Federal Circuit Reverses District Court and Orders Stay Pending Covered Business Method Patent Review

July 11, 2014

On July 10, 2014, the U.S. Court of Appeals for the Federal Circuit addressed a statutory provision of the recently enacted America Invents Act (AIA) that permits a stay of a district court patent litigation pending a Covered Business Method (CBM) patent review.1 In a 2-1 precedential decision, and a matter of first impression, the Federal Circuit reversed a district court order from the Eastern District of Texas denying the defendant's motion to stay a patent litigation. This decision is important because it provides guidance to a party considering a CBM review and a motion to stay an ongoing related patent litigation.

History of CBM Reviews

Effective September 2012, the AIA established the Transitional Program for Covered Business Method Patents, which allows entities charged with infringement of a covered business method patent to challenge the validity of the asserted patent in the U.S. Patent Office.2 In addition, the AIA allows a party to seek a stay of an ongoing patent litigation pending the CBM review, which should be considered in light of a four-factor test. The July 10, 2014, opinion from the Federal Circuit is the first time an appellate court has interpreted the four-factor test for a stay provided in the AIA.

Background of the Case

In January 2013, plaintiff VirtualAgility, Inc. (VirtualAgility) brought suit against, Inc. (Salesforce), and several of its customers, alleging infringement of a single patent. Salesforce petitioned the Patent Trial and Appeal Board (PTAB) for CBM review, arguing unpatentability over certain prior art and for claiming ineligible subject matter. The defendants then filed a motion to stay proceedings in the district court pending CBM review. The PTAB granted Salesforce's petition and instituted CBM review. Nevertheless, the district court denied the stay request. The defendants then invoked the AIA provision providing for an immediate appeal to the Federal Circuit.

The Federal Circuit Decision

The Federal Circuit, upon consideration of the four statutory factors, concluded that three of the four factors "weigh heavily in favor of a stay in this case" and that the district court abused its discretion in denying the request for stay. 3

Simplification of Issues and Reduced Burden of Litigation

As to the factors considering whether a stay simplifies the issues and reduces the burden of litigation, the Federal Circuit determined that the district court "clearly erred" when it concluded that these factors did not weigh heavily in favor of a stay under the circumstances. In doing so, the Federal Circuit found that a stay would greatly simplify the issues in the case, if not eliminate all issues entirely. Given that the PTAB granted review of all claims of the sole asserted patent on two separate grounds of invalidity, a PTAB decision could dispose of the entire litigation.4 The court also reasoned that if Salesforce was successful in the CBM review, the district court would not need to consider other invalidity defenses, thereby eliminating the burden of litigation on the parties and the court.

Whether Discovery Is Complete and Whether a Trial Date Has Been Set

The Federal Circuit held this factor also "heavily" favored stay. When the stay motion was filed, discovery had not yet begun, and the case was not yet scheduled for trial. When the PTAB instituted CBM review, eight months of fact discovery remained, the parties' joint claim construction statements were not yet filed, and jury selection was a year away. Thus, considering the posture at either point, the court found the litigation was in its infancy, heavily favoring a stay of litigation proceedings.

Undue Prejudice or Tactical Advantage

The Federal Circuit reasoned that VirtualAgility would not be unduly prejudiced by a stay as it did not demonstrate a need for expeditious resolution of its claim. VirtualAgility did not seek a preliminary injunction at the outset of the case and had delayed for nearly a year after the asserted patent issued before filing suit. In addition, the record did not establish a clear tactical advantage because specific prior art at issue in the litigation, but not submitted to the PTAB, was obtained after Salesforce filed its petition for CBM review. The court also indicated that "[o]n this record, the evidence of competition is weak." It thus concluded that this factor, under the clear error standard, at most weighed slightly against a stay of the case.

In sum, the Federal Circuit determined that three of the four factors weighed heavily in favor of a stay. Thus, the district court's decision denying a stay was reversed.

Practical Effects

Congress established new procedures in the AIA designed to provide a less expensive and faster alternative to district court litigation to determine the validity of certain business-method patents. VirtualAgility provides guidance to parties accused of infringing certain business-method patents as to the benefits and timing of a CBM review petition and the analysis courts will apply in considering a stay in the ongoing litigation pending completion of any CBM review.

Wilson Sonsini Goodrich & Rosati represented Salesforce and most other appellants in the appeal. For more information on how the decision may impact your situation or circumstances, please contact a member of Wilson Sonsini Goodrich & Rosati's intellectual property litigation and counseling practice.

1 VirtualAgility Inc. v., inc., No. 2014-1232 ("VirtualAgility") (Fed. Cir. July 10, 2014).
2 AIA § 18(a).
3 The Federal Circuit declined to rule whether it was proper to review an appeal of a stay decision pending CBM review de novo or under the higher "abuse of discretion" standard, finding that even under the higher standard the district court's decision should be reversed.
4 The Federal Circuit further noted that it was not within the district court's purview to review whether it was correct for the PTAB to grant a petition for CBM review.