Requesting a reexamination of a patent by the U.S. Patent and Trademark Office-questioning whether a patent should have been granted in the first place-was until recently an arcane administrative procedure. But over the last few years this back-office process has emerged as a key weapon in high-stakes corporate patent litigation. Defendants now frequently seek reexams of patents they're alleged to have infringed. And here's the key part: They have started asking for-and sometimes winning-stays from trial judges while the PTO proceedings run their course. Counting appeals, a reexam can take four or five years, by which point much of the urgency, and potential for damages, of the original litigation may have disappeared. The strategy of reexamination-and-stay and its related tactics are reshaping how lawyers approach patent infringement suits. "It is a sea change," says Yar Chaikovsky, a veteran litigator and co-managing partner in the Menlo Park, California, office of Sonnenschein Nath & Rosenthal. Reexamination requests related to litigation have more than tripled over the past four years, to 450 in 2007.
One important consequence of the change is that federal district court judges, rarely reluctant to use their powers, now have a potent new prerogative: near absolute authority to grant or reject those motions as part of their right to manage their dockets. A judge's decision to grant or deny such a stay is increasingly pivotal to the outcome of litigation. So even before deciding whether to seek a reexam, for instance, Michael Jacobs, a litigator at Morrison & Foerster, researches the stay-granting proclivity of the judge. "Each district and judge within a district is different," says Jacobs. "Of course, we study the record of each judge in question."
Delay is often a defendant's best friend. A stay puts off the potential payday for plaintiff attorneys working on contingency. Moreover, a stay takes off the board the threat of an injunction, increasing the chance of reaching a favorable settlement, the endgame in the vast majority of patent infringement cases. (Of 2,274 filed patent cases resolved in 2007, 84 percent were settled, according to the University of Houston Law Center.) And a stay can also translate into "two or three years [for the defendant] to design around the patent or to adopt new or different technology," points out Francis DiGiovanni, a partner of Connolly Bove Lodge & Hutz in Wilmington. "When the technology at issue is rapidly evolving, even if a patent survives the reexam, the market may change . . . so that when litigation resumes, there is nothing left to fight about except past conduct."
"For a defendant, [a stay] is huge, because you potentially avoid the cost of litigation," notes Teresa Corbin, a litigator at Howrey. A reexamination is much cheaper than litigation because it focuses only on the issue of patent invalidity, requires far fewer appearances and, perhaps most important, requires little or no discovery. A reexam costs tens, or at most hundreds, of thousands of dollars, compared to the roughly $5 million cost of full-fledged litigation through trial, according to the American Intellectual Property Law Association.
Why would lawyers embrace a process that lowers their income? "You did have some patent litigators saying, 'We can't have reexams because it's going to kill our fees!'" says one patent lawyer. But competition among firms has changed that view, even as shifts in the law and in PTO policy have made reexamination a better option.
A long line of cases spells out three factors for judges to weigh in deciding whether or not to grant a stay. The desire for judicial economy favors stay motions made early in a case. Judges also ask whether a stay will unduly prejudice the party that didn't request it and whether it will simplify the issues likely to arise in litigation.
But the three-part test gives judges a great deal of discretion and the results are all over the map. According to LegalMetric, a legal research firm, in cases with contested reexam-related stay motions, 60 percent of published opinions have granted the stays since 1999.
But there are stark differences among judges and districts. For example, Judge Gregory Sleet of the U.S. district court in Wilmington, has granted eight of ten stays since 1999, according to LegalMetric. By contrast, in the Eastern District of Texas, only 23 percent of such motions have been granted since 1999 (the Eastern District statistics do not include slip opinions, which don't play a large role in the LegalMetric numbers). How the judges handle reexam stay motions now figures so critically in litigators' strategy that at least two patent lawyers have built databases recording every relevant stay decision by each district court judge to help calculate the odds of success in pursuing a reexamination-and-stay strategy with a particular judge.
The timing of these motions can be controversial; the later they are filed the less likely they are to be granted. The exceptions are notable. For instance, in 2006 Martin Jenkins, then a federal judge in the Northern District of California (and now serving on the California Court of Appeal), stayed a four-year-old patent infringement case brought by Ricoh Co. against Aeroflex Inc., a microelectronics maker based in Plainview, New York. At the time, the trial was looming just three months away, and the discovery and claims construction phases were already complete. (Aeroflex defense counsel Corbin of Howrey had asked for a stay earlier because a reexam instigated by a third party was already under way. But Judge Jenkins acceded only to a later request, after the reexam had advanced to a "first office action" in which the PTO had tentatively rejected all of the patent claims.)
There are more extreme examples of a stay being granted in the homestretch-even after a jury verdict. In March 2008 Judge Jose Linares of the U.S. district court in Newark, New Jersey, deferred to a reexamination in halting the case of Stryker Trauma v. Synthes. Five months before, a jury had rendered a verdict finding the surgical clamp patent at issue to be valid and infringed. In a brief for Stryker urging denial of the stay, William Mentlik, a partner at Lerner, David, Littenberg, Krumholz & Mentlik based in Westfield, New Jersey, wrote that to freeze the proceedings after the verdict would promote "dilatory conduct at its most egregious." Linares granted the stay anyhow, saying it had "the potential to render obsolete or moot" issues in the remaining inequitable conduct, willfulness, and damages aspects of the case.
By contrast, motions for stays filed at a late stage in litigation sometimes provoke harsh ripostes from judges. Last year, despite an adverse jury verdict, the defendant in Fresenius Medical Care Holdings Inc. v. Baker International Inc. called on Judge Sandra Brown Armstrong of the Northern District of California to stay the proceedings in view of a reexamination. In her order refusing a stay, she chastised the defendant for attempting to "game the system" and fostering "sloth that is the essence of a stay."
Anchoring the antistay camp are the judges of the Eastern District of Texas, the nation's most popular venue for patent cases, with 371 filed last year. For a seven-year stretch ending in July 2006, the judges turned down every single request for a stay, all 34 of them.
Judge T. John Ward of Marshall, Texas, who is credited for making his district into a litigation hot spot, has continued that "just say no" approach. In his written opinions Ward has denied or dismissed all 14 of the contested stay motions filed with him since he became a federal judge in July 1999. As an example, consider his order in February of last year in BIAX Corp. v. Fujitsu Computer Systems. By the time BIAX brought the patent infringement suit against Fujitsu in September 2006, a reexamination of the two patents at issue was ongoing at the behest of Intel Corp., which was sued separately by BIAX. In November, Fujitsu, represented by Morrison & Foerster's Jacobs, asked Ward to stay the case. The parties had not begun discovery or even held a scheduling conference. Conceding in a four-page opinion that the suit was in an early stage, Ward held that a stay could delay the litigation for an "indefinite period," prejudicing the patent owner BIAX. In seven sentences Ward dispensed with Fujitsu's argument that a stay would simplify the case. He termed the point "speculative."
Though Ward has not wavered, his two colleagues in Texarkana, Magistrate Judge Caroline Craven and Judge David Folsom, have granted stays in limited circumstances. Craven broke first with Eastern District tradition by granting TiVo Inc. a stay in July 2006 in a case where it was being sued by EchoStar Technologies over DVR technology. TiVo had sought ex parte reexam for two patents and inter partes reexam for another-in the inter partes proceeding the challenger can play a bigger role [see box below]. Putting the case on hold while awaiting the reexam would avoid "wasting" the court's and parties' resources and time," argued TiVo's lawyer, Richard Birnholz of Irell & Manella.
EchoStar, represented by Martin Noonen of Morrison & Foerster, responded that TiVo had already allowed the litigation to reach its "later stages"-the case had been ongoing for more than a year, most of the discovery had been completed, and a trial was approaching in a few months.
EchoStar also cited four Eastern Texas cases for the proposition that the district's judges had "routinely" denied stay motions like TiVo's. But the judge apparently didn't like the defense counsel predicting her reasoning. In her opinion Judge Craven tartly asserted that the court considers stay motions "on a case-by-case basis." As for the cases cited by EchoStar, she noted that they pertained to ex parte reexaminations. An inter partes reexamination was a different story, she said, because of the statutory rule that prevents the requester from raising in court any issue it could have raised in the inter partes reexamination. The judge therefore declared that an inter partes reexamination can "have no other effect but to streamline ongoing litigation."
Likewise, Judge Folsom has embarked on a new tack. In five cases since October 2006 he has extended the estoppel rules that are statutory for inter partes reexams to the traditional ex parte reexam. With that quid pro quo, Folsom aims to promote "judicial economy" and "the avoidance of unnecessary costs on the parties," as he wrote in a January 2007 order granting a stay in DataTreasury Corp. v. Wells Fargo & Co. et al.
The saga of DataTreasury-which is wielding check-processing patents against a large group of banks-is a perfect example of how requesting a reexamination is not without risk, and indeed can backfire viciously on a defendant. When the PTO confirmed the validity of all 93 claims of DataTreasury patents last summer-and even approved an additional 73 claims-one defense lawyer quipped that the banks "might as well write the settlement checks now." In fact, after Folsom quickly lifted the stay, a trial date was set for October 2009, and now a jury will probably hear that the government's expert examiners have blessed Data- Treasury's patent not once but twice. To initiate a reexam is always "something of a dice roll" because of the risk that the PTO's review may validate additional claims "that make the patent worse from the defendant's perspective," acknowledges Fish & Richardson's Thomas Melsheimer, who is defending Bank of America Corp.
Perhaps the most notorious litigation in which reexamination has played a role is NTP Inc.'s ongoing effort to enforce its patents on technology that permits mobile devices to send and receive e-mail. NTP's patents were rejected by the PTO on reexamination-but only after NTP won a settlement of $612.5 million from BlackBerry maker Research In Motion Ltd. in 2006. What's more, the patent office rejection has not stopped NTP from suing additional telecom giants. That's because it is appealing the reexam findings to the PTO's Board of Patent Appeals and Interferences. The deep-pocketed NTP may be hoping it will win the appeal, or that it will cause so much trouble for the companies it is suing that they will settle before the appeal is resolved.
This tactic-taking advantage of delays in the reexam and appeal process-is possible because reexams and subsequent appeals can take more than five years. This laggard pace has gotten a lot of publicity lately, as Harold Wegner, an influential patent lawyer at Foley & Lardner, recently pointed out that the PTO appeals board is yet to dispose finally of any cases arising from inter partes reexams, even though at least three of them have been in the reexam-and-appeals pipeline for longer than four years (one is scheduled for argument in July before the Federal Circuit on a procedural issue). The patent bar is blaming the sluggish pace on the management of the PTO, which has already faced plenty of criticism on other scores.
Will judges come down differently on the question of granting a stay now that they know they are condemning the litigation to years of purgatory? You can be sure the patent bar will be watching intently.
