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Article: Stays Pending Covered Business Method Patent Review: VirtualAgility v.

December 01, 2014
Business Litigation Reports

The Federal Circuit’s divided decision in VirtualAgility Inc. v., Inc. is the first major decision from the Federal Circuit interpreting the discretionary stay provision of § 18(b)(1) of the America Invents Act (“AIA”) for post-grant review of covered business method (“CBM”) patents. 759 F.3d 1307 (Fed. Cir. July 10, 2014). In VirtualAgility, a majority of a Federal Circuit panel consisting of Judges Moore and Chen liberally interpreted the AIA’s guidance for reviewing a district court’s decision on a stay pending CBM review, easing the path to a stay at the district court level. See generally id.

In VirtualAgility, defendant (“Salesforce”) moved to stay litigation in the Eastern District of Texas pending a CBM review. CBM review is available only for patents that “claim[] a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service.” 37 C.F.R. 42.301(a). VirtualAgility (“VA”) filed suit in January 2013, alleging infringement of U.S. Patent No. 8,095,413 (the “‘413 patent”). VirtualAgility, 759 F.3d at 1308. In May 2013, Salesforce petitioned for CBM review, and less than a week later, Salesforce moved to stay pursuant to AIA § 18(b)(1). Id. at 1308-09. In November 2013, Salesforce’s petition was granted. Id.

In January 2014, shortly after the Patent Trial and Appeal Board granted Salesforce’s petition for CBM review of the ‘413 patent, Judge Gilstrap of the Eastern District of Texas denied Salesforce’s motion to stay. Id. at 1309. On appeal, the Federal Circuit reversed, finding that the factors enumerated in AIA § 18(b)(1) favored granting a stay. AIA § 18(b)(1) provides four factors on which the district court “shall” base a decision to stay pending CBM review:

(A) whether a stay, or the denial thereof, will simplify the issues in question and streamline the trial;
(B) whether discovery is complete and whether a trial date has been set;
(C) whether a stay, or the denial thereof, would unduly prejudice the nonmoving party or present a clear tactical advantage for the moving party; and
(D) whether a stay, or the denial thereof, will reduce the burden of litigation on the parties and on the court.

The Federal Circuit addressed each of the four AIA § 18(b)(1) factors in VirtualAgility, in each case considering the district court’s methodology and conclusions. The district court concluded that the first § 18(b)(1) factor was neutral or weighed slightly against granting a stay. VirtualAgility, 759 F.3d at 1310. The district court reviewed the ‘413 patent’s prosecution history as well as Salesforce’s petition for CBM review, and was not convinced that all of the ‘413 patent’s claims would be canceled. Id. But the Federal Circuit found that the district court’s review of the PTAB’s decision was error as a matter of law, holding that any challenge to the PTAB’s determination that a patent’s claims are “more likely than not” invalid amounts to an improper collateral attack on the PTAB’s decision. Id. The stay determination is not the proper time or place for such a challenge. Id. Once removed from the calculus, the Federal Circuit reviewed the evidence of record and found that the first factor weighed heavily in favor of a stay. Id. at 1314. Because the PTAB determined that all claims of the lone asserted patent were more likely than not unpatentable on two independent grounds, the CBM review had the potential to dispose of the entire litigation—the “ultimate simplification of issues”—and the first factor weighed heavily in favor of a stay. Id.

The Federal Circuit also found that the second § 18(b)(1) factor heavily favored a stay. Id. at 1315-1317. The Federal Circuit determined that it was not clear error for the district court to wait until after the PTAB decided to institute the CBM review before it ruled on the motion to stay. Id. at 1315-16. While there is no consistent practice among the various district courts about when a district court must rule on motion to stay pending CBM review, “the case for a stay is stronger after post-grant review has been instituted.” Id. at 1316. In this case, Salesforce filed its motion to stay mere days after filing its petition for CBM review, less than four months into the litigation as a whole, and the district court waited until after Salesforce’s petition was granted before ruling on the motion to stay. Id. at 1308-09, 1317. Because “the time of the motion is the relevant time to measure the stage of the litigation,” the Federal Circuit held that the second factor also heavily favored a stay. Id. at 1317 (emphasis added).

The Court then moved on to the third § 18(b)(1) factor. Id. Focusing on the direct competition between VA and Salesforce, the district court concluded that VA, a small company with limited resources, would suffer irreparable harm due to lost market share and consumer goodwill. Id. The district court therefore found that the third factor weighed heavily against granting a stay. Id. The Federal Circuit disagreed and held that this factor at best weighed slightly against a stay. Id. at 1318. The Federal Circuit focused on VA’s failure to move for a preliminary injunction. Id. at 1318-19. The Court acknowledged that there are a number of reasons a party may choose not to move for a preliminary injunction, but concluded that the fact that it was not worth VA’s expense contradicted VA’s assertion that it needed immediate injunctive relief and would be unduly prejudiced by a stay. Id. at 1319. The Court also found that although Salesforce did not include certain prior art in its petition for CBM review, the withholding of prior art was not indicative of any “dilatory motive” which would have counseled against a stay. Id. at 1319-20. Although the Court agreed that in some circumstances saving prior art for the district court would counsel against a stay, the facts surrounding the prior art in this case resulted in no clear tactical advantage if the case was stayed. Id. Therefore, under the clear error standard, the third factor at best weighed slightly against a stay. Id.

Lastly, addressing the fourth factor, the district court noted that the parties’ arguments substantially overlap with those presented under the first factor, reaching similar conclusions for the fourth factor. Id. at 1311. Despite this overlap, the Federal Circuit was clear: the four-factor test expressly adopted by Congress cannot be collapsed into a three-factor test. Id. at 1313. Addressing the same facts it did when analyzing the first factor, the VirtualAgility Court found that the fourth factor heavily favored a stay as well. Id.

The Federal Circuit’s decision in VirtualAgility was not unanimous. Judge Newman, the third panel member, authored a lengthy dissent criticizing the majority for not fully considering the effects of their broad decision. Judge Newman’s dissent in VirtualAgility is a reflection of her concern that the majority opinion circumvented the district court’s discretionary authority to manage its cases without making a single finding of an abuse of discretion, at least in part because it did not confront the issue of the proper standard of review of a motion for stay pending a CBM review. Id. at 1321-22 (Newman, J., dissenting). Judge Newman concluded that the majority’s decision “effectively creates a rule that stays of district court litigation pending CBM review must always be granted.” Id. at 1322. She noted that this “near automatic grant of litigation stays . . . tilts the legislative balance” and leads “to inequity and tactical abuse.” Id.

The panel majority, however, addressed all four § 18(b)(1) factors at length, performing the fact-specific inquiry into each factor and concluding that when properly weighed a reversal of the district court’s denial of a stay was necessary. Id. at 1310-20. The majority decision also addressed whether the proper standard was de novo review, as suggested by AIA § 18(b)(2) (“such review may be de novo”), or abuse of discretion, but declined to rule on the proper standard of review because even under the stricter abuse of discretion standard the district court’s decision not to grant a stay must be reversed. Id. at 1309-10.

The Federal Circuit’s opinion in VirtualAgility provides valuable guidance for the approach a party seeking CBM review should take if also seeking a stay. While a stay pending CBM review is not mandatory under AIA § 18, VirtualAgility paves the way for an easier road to stays in district court litigations pending CBM review. The Court’s nuanced, fact-specific analysis of each of the four § 18(b)(1) factors provides a roadmap by which future parties considering CBM review can increase the likelihood of a district court granting a stay request.