United States: Section 146 Establishes De Novo Review

This article previously appeared in Last Month at the Federal Circuit November, 2011.

Judges:  Newman (author), O'Malley, Reyna

[Appealed from D. Neb., Chief Judge Bataillon]

In Streck, Inc. v. Research & Diagnostic Systems, Inc., No. 11-1045 (Fed. Cir. Oct. 20, 2011), the Federal Circuit affirmed the district court's award of priority of invention to senior party, Streck, Inc. ("Streck"), in an action brought under 35 U.S.C. § 146 because the district court correctly applied the relevant procedural and substantive law, and error was not shown in the court's factual findings and conclusions of law.

Streck filed suit against Research and Diagnostic Systems, Inc. ("R&D"), alleging infringement of three of its patents relating to hematology control compositions.  The control compositions can be used to check the accuracy of hematology instruments that are used to analyze samples of blood.  The patents listed Streck employees, Dr. Wayne Ryan and John Scholl, as inventors.  In response to the suit, R&D asserted that the patents were invalid on the ground that R&D employee, Dr. Alan Johnson, was the earlier inventor of the same invention patented by Streck.  The jury determined that R&D failed to prove priority of invention by clear and convincing evidence.

Concurrently with the infringement litigation, priority of invention, involving at least the same three patents invented by Ryan and Scholl and one patent invented by Johnson, was contested in an interference proceeding before the PTO.  The PTO awarded priority to the junior party, R&D employee Johnson.  Streck filed a § 146 action in the district court, where the case was assigned to the same judge who had tried the infringement case.  The district court awarded priority in favor of the Streck inventors, and R&D appealed.

On appeal, the Federal Circuit first rejected R&D's argument regarding district court procedure—that the district court in a § 146 proceeding must accept the findings of the Board if those findings were supported by substantial evidence in the PTO record, and not make de novo findings on those same issues.  The Court noted that while § 146 provides that the PTO record "shall be admitted on motion of either party," slip op. at 5, "[s]ection 146 provides that the civil action is 'without prejudice to the right of the parties to take further testimony,'" id. at 6.  Accordingly, prior Federal Circuit precedent held that § 146 "affords a litigant the option of shoring up evidentiary gaps."  Id.  (citation omitted).

The Federal Circuit also rejected R&D's argument that the district court may make de novo factual findings only when the evidence adduced in the district court is in conflict with the evidence before the Board.  The Court reasoned that neither statute nor precedent supports such a distinction, and noted that "[t]he standard for trial and decision of a § 146 action in the district court is not the same as the standard for review by the Federal Circuit in a § 141 direct appeal from the PTO on the Board record."  Id. at 8.  The Court further noted that "[s]ection 146 recognizes that, while the Board is fully capable of assessing all matters presented to it, there are inherent limits to its fact finding function that arise from the sterile nature of a proceeding that is limited to documentary and declaration or deposition evidence."  Id. at 9.  Thus, the district court appropriately considered additional evidence and conducted a de novo determination of the issue of priority under § 146.

The Federal Circuit further rejected R&D's arguments regarding the burden of proof—that Streck should have had the burden of proof in the § 146 action because Streck lost in the PTO and the appellant routinely bears the burden of proof on appeal.  Although "[p]lacement of the burdens in interactive litigation is not simple," the Court found that the burden of persuasion was properly placed on R&D because a § 146 action is a new civil proceeding subject to de novo determination.  Id. at 10.  The Court also found that the lesser preponderance of the evidence standard applied by the district court was correct because the Johnson and Ryan patent applications were initially copending in the PTO.

Regarding priority of invention, the Federal Circuit rejected R&D's arguments that, although Ryan was the first to conceive of the subject matter of the count, Johnson was the first to reduce the invention to practice and Ryan had not shown diligence between his conception and actual or constructive reduction to practice.  The Court found that the district court correctly determined that Johnson's experiments did not constitute an actual reduction to practice because they did not demonstrate that the invention worked for its intended purpose—determining the accuracy of the hematology instrument—rather, his experiments were directed to determining the stability of the composition over time.

The Court also noted that the district court found R&D's evidence deficient in that it consisted mainly of Johnson's uncorroborated testimony that his composition worked, but without evidence of precisely what went into the allegedly successful compositions.  Although the "intended purpose need not be explicitly included in the count of the interference, . . . establishing an actual reduction to practice requires demonstration that the invention worked for its intended purpose."  Id. at 17 (citation omitted).  In addition, the compositions tested by Johnson were mentioned in a later document of Johnson's as producing negative results, and were avoided when he later designed an integrated control.  Thus, the Court found that the district court's findings on the sufficiency of testing to show whether an invention worked for its intended purpose were not clearly erroneous.

The Federal Circuit reiterated that § 146 establishes de novo review, and commented that "[t]he purpose of § 146 is to bring to bear, upon the contested issues of priority of invention, the procedures and rules of federal litigation."  Id. at 19.  Accordingly, the Court affirmed the district court's finding that R&D did not establish an earlier reduction to practice and award of priority to Ryan and Streck.

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