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VirtualAgility Inc. v., Inc.

United States Court of Appeals, Federal Circuit

July 10, 2014

VIRTUALAGILITY INC, Plaintiff-Appellee,

Appeal from the United States District Court for the Eastern District of Texas in No. 2:13-cv-00011-JRG, Judge J. Rodney Gilstrap.

CHRISTIAN JOHN HURT, Nix Patterson & Roach LLP, of Irving, Texas, argued for plaintiff-appellee. With him on the brief were EDWARD K. CHIN and ANDREW JOSEPH VIRTUALAGILITY INC. 2 v. SALESFORCE.COM, INC. WRIGHT; and DEREK T. GILLILAND, of Daingerfield, Texas. Of counsel was D. NEIL SMITH, of Irving, Texas.

JOSE C. VILLARREAL, Wilson, Sonsini, Goodrich & Rosati, PC, of Austin, Texas, argued for defendants-appellants. With him on the brief was DARRYL J. ADAMS, Baker Botts, LLP, of Austin, Texas, for Kimberly--Clark Corporation. Of counsel were JOEL CHRISTIAN BOEHM and BRIAN DAVID RANGE, Wilson, Sonsini, Goodrich & Rosati, PC, of Austin, Texas; and KEVIN J. MEEK, Baker Botts, LLP, of Austin, Texas.

Before NEWMAN, MOORE, and CHEN, Circuit Judges. OPINION filed by Circuit Judge MOORE. Dissenting opinion filed by Circuit Judge NEWMAN.


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Moore, Circuit Judge ., Inc. and other defendants (collectively, Defendants)[1] appeal from the district court's order denying their joint motion to stay VirtualAgility Inc.'s (VA) patent infringement lawsuit against Defendants pending post-grant review of the validity of VA's asserted claims under the Transitional Program for Covered Business Method Patents (CBM program). We reverse .


In January 2013, VA sued Defendants alleging infringement of U.S. Patent No. 8,095,413 ('413 patent). On May 24, 2013, Salesforce filed a petition with the Patent Trial and Appeal Board (PTAB) for post-grant review of all claims of the '413 patent under the CBM program. In the petition, Salesforce argued that all claims of the '413 patent were eligible for this form of post-grant review because they are directed

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to a " covered business method patent" within the meaning of § 18(a)(1) of the America Invents Act (AIA), Pub L. No. 112-29, 125 Stat. 284, 329-31 (2011), and that Salesforce had standing to bring the petition because it was sued for patent infringement, AIA § 18(a)(1)(B). Salesforce further argued the PTAB should institute CBM review because all the claims of the '413 patent were more likely than not patent-ineligible under 35 U.S.C. § 101 and invalid under 35 U.S.C. § § 102, 103 in view of several prior art references.

On May 29, 2013, Defendants filed a motion to stay district court proceedings pursuant to AIA § 18(b)(1). See Defendants' Joint Motion To Stay Proceedings, VirtualAgility Inc. v., Inc., 13-cv-00111 (E.D. Tex. May 29, 2013), ECF No. 67. In August 2013, while this motion was pending, the district court issued a discovery order and held a scheduling conference, setting an April 2014 date for a claim construction hearing and a November 2014 date for jury selection. Also in August 2013, VA filed a Preliminary Response in opposition to Salesforce's petition at the PTAB pursuant to 37 C.F.R. § 42.207(a). In November 2013, the PTAB granted-in-part Salesforce's petition based on its conclusion that all claims of the '413 patent are directed to a covered business method, and are more likely than not patent-ineligible under 35 U.S.C. § 101 and invalid under § 102 as anticipated by U.S. Patent No. 5,761,674 (Ito). The PTAB also issued its own scheduling order, setting a July 2014 date for a trial on the validity of the '413 patent claims.

In early January 2014, the district court denied Defendants' motion to stay the case pending CBM review. VirtualAgility Inc. v., Inc., 13-cv-00111, 2014 WL 94371 (E.D. Tex. Jan. 9, 2014). Defendants timely filed an interlocutory appeal to this court, and also filed motions to stay district court proceedings pending the disposition of this appeal with the district court and this court. While these motions were pending, VA filed a Motion to Amend the '413 patent claims with the PTAB contingent on the claims' invalidation. PTAB No. CBM2013-00024, Paper 26 (Jan. 28, 2014). In February, we issued an order staying proceedings in the district court pending our disposition of Defendants' motion to stay pending appeal. VirtualAgility Inc. v., Inc., 14-1232 (Fed. Cir. Feb. 12, 2014), ECF No. 34. Pursuant to our order, the district court entered the stay pending appeal.


We have jurisdiction over this appeal under AIA § 18(b)(2), which provides that " [a] party may take an immediate interlocutory appeal from a district court's decision" granting or denying a motion to stay litigation pending CBM review. The statute instructs the district court to consider the following four factors when deciding whether to grant a stay:

(A) whether a stay, or the denial thereof, will simplify the issues in question and streamline the trial;

(B) whether discovery is complete and whether a trial date has been set;

(C) whether a stay, or the denial thereof, would unduly prejudice the nonmoving party or present a clear tactical advantage for the moving party; and
(D) whether a stay, or the denial thereof, will reduce the burden of litigation on the parties and on the court.

AIA § 18(b)(1). The statute further provides that we " shall review the district court's decision to ensure consistent application of established precedent, and such review may be de novo." Id . § 18(b)(2) (emphasis added).

I. Standard of Review

The parties dispute the standard of review that we should apply to this case.

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Defendants contend that the statute " encourages full de novo review where factual evidence and conclusions of law are reviewed fully and independently." Appellant's Br. 15. VA responds that we should review the order denying a stay with deference because such decisions implicate district courts' management of their own dockets, which is a matter traditionally left to their discretion. We note that prior to the AIA, district court decisions on motions to stay pending U.S. Patent and Trademark Office (PTO) proceedings were generally not appealable and, when they were, we reviewed them under the abuse of discretion standard. Procter & Gamble Co. v. Kraft Foods Global, Inc., 549 F.3d 842, 845, 848-49 (Fed. Cir. 2008); see also Landis v. N. Am. Co., 299 U.S. 248, 254-55, 57 S.Ct. 163, 81 L.Ed. 153 (1936); Gould v. Control Laser Corp., 705 F.2d 1340, 1341 (Fed. Cir. 1983). We also note that the AIA expressly created an immediate right of appeal of stay decisions pending CBM review, gave us jurisdiction over the interlocutory appeals, and that the only standard mentioned in the statute is de novo review. Nevertheless, we need not resolve this dispute because we hold that, even under the abuse of discretion standard argued for by VA, the district court's decision to deny a stay pending the PTAB's review of the '413 patent claims under the CBM program must be reversed. Nothing in this opinion should be read as deciding the standard of review applicable to the ultimate stay decision or the individual factors. We leave it to a future case to resolve what Congress meant when it indicated that our " review may be de novo."

II. Factors (A) and (D): Simplification of Issues and Reduced Burden of Litigation

The district court concluded that the first factor--simplification of the issues--was " essentially neutral, if not slightly against" granting a stay because it was " not convinced" by the PTAB's assessment that cancellation of some or all of the claims during CBM review was " probable." VirtualAgility, 2014 WL 94371, at *2, *5. The district court reviewed the lengthy prosecution history that the '413 patent underwent before issuance. The court was persuaded that " there can be little dispute here about the thoroughness of the PTO's prior examination of the '413 patent, given the various grounds of invalidity and the breadth of prior art references considered by the PTO before issuing this patent." [WL] at 3. The court then performed its own evaluation of the bases upon which the PTAB granted the CBM petition. The court stated that, even though the Ito patent had never been before the PTO, it was not persuaded that Ito anticipates all of the claims given the PTO's extensive review of other prior art during " a lengthy prosecution process." Id. The court also concluded that the value of the PTAB's consideration of Ito was " marginal" because Defendants introduced two other pieces of prior art in the district court proceedings--which, they represented, were " of particular importance" --that Salesforce did not include in its CBM petition. Id. With regard to the PTAB's decision to review whether the '413 patent claims are patent-ineligible, the court observed that the claims were amended during prosecution to overcome an earlier § 101 rejection. Based on its assessment of the claims and the law of § 101, the court " was not persuaded that the PTAB will likely cancel all claims of the '413 patent" as patent-ineligible. [WL] at 4. In spite of the PTAB's grant of the CBM petition, finding that all the claims of the '413 patent were more likely than not invalid on two different grounds, the district court concluded that it was not convinced that the PTAB would cancel some or all of the '413 patent claims. The court further concluded that it was not convinced that the CBM review would simplify

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the issues in this case and that, therefore, this factor was " neutral, if not slightly against, granting a stay." [WL] at 5.

The court determined that the parties' arguments regarding the fourth factor--burden of litigation--" substantially overlap" with those presented under the first factor. It found that " the specific circumstances in the instant case present only a limited possibility" of a reduced burden on the court and the parties. [WL] at 8. The court therefore concluded that the fourth factor " weighs only slightly in favor of a stay." Id.

After the court denied the motion for a stay, VA filed proposed claim amendments in the CBM review. Defendants filed a motion to, at least, stay district court proceedings pending appeal of the denial of the motion to stay. Defendants argued that the fact that VA has already filed a motion to amend claims in the CBM proceeding increased the likelihood that the CBM proceeding will simplify issues. In its decision denying the motion to stay pending appeal, the court observed that VA's proposed amendments to the '413 patent claims in the CBM proceeding were not a part of the record at the time of its decision on the motion now on appeal. See VirtualAgility Inc. v., Inc., 13-cv-00111, 2014 WL 807588 (E.D. Tex. Feb. 27, 2014). On the merits, the court concluded that Defendants " made no attempt at showing how . . . conditions triggering the amendments would likely arise" and have not " challenged [its] previous finding that cancellation of some or all the claims was unlikely." [WL] at 2. The court also noted that, " [t]o the extent any further statements [by VA] or amendments to claims may affect [its] claim construction, such is fully remediable with supplemental claim constructions." [WL] at 3. Thus, the court concluded that the fact that VA moved to amend the claims in the CBM proceeding did not affect its determination regarding the first and fourth factors.

On appeal, Defendants contend that the district court made " critical errors" in finding the first factor neutral or slightly against the stay. Defendants argue that CBM review will simplify and streamline issues for trial because the district court would not need to address any claims that are cancelled and because Defendants will be estopped from challenging the validity of the '413 patent in view of § 101 and the Ito patent after the review is concluded.[2] Defendants further argue that claim amendments during CBM review may eliminate infringement arguments and give rise to intervening rights. They contend that the district court should not have second-guessed the PTAB's conclusion that all '413 patent claims are " more likely than not" anticipated by Ito and invalid under § 101.

Defendants also argue that the fourth factor likewise strongly favors a stay because CBM review may spare Salesforce's customers, who have also been sued by VA, from discovery, while " the true parties in interest" focus on the validity of the '413 patent at the PTAB. They argue that a stay will further reduce discovery burdens on third parties. Finally, they contend that the district court erred by conflating the fourth factor with the first factor and by giving it too little weight.

VA counters that a stay will not significantly simplify this case or reduce the

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burden on the court and the parties. As an initial matter, VA contends that we should not take into account its Motion to Amend because it was not a part of the record below. VA asserts that, while the motion to stay litigation pending CBM review was pending, it told Defendants that it might move to amend the claims. It contends that, because Defendants did not notify the district court about VA's possible amendments, they waived any argument about the Motion to Amend. On the merits, VA points out that the motion seeks to amend only seven of the twenty-one asserted claims and that the amendments may not necessarily be entered for any of the claims. It contends that the proposed amendments merely clarify the claim language and are not related to claim construction disputes currently before the district court, and thus would not significantly impact the litigation.

VA also argues that a stay is unlikely to meaningfully simplify the case because invalidity issues not before the PTAB, as well as infringement and damages issues, will remain as long as a single claim survives CBM review. It contends the PTAB's § 101 review is also unlikely to simplify the case because patent-eligibility analysis is generally not resource-intensive. VA contends that the district court's conclusion that the claims would likely survive the PTAB's scrutiny was reasonable based on its assessment of § 101 law. Further, VA argues that there is a " palpable risk" that we would vacate the PTAB's decision to initiate CBM review of the '413 patent under the Administrative Procedure Act (APA) because it is not a " covered business method patent" within the meaning of § 18(d)(1) of the AIA. It argues that Defendants' assertion that PTAB review would simplify litigation is contrary to trial court experience, and that the district court therefore properly rejected Defendants' " generic" arguments that a stay pending CBM review would promote efficient adjudication in this case. VA contends that Salesforce's arguments about its customer defendants and third parties were not properly preserved for appeal. It argues that, in any event, the customers are the true parties in interest because they partner with Salesforce, and that a stay would not reduce a burden on third parties because most third-party discovery has already taken place.

We conclude that it is proper for us to consider the fact that VA filed a Motion to Amend in our review of the district court's decision. Defendants did not waive the arguments regarding claim amendments. They argued to the district court that claim amendments during PTAB review are a distinct possibility and, in doing so, gave VA an opportunity to respond to this argument below. Defendants' Joint Motion To Stay Proceedings at 7-8.

We also conclude that we are not improperly expanding the record on appeal if we consider the Motion to Amend. See Moore U.S.A., Inc. v. Standard Register Co., 229 F.3d 1091, 1116 (Fed. Cir. 2000) (citing Fed. R. App. P. 10(a)). We are mindful that " [a]n appellate court may consider only the record as it was made before the district court." Ballard Med. Prods. v. Wright, 821 F.2d 642, 643 (Fed. Cir. 1987); see also Sage Prods., Inc. v. Devon Indus., Inc., 126 F.3d 1420, 1426 (Fed. Cir. 1997) (" No matter how independent an appellate court's review of an issue may be, it is still no more than that--a review." ). Nevertheless, pursuant to Rule 201(b)(2) of the Federal Rules of Evidence, we may take judicial notice of the fact that a filing was made before the PTAB. See, e.g., Genentech, Inc. v. Chiron Corp., 112 F.3d 495, 497 n.1 (Fed. Cir. 1997) (noting that, because the " record before the Board is a public record . . . and thus capable of accurate and ready determination by resort to unquestionable sources," judicial

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notice was appropriate). Cognizant of the limits imposed by Rule 201(b)(2), however, we reiterate that we consider only the fact that a Motion to Amend was filed--not the impact of the proposed amendments on the parties' claim construction and infringement arguments. The latter cannot be " accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed.R.Evid. 201(b)(2). Moreover, the district court's ability to address the Motion to Amend in its ruling denying a stay of its proceedings pending appeal supports our consideration of the fact that VA filed proposed claim amendments because we are not faced with the uncomfortable task of doing so for the first time on appeal. Cf. Singleton v. Wulff, 428 U.S. 106, 121, 96 S.Ct. 2868, 49 L.Ed.2d 826 (1976).

Another preliminary issue concerns the relationship between the first and fourth factors. We agree with the district court that there is a great deal of overlap between the parties' arguments with regard to these two factors. We note, however, that the simplification of the issues factor and the burden of litigation factor are listed separately in the statute. Thus, even when both factors point in the same direction--in favor of or against the stay--they continue to be separate, individual factors which must be weighed in the stay determination. We cannot, as VA requests, collapse the four-factor test expressly adopted by Congress into a three-factor test.

We conclude that the district court clearly erred in finding that the first factor was neutral or slightly against a stay, and that the fourth factor weighed only slightly in favor of a stay. We hold that these factors strongly favor a stay in this case. The district court erred as a matter of law to the extent that it decided to " review" the PTAB's determination that the claims of the '413 patent are more likely than not invalid in the posture of a ruling on a motion to stay. Under the statutory scheme, district courts have no role in reviewing the PTAB's determinations regarding the patentability of claims that are subject to CBM proceedings.

Indeed, a challenge to the PTAB's " more likely than not" determination at this stage amounts to an improper collateral attack on the PTAB's decision to institute CBM review, and allowing it would create serious practical problems. As a preliminary matter, Congress made post-grant review more difficult to obtain than reexamination by raising the standard from " a substantial new question of patentability," 35 U.S.C. § 303(a) (2012), to " more likely than not . . . unpatentable," id. § 324(a). Congress clearly did not intend district courts to hold mini-trials reviewing the PTAB's decision on the merits of the CBM review. To do so would overwhelm and dramatically expand the nature of the stay determination. If the district court were required to " review" the merits of the PTAB's decision to institute a CBM proceeding as part of its stay determination, it would undermine the purpose of the stay. When the stay decision is then appealed to this court, we would be required to likewise review the PTAB's decision to institute a CBM proceeding. This is clearly not how or when Congress intended review of the PTAB's CBM determinations to take place. See id . ยง 141(c) (" A party to . . . a post-grant review who is dissatisfied with ...

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