VirtualAgility Inc. v. Salesforce.Com: Federal Circuit Reverses District Court And Requires A Stay Pending A Patent Office Review Of A Covered Business Method Patent

Last week, the Federal Circuit had its first occasion to opine on an America Invents Act provision allowing immediate interlocutory appeals from a district court's denial or grant of a motion to stay an infringement proceeding pending before it when a covered business method (CBM)1transitional proceeding has been instituted at the Patent Office. In VirtualAgility Inc. v. Salesforce.com2 the Federal Circuit reversed the District Court for the Eastern District of Texas' decision not to stay infringement proceedings pending the conclusion of CBM review. The Federal Circuit's opinion provides some useful guidance as to the grounds for staying infringement proceedings.

As background, the America Invents Act added a new tool for parties that are accused of infringing business method patents; namely, creating a post-grant review of the validity of "covered business method patents" at the Patent Trial and Appeal Board (PTAB). As part of the CBM review statute, the AIA contemplates the existence of a co-pending CBM review and district court case. The AIA statute expressly requires the district court to consider four factors when deciding whether to grant a stay of the district court case in favor of the CBM review:

(1) whether a stay, or the denial thereof, will simplify the issues in question and streamline the trial;

(2) whether discovery is complete and whether a trial date has been set;

(3) whether a stay, or the denial thereof, would unduly prejudice the nonmoving party or present a clear tactical advantage for the moving party; and

(4) whether a stay, or the denial thereof, will reduce the burden of litigation on the parties and on the court. AIA § 18(b)(1).3

The AIA also contemplates immediate appeals from such stay decisions and provides that a "party may take an immediate interlocutory appeal from a district court's decision" granting or denying a motion to stay litigation pending CBM review. AIA § 18(b)(2). In discussing these provisions during the AIA debate, Senate sponsor Charles Schumer stated that it was "nearly impossible to imagine a scenario in which a district court would not issue a stay."4Despite Senator Schumer's statements, a denial of a stay after institution of a CBM review is exactly what occurred recently in the Eastern District of Texas case of VirtualAgility Inc. v. Salesforce.com et al.

In VirtualAgility the PTAB instituted review of all claims of the patent-at-issue, stating that the patent was more likely than not invalid on two different grounds, i.e., ineligible subject matter under 35 U.S.C. § 101 and lack of novelty under 35 U.S.C. § 102. In denying a motion to stay the district court case, the district court examined the four factors as required by the statute. With regard to the simplification of issues and reduced litigation burden, the district court found that these factors overlapped. The district court then proceeded to undertake an examination of a likely outcome of the PTAB proceedings and concluded that the district court "was not persuaded that the PTAB will likely cancel all claims of the '413 patent." Therefore, the district court found, the simplification of issues was essentially neutral or weighed against a stay and the potential possibility of reducing the litigation burden was limited. The district court further found that the timing and trial date factor weighed in favor of a stay. However, the district court determined that the market share potentially lost by the patentee competitor during a stay would be unduly prejudicial and weighed heavily against a stay. On the basis of these findings, the district court refused a stay. An immediate Federal Circuit appeal followed.

The Federal Circuit reversed the district court in a 2-1 opinion. The 26-page opinion begins by considering the applicable standard of review, i.e., abuse of discretion or de novo review. While the statute requires the Federal Circuit to hear the interlocutory appeal,5 the applicable statute allows, but does not clearly mandate, de novo review, stating that the Federal Circuit "shall review the district court's decision to ensure consistent application of established precedent, and such review may be de novo." Id. § 18(b)(2) (emphasis added). We discuss that peculiar formulation later, but for now we note that the Federal Circuit declined to address and expressly left for another day when de novo review should be applied. Instead, the Federal Circuit stated it would reverse the district court under either standard of review.

The opinion then thoroughly analyzes each of the four factors. The analysis is necessarily fact-intensive and...