Since the creation of the Court of Appeals for the Federal Circuit in 1982, the Washington D.C.-based appeals court has had an outsized influence on the development of patent law in the United States. With the burgeoning interest in "patent play" stocks, it behooves investors to acquire some knowledge of the workings of the Federal Circuit as part of their due diligence and monitoring of their investments in the patent assertion sector. Because the Federal Circuit has exclusive appellate jurisdiction over patent disputes, whether they arise out of the Federal District Courts or the USPTO, its importance in patent law cannot be overstated. And because the US Supreme Court takes on patent matters relatively infrequently, the Federal Circuit is often the "court of last resort" for patent litigants.
As many investors have learned, when it comes to patent law, victory at the trial court level is usually an intermediate, rather than a final, event in the process of deciding a patent case. Absent a settlement, most patent litigants will eventually seek Federal Circuit adjudication, whether they are appealing from a summary judgment ruling, a jury verdict, or an USTPO decision (notably, International Trade Commission (the ITC) decisions are also appealed to the Federal Circuit). An obvious example of this phenomenon is unfolding now, in the form of the Vringo (NASDAQ:VRNG)/Google (NASDAQ:GOOG) case -- a case of immense importance to many "patent play" investors, and one in which the Federal Circuit proceedings are about to begin in earnest, with the upcoming filing of Google's opening brief on July 22, 2013.
While this is in no way meant to be an exhaustive list of considerations for investors in regards to the Federal Circuit (there are legal treatises of considerable length focusing on Federal Circuit jurisprudence in patent cases), there are a number of things that patent investors should be aware of on a basic level. For purposes of this article, we will use the Vringo/Google appeal as an exemplar, but the general points to consider will be applicable to most patent cases that have reached the Federal Circuit stage. Some other patent plays that are or are anticipated to reach the Federal Circuit other than Vringo are VirnetX (NYSEMKT:VHC), ParkerVision (NASDAQ:PRKR) -- see our article regarding the likelihood that Parkervision's case against Qualcomm (NASDAQ:QCOM) will be going to trial), Worlds (OTCQB:WDDD) as well as the ongoing infamous Apple (NASDAQ:AAPL) cases against Samsung (OTC:SSNLF), among others.
Most of the action in the Federal Circuit is limited to the briefing -- or the written submissions that the parties make laying out their arguments. The Appellant (lit. party appealing) goes first with their opening or principal brief. In Vringo's case, Google is the Appellant (even though Vringo initiated the appeal process first, the Federal Circuit decided that, on balance, Google was the one appealing the more substantive rulings from below) and its principal brief is due next week. The response brief comes next, usually within 40 days of the filing of the principal brief, absent some other agreement by the parties for more time. So we can expect to see Vringo's response brief within 40 days, or perhaps even an extension request. In the response brief, the Appellee will also put forth its arguments for its cross-appeal. After the parties serve these opening briefs, they are required to talk settlement, and the Federal Circuit has a robust mediation program available to help accomplish that goal. Investors will need to monitor for the setting of any mediation date, as that may serve as a catalyst if settlement is announced.
If the case does not settle, then the Appellant will get a reply brief, in which it can reply to the Appellee's arguments regarding the Appellant's appeal points, and also respond with its own arguments to the appeal points raised in the Appellee's cross-appeal. In the Vringo case, this will be Google's opportunity to reply to Vringo's arguments seeking to sustain the jury verdict for example, as well as Google's opportunity to respond to Vringo's arguments on the laches ruling that Vringo is undoubtedly appealing. The final brief, absent exceptional circumstances, is the Appellee's reply to the Appellant's response on the cross-appeal. Here, Vringo will get to reply to Google's arguments on the laches issue, for example. It is hard to predict with certainty when the briefing will be done in any case because extensions are so common. Monitoring the docket for those extension requests and subsequent orders by the Clerk of the Federal Circuit is advised.
Once briefing is complete, the next stage of the process involves the setting of the oral argument date -- usually 3 months or so from when the written submissions are done. Oral arguments in the Federal Circuit are usually conducted before a panel of three Circuit Judges (whose identities are revealed the day of the argument), and each side will have 15 minutes for their argument. Sometimes parties are given more time, but anything over 30 minutes a side is extremely unusual. You can listen to oral arguments (or attend them in D.C.), and access recently filed briefs (with a PACER account) through the Federal Circuit's website. We have a practice of reading the briefs and listening to prior oral arguments involving counsel for cases we are interested in, and consider it an essential element of our due diligence.
Given the short amount of time allotted for oral argument at the Federal Circuit, unlike at the district court level, the parties briefing is critical to advancing their arguments. In our experience, a poorly drafted argument cannot typically be saved at the hearing.
From the perspective of the investor, the oral argument is nevertheless critical. Decisions are never made by the Court from the bench. Patent play stocks have, at times, jumped on the day of the hearing, even though nothing will technically be decided on that day. Nevertheless, an informed investor can gain critical insight from the panel's questions and comments during the hearing. These questions and comments often provide important signals as to where the Court is leaning. That insight can help an investor reallocate a position in advance of the decision.
After the oral argument, the Federal Circuit decides the case on its own timetable. Sometimes, the rulings below are summarily affirmed (a "Rule 36" affirmance) within a matter of weeks. Should the Federal Circuit issue a formal non-precedential or precedential opinion, it can affirm, or reverse the conclusions below. In the case of a reversal, it will frequently remand the case to the District Court for further proceedings. Multi-issue appeals frequently have some combination of affirmances and reversals within the same opinion, those broken down by the issues the Federal Circuit chooses to address in its opinion.
Parties can ask for a rehearing or an en banc (full Federal Circuit) review of the decision within 30 days of the Federal Circuit's ruling. These are rarely granted, and usually only deal with one issue when they are. A party can also petition to the Supreme Court from a Federal Circuit ruling, but those petitions are granted only in extraordinarily limited circumstances. As we said, for the vast majority of patent cases, the Federal Circuit is the court of last resort. It is no wonder that a Federal Circuit opinion can be a tremendous catalyst investment wise.
The Legal Standards
A discussion of the different legal standards that the Federal Circuit uses to decide issues before it on appeal is beyond the scope of this article. As a general matter though, investors should realize that the Federal Circuit does use different standards on review for different legal issues. And that the more strictly "legal" (e.g., claim construction, a summary judgment ruling) a decision by the lower court is, the less deference it will receive -- for example, claim construction is reviewed de novo (Latin for "from the beginning"), which is one of the reasons for the Federal Circuit's reputation as an appellate court with a high reversal rate of District Court rulings. On the flip side, factual findings by the jury and/or Judge are entitled to the highest level of deference. Again, this is a very complicated topic that we just want to acknowledge exists and that investors should be aware of. With respect to the Vringo case, investors should consider consulting with experienced patent counsel to determine the standards of review that will apply to the jury's findings and Judge Jackson's various rulings.
Those following the Vringo case may have noticed the addition of more lawyers (on both Google's and Vringo's sides) to the trial teams for appeal purposes. This is not unusual, due to the specialized nature of Federal Circuit practice -- even for patent litigators with trial experience. Many times, companies will want to have counsel that has deep Federal Circuit experience to either handle the appeal, or at least assist lead trial counsel with navigating the Federal Circuit process. These experienced appellate advocates bring knowledge of the sometimes quirky Federal Circuit procedures to the table, in addition to helping provide a new perspective on the actual issues that are up on appeal.
And picking the right issues for appellate review is critical. Appeals are much more focused than trials, and many experienced Federal Circuit practitioners like to focus on two or three core issues in a case, maximum. Trying to re-litigate every ruling from the trial, or bring to bear every single piece of evidence uncovered at trial is often a losing strategy. Winning in the Federal Circuit depends on maintaining a laser focus on advancing your best arguments on your strongest issues. Vringo and Google have brought in appellate lawyers who they think can help them do that. Investors can do their due diligence on those lawyers on their own or with the help of patent counsel.
As we have already said, it is difficult to estimate the timeframes for a Federal Circuit Appeal. With extensions for the briefing phase, and the amount of time the Federal Circuit often takes to decide cases, there is often a wide variance between the actual time to decision and the amount of time contemplated by the Federal Circuit's rules. For example, the first brief in the Vringo appeal was due originally on 6/3/2013, and that has already been extended to 7/22/2013. Similar extensions for the remaining three briefs could add months to the briefing schedule and overall timeframe of the case.
As a frame of reference, we took a look at some of the recent appeals involving the appeal lawyers in Vringo's case. In one case, the appeal started in May of last year, and the oral argument was held in February of this year. There has still been no decision, over a year from the filing of the appeal. We would consider this a typical timeframe, and expect a decision within the next few months. In another case, however, an appeal opened in October 2010, is still ongoing. That appeal was argued in August of 2011, and the Federal Circuit decision did not come until January 2013. While that is longer than the typical case, such lengthy waits for a Federal Circuit decision do happen and investors need to factor that possibility in to their assessment of any particular case. Again, forecasting the overall length of Federal Circuit appeals is an inexact science.
While Federal Circuit appeals are of critical importance to patent investors, at first blush they do not seem to present many catalysts for stock price movement while they are ongoing. Obviously, investors will closely monitor the briefing as it is filed, and perhaps strong arguments on one side or the other can help with placing bets on a case outcome. And investors will surely monitor for any signs of settlement while an appeal is ongoing, with stronger attention paid should the parties avail themselves of the Federal Circuit's mediation program. Finally, close attention should be paid to the oral argument, for any "tells" from the panel on how they feel regarding the issues that are discussed -- in fact, experienced patent counsel can often discern quite a bit just from seeing which of the issues the panel wants to discuss at all.
Ultimately, while not every investor (including those with positions in Vringo) will have access to experienced patent counsel, an awareness of the Federal Circuit's role and process in deciding patent issues is of critical importance for due diligence purposes. We hope this article contributes to that awareness for those interested in the patent investment sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.