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April 20, 2014

Rehearing of Decision Affirming PTO Invalidity Finding Denied, Even After Upholding District Court Validity Finding

Addressing the merits of patent claims it had previously found to be valid, the U.S. Court of Appeals for the Federal Circuit denied a request for an en banc rehearing of its decision affirming a finding (of invalidity) by the U.S. Patent and Trademark Office (PTO) Board of Patent Appeals and Interferences (Board).  In re Baxter International, Inc., Case No. 11-1073 (Fed. Cir., Oct. 26, 2012) (per curiam) (O’Malley, J., concurring) (Newman, J., dissenting).

Baxter International (Baxter) owns a patent directed to hemodialysis machines.  A competitor of Baxter’s, Fresenius, filed a declaratory judgment action alleging invalidity of certain of claims of Baxter's patent.  After a trial, the district court found Fresenius failed as a matter of law to show by clear and convincing evidence that the patent claims were obvious.  The ruling was affirmed by the Federal Circuit (using the clear and convincing standard).  Fresenius also initiated a reexamination proceeding at the PTO in which the examiner found the same claims obvious in view of a combination of references, some of which were at issue in the declaratory judgment proceeding and others that were not.  The Board affirmed the examiner’s rejections of the claims.  Baxter appealed.

A panel of the Federal Circuit affirmed the Board, (IP Update, Vol. 15, No. 6) finding that, while the Board should give serious consideration to a court decision, it is permissible for the Board to reach a different conclusion.  After noting that the Board expressly considered the Federal Circuit’s prior decision, the Federal Circuit pointed out “the PTO in reexamination proceedings and the court system in patent infringement actions ‘take different approaches in determining validity and on the same evidence could quite correctly come to different conclusions,’” quoting In re Swanson.  The difference is that a challenger attacking the validity of patent claims in civil litigation has the burden of proving invalidity by clear and convincing evidence, and, if they fail to meet that burden, the court will not find the patent claims valid, but will hold only that the challenger did not meet their burden.  In contrast, the standard of proof in PTO reexaminations is a preponderance of the evidence, which is substantially lower.

The Court pointed out that Congress has provided for a reexamination system that permits challenges to patents by third parties, even those who have lost in prior judicial proceedings.  In this case, the director of the PTO found a substantial new question of patentability, the examiner relied on new prior art not raised in the district court proceeding and the examiner properly conducted the reexamination.  Thus, the Federal Circuit concluded that “this case is not about the relative primacy of the courts and the PTO, about which there can be no dispute.”  Further, the Federal Circuit could not bar the PTO from conducting a reexamination proceeding because of the final judgment in the district court proceeding without overruling its own prior precedents, including Swanson and Ethicon.  The Court thus affirmed the Board’s decision.

Judge Newman dissented, contending the majority’s decision “permits administrative nullification of a final judicial decision.”  She stated that the majority was simply deferring to the PTO and opined that “the nature of the burden of proof does not overcome the strictures of judicial finality.”  She further argued the principle of preclusion should apply to reexamination of the same issues of fact and law and concluded that the reexamination rejection was based “solely” on the same references Fresenius relied on in the district court proceeding.

Baxter then filed a petition for rehearing by the panel or by the Court en banc.  The petition was denied without an opinion.  However, in concurring with the majority decision, Judge O’Malley agreed that “a prior court decision in which a party has failed to prove a patent invalid does not bar the Patent and Trademark Office (PTO) from subsequently reexamining that same patent.  And . . . despite a final court judgment reaching a contrary conclusion as between the patent holder and one alleged infringer, the PTO is free to conclude that the patent is, indeed, invalid.”   O’Malley noted that a subsequent reexamination decision that the patent is invalid does not disturb the judgment of the court or alter its binding effect on the parties, and points out “principles of res judicata will govern the continuing relationship between the parties to any court proceeding and will dictate whether the PTO’s reexamination ruling will have any impact on them going forward.”

In her dissent, Judge Newman reiterated her concerns and arguments from her previous dissent, and added “the court has created an additional burden and disincentive to inventors, for reexamination after a patent has been sustained in court is a multiplier of cost, delay, and uncertainty, in direct negation of the principles of res judicata.”  

© 2014 McDermott Will & Emery

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