Yogi Berra, the sage of baseball and life, once said, “It ain’t over until it’s over.” In many respects, that philosophy applies to district court patent infringement litigation that advances in parallel with proceedings in the U.S. Patent and Trademark Office to invalidate one or more of the patents in the litigation.

It has long been a strategy for a company facing charges of infringement in district court to initiate an action with the PTO to invalidate some or all of the patent claims at issue – by ex parte re-exam, inter partes re-exam or, since the passage of the America Invents Act in 2011, inter partes review. Because court cases and PTO proceedings progress at different speeds, it is typical for the court and the PTO to reach a decision at different times. When those tribunals reach conclusions at odds with one another – say, the court finds the patents valid and infringed and the PTO finds them invalid – the litigants are forced to continue the fight until the situation gets sorted out. Within the past year, the Federal Circuit has issued three decisions which bring some clarity to this murky area. This article exams those decisions.

Fresenius USA, Inc. v. Baxter International, Inc.

In the first, and best known, of these cases, Fresenius USA, Inc. v. Baxter Int’l, Inc., 721 F.3d 1330 (Fed. Cir. 2013), the court held that the cancellation of claims of a patent owned by Baxter and asserted against Fresenius by the PTO in a re-exam proceeding after judgment had been entered in Baxter’s favor in district court served to vacate the judgment and end the matter with Fresenius prevailing. The history of the litigation is torturous, messy and long, having begun more than ten years before the Federal Circuit rendered its most recent (and probably last) decision in the case. Before it got to this point, the court case involved a jury trial, two appeals to the Federal Circuit and the entry of a judgment in Baxter’s favor, while the ex parte re-exam involved a finding that the patent claims were obvious, an appeal to the Federal Circuit and a cancellation of the claims. In the end, the critical facts were that the Federal Circuit had affirmed judgment of invalidity in 2009 but remanded the case to dispose of issues relating to damages; following the “final” judgment on March 16, 2012, the court granted Fresenius’s motion to stay the judgment while the parties cross-appealed on damages issues; and the PTO issued a certificate cancelling patent claims on April 30, 2013. The issue facing the Federal Circuit this time was whether the cancellation of the claims after final judgment had been entered but while that judgment was stayed ended the litigation in Fresenius’s favor because the cancellation of the patent claims extinguished Baxter’s cause of action.

In the majority decision issued on July 2, 2013, Judge Dyk (joined by Judge Prost) vacated the district court judgment in favor of Baxter and remanded with instructions to dismiss. Because both sides – and the court – agreed that “the cancellation of a patent’s claims cannot be used to reopen a final damages judgment ending a suit based on those claims,” Id. at 1340, the issue came down to whether the “final” judgment on invalidity that the district court had entered and the Federal Circuit had affirmed in 2009 was final enough. The court held it was not. Even though the Federal Circuit’s affirmance of the judgment of invalidity had brought to an end court proceedings relating to invalidity, “it did not end the controversy between the parties, or leave ‘nothing for the court to do but execute the judgment.’” Id. at 1341, quoting from Mendenhall v. Barber-Greene Co., 26 F.3d 1573, 1580 (Fed. Cir. 1994). Therefore, at the time of the PTO’s cancellation of the claims, the district court case was still “open” and the judgment was still vulnerable to the PTO’s decision.

Judge Newman wrote a dissent, the first two sentences of which neatly summed up her concerns:

The court today authorizes the Patent and Trademark Office, an administrative agency within the Department of Commerce, to override and void the final judgment of a federal Article III Court of Appeals. The panel majority holds that the entirety of these judicial proceedings can be ignored and superseded by an executive agency’s later ruling.

Fresenius, 721 F.3d at 1347 (Newman dissent). According to Judge Newman, “when the issue of validity of claims has already been resolved in litigation, subsequent redetermination by the PTO is directly violative of the structure of government.” Id. at 1349. Because the Federal Circuit had finally resolved the issue of patent validity, with its 2009 affirmance of the district court’s judgment, the fact that the district court had to deal with damages issues did not make the validity judgment any less final because what remained “had no relation to any issue in reexamination; validity had been finally resolved in the courts.” Id. at 1355. In a six to four vote, the Federal Circuit denied Baxter’s petition for rehearing and rehearing en banc. Fresenius USA, Inc. v. Baxter Int’l, Inc., 733 F.3d 1369 (Fed. Cir. 2013).

Versata Software, Inc. v. SAP America, Inc.

Faced with a different chronology than the court in Fresenius, the Federal Circuit reached a different result in Versata Software, Inc. v. SAP America, Inc., 564 Fed.Appx. 600 (Fed. Cir. June 18, 2014). Versata obtained a judgment of infringement against SAP based upon a jury verdict, and SAP appealed. During the appeal, SAP filed a petition for Covered Business Method review of the Versata patent, and the PTAB initiated review. The Federal Circuit affirmed the judgment in favor of Versata but remanded to the district court to modify the permanent injunction it had issued. Versata Software, Inc. v. SAP America, Inc., 717 F.3d 1255 (Fed. Cir. 2013). Six weeks after the Federal Circuit’s decision, the PTAB found the patent to be invalid. Versata appealed. In the meantime, Versata withdrew its request for an injunction, which was the only part of the judgment not affirmed by the Federal Circuit.

SAP moved the district court to vacate or stay the judgment, in part, because of the PTAB’s finding that the Versata patent was invalid. The district court denied the motion because a final judgment had been issued in the case (and the CBM proceedings were on appeal and not final). The court reasoned:

To hold that later proceedings before the PTAB can render nugatory that entire [court] process, and the time and effort of all the judges and jurors who have evaluated the evidence and arguments would do a great disservice to the Seventh Amendment and the entire procedure put in place under Article III of the Constitution.

Versata Software, Inc. v. SAP America, Inc., 2014 WL 1600327 at *2 (E.D. Tex. April 21, 2014). The court distinguished Fresenius on the ground that Versata’s judgment “is final and there are no further issues to be resolved.” Id. In a very short per curiam decision, the Federal Circuit granted Versata’s motion to dismiss SAP’s appeal without citing Fresenius or any other cases. Versata, 564 Fed.Appx. 600.

The Federal Circuit decided the final installment of its what-is-final trilogy on July 25, 2014 in ePlus, Inc. v. Lawson Software, Inc., — F.3d –, 2014 WL 3685911 (Fed. Cir. July 25, 2014). In another split decision, the majority (again consisting of Chief Judge Prost and Judge Dyk) vacated a permanent injunction and contempt order following the PTO’s cancellation of the patent claim on which the injunction and contempt order had been based. As in the Fresenius and Versata cases, ePlus took a winding path to the Federal Circuit. At trial, ePlus prevailed on both infringement and validity, and the district court entered an injunction. The Federal Circuit reversed in part, holding only one of the claims of one of the asserted patents valid and infringed and remanded for the district court to reconsider the injunction. On remand, the district court modified the injunction and then found Lawson in contempt of the injunction. Lawson appealed both the injunction and contempt order. While that appeal was pending, the PTO concluded in a re-exam proceeding that the surviving claim was invalid, which the Federal Circuit affirmed in a separate appeal.

The Federal Circuit panel unanimously – without objection from the patent owner – first vacated the injunction, holding that the basis for the injunction – a valid patent claim – no longer existed in view of the PTO’s invalidation of the claim. Accordingly, under long-standing Federal jurisprudence, the injunction could not remain in place. ePlus, 2014 WL 3685911 at *5.

On the contempt question, the majority began its analysis by noting that courts have long held that civil contempt sanctions arising from the violation of a non-final injunction barring infringement of a patent should be set aside when the patent is subsequently found to be invalid. Id. at *6, citing Worden v. Searls, 121 U.S. 14, 26 (1887). The court then held that the Worden rule applied equally where “the injunction has been set aside as the result of the PTO proceeding rather than a court judgment.” ePlus, 2014 WL 3685911 at *7. Finally, relying extensively on Fresenius, the majority concluded that the injunction entered by the district court was not final at the time the PTO invalidated the claim at issue because following remand the court had issued a modified injunction, which had been appealed, and the PTO decision invalidating the patent had occurred before the appeal had been decided. Therefore, Lawson could be relieved from the contempt order. Id. at **7-8.

Judge O’Malley dissented from the portion of the majority’s decision holding that Lawson did not have to pay civil contempt sanctions. First, she argued that Fresenius did not apply to the ePlus case because the factual and procedural postures were different at the point in time when the PTO found the patent claims to be invalid. Id. at *12. Even if Fresenius were not distinguishable, however, Judge O’Malley found the application of that decision to the situation in ePlus troubling because “[t]he majority’s approach to finality will further displace the critical role of district courts in patent infringement suits.” Id. at *14. Specifically:

By extending Fresenius II to these materially different circumstances, the majority assumes that any determination made during an infringement case, even if that specific issue is never appealed, can be nullified by the action of an administrative agency as long as anything – even a fully discretionary “consideration” of an intact remedy – remains available.

Id. (emphasis in original). According to Judge O’Malley, the majority’s approach to finality “creates uncertainty for any future compensatory contempt awards” because the trial court always retain the equitable power to revise injunctions prospectively. Id. at *15.

Notwithstanding the strong dissents of Judge Newman (in Fresenius) and Judge O’Malley (in ePlus), practitioners must now consider the law of the Federal Circuit to be that as long as any part of a district court case remains to be decided, an intervening final decision by the PTO that invalidates the claims of an asserted patent will lead to the vacating of a court judgment in favor of the patent owner, regardless of how remote the open issues in the case are from the issue of the validity of the patent. We have likely not heard the last on this issue, however, as it would not surprise anyone if the Federal Circuit eventually decides to Bob has spent over 30 years litigating intellectual property and commercial disputes. With his experience as both a law firm partner serving as a first-chair litigator and a senior in-house counsel at a major US technology company managing patent litigation, Bob calls upon a broad and unique set of skills to resolve clients’ legal disputes. He not only has the expertise of a topflight litigator, but also an in-house perspective to better understand a client’s dispute-resolution goals and to maneuver a case in such a way as to achieve those goals.

While early stage technology companies typically seek investment from angels and VCs, strategic investments from commercial partners can also be a valuable source of capital. Strategic investors can often offer higher pre-money valuations than angels or VCs since they may be gaining in other ways from the relationship. In addition, if the capital investment is intelligently combined with a commercial agreement, the overall result may be greater than the sum of its parts. Despite the potential advantages of such financings, however, negotiating the financing and commercial arrangements together results in a unique set of issues, and startups should be aware of these before embarking on a strategic financing:

Increased Complexity; Importance of Understanding Commercial Terms. Adding a commercial agreement to a financing transaction can add disproportionately to amount of time and expense that will be needed to get to closing. The legal documents for early-stage equity investments are often based on well-known forms; lawyers that are experienced in early stage financings can provide specific guidance on deal terms. Commercial agreements, on the other hand, often require the business principals to become more directly involved in the negotiations, since their terms are driven much more by the day-to-day realities of the company’s business. The company’s management should therefore realize it will likely have to put significantly more time and effort into hashing out deal terms than in a pure financing transaction. If the company’s lawyers are involved in negotiating the commercial agreement in addition to the investment documents, the legal fees may also be significantly higher than in a VC or angel financing. Some of the requested terms, since not financial in nature, often go to the heart of what creates value in the business and, therefore, if not carefully considered and negotiated, can result in a reduced value of the company after the financing. For example, it is not uncommon for strategic investors to ask for an exclusive relationship of some sort (whether as an exclusive provider or re-seller of the company’s products or services), and companies should carefully consider the foregone opportunities. Some strategic investors also insist on special access to intellectual property rights, or on covenants not to sue, which can chill future acquisitions.

Different Incentives. When an angel or VC makes an investment in a company, their ultimate goal is fairly clear: to get a strong financial return on the investment. When a commercial partner makes a strategic investment, they are likely to be motivated by a combination of financial returns on the company’s stock and the commercial relationship. The multifaceted goals of strategic investors can ultimately bring them into conflict with the founders in ways that would not happen with VCs or angels. For example, if the company later receives an offer to be acquired by a competitor of the strategic investor at a high valuation, the founders and financial investors may want to take the deal, but a strategic investor may want to prevent it, even if it stood to receive a significant return on its investment in the acquisition. The company will need to keep these dual motives in mind in a strategic financing, especially when it comes to negotiating provisions that govern future financings or a sale of the company.

While teaming up with one of the major players in a company’s space can seem like a very good idea, and may create more value than could be expected from an angel or VC investor, care needs to be taken to avoid pitfalls common to these relationships, including the possibility the relationship with the new partner deteriorates, with that partner having disproportionate leverage.

PAUL B. JOHNSON

Paul is Co-chair of the firm’s Mergers & Acquisitions and Strategic Join Ventures practice group. His practice focuses on buy and sell-side mergers and acquisitions, venture capital investments, securities offerings and compliance, startup companies and general business counseling.

For additional information, please contact Paul directly:

Procopio, Cory, Hargreaves & Savitch LLP

12544 High Bluff Drive, Suite 300, San Diego CA 92130

Direct Dial: (619) 525.3866

Email: paul.johnson@procopio.com

AARON B. SOKOLOFF

Aaron’s practice focuses on corporate law, including startup/venture capital and mergers and acquisitions. Aaron has represented venture-backed companies in early- and late-stage equity financings as well as debt financings. He has experience representing both buyers and sellers in M&A transactions.

For additional information, please contact Aaron directly:

Procopio, Cory, Hargreaves & Savitch LLP

12544 High Bluff Drive, Suite 300, San Diego CA 92130

Direct Dial: (619) 906.5739

Email: aaron.sokoloff@procopio.com