United States: Cancellation Of Claims By The PTO During Reexamination Is Binding In Concurrent Infringement Litigation

In Fresenius USA, Inc. v. Baxter International, Inc., Nos. 12-1334, -1335 (Fed. Cir. July 2, 2013), the Federal Circuit vacated and remanded with instructions to dismiss the district court's judgment of noninvalidity and infringement, concluding that cancellation of asserted claims in a reexamination proceeding is given effect in pending infringement litigation.

Baxter International, Inc. and Baxter Healthcare Corporation (collectively "Baxter") own U.S. Patent No. 5,247,434 ("the '434 patent"), which covers hemodialysis machines with touchscreen interfaces. In 2003, Fresenius USA, Inc. and Fresenius Medical Care Holdings, Inc. (collectively "Fresenius") filed a DJ action against Baxter for invalidity and noninfringement of claims 26-31 of the '434 patent. Fresenius counterclaimed for infringement. In February 2007, the district court entered judgment against Fresenius, finding claims 26-31 infringed and not invalid. On appeal, both parties stipulated to infringement, but Fresenius argued that the '434 patent was invalid. In September 2009, the Federal Circuit affirmed the determination that claims 26-31 of the '434 patent were not invalid, but remanded to the district court to reconsider its postverdict damages.

While the district court litigation was pending, in 2005, Fresenius requested ex parte reexamination of claims 26-31 of the '434 patent. In December 2007, the PTO examiner completed the reexamination of the '434 patent and determined that claims 26-31 were invalid. In March 2010, the Board affirmed the examiner's decision. On May 17, 2012, the Federal Circuit affirmed the PTO's invalidity determination of claims 26-31 of the '434 patent. Meanwhile, on March 16, 2012, the district court entered final judgment against Fresenius. Both parties appealed, disputing the effect of the PTO's cancellation of claims 26-31 on the infringement litigation, as well as issues related to damages. The primary question for the appeal was therefore whether, under the reexamination statute, the cancellation of claims by the PTO was binding on pending district court infringement litigation.

On appeal, Fresenius argued that the PTO's cancellation of claims 26-31 of the '434 patent divested Baxter of a cause of action for infringement. In agreeing with Fresenius, the Federal Circuit first reviewed the history and scope of the PTO's reissue and reexamination authority, determining that, "[a]s with the reissue statute, 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." Slip op. at 16. Moreover, the Court noted that "under either the reissue or reexamination statute, if the PTO confirms the original claim in identical form, a suit based on that claim may continue, but if the original claim is cancelled or amended to cure invalidity, the patentee's cause of action is extinguished and the suit fails." Id. at 17.

Baxter argued that the cancellation of claims 26-31 of the '434 patent in the reexamination proceeding should not have been given effect during the present litigation because the validity of the '434 patent and Fresenius's liability for infringement of the '434 patent had already been conclusively decided prior to cancellation of the claims during the reexamination proceeding. According to Baxter, the district court's 2007 judgment regarding the issues of validity and infringement was "final" and "binding" on the parties in this case, and therefore has res judicata effect within the present litigation.

While the Federal Circuit was cognizant that the district court had entered a judgment final for purposes of appeal in 2007, the Court nevertheless concluded that the judgment was not sufficiently final to preclude application of the intervening final judgment in the PTO reexamination proceedings. Referencing an earlier decision, the Court explained that to rise to the requisite level of "finality," 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 20 (quoting Mendenhall v. Barber-Greene Co., 26 F.3d 1573, 1580 (1994) (alterations in original)). And, according to the Court, the remand in the present litigation to the district court to reconsider its postverdict damages did not end the controversy between the parties or leave "nothing for the court to do but execute the judgment." Id. Rather, the Court went on to specify several aspects of the district court's original judgment that were left unresolved, including, for example, royalties on infringing machines, royalties on related disposables, and injunctive relief.

The Court next rejected Baxter's argument that under Plaut v. Spendthrift Farm, Inc., 514 U.S. 211 (1995), allowing a PTO determination to control the outcome of pending litigation is unconstitutional, because it offends the separation of powers. In particular, the Court relied on language from Plaut recognizing that appellate courts "must apply the law in effect at the time it renders its decision." Slip op. at 27 (quoting Thorpe v. Hous. Auth. of the City of Durham, 393 U.S. 268, 281 (1969)). The Court explained that its decision was fully consistent with this duty since it gave effect to the PTO's cancellation of claims asserted while the infringement litigation was still pending on appeal.

Accordingly, the Federal Circuit vacated and remanded with instructions to dismiss the district court's judgment of noninvalidity and infringement, since the asserted claims were cancelled by the PTO during a pending reexamination proceeding.

Judge Newman dissented on multiple grounds. First, Judge Newman opined that the holding violated the constitutional framework, which requires that "when there has been a prior judicial determination of the issue of patent validity, the conclusiveness of judicial rulings resolves the determination." Newman Dissent at 4. According to Judge Newman, "when the issue of validity of the claims has already been resolved in litigation, subsequent redetermination by the PTO is directly violative of the structure of government." Id. at 5. Judge Newman stressed that the reexamination statute fails to provide that a decision in a PTO reexamination proceeding will override a judicial decision. Further, Judge Newman reasoned that if such were indeed to be the case, "it is inconceivable that no one would have mentioned it in the legislative process." Id. at 10.

Second, Judge Newman refuted the panel majority's "finality" construct and holding. Specifically, Judge Newman disagreed with the panel majority that the Court's 2009 judgment was not final because the judgment included a remand to the district court to assess postjudgment damages. Rather, Judge Newman noted that all of the issues on appeal were finally adjudicated by the Court, and that the remand only authorized the district court to determine postjudgment royalties. According to Judge Newman, "[t]he remand had no relation to any issue in reexamination; validity had been finally resolved in the courts." Id. at 15. Therefore, Judge Newman concluded that the judgment of validity should be binding on the courts, the parties, and the PTO.

Judges: Newman (dissenting), Dyk (author), Prost

[Appealed from N.D. Cal., Judge Hamilton]

This article previously appeared in Last Month at the Federal Circuit, August 2013

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