award in light of the Federal Circuit’s modification of the District Court’s judgment.

On remand, the District Court ordered Fresenius to pay Baxter $14.266 million plus interest in pre-judgment damages and $9.3 million plus interest in post-verdict damages. Fresenius appealed, and the District Court granted Fresenius’ motion to stay execution of the new judgment pending the appeal.

While the original District Court litigation was pending, Fresenius requested ex parte reexamination of the claims at issue. Sometime after the District Court’s grant of JMOL, but before the Federal Circuit remanded the action back to the District Court, the USPTO rejected the claims at issue as obvious, basing its decision in part on two prior art references that were neither before the USPTO during the initial examination nor the prior District Court proceeding. The Federal Circuit affirmed the PTO’s determination shortly after Fresenius filed its second appeal in the concurrent litigation. Fresenius argued that since the claims were cancelled, Baxter no longer had a cause of action. Baxter argued that cancellation of the claims at this point is irrelevant because infringement and validity were conclusively decided by the first district court decision and the first Federal Circuit decision, and therefore had res judicata effect.

The first issue for the Federal Circuit to decide was whether “judgment in this infringement case is sufficiently final so that it is immune to the effect of the final judgment in the PTO proceedings, as affirmed by [the Federal Circuit].” Id. at *27. The Federal Circuit held that to be sufficiently final, “the litigation must be entirely concluded so that the cause of action against the infringer was merged into a final judgment . . . one that ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Id. at *29 (quotations omitted). However, following the Federal Circuit remand, there were still several aspects of the District Court’s original judgment unresolved, and thus, the case was not final.

Turning to the issue of whether the PTO’s decision is binding on the concurrent (not final) litigation, the Federal Circuit analyzed the history of the reexamination statute. The Court held that “the language and legislative history of the reexamination statute show that Congress expected reexamination to take place concurrent with litigation, and that cancellation of claims during reexamination would be binding in concurrent infringement litigation.” Id. at *23. Therefore, since the PTO found the claims at issue to be invalid and the Federal Circuit’s affirmation occurred while the litigation was still pending, the PTO’s decision was binding. The Federal Circuit remanded the case to the District Court for dismissal.

Of note, Judge Newman wrote a 30-page dissent, in which she argued that the majority opinion (authored by Judge Dyk) amounted to an unconstitutional violation of separation of powers, since it allowed the PTO, an administrative agency within the Commerce Department, to override a final order on validity by an Article III court. Judge Newman further argued that the majority’s conclusion that the case was not final as to validity was out of step with the standards of other circuits. Finally, as to the majority’s conclusion that Congress expected reexamination to be binding on a concurrent litigation, Judge Newman strongly responded:

No hint can be found in the legislative record for an expectation of concurrent proceedings; no hint of an intent that a PTO reexamination decision would override a prior judicial decision rendered in either prior or concurrent litigation. There is no authority for the majority’s creative revision of the historical record.

A take away from this case is the rarity in which district court cases would still be pending, without the issuance of a stay, by the time the PTO reached a final determination during a reexamination. Judge Newman in the first Fresenius ruling pointed out that the average pendency for inter partes reexamination is 41.7 months. See Fresenius USA, Inc. v. Baxter Int’l, Inc., 582 F.3d 1288, 1305-6 (Fed. Cir. 2009). However, it would seem that inter partes review will have the same binding effect. Fresenius, 2013 U.S. App. LEXIS 13484 at *21. And since the PTO’s final determination in an inter partes review is required to be issued no later than a year after the date the institution of the review (see 35 U.S.C. § 316(a)(11)), instances of PTO decisions on claims concurrently at issue in pending litigations should increase. It will be interesting to see how district courts react to the binding effect of PTO determinations and if they make that a factor in determining whether to stay a case pending inter partes review.

We will continue to monitor this decision and its impact, as well as whether Baxter will file a petition for writ of certiorari.

Charles H. Chevalier is an Associate in the Gibbons Intellectual Property Department. Christopher H. Strate, an Associate in the Gibbons Intellectual Property Department, co-authored this post.