United States: Federal Circuit Reverses District Court Judgment Under Theory Of Issue Preclusion

In Soverain Software LLC v. Victoria's Secret Direct Brand Management, LLC, Nos. 12-1649, -1650
(Fed. Cir. Feb. 12, 2015), the Federal Circuit reversed the district court's judgment that the asserted patents were infringed and not invalid. 

Soverain Software LLC ("Soverain") is the assignee of two patents, U.S. Patent Nos. 5,715,314 ("the '314 patent") and 5,909,492 ("the '492 patent"), which are directed to virtual shopping carts.  Soverain asserted the '314 and '492 patents against multiple defendants in separate suits in the Eastern District of Texas, including against Victoria's Secret Direct Brand Management, LLC ("Victoria's Secret") and Avon Products, Inc. ("Avon").  Following a jury trial, the district court entered judgment that Victoria's Secret and Avon infringed the asserted claims and that the asserted claims were not invalid.  Victoria's Secret and Avon appealed. 

"Complete identity of claims is not required to satisfy the identity-of-issues requirement for claim preclusion."  Slip op. at 15 (citing Ohio Willow Wood Co. v. Alps S., LLC, 735 F.3d 1333, 1342 (Fed. Cir. 2013)).

On appeal, the Federal Circuit reversed the district court's judgment, holding that issue preclusion applied in light of its previous decision in Soverain Software LLC v. Newegg Inc., 705 F.3d 1333 (Fed. Cir.), amended on reh'g, 728 F.3d 1332 (Fed. Cir. 2013), which held claims of the asserted patent invalid as obvious. 

To determine whether issue preclusion should apply to the asserted claims as a result of the Newegg decision, the Court used the four-part test applied in the Fifth Circuit:  (1) the issue under consideration in the subsequent action must be identical to the issue litigated in the prior action; (2) the issue must have been fully and vigorously litigated in the prior action; (3) the issue must have been necessary to support the judgment in the prior case; and (4) there must be no special circumstance that would render preclusion inappropriate and unfair.  The Federal Circuit applies a similar test to determine whether issue preclusion applies. 

As an initial matter, the Court noted that in Newegg, it explicitly held that most of the asserted claims were invalid for obviousness.  The Court also held that although one of the asserted claims was not explicitly invalidated in Newegg, the Court did find one of its dependent claims invalid and, therefore, the invalidity determination extended to it as well. 

The Court then addressed whether Victoria's Secret and Avon could properly use a defense of issue preclusion.  The Court relied on the Supreme Court's holding "that a defense of issue preclusion applies where a party is 'facing a charge of infringement of a patent that has once been declared invalid,' even though the party asserting the defense was not a party to the action where the patent was invalidated."  Slip op. at 7 (quoting Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313, 349-50 (1971)).  The Court noted that its own precedent similarly establishes that "once the claims of a patent are held invalid in a suit involving one alleged infringer, an unrelated party who is sued for infringement of those claims may reap the benefit of the invalidity decision under principles of collateral estoppel."  Id. at 7-8 (quoting Mendenhall v. Barber-Greene Co., 26 F.3d 1573, 1577 (Fed. Cir. 1994)).

After addressing these initial considerations, the Court proceeded in assessing the four-factor test to determine whether issue preclusion applies.  Soverain agreed that issue preclusion would normally apply, but that it did not in this case because the second factor had not been met, namely, Soverain had not been given a full and fair opportunity to litigate the issue of obviousness.  The Court rejected Soverain's argument, however, holding that during the appeal from the district court in the Newegg case, the Court addressed the question of obviousness.  Specifically, the Court noted that after determining that the claims at issue were invalid as obvious, Soverain petitioned for rehearing to address claims that were not considered by the Court.  The Court also noted that it allowed for additional briefing and arguments, and again held the additional claims invalid for obviousness.  In addition, the Court rejected Soverain's argument that a new trial should have been granted at the district court, stating, "We implicitly rejected the patentee's argument that the court should have granted a new trial rather than JMOL, implicitly rejecting the idea that Soverain did not have a full and fair opportunity to litigate."  Id. at 11 (citation omitted). 

The Court similarly rejected Soverain's assertion that it would have raised different arguments had it known that the Court would reverse the district court on invalidity rather than only granting a new trial.  The Court noted, however, that the basic issue of obviousness was central to the question of whether there were grounds for a new trial.  In addition, the Court noted that Soverain presented the same arguments about limitations in the asserted claims that it put forth in the instant case, which were rejected in Newegg.  The Court also rejected Soverain's assertion that it would have presented evidence that Newegg's expert did not properly establish obviousness, given that the Court already concluded that the expert indeed established that each element of the asserted claims was present in the prior art system on which his testimony relied.  Given that Soverain had a full and fair opportunity to litigate the issues presented in Newegg, the Court held that the invalidity determination in Newegg was properly applied in the instant case. 

Finally, the Court ruled that the asserted claim not invalidated in the Newegg decision was also invalid.
Soverain argued that issue preclusion should not apply because the claim was not previously held obvious, and thus did not present identical issues.  The Court explained that "[c]omplete identity of claims is not required to satisfy the identity-of-issues requirement for claim preclusion."  Id. at 15 (citing Ohio Willow Wood Co. v. Alps S., LLC, 735 F.3d 1333, 1342 (Fed. Cir. 2013)).  The Court further explained that collateral estoppel applies when "the differences between the unadjudicated patent claims and adjudicated patent claims do not materially alter the question of invalidity."  Id. (quoting Ohio Willow Wood, 735 F.3d at 1342).  The unadjudicated limitation here, transmitting a hypertext statement over the Internet, according to the Court, did not materially alter the question of validity of the claim, stating that it reasoned in Newegg that the patentee "did not invent the Internet, or hypertext, or the URL."  Id. at 16 (quoting Newegg, 705 F.3d at 1343).

For the above reasons, the Court reversed the judgment of the district court, finding the asserted claims of the '314 and '492 patents invalid. 

Judges:  Dyk (author), Taranto, Hughes

[Appealed from E.D. Tex., Chief Judge Davis]

This article previously appeared in Last Month at the Federal Circuit, March 2015.

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