Baxter battle may change IP litigation

PTO decision encourages infringers to challenge patents in both court and PTO proceedings

What more can a patentee do? Baxter International won a patent infringement suit against rival Fresenius USA, convinced the Federal Circuit to uphold that verdict and on March 16, obtained a final judgment for more than $23.5 million dollars. Baxter’s legal battle, one might think, is over.

It’s not. Baxter is at risk of losing its hard-fought judicial victory because in an ex parte re-examination, the U.S. Patent and Trademark Office (PTO) found Baxter’s invention was obvious and voided its patent.

The agency reached this decision despite the fact that the district court and the Federal Circuit had rejected Fresenius’ assertion that Baxter’s patent should be thrown out because the invention was obvious.

The PTO’s action amounts to an unconstitutional “administrative nullification of a final judicial decision,” Federal Circuit Judge Pauline Newman said in a ruling after the PTO re-examined Baxter’s patent claims. It “violates the rules of litigation repose as well as the rules of estoppel and preclusion,” she wrote in the May 17 opinion.

While Judge Newman wrote in dissent, two other Federal Circuit judges upheld the PTO’s decision. Judges Alan Lourie and Kimberly Moore said, in In re Baxter International, that the prior court rulings did not bar the PTO from re-examining the patent for obviousness.

This controversial decision has upset many patent owners because it encourages alleged infringers to challenge a patent’s validity in both court and PTO proceedings. It also allows a challenger to prevail even after a court has issued a final determination. “This gives challengers two bites at the apple,” says Scott McKeown, a partner in Oblon, Spivak, McClelland, Maier & Neustadt.

Obvious Ruling

The legal battle began in 1991, when Baxter filed for patents on a hemodialysis machine with a touchscreen interface. Baxter subsequently obtained three patents on this machine, which became a commercial success.

In 1998, Fresenius began selling its own hemodialysis machine with a touchscreen interface. The company sued Baxter in 2003, seeking a declaratory judgment that its product was not infringing. Baxter countersued, accusing Fresenius of patent infringement.

Several years later, while the lawsuit dragged on, Fresenius asked the PTO to open an ex parte re-examination of Baxter’s patents. The examiner determined in 2007 that all three of Baxter’s patents were void because the invention was obvious. Baxter appealed this decision to the PTO’s Board of Patent Appeals and Interferences (BPAI).

That same year, in the lawsuit between Baxter and Fresenius, a California jury found Baxter’s invention was obvious and all three of the company’s patents were void. But the trial judge overruled the jury and granted judgment as a matter of law (JMOL) to Baxter.

Fresenius appealed and, in 2009, won a partial victory. The Federal Circuit, in Fresenius USA v. Baxter International, reversed the district court’s JMOL on two of the patents and reinstated the jury’s finding that these patents were invalid for obviousness. The Federal Circuit upheld the JMOL on the third patent. The panel then ordered the district court to determine the remedy to be imposed on Fresenius for violating that one patent.

The BPAI took note of the Federal Circuit decision. Nevertheless, in 2010, the agency upheld the examiner’s decision and found all three of Baxter’s patents were void. Baxter appealed this ruling to the Federal Circuit.

Then, on March 15, 2012, the trial court handed down its final judgment against Fresenius for infringing Baxter’s one remaining patent. The court ordered Fresenius to pay more than $23.5 million in damages and royalties.

Less than two months later, the Federal Circuit upheld the BPAI’s invalidation of all three Baxter patents. The agency’s decision, the court held, did not conflict with Fresenius v. Baxter.

Determining Validity

The Federal Circuit explained that in cases such as Fresenius v. Baxter—in which a party challenges a patent for obviousness—courts don’t decide whether patents are valid. The court merely decides whether the challenger has satisfied its “statutory burden to prove invalidity by clear and convincing evidence.” Should the challenger fail to meet that burden, “the court will not find the patent ‘valid,’ only that ‘the patent challenger did not carry the “burden of establishing invalidity in the particular case before the court.’”

The PTO, by contrast, does determine validity in its re-examination proceedings. And it does so based on a different standard: a preponderance of the evidence.

The courts and the PTO thus apply different tests in order to decide different legal questions. Ideally, both legal procedures should produce the same outcome, the Federal Circuit stated. But if the outcomes are different, that does not create a conflict between the courts and the PTO, according to the Federal Circuit.

“When you have separate proceedings with separate standards, sometimes the outcomes are different. But according to the majority, that’s what Congress provided for,” McKeown says.

Judge Newman, however, strongly disagrees. “Any distinction between judicial and agency procedures cannot authorize the agency to overrule a final judicial decision,” she wrote in her dissent. “The validity of the Baxter patent was resolved upon litigation in the district court and on appeal to the Federal Circuit. This judgment cannot be ‘revised, overturned or refused full faith and credit by another Department of Government’ [such as the PTO].”

Concurrent Challenges

In re Baxter isn’t the first time the Federal Circuit has declared that even after the courts have rejected an obviousness challenge to a patent, the PTO can nullify a patent for obviousness (see “Drawing Distinctions”). But this interpretation of the law seems far from settled.

“There is a growing drumbeat of dissent by patent owners,” says Jon Wright, a partner at Sterne, Kessler, Goldstein & Fox. “A head of steam is building for further review of this.”

Such review is likely, according to some experts. “Judge Newman’s angst over the ruling will be significant. She has invited the Supreme Court’s review, and the Supreme Court will have a hard time turning her down,” says Jordan Sigale, a partner at Loeb & Loeb.

In the meantime, a growing number of businesses are likely to challenge patents concurrently before the courts and the PTO. “Since 2005, the number of re-examinations has gone steadily up,” Wright says. “Today, challengers often ask for re-examination as well as fight in court. It is very common.”

Some provisions of the America Invents Act (AIA) that go into effect Sept. 16 will revise and speed up the process of challenging patents before the PTO. That is likely to further boost re-examinations.

Fresenius, for its part, intends to make the most of its re-examination victory. According to Juanita Brooks, a Fish & Richardson principal who represents Fresenius in this legal battle, the company will argue that because the PTO found Baxter’s patent to be void ab initio, Baxter can’t base any legal recovery on the patent. The district court’s final judgment against Fresenius therefore should be overturned.

Baxter and its counsel declined to comment on the ongoing litigation.

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Steven Seidenberg

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