In Fresenius, USA Inc. v. Baxter International, Inc., the Federal Circuit interpreted the ex parte reexamination statutes (35 USC §§ 301-307) as providing that the final cancellation of claims in a reexamination proceeding is binding on concurrent litigation proceedings, as long as the litigation is still pending. This decision validates the use of ex parte reexamination to launch a collateral attack on patents in litigation. While many defendants hesitate to bring an ex parte reexamination because of the very limited role they would have in the proceedings, because ex parte reexamination is not limited by the timing requirements of inter partes review and post grant review proceedings, and does not carry the same litigation estoppel, it may be worthy of a second look under appropriate circumstances.

The District Court Litigation

The lengthy district court proceedings are summarized in the Federal Circuit opinion as follows:

In 2003, Fresenius brought a declaratory judgment action asserting non-infringement and invalidity of certain claims of Baxter’s U.S. Patent 5,247,434, U.S. Patent 5,744,027, and U.S. Patent 6,284,131, relating to kidney dialysis machines.

After the court construed the claims, Fresenius stipulated to infringement, but asserted that the claims at issue were invalid. A jury returned a verdict in Fresenius’ favor; however, the district court granted Baxter’s motion for judgment as a matter of law (JMOL), finding that the jury verdict was not supported by sufficient evidence. After a jury trial on damages, Baxter was awarded $14.266 million for infringement and the district court issued a permanent injunction.

Both parties appealed to the Federal Circuit, which rendered its decision in September of 2009, finding the asserted claims of the ’027 patent and the ’131 patent invalid (and thus reversing the JMOL as to those patents), but affirming the district court’s decision that Fresenius had failed to present sufficient evidence to invalidate the asserted claims of the ’434 patent.

The case was remanded to the district court for reconsideration of the damages award and injunction. On March 8, 2012, the district court awarded Baxter post-verdict damages at a reduced royalty rate. On March 16, 2012, the district court entered final judgment for Baxter, ordering Fresenius to pay $14.266 million plus interest in pre-judgment damages (based on the original jury award), $9.3 million plus interest in post-verdict royalties on infringing machines, additional royalties on related disposables sold prior to the expiration of the ’434 patent, and costs.

The parties again appealed to the Federal Circuit. It is this appeal that is decided in the Federal Circuit’s most recent decision.

The Ex Parte Reexamination Proceeding

In 2005, before any decision was rendered in the district court litigation, Fresenius requested ex parte reexamination of claims 26-31 of the ’434 patent. In December 2007, the USPTO Examiner finally rejected the challenged claims. In March 2010, the USPTO Board affirmed the Examiner’s determination. Baxter appealed that decision to the Federal Circuit.

Although by this time the Federal Circuit had affirmed the district court’s JMOL decision based on its finding that Fresenius had failed to present sufficient evidence to invalidate claims 26-31 of the ’434 patent in the district court litigation, the Federal Circuit affirmed the USPTO’s determination of obviousness. Several judges addressed the apparent inconsistency of these decisions in concurring opinions to the denial of Baxter’s Request for Panel Rehearing and Rehearing en banc, explaining that the USPTO decision was supported by prior art references and explanations that were missing from Fresenius’ district court case.

Does The USPTO Decision Impact The District Court Litigation?

As summarized by the Federal Circuit, the impact of the USPTO decision on the district court litigation “became central when the district court entered final judgment for Baxter on March 16, 2012, while Baxter’s appeal of the PTO’s reexamination decision was pending before us.” Now that the Federal Circuit had affirmed the USPTO determination that the claims of the ‘434 patent were invalid, it had to decide “the effect of the PTO’s cancellation of those claims on the infringement.”

The court read the history and express language of the reissue and reexamination statutes as indicating that cancellation of claims by the USPTO in a reexamination proceeding would impact concurrent district court litigation.

As 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.
* * * * *
In sum, 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. 

Later in its decision, the court says:

But it could hardly be clearer that Congress meant for cancellation to terminate pending suits.

Notwithstanding these principles, Baxter argued that because the district court’s final decision on validity was rendered in 2007, the USPTO’s determination years later should not undo it. In particular, Baxter argued:

[T]he district court’s 2007 judgment is “final” and “binding” on the parties in this case, and therefore has res judicata effect within the pending litigation: “the liability determination and Past Damages Award are now final and Fresenius is precluded from relitigating those issues.”

Unfortunately for Baxter, the Federal Circuit determined that there is “final” and then there is “FINAL,” and the district court decision was not really FINAL.

It is important here to distinguish between different concepts of finality. “Definitions of finality cannot automatically be carried over from appeals cases to preclusion problems.” See 18A Charles A. Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure§ 4432 (2d ed. 2002). We are also not dealing with finality for purposes of determining the potential res judicata effect of this infringement litigation on another suit. We are concerned instead with whether the 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 this court in In re Baxter.

In this case, there is no question of reopening a final court judgment, because no such judgment has been entered. To be sure, the district court entered a judgment in November of 2007. But while the district court in 2007 entered a judgment final for purposes of appeal, and that judgment might have been given preclusive effect in another infringement case between these parties, it was not sufficiently final to preclude application of the intervening final judgment in In re Baxter, and in any event, we set the district court’s judgment aside in the first appeal in the infringement case.

 It is also clear that our remand decision in Fresenius I was not sufficiently final to prevent the application of In re Baxter in the pending suit. “To rise to that level, 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.’” Mendenhall v. Barber-Greene Co., 26 F.3d 1573, 1580 (1994) (quoting Catlin v. United States, 324 U.S. 229, 233 (1945)). Our remand to the district court in Fresenius I did not end the controversy between the parties, or leave “nothing for the court to do but execute the judgment.” To the contrary, we left several aspects of the district court’s original judgment unresolved, including royalties on infringing machines, royalties on related disposables, and injunctive relief. Looking to general res judicata principles governing the preclusive effect of a judgment, it is well-established that where the scope of relief remains to be determined, there is no final judgment binding the parties ….

Because the USPTO had canceled the only claims that remained at issue in the litigation, the Federal Circuit determined that “the pending litigation is moot,” vacated the district court’s judgment, and remanded “with instructions to dismiss.”

Judge Newman’s Dissent

Judge Newman wrote a lengthy dissenting opinion, arguing that the majority decision violates Constitutional principles regarding the relative authority of an Article III court versus an administrative agency and ignores important principles of finality.

The court’s ruling that PTO reexamination overrides the prior adjudication of patent validity is contrary to the legislative purposes of reexamination, offensive to principles of litigation finality and repose, and violative of the Constitution. The judicial decision of patent validity is not available for review, revision, or annulment by the PTO. When the issue of patent validity has been litigated and finally decided in the courts, this binds not only other courts, the parties, and the public; it binds the other branches of government. From the court’s contrary decision, I respectfully dissent.

The Balance Struck By Congress

Congress may have addressed some of Judge Newman’s concerns when it eliminated inter partes reexamination proceedings and replaced them with inter partes review proceedings. These new proceedings are subject to strict limitations on parallel litigation proceedings. For example, a party who has brought a declaratory judgment action challenging a patent cannot subsequently challenge the patent in an inter partes review proceeding. Moreover, once a party has been served with an infringement complaint, that party only has one year to challenge the patent in an inter partes review proceeding.

The new restrictions do not apply to ex parte reexamination proceedings, however. Thus, a party unsuccessful in invalidating a patent in a district court might still might be able to do so in a USPTO proceeding—just as Fresenius did here. Perhaps Congress decided that the patent holder’s interest in “repose” is outweighed by the public interest in having invalid patents invalidated. In any event, the Federal Circuit decision here reinforces the potential value of an ex parte reexamination proceeding, as it ultimately saved Fresenius from over $25 million in damages.

Incentives To Stay, Delay

The Federal Circuit noted that the district court declined to stay litigation pending the ex parte reexamination proceeding several times. Knowing that only completely closed cases are immune from the effects of a concurrent USPTO proceeding may encourage district courts to grant stays, especially when the PTO proceeding could render all pending issues moot.

The lengthy pendency (10 years) of the district court litigation contributed to the unusual circumstances of this case. If the district court litigation had been completely resolved before the Federal Circuit affirmed the USPTO decision, Fresenius might have had to comply with the court’s judgment. Knowing that a contrary USPTO decision can override an unfavorable district court decision as long as some aspect of the litigation is pending may give patent challengers an incentive to prolong district court proceedings that are not going well, in the hope that a favorable USPTO decision will be rendered in time to avoid an impending loss in the district court.