XY, LLC v. Trans Ova Generics, L.C. (Fed. Cir. 2018)

By Kevin E. Noonan --

Judge Pauline Newman has been concerned regarding constitutional issues raised by the U.S. Patent and Trademark Office Patent Trial and Appeal Board's implementation of inter partes review as provided by the Leahy-Smith America Invents Act (codified at 35 U.S.C. § 311 et seq.).  Specifically, Judge Newman's concerns involve separation of powers issues and accordingly, are different from the issues raised in Oil States Energy Services, LLC. v. Greene's Energy Group, LLC.  As she wrote in her dissent in Fresenius USA, Inc. v. Baxter Int'l, Inc., 721 F.3d 1330 (Fed. Cir. 2013):

The court today authorizes the Patent and Trademark Office, an administrative agency within the Department of Commerce, to override and void the final judgment of a federal Article III Court of Appeals.  The panel majority holds that the entirety of these judicial proceedings can be ignored and superseded by an executive agency's later ruling.

Judge Newman had an opportunity to reiterate her concerns in her dissent (in part) from the Federal Circuit's decision in XY, LLC v. Trans Ova Generics, L.C.

The case arose from a lawsuit between the parties alleging mutual breach of contract, patent infringement by Trans Ova, and invalidity and antitrust allegations by Trans Ova against XY.  The technology involved sperm cell sorting (to separate X- and Y-chromosome containing sperm) (of direct, U.S. Patent Nos. 6,149,867 and 6,524,860, and reverse, U.S. Patent Nos. 7,713,687 and 7,771,921, varieties), sorted, frozen sperm cell preparations (U.S. Patent No. 7,820,425), and methods for using the sorted sperm cells for in vitro fertilization (U.S. Patent No. 8,569,053).  The '867 and '860 patents involve devices and methods for providing "optimum pre- and post-sorting fluid environments for the cells to 'achieve as unaffected a sorted result as possible.'"  The '425 patent claims methods for "'cryopreserving sperm that have been selected for a specific characteristic.'"  The '687 and '921 patents claim methods for first freezing and then sorting sperm, distinguished from the '867 and '860 patents by the use of "a relatively high concentration of dye for staining the sperm cells," specifically 40 micromolar versus 9 micromolar.  The '053 patent claims use of both types of sorted sperm for in vitro fertilization methods.

The breach of contract issues between the parties stemmed from a license to the patents-in-suit between Trans Ova and XY, which Trans Ova entered into after becoming dissatisfied with sperm it purchased from another XY licensee, Inguran.  When Inguran acquired XY it notified Trans Ova that it was terminating the license for material breach.  Despite this notice, Trans Ova continued to pay the license royalty during years of negotiations between the parties (which XY did not accept but one, asserted to be in error).  Also, during the negotiation period XY alleged additional instances of material breach by Trans Ova.

The District Court granted summary judgment to XY in rejecting Trans Ova's antitrust claims, on the grounds that the 4-year statute of limitations on Sherman antitrust actions had run and that Trans Ova did not satisfy the "continuing conspiracy" exception (Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 338 (1971)) to the limitations statute under Tenth Circuit law, citing Champagne Metals v. Ken-Mac Metals, Inc., 458 F.3d 1073, 1088 (10th Cir. 2006).  In the subsequent trial, the jury found each party liable for damages for breach of contract and awarded damages to each.  In addition, because the jury found XY had properly terminated the license by its Termination Letter, Trans Ova's activities thereafter constituted willful infringement (in view of the Supreme Court's intervening decision setting the willful infringement standard in Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016)).  Finally, the jury found that Trans Ova had not satisfied its burden to show invalidity by clear and convincing evidence.

The District Court denied Trans Ova's post-trial motions and granted XY's motions for a continuing royalty (12.5% for direct sales and 2% royalty for the "reverse" sorting methods) but denied its motion for enhanced damages for prior, willful infringement and injunctive relief (based on the jury's finding that XY had unclean hands).

The Federal Circuit affirmed-in-part, vacated-in-part, and remanded, in an opinion by Judge Chen joined in full by Judge Dyk; Judge Newman concurred-in-part and dissented-in-part.  The Court's decision on summary judgment against Trans Ova on its antitrust counterclaims affirmed that the burden to present evidence that the continuing conspiracy exception applied rested with Trans Ova, which had not adduced sufficient evidence to have borne its burden.  With regard to the cross-claims for breach of contract, the panel rejected Trans Ova's three arguments in affirming the District Court.  First, the panel held that "Trans Ova's breaches were [not] excused by XY's prior material breach and continuing breaches," because "a reasonable jury could have found that Trans Ova materially breached before XY by underpaying royalties and developing improvements to XY's technology without disclosing such improvements to XY."  Trans Ova's second argument, that "the jury's findings that both parties breached were irreconcilably inconsistent," was never presented to the District Court, the panel stating that it would not consider the argument on appeal.  Finally, with regard to Trans Ova's argument that the District Court had abused its discretion by adopting XY's proposed jury verdict form, the Federal Circuit held that "the jury was properly instructed on materiality, [therefore] the jury was adequately equipped to determine how a material breach by one party affected later breaches by the opposing party."

Turning to Trans Ova's invalidity argument, the Court stated that it "need not address" the question of invalidity of the '425 patent in light of its summary affirmance of the PTAB's determination that these claims were invalid in an IPR instituted by a third party.  This decision collaterally estops XY "from asserting the patent in any further proceedings," according to the majority, basing its decision on its precedent in Mendenhall v. Barber-Greene Co., 26 F.3d 1573, 1576 (Fed. Cir. 1994); Dana Corp. v. NOK, Inc., 882 F.2d 505, 507–08 (Fed. Cir. 1989); and other cases, and ultimately on the Supreme Court's decision in Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313 (1971).  Contrary to Judge Newman's argument (see below), the majority saw no distinction between whether a patent was invalidated by a district court or the PTAB with regard to its collateral estoppel effect.  The majority found this to be "a straightforward application of this court's and Supreme Court precedent."  It justified the application of collateral estoppel by the parties joint expectations that it would apply, and in an effort to avoid "unnecessary judicial waste," citing Pharmacia & Upjohn Co. v. Mylan Pharm., Inc., 170 F.3d 1373, 1379 (Fed. Cir. 1999).

As for the invalidity arguments, the panel held that the District Court did not abuse its discretion in denying Trans Ova's post-trial motions and that the jury's verdict was supported by substantial evidence (from XY's expert).

Regarding the damages determinations, the District Court's decision not to award enhanced damages mooted appeal of the willfulness determination, but the Federal Circuit found that the District Court's imposition of the differential royalty rates were improperly arrived at.  Specifically, the District Court had not appreciated the distinction between "a reasonable royalty for pre-verdict infringement and damages for post-verdict infringement," citing Amado v. Microsoft Corp., 517 F.3d 1353, 1360 (Fed. Cir. 2008).  This included considerations such as the change in bargaining position occasioned by a verdict that claims were not invalid and infringed in a negotiation between the parties for an on-going royalty.  The Federal Circuit held that the District Court had focused inappropriately on pre-verdict factors (which were either "irrelevant or less relevant than post-verdict factors") and in using a license rate arrived at by using the pre-verdict positions of the parties.  This would have led to the "absurd" result that it would have been economically more lucrative for XY to continuously sue Trans Ova for future infringement (and thus get a higher royalty for "past" infringement) than to accept an on-going royalty at the District Court's on-going royalty rate.  The Federal Circuit vacated this portion of the District Court's decision and remanded for the Court to recalculate the on-going royalty rate in light of this opinion.

Judge Newman's dissent was focused on the collateral estoppel issue.  She stated her constitutional concerns at the start of her dissenting opinion:

[T]his holding that judicial authority is estopped by an administrative agency ruling between non-mutual parties warrants attention to the constitutional balance among the branches of government.

And she believes (and was further concerned) that the panel's "sua sponte creation" of collateral estoppel under these circumstances occurred "without notice to the parties, without briefing, and without opportunity to respond."

Judge Newman recognized that the PTAB is empowered to decide questions of validity in IPRs before it, but the estoppel provided in the statute is against the petitioner under 35 U.S.C. § 315(e)(2).  Here, the majority imposed an estoppel against a decision from a district court where the petitioner before the PTAB was neither a party nor its privy.  According to Judge Newman, "the agency decision does not automatically override and estop the district court's earlier validity judgment, and remove that judgment from our appellate cognizance," which is what the majority's decision does.  The point is also procedural:  the fact that the Court has validated the PTAB decision in a separate decision "cannot ratify our concurrent refusal to apply the Article III standard of review to the district court decision here on appeal" and this outcome is not mandated by the law of collateral estoppel in Judge Newman's view.  To this end, the dissent cites United States v. Mendoza, 464 U.S. 154 (1984), for the principle and Mackey v. Mendoza-Martinez, 362 U.S. 384, 387 (1960), for "the constitutional concerns raised by collateral estoppel."  Application of collateral estoppel is not automatic under Blonder-Tongue, according to Judge Newman, and "is subject to a variety of exceptions" under Montana v. U.S.  But according to this dissent, the majority's decision provides "no opportunity [] to raise possible exceptions and objections" because it imposes the estoppel on the basis solely of the PTAB's decision.  Judge Newman relies on the Restatement of Judgments §§ 28–29 for eight separate and distinct exceptions, and states that

Applying these principles to this appeal, we need understand no more than the different standards of validity in the PTAB and the district court, the different burdens of proof, and the different standards of appellate review in this court, to appreciate that inconsistent decisions can be reached in the PTAB and the district court, all weighing heavily against estoppel.

Characterizing the majority's decision as "appellate surprise," Judge Newman concluded that the Federal Circuit precedent relied upon by the majority, Dana Corp. v. NOK, Inc., 882 F.2d 505 (Fed. Cir. 1989), can be distinguished from this case because here "estoppel was not raised on this appeal, was not briefed, not argued at the hearing, not briefed post-hearing" (regardless of the parties "expectations" which cannot be known because estoppel was never discussed on the record, citing Justice Story's concurrence in Trs. of Dartmouth Coll. v. Woodward, 17 U.S. 518, 697 (1819), for the point that "[t]he fallacy of the argument consists in assuming the very ground in controversy").

And in a footnote, she makes the broader point about the issues between decisions by district courts and the PTAB:

My colleagues rely on this panel's concurrent affirmance of the PTAB's invalidation of the Freezing Patent in a non-mutual proceeding, XY, LLC v. ABS Global, Inc., Appeal No. 16-2228.  On the standard of "substantial evidence," the PTAB decision is supportable.  However, on the district court's standard of "clear and convincing evidence," or even applying the standard of "preponderant evidence," the Freezing Patent retains validity.  This discrepancy and the ensuing uncertainty of outcome illuminate a major flaw in the America Invents Act.  Although it is now confirmed that Congress has authority to authorize the PTAB to invalidate issued patents, see Oil States Energy Services, LLC v. Greene's Energy Group, LLC, No. 16-712, 2018 WL 1914662 (U.S. Apr. 24, 2018), it cannot be inferred that Congress also authorized the PTAB to override the judgments of Article III courts.

Ultimately, Judge Newman's concern is due process, which it will be recalled is an area where the Supreme Court has left open the possibility for further judicial review of how the PTAB implements the IPR provisions of the AIA.  "The indispensable ingredients of due process are notice and an opportunity to be heard by a disinterested decision-maker," Judge Newman writes, citing the Federal Circuit's application in Abbott Labs. v. Cordis Corp., 710 F.3d 1318, 1328 (Fed. Cir. 2013), of Supreme Court precedent from Caperton v. A.T. Massey Coal Co., 556 U.S. 868, 876–81 (2009).  These very due process concerns were absent in Dana Corp., providing Judge Newman with a distinction that vitiates the majority's reliance thereupon in supporting its decision to apply collateral estoppel here.  While judicial efficiency (another principle the majority cites) may be admirable, "[d]ue process is not 'unnecessary judicial waste'" and failing to provide the parties with due process is improper.

After citing the Court's own precedent supporting her position on how collateral estoppel must be imposed, Judge Newman closes her dissent by saying:

Here, collateral estoppel was not pleaded and was not argued, yet is imposed on appeal without opportunity for response—contrary to precedent requiring that the precluded party "had a full and fair opportunity to present its arguments" concerning estoppel.  Transclean Corp. v. Jiffy Lube International, Inc., 474 F.3d 1298, 1308 (Fed. Cir. 2007).  The cases cited by the panel majority do not support their position; they support the contrary position.

These departures from statute, precedent, practice, and due process add to the uncertainty of the patent grant, and thus add disincentive to patent-supported innovation.  I discern no benefit to the public.  I respectfully dissent.

Once again, Judge Newman appears to make the better argument on this issue.

XY, LLC v. Trans Ova Generics, L.C. (Fed. Cir. 2018)
Panel: Circuit Judges Newman, Dyk, and Chen
Opinion by Circuit Judge Chen; opinion concurring-in-part and dissenting-in-part by Circuit Judge Newman

Comments

[Atari Man]

"Once again, Judge Newman appears to make the better argument on this issue."

An understatement, Kevin.

Judge Newman's characterization of the majority's holding as "appellate surprise" is an even greater understatement. It should "judicial ambush".

I look forward to the en banc petition. Hopefully recourse to a cert request won't be necessary.

[EG]

"Once again, Judge Newman appears to make the better argument on this issue."

Hey Kevin,

Not a surprise, she usually does, truly the "conscience" of the Federal Circuit. It will be a very sad day when she is no longer sitting on the Federal Circuit bench.

[Greg DeLassus]

“I look forward to the en banc petition. Hopefully recourse to a cert request won't be necessary.”

From your lips to God’s own ears. Judge Newman has essentially drafted the petition for reconsideration for XY. Hopefully the rest of the court can see how far this panel has run off the rails on this one point. I agree that certiorari should not be necessary. This is the sort of mistake that the CAFC can correct by itself.