The administrative proceedings for challenging patents, including new proceedings enacted by America Invents Act (Inter Partes Review, Post Grant Review, and Business Method Review), can be potent tools for exerting considerable leverage against patentees. A third party can use these proceedings to attempt to cancel and/or narrow the scope of a troublesome patent before any litigation is commenced. Further, an accused infringer can take advantage of these proceedings after patent litigation has been initiated to cause significant uncertainty for the patentee.
The recent case of Fresenius USA Inc. v. Baxter International Inc. provides a compelling example of how a reexamination proceeding that was pursued in parallel with litigation became instrumental in the final determination of the case and saved Fresenius from a $24 million dollar damages award that had been imposed by the District Court.
In 2003, Fresenius filed a declaratory judgment suit in the Northern District of California seeking a judgment of invalidity against three Baxter’s patent, which were directed to hemodialysis machines, including U.S. Patent No. 5,247,434 (the ‘434 patent) as well as non-infringement. Baxter counterclaimed that Fresenius infringed certain claims of those patents.
In 2007, the District Court entered judgment against Fresenius with regard to infringement and invalidity. The District Court held that Fresenius had infringed Baxter’s patent and had not provided sufficient evidence to show invalidity of those patents. In 2008, the District Court imposed a permanent injunction and awarded Baxter damages including post-verdict damages. The Federal Circuit affirmed the District Court’s validity determination with regard to the ‘434 patent but deemed the other two patents invalid. The Federal Circuit sent the case back to the District Court for reconsideration of the injunction and the post-verdict damages. In March 2012, the District Court entered final judgment with regard to post-verdict damages awarding Baxter a reduced royalty rate. The District Court awarded Baxter approximately $24 million dollars in damages. Both parties appealed the District Court’s decision to the Federal Circuit.
In parallel with the District Court litigation, an ex-parte reexamination filed by Fresenius in 2005 proceeded in the Patent Office. Fresenius had requested reexamination of those claims of the Baxter’s patents involved in the District Court litigation based on certain references not considered during the original examination and not presented against the Baxter’s patents in the litigation. In May 2012, the Federal Circuit affirmed the final determination of the Patent Office that the claims of the ‘434 that were subject to reexamination were in fact invalid.
In the appeal of the post-verdict damages before the Federal Circuit, Fresenius argued that the cancelation of the claims by the Patent Office eliminated the underlying cause of action and requested that the case be dismissed. The Federal Circuit agreed. The Federal Circuit reasoned that the cancelation of the Baxter’s claims by the Patent Office extinguished the cause of action because the judgment in the litigation was not final when the reexamination was concluded (the issue of post verdict damages was still on appeal before the Federal Circuit).
This decision further encourages the use of administrative proceedings for challenging issued patents, including Ex Parte Reexamination as well as the new Inter Partes Review created by the America Invents Act, as essential tools in patent litigation. It will also be interesting to see if, as a result of the Fresenius decision, the rate of stays of district court litigations in view of pending reexaminations will increase.