United States: District Court Erred In Denying Stay By Reviewing Board’s Decision To Institute A Covered Business Method Proceeding

n VirtualAgility Inc. v. Salesforce.com, Inc., No. 14-1232 (Fed. Cir. July 10, 2014), the Federal Circuit held that the district court clearly erred in denying a stay pending a covered business method ("CBM") review when it undertook its own review of the Board's decision to institute the CBM review.

VirtualAgility Inc. ("VA") sued Salesforce.com, Inc. ("Salesforce") and other defendants (collectively "Defendants"), alleging infringement of U.S. Patent No. 8,095,413 ("the '413 patent").  In May 2013, Salesforce filed a petition with the Board for CBM review, alleging that all claims of the '413 patent were not patent eligible under 35 U.S.C. § 101 and were invalid under 35 U.S.C. §§ 102 and 103 based on prior art.  Also in May 2013, Defendants filed a motion to stay all district court proceedings pending the CBM review.  In August 2013, while the motion to stay was pending, the district court issued a discovery order and held a scheduling conference, setting the claim construction hearing and trial dates for April 2014 and November 2014, respectively.  In November 2013, the Board instituted CBM review of all claims of the '413 patent under §§ 101 and 102, setting a trial date at the Board for July 2014.  The district court then denied Defendants' motion to stay in January 2014.  Defendants appealed.

On appeal, the Federal Circuit first considered the proper standard of review.  The parties disputed whether the appellate review standard should be de novo or abuse of discretion.  The Court observed that prior to the America Invents Act ("AIA"), a district court's denial of a motion to stay pending PTO proceedings was generally not appealable, but when it was, the Court reviewed the denial under the "abuse of discretion" standard.  The Court noted that the AIA created an express right to appeal stay decisions pending CBM review.  The Court declined, however, to resolve the parties' dispute over the standard of review, holding that the district court's denial would be reversed even under the "abuse of discretion" standard.

"Under the statutory scheme, district courts have no role in reviewing the [Board's] determinations regarding the patentability of claims that are subject to CBM proceedings."  Slip op. at 11.

The Court then considered each of the factors set forth in the AIA for deciding whether to grant a stay pending CBM review.  First, in considering whether a stay would simplify the issues in question and streamline the trial, the Court rejected the district court's finding that "it was 'not convinced' by the [Board's] assessment that cancellation of some or all of the claims during the CBM review was 'probable.'"  Slip op. at 6 (quoting VirtualAgility Inc. v. Salesforce.com, Inc., No. 13-cv-00111, 2014 WL 94371, at *2, *5 (E.D. Tex. Jan. 9, 2014)).  The Court agreed with Defendants that the issues would be simplified and determined that this factor heavily favored a stay.  Although agreeing that this factor and another stay factor overlap in their analyses, the Court stated that "they continue to be separate, individual factors which must be weighed in the stay determination" and could not be collapsed into a single factor.  Id.  at 11.  The Court held that the district court erred in collapsing two of the factors and to the extent that the district court "decided to 'review'" the Board's determination because "district courts have no role in reviewing the [Board's] determinations regarding the patentability of claims that are subject to CBM proceedings."  Id.  The Court then determined that once the district court's improper review of the Board's analysis was removed, the remaining evidence of this factor weighed in favor of a stay.  For example, the Court observed that because CBM review was granted on all claims of the only patent-at-issue, if Salesforce is successful at the Board, then any burden on the district court would be eliminated.  The Court also took judicial notice of the fact that VA filed a motion to amend its claims at the PTO.  Although the Court did not consider the motion to amend, it stated that the motion to amend would "only weigh further in favor of granting the stay."  Id. at 14. 

The Court next examined the factor of whether discovery was complete and whether a trial date had been set.  The Court determined that this timing factor heavily favored a stay.  The Court noted that "it was not error for the district court to wait until the [Board] made its decision to institute CBM review before it ruled on the motion"; however, the Court also stated that "a motion to stay could be granted even before the [Board] rules on a post-grant review petition."  Id. at 16.  The Court observed that Defendants filed the stay motion in May 2013 and the Board instituted CBM review in November 2013, but the district court denied the stay motion in January 2014.  Although the Court reiterated that it was not error to decide the motion to stay until after institution by the Board, it stated that a court "should make every effort to expeditiously resolve the stay motion after the [Board] has made its CBM review determination."  Id.  at 17.  The Court also explained that the time at which the motion was filed is generally the relevant time to measure the stage of litigation.  The Court then held that, in this case, this factor weighed in favor of a stay because the motion was filed before discovery had begun and before a trial date had been set.  The Court also noted that when the PTO instituted CBM review, eight months remained in fact discovery, claim construction statements had not yet been filed, and jury selection was more than a year away.  Thus, the Court concluded that, even at the time of institution, this factor favored granting a stay.

The Court then turned to whether a stay would unduly prejudice the plaintiff or give the Defendants a tactical advantage.  The Court determined that the district court clearly erred in finding that undue prejudice weighed heavily against a stay, stating that although "competition between parties can weigh in favor of finding undue prejudice," there was "no evidence in [the] record that the two companies ever competed for the same customer or contract."  Id. at 21.  Further, the Court noted that VA's delay in seeking relief and its decision not to seek a preliminary injunction contradicted VA's assertions that it needed injunctive relief as soon as possible.  The Court also rejected VA's argument that there was a risk of witness loss, explaining that there was "no evidence that any of these individuals are in ill health, and at least one of the older witnesses has already been deposed."  Id. at 23.  Although noting that no single factor in its analysis was dispositive, the Court concluded that "the evidence of competition is weak and the patentee's delays in pursuing suit and seeking preliminary injunctive relief belie its claims that it will be unduly prejudiced by a stay."  Id. at 25.

The Court concluded that, because three of the four factors weighed heavily in favor of a stay and the fourth factor, "at best, weighs slightly in favor of denying a stay," the district court had abused its discretion in denying the stay.  Id. at 25-26.

Judge Newman dissented.  Judge Newman would have found that the district court's denial was within its discretion, concluding that "[a]lthough the Covered Business Method (CBM) statute provides that appellate review of a district court's decision to grant or deny a stay 'may be de novo,' when the district court's decision is within its range of discretion, it warrants appellate respect."  Newman Dissent at 3.

This article previously appeared in Last Month at the Federal Circuit, August, 2014.

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