Federal Circuit rules Soverain collaterally estopped despite obvious due process concerns

Yesterday the United States Court of Appeals for the Federal Circuit issued one of the most procedurally unfair and fundamentally inappropriate decisions you will ever read.

In Soverain Software v. Victoria’s Secret Direct Brand Management, the Federal Circuit ruled that Soverain is collaterally estopped from suing on patent claims earlier invalidated in Soverain Software v. Newegg (September 4, 2013). Stated in that way the decision seems reasonable. Once you learn that the Federal Circuit sua sponte ruled the patent claims were obvious without affording Soverain the opportunity to raise arguments that the claims were non-obvious it becomes clear that the Federal Circuit fundamentally violated Soverain’s due process rights both in the litigation against Newegg and in this more recent case against Victoria’s Secret.

To understand just how unfair and legally incorrect this decision by the Federal Circuit is we need to go back to the Newegg case. In that case Soverain brought a patent infringement suit against Newegg for infringement of claims of U.S. Patent No. 5,715,314, its continuation Patent No. 5,909,492, and Patent No. 7,272,639. The patents relate to electronic commerce, wherein a merchant’s products are offered and purchased online, through computers interconnected by a network. The jury found Newegg liable for infringement of the ’314 and ’492 patents, and awarded Soverain damages of $2.5 million. The jury found that Newegg did not infringe the ’639 patent, but the district court granted Soverain’s motion for JMOL of infringement of the ’639 patent, and ordered a new trial to assess damages for the ’639 patent, to be tried after the completion of appeals. The district court awarded Soverain post-verdict damages and an ongoing royalty. After the close of evidence the district court removed the question of obviousness from the jury, the court stating: “I don’t think there’s sufficient testimony to present an obviousness case to the jury. I think it would be very confusing to them.”  The district court then held that the claims were not invalid on the ground of obviousness. Newegg’s motions for JMOL or a new trial were denied.

On appeal to the Federal Circuit the only relief Newegg sought was a remand for a new trial. The Federal Circuit had other ideas, however, and sua sponte found the patent claims at issue invalid because they were obvious despite the fact that Soverain was defending a JMOL of non-obviousness and thus had no reason to brief the underlying factual disputes related to obviousness. The unfairness of deciding a case on an issue not presented to the Court should be self evident, and no doubt is self evident to anyone with an open mind and no agenda.

So blatant was the Federal Circuit’s lack of due process in Soverain v. Newegg, in parallel patent infringement litigation the district court allowed Soverain to continue to sue on the patents and claims lost at the Federal Circuit.

In the decision reached Thursday, Judge Dyk properly explained the relevant law, and then proceeded to ignore the facts of the case to reach his conclusion. Dyk explained:

Under issue preclusion law generally and under both our law and Fifth Circuit law, a judgment of invalidity will not have a preclusive effect if a patentee can demonstrate that it did not have a full and fair opportunity to litigate the issue.

Ultimately, one by one, Dyk revisited and dismissed all of the arguments made by Soverain in the Newegg appeals. Dyk concluded: “The fact that Soverain had arguments which it did not make does not mean that Soverain lacked the incentive to make them.” However, in the current appeals, Dyk disregarded that Victoria’s Secret sought issue preclusion on an issue it hadn’t preserved on appeal, flipped the full and fair opportunity burden of proof against Soverain, and overlooked the conflicting prior decisions of the district court, juries and PTO.

Judge Dyk’s conclusion, which was joined by Judge Taranto and Judge Hughes, is fatally flawed. I suppose the Federal Circuit can conclude that Soverain had the ability to fully and fairly litigate the issue of obviousness, including the incentive to make arguments to prove that the claims were non-obvious, but such a conclusion is without any doubt clearly erroneous. Frankly, such a conclusion is also rather ridiculous.

Newegg appealed to the Federal Circuit seeking a new trial and without warning the Court invalidated claims as being obvious. Apparently, despite the fact that there are strict page limits imposed at the Federal Circuit, Soverain was somehow supposed to fully brief all of the issues directly raised by Newegg, as well as all of the issues an activist Federal Circuit could possibly imagine. To call this a ridiculous burden doesn’t begin to scratch the surface. The Federal Circuit is depriving Soverain of property rights without due process, period. This is one of the reasons why Judges are supposed to decide only the case in front of them.

Whatever happened to the well established appellate rules that say an argument not raised below is waived on appeal? The Federal Circuit has a long line of cases that unequivocally say that arguments not raised during the briefing stage are waived. See Cardsoft v. Verifone (Fed. Cir. 2014)(holding that the patentee waived any argument that Appellants infringe under the correct construction because the argument was not briefed in the opening brief); SmithKline Beecham Corp. v. Apotex Corp. (“Our law is well established that arguments not raised in the opening brief are waived.”); Cross Med. Prods., Inc. v. Medtronic Sofamor Danek, Inc., n. 3 (Fed. Cir. 2005); Fuji Photo Film Co. v. Jazz Photo Corp., n. 4 (Fed. Cir. 2005) (holding that this court will not address arguments that are not properly raised in the opening brief); Becton Dickinson & Co. v. C.R. Bard, Inc., (Fed.Cir.1990) (declining to “depart from the sound practice that an issue not raised by an appellant in its opening brief … is waived”). These cases are supposed to be binding on the Federal Circuit until overruled by en banc decision (see Federal Circuit Rule 35(a)(“only the court en banc may overrule a binding precedent…”).

So why exactly didn’t the Federal Circuit appropriately apply the law of the Circuit relative to waiver? Newegg only asked for a new trial and not for a finding that the claims in question were obvious, so under well established law and binding precedent of the Federal Circuit Newegg waived the argument that Soverain’s patent claims were obvious. Did I somehow miss an en banc panel decision that held that arguments are waived unless you are Newegg? Did I miss an en banc panel decision holding that arguments are waived unless you are suing Soverain, in which case we will fill in all the blanks for you? Seriously, why does the Federal Circuit actually require briefs to be filed by opponents of Soverain anyway? It seems relatively clear that regardless of the sufficiency of the brief or arguments the Federal Circuit is only going to rule against Soverain anyway, even if they have to ignore binding precedent.

It is worth noting that prior to the Federal Circuit’s decision in Soverain v. Newegg there were multiple district court judges and multiple juries who continually found the patent claims to be infringed and not invalid. Additionally, the Soverain patents went through lengthy, protracted and repeated reexaminations at the United States Patent and Trademark Office. Here are the facts relating to those reexamination proceedings:

• 5 of Soverain’s patents, out of a portfolio of 60 patents/apps, have been reexamined a total of 8 times.
• Throughout these 8 reexaminations, all of the reexamined claims except one unasserted claim have been confirmed, with none of the other claims ever being amended.
• Throughout these 8 reexaminations Soverain managed to add 270 new dependent claims.
• 3 of Soverain’s patents (the ‘314, ‘492 and ‘639, which are the ones asserted in the Newegg litigation) have each been reexamined twice.

Simply stated, in the Newegg case we once again see the Federal Circuit step in to find patent claims obvious where no other decisionmaker, including multiple juries, agreed.

The lack of process afforded Soverain both in the Newegg case and in the Victoria Secret case should shock everyone. The Federal Circuit complains that they do not have the resources to handle all the cases coming their way as the result of the new proceedings created by the America Invents Act (AIA), but they continue to start from scratch on obviousness and provide district courts and juries absolutely no deference. The lack of deference is astonishing particularly after the Supreme Court just ruled that deference must be given to district courts and juries on findings of fact. See Supremes End CAFC Love Affair with de novo Review. The mere fact that the Federal Circuit provided no deference to the district court in Soverain v. Newegg should alone make any decision on the patents in that case suspect and not binding in further litigation.

This decision by the Federal Circuit is particularly difficult to accept because it seems further evidence of a Court tilted significantly toward infringers and away from innovators. The Federal Circuit is not bound when one panel finds claims valid and infringed. In a subsequent panel the Federal Circuit can, and has, found that the same claims were invalid over the same prior art. It seems that nothing is final and settled at the Federal Circuit until patent claims have been invalidated.

Time will tell whether Soverain will request rehearing, seek en banc review or petition for cert. to the Supreme Court. This type of process question could be particularly attractive to the Supreme Court given the Constitutional aspects involved.