Stay Ordered: Paul Allen Patent Litigation Takes Abrupt Detour

Paul Allen

Paul Allen’s road to monetize his huge patent portfolio took an abrupt detour when Judge Marsha Peckham of the Western District of Washington stayed Allen’s eleven infringement cases, pending completion of reexamination proceedings for the patents-in-suit.

Allen, a co-founder or Microsoft, established Interval Research Corporation and then set about acquiring an enormous number of patents, assigning them to Interval Research.  For years, his patents sat quietly as idle assets.  The subject of constant speculation in the high-tech community, Allen’s patents remained untested.  But on August 27, 2010, Allen, through corporate subsidiary Interval Licensing, sued a who’s-who of computer and Internet companies in the District Court in Seattle, notably AOL, Apple, eBay, Facebook, Google, Netflix, Office Depot, OfficeMax, Staples, Yahoo!, and YouTube.  Apart from a minor hic-up in December, when Judge Peckham ordered Interval Licensing to state the basis for its infringement allegations with greater specificity, see Complaint Dismissed, the case proceeded smoothly.

Then, the accused infringers requested that the Patent Office reexamine whether Allen’s patents-in-suit patents should have issued in the first place.  And on June 16, Judge Peckham stayed the infringement cases, pending the Patent Office’s completion of the reexaminations.

Reexamination is a proceeding that allows the Patent Office to take a second look at patents to determine whether they are, in fact, valid over the prior art.  The prior art references must be either patents or printed publications, and they must raise a “substantial new question” of patentability (SNQ).  The patents or printed publications therefore cannot be “cumulative” to what was considered by the examiner in the original prosecution.  They must either be new or presented in a new light.  The proceeding is most often initiated by a party accused of infringing the patent, though the patentee itself may request reexamination.

Reexamination has become quite popular among sophisticated defendants in patent infringement cases in recent years because it offers a forum far more favorable than the District Courts.  There is no statutory presumption of validity, as in the courts.  The burden of proof is by a preponderance of the evidence, not clear and convincing evidence.  The arbiter of fact is an examiner specially selected for the patent, rather than a jury of laymen.  And decisions made by the Patent Office in reexamination often reach far beyond the issue of patent validity, and effect a number of other issues as well, including claim construction, inequitable conduct and willfulness.

It’s little wonder that each year more and more accused infringers opt to request reexamination and then ask the trial court to stay the litigation pending the Patent Office’s completion of the reexamination.  The macro effect of reexamination’s increasing popularity is a major shift – from the trial courts to the halls of the Patent Office – where important patent rulings are made.  Moreover, Patent Office statistics show that a substantial number of patent claims in reexamination are either canceled or narrowed, with significant effect on infringement and damages issues.

Of course, the trial judge is not required to grant a stay.  Judges are afforded great discretion on the issue, and they exercise that discretion, with results that vary widely from court to court.

The almost universally applied standard for determining whether to stay a patent infringement case pending completion of a reexamination proceeding is clear and seemingly objective.  A court is to apply its discretion in light of the following factors:

(1) whether discovery is complete and a trial date is set, i.e., is the case in its early stages;

(2) whether reexamination would likely simplify, or perhaps eliminate, issues from the litigation; and

(3) whether a stay would unduly prejudice the patentee, or whether the stay is requested by the accused infringer for some tactical reason.

Yet the standard is commonly applied in an extremely subjective manner, such that many practitioners believe the identity of the judge is the best predictor of the outcome of a stay motion.

The problem is not with the trial judges, but with the standard itself.  That standard reflects two compelling, but contradictory, interests: one, the basic right of the patentee to exclude others practicing the claimed invention during the term of the patent, and the other, the obvious benefit to the court and to the parties from the PTO resolving major issues, thereby reducing the cost and complexity of the litigation.  Trial judges, earnestly trying to do what is right, bring different life experience to their decisions, and therefore accord very different significance to those conflicting interests.

The trial judges who typically grant stays clearly have high expectations regarding the expertise of the PTO and the likelihood that reexamination would eliminate issues from the litigation.  One court stated that the “Patent Office’s expert analysis” would simplify the issues and facilitate settlement of the case.  Another noted the Patent Office statistics, indicating that a high percentage of patent claims were either amended or canceled.  Two other courts quoted from an earlier decision that even where there is no claim amendment or cancelation, reexamination would give a “richer prosecution history [that would be] available to inform the claim construction.”  Still another court saw the value in simplification of the patent issues even though the case included several non-patent counts that, obviously, could not be simplified by reexamination.

Judge Ruben Castillo of the Northern District of Illinois stayed the case Chicago Mercantile Exchange v. Technology Research Group pending completion of a reexamination.  Chicago Mercantile filed a declaratory judgment action against Technology Research in June 2009 seeking a judgment of non-infringement and invalidity of U.S. Patent No. 5,963,923; and Technology Research counter-claimed for infringement of the ‘923 patent.  A request for reexamination of the ‘923 patent was filed in February, and at the beginning of May, the PTO ordered reexamination.  When Judge Castillo learned of the reexamination, he sua sponte asked the parties for briefing on whether a stay should issue pending completion of the reexamination.

“After careful review of the submissions provided by [the parties], the Court concludes that there is a significant probability that the PTO may invalidate the ‘923 patent or materially decrease its cope during the course of the pending reexamination” (emphasis added).  Judge Castillo added that “a stay … may avoid a potentially unnecessary jury trial, simply any remaining issues for trial, and conserve judicial and jury resources while providing the Court with the benefit of the PTO’s considerable expertise.”

Judges who typically deny stays, on the other hand, are concerned that the reexamination delay would irreparably damage the patentee by curtailing its statutory right to exclusivity of its claimed invention.  One judge has warned that reexamination delays are indefinite and often prolonged, and that the patentee’s “market loss is difficult to measure in monetary damages.”  Another stated that there was no adequate compensation for the patentee’s potential loss of goodwill.  Still another judge cited the PTO statistics regarding the period for reexamination, but cautioned that appeals could greatly lengthen that period.

For those judges who stay some cases but not others, the key fact is whether the patentee and the accused infringer directly compete in the market – if not, the patentee is unlikely to be prejudiced by a stay because the damage it sustains during a stay may be recompensed by monetary damages.  This point has a significant implications for non-practicing entities: because by definition they do not compete in the market, they are seen by some judges as being unlikely to be prejudiced by a stay.

When a case is not stayed, the patentee’s success often depends on which proceeding is completed first: the court case or the reexamination.

So what about Paul Allen’s case?  Judge Peckham’s record shows that she is one of those judges with high expectations of reexamination.  When the defendants in this case moved to stay, she applied the three-factor test and found, quite matter-of-factly, that each factor weighs in favor of a stay.  Since the reexamination requests “present[ ] a substantial body of art … there is a reasonable probability [that] the PTO will simplify the issues before the Court and the jury.”  Second, the case is in its early stages, with discovery just underway and trial scheduled about a year away.  Finally, Judge Peckham found no prejudice to Interval Licensing because it is “a holding company, [that] does not compete with Defendants and there is no danger [that] it will lose customers, market share, or other intangible benefits.”  Thus, Judge Peckham’s ruling is in line with those judges who focus on whether the parties compete directly in the market.

The focus of the litigation now shifts to the Patent Office.  How Allen’s patent claims will fare in that forum is unknown, but certainly his odds of maximizing the monetary value of his patent portfolio are diminished.  Reexamination has been ordered by the PTO for all four Allen patents, and in one (the ‘314 patent), a non-final rejection has issued.  Had Allen chosen a different court and his cases not been stayed, his patents would still be in reexamination.  Yet, his court trials would likely be completed before the reexaminations, with obvious advantages for him.

EDITOR’S NOTE: For more information on the granting of stays during litigation pending reexamination please see Scott Daniel’s collection of articles on the topic.