(In)valid patents.

Author:Gugliuzza, Paul R.
Position:Inconsistent patent validity decisions between the Patent and Trademark Office and federal courts - Abstract through II. Conflicting Decisions in Concurrent Proceedings B. The Absolute Finality Rule 2. Consequences, p. 271-302


Increasingly, accused infringers challenge a patent's validity in two different forums: in litigation in federal court and in post-issuance review at the Patent and Trademark Office (PTO). These parallel proceedings have produced conflicting and controversial results. For example, in one recent case, a district court rejected a challenge to a patent's validity and awarded millions of dollars in damages for infringement. The Federal Circuit initially affirmed those rulings, ending the litigation over the patent's validity. In a subsequent appeal about royalties owed by the infringer, however, the Federal Circuit vacated the entire judgment--including the validity ruling and damages award it had previously affirmed--because the PTO had since decided that the patent was invalid. The Federal Circuit reasoned that only "final" court judgments are immune from the effects of PTO review and, because of the open issue about royalties, no final judgment existed when the PTO rendered its conflicting decision on patent validity.

The Federal Circuit's stringent conception of finality, which this Article terms the "absolute finality rule, " raises serious questions of judicial economy, fairness, and separation of powers. Among other things, it allows accused infringers multiple opportunities to defeat liability, permits an administrative agency to effectively nullify decisions of Article III courts, and incentivizes courts to abstain from hearing patent cases altogether, at least until the PTO reconsiders the patent's validity. That said, some inefficiency or unfairness is inevitable when two different government bodies can evaluate the validity of the same patent, and the absolute finality rule, if nothing else, provides a relatively bright-line test. But it is not the only way to mediate disagree merits between the courts and the P'TO. This Article, in addition to identifying, describing, and critiquing the absolute finality rule, explores several other options for providing greater certainty about patent validity.


In 1935, the physicist Erwin Schrodinger illustrated a paradox in quantum theory with a thought experiment. (1) Imagine, Schrodinger suggested, a closed box containing radioactive material, poison in a glass bottle, and a live cat. If an atom of the radioactive material decays while the cat is in the box, a mechanism breaks the bottle, releasing the poison and killing the cat. In our everyday world, the cat, while in the box, exists in one of two states: it is either alive or dead, depending on whether or not atomic decay has occurred. According to quantum theory, however, one cannot know for certain whether decay has occurred without observing it. Thus, until the box is opened, the cat seems to exist in an indeterminate state, both alive and dead. Yet, in reality, it must be one or the other.

Like Schrodinger's cat, some U.S. patents seem to exist in an indeterminate state because of conflicting decisions about their validity. The PTO may issue a patent only if, in its view, the patent satisfies the requirements of the federal Patent Act. (2) In a subsequent lawsuit involving that patent, however, a court can declare the patent to be invalid, which happens in nearly half of all patent cases litigated to a final judgment on the issue of validity. (3) When a court finds a patent to be invalid, there is no indeterminacy about the patent's legal status. The Supreme Court has held that a court ruling of invalidity precludes the patent holder from ever again enforcing the patent. (4)

Litigation, however, is not the only way the validity of an issued patent can be reviewed. The PTO offers several proceedings through which an accused infringer can ask the agency to reconsider a patent's validity. These post-issuance proceedings have become very popular in the past few years, due largely to the America Invents Act (AIA), which Congress passed in 2011. (5) Consequently, in several recent cases, a court has ruled in the patent holder's favor on the issue of validity, found the patent to be infringed, and awarded damages, but the PTO, in a concurrent proceeding, ruled that the patent was invalid. Like Schrodinger's cat, which seemed to be both alive and dead, these patents appear to be both valid (according to the court) and invalid (according to the PTO).

Resolving the legal status of these patents is critically important. Most patents in post-issuance review at the PTO are also involved in litigation between the same parties. (6) Courts often stay litigation pending PTO review, but a stay is not automatic. (7) And the PTO is not allowed to stay its proceedings--it must move forward with post-issuance review regardless of any pending litigation. (8)

Parallel proceedings and conflicting decisions are therefore increasingly common. (9) Indeed, even the Supreme Court, in a recent case involving one of the new proceedings created by the AIA, "recognize [d].... that the possibility of inconsistent results is inherent to Congress' regulatory design." (10) Before 2013, however, there were precisely zero precedential appellate opinions considering how the PTO's invalidation of a patent affects concurrent infringement litigation. But in the past three years, the U.S. Court of Appeals for the Federal Circuit, which has exclusive jurisdiction over patent appeals, (11) has decided several cases presenting that issue. In two decisions, the Federal Circuit nullified district court awards of infringement damages to patent holders because the PTO invalidated the patent before the court proceedings concluded. (12) In both cases, however, the issues of patent validity and infringement had been fully litigated in court and resolved in the patent holder's favor; at the time the PTO invalidated the patent, the only issues that remained in the court cases related to the patent holders' remedies, such as determining the precise scope of an injunction. The Federal Circuit ruled, in essence, that court proceedings must be absolutely final for the court's ruling to survive the PTO's invalidation of the asserted patent.

On first glance, this absolute finality rule seems problematic. As a doctrinal matter, it is inconsistent with the flexible and pragmatic definition of finality found in the law of issue preclusion, which generally considers a decision on liability to be entitled to preclusive effect even if the court has not yet determined the remedy. As a structural matter, the absolute finality rule raises separation of powers concerns because it allows the PTO to override decisions of Article III courts. As a practical matter, it deters settlement and encourages losing parties to prolong litigation while seeking a favorable decision from the PTO. And, by giving an accused infringer two chances to defeat liability, the absolute finality rule is inconsistent with the notion, well-established in the Supreme Court's caselaw on preclusion, that a party should receive one "full and fair opportunity" to litigate its claims. (13)

Yet the absolute finality rule has some redeeming qualities. For example, by giving precedence to the PTO's decision, the rule permits a supposedly expert agency, rather than a court, to make the final decision on patent validity. Moreover, the rule helps protect accused infringers from paying damages for infringing a patent the PTO has determined it never should have issued. (14) The Federal Circuit, however, undermined the potential benefits of the absolute finality rule in another recent decision. In that case, the Federal Circuit affirmed a district court's refusal to vacate a judgment awarding nearly $400 million in infringement damages even though the PTO had determined--in a ruling the Federal Circuit later affirmed--that the infringed patent was invalid. (15) The Federal Circuit did not offer any reasoning in its opinion, but the rationale seems to be that the courts had resolved all issues of liability and damages--and a final judgment had been entered--before the Federal Circuit reviewed the PTO's invalidity ruling.

To be sure, it is not an easy task for the Federal Circuit to balance the authority of two different government bodies that possess independent power to invalidate the same patent. Yet the Federal Circuit has not even acknowledged the numerous difficult questions raised by inconsistent court and PTO decisions in concurrent proceedings, instead claiming that binding precedent mandates the absolute finality rule. The cases on which the Federal Circuit has relied, however, do not squarely address the matter at hand. (16) For example, the Federal Circuit has analogized to cases holding that one court's decision of patent invalidity requires dismissal of a claim for infringement of the same patent that is pending in another court. (17) But those cases involve the doctrine of issue preclusion as between two courts; they do not answer the question of how a PTO decision of invalidity affects court proceedings. Although the Supreme Court has recognized that agency decisions can be preclusive in later court proceedings, (18) a key element of issue preclusion is not satisfied in parallel court and PTO proceedings on patent validity because the two bodies use different legal standards to resolve the dispute. Most significantly, in court, the accused infringer bears the burden of proving invalidity by clear and convincing evidence, (19) but at the PTO the standard of proof is merely a preponderance of the evidence. (20)

This Article critiques the Federal Circuit's absolute finality rule from a doctrinal perspective and engages the normative questions the Federal Circuit has ignored. In so doing, the Article contributes to a nascent literature exploring the interplay between district court litigation and the increasingly popular post-issuance review mechanisms at the PTO. (21) Doctrinally, the Federal Circuit should resolve conflicts between the courts and the PTO by looking to...

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