Vacating an Invalidity Rulings as a Condition of a Negotiated Settlement

Block Financial v. LendingTree (W.D. Mo. 2010)
[File Attachment: Block.v.LendingTree.Invalidity.pdf (25 KB)]
[File Attachment: DismissalReq.pdf (16 KB)]

[Updated March 17, 2010] In 2001, Block Financial sued LendingTree for infringement of its US Patent No. 6,014,645 entitled "REAL-TIME FINANCIAL CARD APPLICATION SYSTEM." Later, Block added assertions of infringement of its US Patent No. 7,310,617 (a continuation application). The case was stayed for several years pending outcome of a reexamination that changed or eliminated about half of the '645 patent's 35 claims.

In a September 2009 order, the district court (W.D. Mo. Judge Smith) issued a partial summary judgment order invalidating many of Block's claims in its '617 patent based on a violation of the "new matter" prohibition of the written description requirement – holding that Block's "February 2002 amendment added new matter to the pending application, which is prohibited by section 132. As those claims are not supported by the original application, they must be declared invalid."

In February 2010, the parties entered into a confidential settlement agreement after the court agreed to vacate its invalidity findings. The parties explained that such an action would serve the public interest:

The court vacating its order would serve the public interest since it facilitates a resolution of the litigation between the parties and the dispute regarding this particular issue. See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 26 (1994) (holding that vacatur is appropriate when it would serve the public interest). The parties respectfully submit that the vacatur of the court's partial summary judgment order is in the public interest and ask that the court vacate its order in order to allow the parties to settle the current case.

In response to the joint motion vacate, the court issued following order:

The Court is informed that the parties have reached settlement of this case. The settlement contemplates that the Court vacate its Order of September 10, 2009 (Doc # 188). In accordance with the parties' agreement and their joint motion (Doc. # 247), the Court's Order of September 10, 2009 is hereby vacated.

Of course, the US Supreme Court might well contend that the public interest is not being served by this vacatur. In Lear, Inc. v. Adkins, 395 U.S. 653 (1969), the court refused to enforce a contract that barred patent validity challenges – noting a "strong federal policy" in challenging invalid patents and therefore "permitting full and free competition in the use of ideas which are in reality a part of the public domain." A major purpose of this settlement is to remove the black-spot of invalidity from the '617 patent so that it can be asserted against other parties at other times. And, as many have noted, the expense of invalidating a clearly invalid patent is often sufficient to lead to settlement. Of course, once a defendant is relieved of potential liability, it may be quite happy for the patent to remain in effect as a roadblock to other competitors.

See also, Gear Inc. v. L.A. Gear California Inc., 13 USPQ2d 1655 (S.D.N.Y. 1989) (using settlement agreement to vacate judgment of that the term "gear" was generic when used on clothing); Judkins v. HT Window Fashion Corp, 529 F.3d 1334 (Fed. Cir. 2008) (discussing the lower court's decision to vacated ruling of abandonment under 102(g) based on settlement agreement); In re Tamoxifen Citrate Antitrust Litigation, 429 F.3d 370 (2nd Cir. 2005); Aqua Marine Supply v. AIM Machining, Inc., 247 F.3d 1216 (Fed. Cir. 2001).

27 thoughts on “Vacating an Invalidity Rulings as a Condition of a Negotiated Settlement

  1. The court’s decision to vacate an invalidity determination in Block Financial v. LendingTree (W.D. Mo. 2010) appears to fly directly in the face of well settled Federal Circuit and Supreme Court precedent prohibiting this very action. The Supreme Court’s decision in U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18 (1994), makes clear that vacatur should not be granted when requested pursuant to a post-judgment settlement absent some exceptional circumstance beyond the parties’ control. In this regard, the Supreme Court and the Federal Circuit have found that vacatur is proper only where review of a judgment is prevented through happenstance and circumstances beyond the parties’ control and that voluntary settlement is insufficient to vacate, absent exceptional circumstances. See Aqua Marine Supply v. AIM Machining, Inc., 247 F.3d 1216 (Fed. Cir. 2001).

    The courts should not endorse the practice of vacating invalidity decisions where the only basis is voluntary settlement. The obvious reason for seeking vacatur is to avoid the preclusive effects on subsequent lawsuits. The parties’ argument in Block Financial that vacatur served the public interest because it facilitated settlement of the parties’ dispute flies in the face of U.S. Bancorp, where the Court said that allowing parties to collaterally attack a judgment through vacatur, in order to avoid the statutorily mandated path of appeal, would “disturb the orderly operation of the federal judicial system.”

    Allowing parties to escape the preclusive effect of a judgment permits repeat litigants to buy their way out of adverse judgments and get a second bite at the apple. This practice not only deters settlement at an earlier stage but discourages settlement of other litigation involving the same patent.

    Case in point, I was recently involved in a case in which after full trial on the merits in another case involving the same patent, a jury found that the patent was invalid. This final judgment not only inevitably had preclusive effect on my case, but also had been held to have preclusive effect on yet another case in which the judge granted summary judgment on the basis of collateral estoppel.

    My client was permitted to intervene to object to the vacatur of the underlying judgment of invalidity; however, the court granted the parties’ request to vacate based solely on their voluntary settlement; absolutely no other basis was provided for the vacatur request. The unbridled waste of judicial resources consumed by the lengthy jury trial coupled with the deterrence to settle prior to trial does not serve the public interest. A patentee should not be permitted to pursue claims of infringement against others where the patent has been invalidated, particularly given the enormous costs of patent infringement litigation. As the Supreme Court noted, the proper avenue to challenge the judgment is post-trial motions and appeal, not court-sanctioned vacatur.

  2. I just took a look at the amendments filed in Feb. 2002. (There are two such amendments.) One added new claims 10-25. Neither amendment added anything to the specification so how could new matter been added?

    It strikes me that the district court mentioned Section 132 as a basis for holding the claims invalid. The proper holding should have been limited to Section 112, p. 1 — meaning that the claims were not supported in the patent application as filed.

  3. First of all, the invalidity had not been reduced to judgment. Period. It was an interlocutory decision of the court subject to change prior to the entry of judgment. So we are talking about an interlocutory decision, not a final appealable judgment. Even a part of a case that is certified for appeal.

    Consider: The better view is that appellate opinions are not precedent until the mandate issues. Why should a district court ruling have precedential value (even between the parties) prior to judgment?

    The Supreme Court vacates opinions because a possibly erroneous judgment may have an effect. Certiorari acknowledges the existence of an important, unresolved issue. It seeks to avoid mischief.

    A judge does not have to accept a settlement conditional on an act of his. If that is true, the case is not moot yet. The court is the one looking out for the public interest, which may well be to get the case off the docket to let justice be dispensed in other cases.

    The judiciary does not view itself as a forum where participants are forced to fight to conclusion. Judges turn down agreed settlements all the time. Look at plea bargain agreements.

  4. I see, Dennis. Thank-you. The option of an alternatively structured settlement sheds light on the situation.

  5. Broje – With an ordinary settlement the answer is no. If the parties no longer have a dispute then there is no longer an active “case or controversy” and the court loses its Article III jurisdiction.

    I have seen examples where cases have settled except that the parties put a contingency on the outcome of the appeal. If the appeal goes one way then the defendant pays $x if not then defendant pays $y.

  6. My question is, could the patentee both settle with the defandant AND still appeal the ruling, or would the patentee no longer have proper grounds or standing to appeal? I really don’t know. Can someone please tell me?

    If so, then maybe there is reason to object to allowing settlements to be conditioned on such vacatur, and argue for a policy ruling against such conditional settlements. If not, preventing such vacatur would stand in the way of settlements in these situations, as patentees would need to complete the appeal of the invalidity ruling in one patent before settling with the denfendant on other patents. Such a disincentive to settle would be a remarkably bad policy. So you can see why I’m asking this question.

  7. Ned, that is ridiculous, in so far as your criteria for a supposedly-minor “technical defect” applies to just about anything can be wrong with a patent. Whether something is obvious or not is often a close question. If it is obvious, it can be removed via reissue. Obviousness or any other ground of rejection need not be permanently fatal, at least in most cases.

  8. Whether something is new matter or not is often a close question. If it is new matter, it can be removed from the spec by a certificate of correction. If it is also in the claims, it can be removed via reissue. New matter need not be permanently fatal.

    Technical defect. No more.

  9. That is very insightful Max.

    That is also very clever Ms. Mcpherson. Are you perhaps one of Eric Massa’s staff members, or perhaps The Tickler himself?

  10. ….and following on from that, Dennis, do you think “vacating” is anything like “voiding”? In your book, I mean.

  11. I was beginning to think that Sarah Mcpherson is code for “random word generator”. Is she a soap opera character, or what?

    Then I realised that it is an anagram of “She craps on Rahm.”

    Readers, what do you think? Is this interesting.

  12. Adding matter during prosecution ought not to be dismissed as a “technicality”. It is as good a ground to find a patent invalid as is prior art. Better actually. The inventor can’t be held responsible for the prior art, and opinions on obviousness may differ. But prosecution amendment is different. Applicant has a free choice and some incentive is necessary, to keep him honest. Where is the public interest in turning a blind or benign eye to covetous prosecution amendments?

    In the public interest in legal certainty, and fairness between rival queuing Applicants with different filing dates, and the usefulness of convincing clearance opinions, there needs to be a powerful deterrent to those who would amend during prosecution to smuggle into the pending app the matter that will convert an invalid claim as filed into a valid claim at issue, or to direct the claims to an invention that had not been made at the date on which the app was filed.

    For an example of the trouble that can be caused by letting new matter in during prosecution, see the DSS case in Europe, to which Ron Katznelson adverts in the FtF thread running concurrently. DSS asserts that ever Euro banknote that ever issued is an infringement. Heavy stuff.

  13. Patent grants are infected with the public interest. In order to get a limited monopoly, you must disclose to the public something that the public didn’t have before. Lear was rightly decided.

    The following are not in the interest of the public:

    1. Vacated invalidity holdings.
    2. Reverse damages (if that is what it is called in the drug cases where the winner pays the loser.)
    3. Non-precedential decisions (which allows a court to badly decide a case because the decision is then not binding on other cases.) Can you imagine if SCOTUS had non-precedential decisions?

  14. Ned Note further that the instant case invalidated the patent on a technicality

    New matter is a “technicality”?

    As far as we can tell, the inventor brought to the public the invention

    Or not.

    Freedom of speech, Ned. It’s in the Constitution.

  15. The court is being manipulated by the litigants. The law should discourage settlement after a case has been gone through the trial phase by requiring any joint stipulation on settlement include a commission as a percentage (say 5%) of the settlement value to be paid to the government. After all, the government worked to facilitate the settlement.

  16. I was about to post similar thoughts, Mr. Morgan. If the accused infringer in case #2 can show how judge #1 found the patent to be invalid, it probably won’t matter whether it’s the clean kill of collateral estoppel or the mortal wound of stare decisis.

  17. Ned, I like your post. I agree with you that this case can be distinguished from Aqua Marine on the “conditional” grounds and therefore the court was not necessarily bound by that case. I also agree that the Supreme Court used what is now antiquated language in Lear when referring to patent “monopolies” and that new matter “technicality” issues should perhaps be treated differently than prior art issues. However, I suspect that the current Supreme Court would not support your final conclusion.

  18. “When a defendant has obtained a license, his incentive is actually for the patent to be enforced as vigorously against his remaining competitors as possible.”

    While generally correct, this assumes the settlement includes a license; which, though highly likely, is not readily apparent from the available information.

  19. Ned, if “conditioning” a settlement on vacatur will ensure that a district judge will approve it, then settlements will quickly and consistently be “conditioned” on such vacatur. That includes the supposedly superior “prior art” invalidations as well as any other type of invalidation. When a defendant has obtained a license, his incentive is actually for the patent to be enforced as vigorously against his remaining competitors as possible.

  20. TJ, Both Aqua Marine and the Supreme Court case upon which it relies, Bancorp, relied on “mootness” based on a “prior” settlement to eliminate the court’s subject matter jurisdiction to vacate a prior judgment.

    Here, in contrast, the settlement, if I understand it correctly, was “conditioned” on vacating the prior order. This is whole different kettle of fish.

    Now, what I really object to is Dennis’s implication that the court should not have vacated the invalidity order even where that was necessary to settle the litigation on the basis of “public policy.” As Paul Morgan said, the order still is of public record and can and will provide future litigants with a road map to invalidity. It is just that the patent owner has one more shot at the district court level to get it right before he or she has to appeal. Now, as far as I can see, there is nothing whatsoever wrong with that.

    Lear v. Atkins, a 1969 case, still viewed and called patents “monopolies,” even after Congress has legislatively overruled that thinking in 1952 with 271(d). Patents are not monopolies, they are property. Enough of this “c r a p.”

    Note further that the instant case invalidated the patent on a technicality, not on the basis of prior art. As far as we can tell, the inventor brought to the public the invention which Dennis now seems to derogate as the common resource of all mankind. That kind of thinking should be reserved by patents on things which are demonstrably part of public domain.

  21. A major purpose of this settlement is to remove the black-spot from the ’617 patent so that it can be asserted against other parties at other times.

    LOL. Bring it on.

  22. As long as the basis of the invalidity decision is publicly available, as here, it at least does not present the same level of adverse public interest as a settlement that results in the supression of patent invalidating evidence not easily found by others (such as prior art or bar dates known only to the parties).

  23. I don’t think this is even close. Under Aqua Marine Supply v. AIM Machining, Inc., 247 F.3d 1216 (Fed. Cir. 2001), the district court here got is so wrong it is out of the ballpark. But, the prohibition against vacating invalidity judgments just because the parties agree to it is kind of impossible to police. District courts love to grant them, since it means that it gets rid of the case from its docket, gets insulated from appeal, and district judges are in the habit of rubber stamping anything with “joint motion” on top. And without an appeal, which nobody is about to file since they jointly sought the vacatur, there is nothing for the Federal Circuit to do.

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