Never underestimate the power of a post-grant proceeding

September 17, 2014

Hunter Keeton

(as published in Inside Counsel)

You have a patent infringement suit you are well on the way to winning in court. Or so you thought. Your confidence may be premature if the U.S. Patent and Trademark Office (PTO) invalidates your patent in a post-grant proceeding, as just happened in a recent case before the U.S. Court of Appeals for the Federal Circuit (Federal Circuit).

In ePlus, Inc. v. Lawson Software, Inc., the Federal Circuit let the infringer off the hook, even sidestepping a contempt order and vacating an injunction entered by a judge in a nearly-completed patent litigation after the PTO invalidated the patent. The Federal Circuit extended the logic from three earlier cases which had found that a patent determined to be valid and infringed can still be invalidated by a later PTO reexamination. Those cases established the rule that even an award of damages for infringing a patent could be wiped away if the PTO invalidated the patent while any aspect of the court litigation remained unresolved.

The courts giveth…

In 2011, after a jury ruled that three configurations of defendant Lawson’s product infringed five claims of plaintiff ePlus’s patents, the trial court issued an injunction prohibiting Lawson from engaging in various business activities involving those three configurations. On appeal, the Federal Circuit determined only one of the claims was valid and infringed, and remanded to the district court for changes to the injunction.

In April 2013, the district court narrowed its injunction to prohibit only two of the three configurations and also found Lawson in contempt of the modified injunction, ordering Lawson to pay a civil contempt penalty and daily fines until it complied with the revised injunction. In August 2013, Lawson appealed, challenging the modification to the injunction and the contempt order, causing the Federal Circuit to stay the accumulation of fines pending the appeal.

In the meantime, the PTO completed a reexamination that invalidated ePlus’s sole remaining patent claim, which the Federal Circuit affirmed in November 2013. As a result, when dealing with Lawson’s appeal of the modified injunction, the Federal Circuit had to determine the impact of this PTO invalidation on the modified injunction and Lawson’s contempt of it.

…And the PTO taketh away

The Federal Circuit identified two major questions. As to the first question — whether an injunction can continue after the PTO has cancelled the only claim on which it was based — the judges and all the parties agreed there could be no injunction or daily fines moving forward. However, the appeals court was split in answering the second question: whether civil contempt remedies for past violations of such an injunction are appropriate if the injunction is overturned.

While both the majority and the dissent agreed that criminal contempt penalties would not be affected by a subsequent PTO invalidity determination, they disagreed on the implications for civil contempt penalties. The majority reasoned that, because civil contempt penalties are a form of remedial relief, they must be set aside when the underlying patent is declared invalid and the injunction is not yet “final” after all appeals, which was true in this case.

The dissenting opinion argued that, because the validity determination in ePlus was not appealed, the remand instruction was very limited, and the injunction was never vacated, the injunction was, in fact, final, and thus the court should review the civil contempt penalties on the merits.

ePlus has recently filed a petition for rehearing by the entire Federal Circuit, so stay tuned to see if the whole appeals court decides to weigh in on the issue.

The power of post-grant proceedings

Patent owners and accused infringers alike should respect the power of the PTO to drastically alter the course of patent litigation. A finding of invalidity in post-grant PTO proceedings such as reexaminations can overturn many of the effects of an affirmed judgment of validity and infringement in a civil litigation, so long as some aspect of the case remains pending. With traditional reexamination and new proceedings that potentially provide a faster decision from the Patent Office, the possibility that an accused infringer can obtain a decision from the PTO before a judgment against it in court becomes final is even more real. For that reason, post-grant proceedings in the Patent Office should be expected in every patent infringement trial.

Not all results of an affirmed judgment can be overturned by a PTO finding of invalidity. Fresenius and ePlus both indicate that neither prior litigation judgments for damages that are final after appeal, nor criminal contempt sanctions, should be altered by subsequent PTO decisions. Further, the effect of a PTO finding of invalidity on an injunction that actually is “final” after all appeals has not yet been squarely presented. Though, to emphasize the power of a decision from the PTO, as the dissent notes, it is unclear whether an injunction ever becomes “final,” as it can always be revised in light of changed circumstances.

Nonetheless, PTO post-grant proceedings remain a powerful tool for defendants accused of infringement, especially if the civil litigation is going against them, and therefore are a huge risk for patent owners.