Patent Owners Still Need a Sound IP Roadmap to Survive Inter Partes Review Challenges
By Procopio Partner Noel C. Gillespie
Recently, there have been several positive events for patent owners with respect to the Inter Partes Review (IPR) process created as part of the America Invents Act (AIA). While these developments are welcome, the IPR process will remain flawed and biased against inventors and the innovation economy until the lower burden of proof required to invalidate a claim in an IPR is addressed. It is therefore important to understand the threat to your IP portfolio that the IPR process presents and to have a robust IP roadmap in place that deals with the threat.
The IPR process ostensibly was created to offer a lower cost, more efficient alternative to district court litigation for dealing with certain questions of patent validity; namely whether there exists prior art that would invalidate the claims of an issued patent under 35 U.S.C. §§ 102 and 103. But to many patent owners and patent practitioners the real reason for creating the IPR process seems to be to allow large infringers to invalidate scores of validly issued patents in order to make infringing more cost-efficient. It certainly is bewildering to many patent owners that after spending years and tens of thousands of dollars in front of the U.S. Patent and Trademark Office (USPTO) obtaining their patent, including convincing the patent examiner that the claims are valid under sections 102 and 103, the same patent office can turn around and decide in a matter of months that the patent is in fact invalid under those same sections 102 and 103. And while the IPR process may be less expensive than district court litigation, it still costs several hundred thousand dollars on average, which is no consolation to those patent owners that are not members of the infringer lobby and to whom hundreds of thousands of dollars would never be considered less expensive.
There is no question that statistically speaking IPRs have not been kind to patent owners. IPRs started being instituted in September 2012, and in FYI 13 and FY14, the institution rates were 87% and 75%, respectively. If there is any good news for patent owners it is that as of February 2018 that rate has fallen to roughly 63%. But if an IPR petition is granted there is an 81% chance that at least some of the challenged claims will be found invalid and a 65% chance that all of the claims will be found invalid. This seems like an enormously high invalidation rate for patents that were validly issued by the patent office in the first place. By comparison, according to a Pricewaterhouse Coopers study, for the period from 2007 to 2012, which is when IPRs began being instituted, the success rate for patent owners in district court was 63% for cases tried to a judge and 77% for cases tried to a jury, even though district court actions typically involve many more challenges to the patent than just section 102 and 103 challenges. Thus, the IPR process has effectively turned the success rate for patent owners on its head.
What is the reason for the much higher invalidation rate for IPRs? Is it because the Administrative Law Judges (ALJs) that make up the Patent Trial and Appeal Board (PTAB) are just way better at ferreting out bad patents than the Article III district court judges who have been dealing with issues of invalidity for decades prior to creation of the PTAB and the IPR process? Of course not: The reason for the higher invalidation rate is that the rules governing IPRs are stacked against the patent owner. In a district court proceeding, a patent is presumed valid, but – and yes, this is hard to believe -- the patent office does not have to presume that the patent it validly granted, is in fact valid. This presumption or lack thereof results in several differences that make it much easier to invalidate a patent in an IPR as compared to a district court proceeding:
- Burden of Proof – Because a patent is presumed valid in a district court proceeding, the defendant challenging the validity of the patent must prove by clear and convincing evidence that the patent is invalid. This is a relatively high burden and means that if there is any real doubt in the mind of the judge and/or jury deciding the issue, then they must side with the patent owner. Conversely, in an IPR the challenger need only show by a preponderance of evidence, i.e., slightly more likely than not that the claims are invalid. This obviously makes it easier to invalidate a patent in an IPR.
- Claim Construction – Often in a patent case certain terms in the claims being asserted must be construed by the court or the PTAB depending on the forum. In a district court case, claim construction is controlled by principles developed through prior cases and is often referred to as a Phillips-based construction after one of the more prominent of these cases. Importantly, and as a result of the presumption of validity, district court judges are supposed to decide questions of construction in favor of maintaining the validity of the patent. In other words, if there are two reasonably possible constructions and adopting one of them would render the claim invalid, then as a general rule the judge is supposed to choose the other, validity preserving construction. But the PTAB applies the “broadest reasonable construction in light of the patent in which it appears.” See 37 C.F.R. § 42.100(b). This is often referred to as the Broadest Reasonable Interpretation (BRI). In general, a BRI construction will be broader and therefore sweep in more prior art, making it easier to invalidate a patent.
- Inability to Amend Claims – The BRI construction used by the PTAB is the same as that used during prosecution before the USPTO, as well as during ex-parte reexamination and inter partes reexamination, which was a precursor to the IPR proceedings. There also is no presumption of validity in these other proceedings before the patent office. But the difference is that in these other proceedings the patent owner can freely amend his claims to overcome the prior art. Thus, if an examiner during prosecution or in a reexamination proceeding applies a broad claim construction and then determines that the claims would be invalid over certain prior art as a result of that broad claim construction, the patent owner or applicant can amend the claims in order to narrow the scope and make clear that the claims are valid over the prior art. In an IPR proceeding, by contrast, the patent owner is effectively barred from amending the claims.* Obviously, the inability to amend the claims to address any validity concerns raised after the patent issues makes it easier to invalidate a patent.
- Unequal Application of Estoppel - If the PTAB issues a final written decision in an IPR, the challenger is precluded from further challenging the validity of the patent(s) at issue in front the USPTO, in a district court, or before the ITC, regarding any ground that the challenger “raised or reasonably could have raised” in the IPR. See 35 U.S.C. § 315(e). But, while this is a good thing for a patent owner, if the PTAB decides not to institute the IPR, then such preclusion does not apply. In other words, if having looked at all the issues raised by the petitioner, the PTAB decides that the petitioner failed to actually show that the claims are likely invalid – even given the lower standard of proof and the broader claim construction – and therefore does not institute an IPR, the challenger is not estopped from raising those exact same issues in another IPR or in a district court or ITC proceeding. As a result, having failed in front of the PTAB, the petitioner can simply refine their arguments, maybe add a prior art reference or two and come right back at the patent owner. Even worse, the PTAB and district courts are not bound by each other’s determinations of validity in large part as a result of the differing standards of proof and claim construction guidelines being applied in the different forums. As a result, as of January of this year, there were 58 patents that had been challenged in a district court and found valid, but that the PTAB subsequently found invalid based on the same grounds.
As noted above, there have been several recent events that provide hope to patent owners. First, at the direction of the new Director of the USPTO, Andrei Iancu, the USPTO proposed ending the use of the BRI standard for construing patent claims in PTAB proceedings and instead would use the Phillips claim construction standard. The USPTO is also proposing to amend the rules for PTAB trials to add that the USPTO will consider any prior claim construction determination concerning a term of the claim in a civil action, or an ITC proceeding, that is timely made of record in an IPR. This should help, although not guarantee, consistency in claim construction between the PTAB and proceedings in district courts.
Second, late last year, the U.S. Court of Appeals for the Federal Circuit issued an en banc decision in Aqua Products Inc. v. Matal, 872 F.3d 1290 (Fed. Cir. 2017), reversing the practice of requiring patent owners to prove that proposed amended, or substitute, claims are patentable. Instead, the court found that the petitioners carry the burden of persuasion to establish that amended claims are unpatentable. In theory, this would make it easier for patent owners to amend their claims and avoid an invalidity determination. But the actual impact is questionable, and current statistics do not indicate any appreciable impact on the grant rate of motions to amend, which remain low.
Third, in an even more recent case, this year in SAS Institute, Inc. v. Iancu, the Supreme Court determined that when the PTAB institutes an IPR, it must decide the patentability of all of the claims the petitioner has challenged. There has been a lot of theorizing as to how the SAS decision will affect the balance between petitioners and patent owners in front of the PTAB. But patent owners should be able to take some positives away regardless. Previously, the PTAB would at times determine to institute review of some claims but not others. But the lack of institution means that there would be no final written decision for these claims on which the patent owner had ostensibly “won.” Accordingly, nothing prevented the challenger from mounting another challenge to those claims on which the patent owner had “won.” Now, as a result of Aqua Products, the PTAB has to institute on all claims, which means in such situations the patent owner should get a final written decision from the PTAB in their favor. In other words, there should be more final decisions upholding at least some claims, which would then cause the estoppel provisions to apply to those claims.
But significant problems remain that result in too much uncertainty and as a result negatively impact our innovation economy. The current IPR process would be improved greatly if the default approach was to find a patent valid as opposed to invalid, i.e., there should be a presumption of validity at the PTAB as there is in district court proceedings. This would require the PTAB to require that a challenger prove by clear and convincing evidence that the challenged claims are invalid. Moreover, if the PTAB used the same standard as district courts, then it would be reasonable to require that each adhere to the other’s findings and we would no longer have the situation where 58 patents can be found valid in one forum, but not in the other. This change at the PTAB, and the likely shift in outcomes, as well as the consistency between forums would restore confidence in the process that would help our innovation economy.**
Let’s hope that Congress or the USPTO will act to address this issue and restore some confidence in the patent process. But in the meantime, it is vitally important that start-up and emerging companies arm themselves with a well thought out and robust IP roadmap. Our experience has shown that the key to leveling the field, at least somewhat, is to have several patents that cover a potential infringer. By having several patents that you can enforce, the statistics actually start to favor a patent owner. This is because the more patents -- or patent claims -- you have at issue, the greater the chance that some of them would survive an IPR challenge. And while the challenger or infringer has to win on every potential claim, the patent owner only has to win on one claim. In other words, if a single claim is shown to be valid and infringed, then the patent owner can prevent the competitor from infringing or demand a royalty to allow them to engage in such infringing activity. A well thought out IP roadmap can ensure that you have sufficient patent assets to overcome, or even avoid a challenge, even from a large company with a lot of resources.
* Technically, a patent owner can file a motion in an IPR requesting permission to amend the claims. But the owner cannot amend as a matter of right as in other patent office proceedings. Moreover, even where permission to amend is given, the patent owner is limited in terms of what the amendments can involve and, at least until a recent Federal Circuit decision, the burden on a patent owner to be successful in such a motion was extreme, requiring him or her to prove that the amended claims would be valid over all prior art known to the applicant, i.e., not necessarily just the prior art raised by the challenger. As a result, the grant rate of such motions is only about 5%. This means that, effectively, a patent owner cannot amend his or her claims.
** Alternatively, if the lower preponderance of the evidence standard is to be used, then an applicant should be free to amend the claims to overcome the prior art. But practically the PTAB is not the appropriate forum for allowing a patent owner to more liberally pursue claim amendments as this is really more of a prosecution activity that is better handled by patent examiners as with reexamination proceedings.
Noel C. Gillespie is a Partner with Procopio and formerly served on the firm’s Management Committee. He advises start-up and emerging growth clients on strategic patent portfolio development and implementation to protect their technology and achieve their business objectives, the most important objectives being market share and premium pricing. Noel’s approach to patent portfolio development helps his clients ensure their patents guard these important objectives, even on a budget. Noel worked as an electrical engineer for many years, leading teams in the development of man-worn free space optical communication systems and early CDMA cellphones before attending law school and becoming a patent attorney. He has extensive experience working with telecommunications companies, especially wireless telecommunications companies; digital health, health information technology, and medical device companies; semiconductor; and software and Internet companies.