By Tom Engellenner
By many estimates, somewhere between five and ten percent of patents that are issued each year by the U.S. Patent and Trademark Office (USPTO) never should have been granted. The USPTO’s own statistics bear this out. Each year a small sample of patent applications allowed by examiners in line for promotion are given a second review to assess the examiners’ skills – and each year about five percent of their work product is flagged for failing to cite and apply the closest prior art. This data may indeed underestimate the number of bad patents since the sampled work product comes from examiners who knew that they are being considered for promotion and, hence, had every incentive to do an especially thorough job.
The general consensus until recently has been that the U.S. patent laws lacked effective mechanisms for opposing dubious patent claims once granted. More specifically, many industrial groups have criticized the options available to challenge a granted patent administratively, without the need for multi-million dollar federal court litigation.
However, recent changes in federal law, new commitments from the U.S. Patent and Trademark Office, and a growing amount of statistical data suggest that a viable American system of post grant proceedings is emerging. Under this system, an administrative challenge to a questionable patent may be an effective defense strategy – even after federal court litigation has commenced against the would-be challenger.
Historic Options For Challenging Patents in the U.S.
U.S. patent laws have permitted reexamination of patents for about 30 years under a procedure known as ex parte reexamination. However, as a vehicle for challenging patents, the ex parte process is considered by many to be fundamentally flawed. Under the ex parte rules, a third party can bring a new issue of patentability to the attention of the USPTO – but the patent owner and a patent examiner conduct the proceedings alone to review the issues raised by the challenger. In fact, ex parte reexamination is typically initiated by the patent holders, themselves, as a way to consider newly discovered prior art, rather than by third parties.
Since 1999, challengers have been able to avail themselves of a second procedure, inter partes reexamination. Inter partes reexamination became an attractive alternative because it provided more opportunities to convince the examiner that the patent was wrongly issued.
However, the inter partes reexamination process, as initially enacted, was still criticized for providing a less than level playing field. Although a challenger in an inter partes reexamination had more opportunities to argue its case, the proceedings eventually returned to secret negotiations between the patent holder and the examiner. Moreover, the challenger was “estopped” (precluded) from making the same arguments – or any other arguments that could have been raised – as defenses in any patent infringement action brought against it by the patent owner.
In 2006, The USPTO implemented a number of changes in its own rules and operating procedures to make reexamination less one-sided and more transparent. Under these rules, the party challenging the patent’s validity has 30 days to comment on every response presented by the patentee. And private interviews between the patent owner’s representatives and the patent examiners were explicitly prohibited in such proceedings. The USPTO also formed a Central Reexamination Unit (CRU) with a staff of experienced examiners.
The America Invents Act
In 2011, Congress enacted the America Invents Act (AIA), which provides further options for challenging patents in the U.S. and again attempts to strike the proper balance to ensure a level playing field for the patentee and challenger. These new options for challenging issued patents include a new “Inter Partes Review” as well as “Post Grant Review and “Covered Business Method Review.”
Inter Partes Review
Effective September 16, 2012, “Inter Partes Review” (IPR) replaced Inter Partes Reexamination. (Pending inter partes reexaminations initiated before September 16, 2012 continue to be handled by patent examiners in the Central Reexamination Unit.) The new IPR proceedings are conducted before a newly established “Patent Trials and Appeals Board.” A panel of three administrative patent judges will hear each IPR case. Presumably, the three judge panels will have more independence than examiners. The USPTO has hired 100 new administrative judges for this new administrative appeals body.
Many of the same rules and requirements from Inter Partes Reexamination will carry-over into the new IPR proceedings. The real party in interest must be identified and there will still be an estoppel; the requestor who enters into an IPR proceeding will be barred from raising or rearguing in a subsequent civil action issues that were raised or could have reasonably been raised during IPR. The types of issues that can be raised during IPR will also follow the old reexamination rules; the requestor will only be able to raised novelty and obviousness arguments (§102 or §103) and these arguments can only be based on prior art patents or printed publications.
However, there are also several significant differences between the new IPR proceedings and the old Inter Partes Reexamination procedures. In addition to the new PTAB tribunal, IPR proceedings will include limited discovery (e.g., taking of deposition testimony from any person who submits a factual or expert opinion declaration on behalf of the other side), motions practice and the right to an oral hearing at the close of discovery. The USPTO has set a $23,000 fee for filing a petition for IPR of up to 20 claims in a challenged patent and higher fees for more than 20 claims.
The AIA requires the USPTO to conduct IPR proceeding with “dispatch” and, absent extraordinary reasons, a final decision must be rendered within one year of the institution of an IPR. The PTAB will issue a final written opinion to conclude the proceeding. However, the parties can voluntarily terminate the proceedings by settlement any time before the written opinion – and in the case of settlement (the substance of which need not be revealed), the estoppels provisions will not apply to the petitioner.
The AIA also includes a brand new mechanism for challenging newly issued patents. This new proceeding, Post-Grant Review, will also be adjudicated by the Patent Trials and Appeals Board (PTAB) and resembles to some extent opposition proceedings conducted by the European Patent Office. Like European oppositions, a third party will be able to petition in the US for post-grant review within nine months following issuance of a US patent. Post-Grant Review (PGR) will nominally become available on September 16, 2012 but only applies to patents with a priority date on or after March 16, 2013. Hence, PGR will not really be an option until applications filed after March 15, 2013 begin to issue (in most instances not until 2014 or later).
PGR petitions will have to meet a higher standard for review to be granted: the requestor must show it is more likely than not that at least one challenged claim is unpatentable. The USPTO has set a $30,000 fee for a petition for PGR of up to 20 claims in a challenged patent and higher fees for more than 20 claims.
In contrast to an IPR proceeding, a Post-Grant Review petition can be based on any ground that can be raised in a civil suit. Thus, during the first nine months, a third party wishing to challenge a patent will not be limited to the presentation of prior art patents or publications but instead can present evidence of prior public use, prior sales activity, or other public disclosures. Moreover, post-grant review can be sought based on a lack of compliance with written description or enablement rules of §112 – or even the patent eligibility standards of §101.
Like IPR proceedings, Post-Grant Review will include limited discovery (e.g., depositions of declarants), motions practice and the right to an oral hearing before a final written decision is isussed. Similarly, if a PGR is settled prior to a decision, the proceeding will be terminated without any finding and no estoppel will attach.
Covered Business Method Review
The AIA also includes another new type of proceeding for challenging a particular class of issued patents, namely “Covered Business Method” (CBM) patents. A CBM patent is defined in by the AIA as a patent that “claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions.” Congress established the “transitional” CBM review procedure to deal with the specific problem of so-called “business method” patents that have been particularly criticized by large segments of the public.
CBM proceedings are a bit of a hybrid between IPR and PGR. Like IPR proceedings, CBM review became available right away and applies to patents issued before the enactment of the AIA. Like PGR proceedings, CBM review is not limited to the presentation of prior art patents or publications but instead a challenger can present evidence of prior public use, prior sales activity, or other public disclosures. CBM review can also be sought based on a lack of compliance with written description or enablement rules – or even the patent eligibility standards. CBM review will also be adjudicated by the PTAB and the petition fee is essentially the same as that for PGR: $30,000 to challenge to 20 claims and higher fees for more than 20 claims.
Also importantly, only a person who is sued or charged with infringement of a covered business method patent may petition for a CBM review of the patent. The transitional CBM review will be phased out and replaced by PGR once patents begin to issue based on applications filed after March 15, 2013.
Effects of IPR, PGR and CBMR on Civil Litigation
The AIA provides several provisions governing the interplay of the new administrative challenge options and civil litigation.
In fact, there is a major incentive for those fearful of infringement charges to race to the USPTO first. If a patent holder files a civil action on or after the filing date of a post-grant or inter partes review petition, the civil action is automatically stayed. However, a court cannot stay its consideration of a patent owner’s motion for preliminary injunction against infringement of the patent on the basis that a post-grant review has been filed or instituted if the action alleging infringement is filed within 3 months of the date of grant.
If a patent holder brings suit in a federal district court first, staying the proceedings pending the resolution of a subsequently filed IPR, PRG or CBMR will remain discretionary with the courts. But the anticipated speed (one year) of the new proceedings may make it more likely that a court will stay the civil litigation. The defendant will need to act promptly, however, if it wants to avail itself of administrative challenge route at the USPTO. The IPR or PRG mechanisms are only available to those defendants that file their review petitions with the USPTO within one year of commencement of the civil litigation.
If a civil action, e.g., a declaratory judgment action is filed challenging the validity of a claim of the patent, the plaintiff is barred from seeking post-grant or inter partes review. However, a counterclaim challenging the validity of a patent does not constitute a civil action for the purposes of this provision of the AIA.
How Likely Is It That A Challenger Will Succeed In The New Proceedings?
Since September 16, 2012, there have been over 100 IPR petitions granted by the new appeal board. None of the IPR cases have yet been decided so no hard data are available to assess how likely it is that a challenger will prevail. Nonetheless, one may be able to make some predictions based on the results of interpartes reexamination, especially since the more robust rules were implemented by the USPTO.
In the first ten years that inter partes reexaminations were available, only 44 such proceedings were concluded – a small sample from which to draw any conclusions. Beginning in 2010, however, use of inter partes reexamination to challenge patents took off. As of June 30, 2012, the USPTO had decided a total of 335 inter partes reexaminations. The success rate for inter partes challengers is now quite notable when compared with the cumulative historic results in ex parte reexaminations – where the rules still heavily favor the patent holder:
Nearly fifteen years of historic data find that inter partes challenges are almost five times more likely than ex parte proceedings to succeed in killing a patent outright. And only twelve percent of the challenged patents in inter partes reexamination escaped unscathed.
These statistics suggest that defendants in patent infringement cases may want to seek a stay of federal court action and pursue inter partes review instead. In addition to the costs – which on average exceed $3 million in many federal districts – lawyers may want to take advantage of differences in the burden of proof between the two types of challenges to a patent. In patent infringement actions, the patent is presumed valid and the defendant must prove its invalidity by clear and convincing evidence. In an inter partes review proceeding, it’s a jump ball at the outset. There is no presumption and the USPTO will decide the issue on the preponderance of evidence. Of course, persuading a judge to issue a stay can be a challenge, but the inter partes success rate may make it worth the effort.
By Tom Engellenner