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18 May 2016Patents

“Splitting the baby”—what’s next for the PTAB

The US Supreme Court is scrutinising the work of the Patent Trial and Appeal Board and its decision in the pending Cuozzo case could change how the board operates, as WIPR finds out.

In April, the US Supreme Court heard arguments in Cuozzo Speed Technologies v Michelle Lee, a highly watched case that sees the procedures of the Patent Trial and Appeal Board (PTAB) reviewed at the highest court for the first time since the board’s creation in 2012.

The PTAB was conceived during a period of intense rhetoric around Washington and stakeholders that litigation from ‘patent trolls’ must be curbed. The biggest companies in the US were constantly facing infringement claims from what were widely considered to be weak patents. The PTAB’s creation was seen as an antidote to this by providing a quick and cost-effective means for revoking weak patents asserted by trolls.

Others, however, feared that the introduction of such a forum would tip the balance away from patent owners in favour of infringers. Randall Rader, the former chief judge of the US Court of Appeals for the Federal Circuit, famously likened the PTAB to a “death squad” for registered patents.

Those siding with Rader point to data published by the US Patent and Trademark Office (USPTO) last year which showed that 84% of final written opinions in instituted inter partes reviews (IPRs) have led to at least one or more patent claims being invalidated.

Furthermore, the fact that the same three judges who decide on whether to institute an IPR also rule on the validity of the patent has been the basis for the argument that the PTAB is biased against patent owners. Johnson & Johnson subsidiary Ethicon Endo-Surgery has filed such a claim, requesting that the full federal circuit review the bias emerging out of the procedure.

Data from research analytics company Lex Machina in January suggest the anti-patent owner bias is a myth. The data show that since the establishment of the PTAB, patent owners have won 66% of IPR petitions filed at the PTAB. Of the 2,700 cases filed by petitioners, 1,783 were unsuccessful in revoking the patent.

Despite its short history, the PTAB has proved divisive. As it continues to emerge as one of the most popular jurisdictions for challenging a patent, the amount of scrutiny on its procedures is set to increase. Cuozzo’s claim is the first to be heard at the Supreme Court, and it is unlikely to be the last.

Divergent standards

One of the key differences between challenging patents at district courts and at the PTAB is the claim construction standard. The PTAB applies the broadest reasonable interpretation (BRI) standard when it assesses patent claims, which contrasts with the Phillips standard applied by district courts. It’s an inconsistency that Cuozzo argues must end.

The important distinction is that the BRI standard encompasses more prior art because of its much more open interpretation of the asserted claims. District courts, on the other hand, seek to find the plain and ordinary meaning of the patent claims, a much more narrow approach which ultimately raises the bar for a verdict of obviousness.

Cuozzo’s writ protests against the application of differing standards. Following a challenge from rival Garmin International, the PTAB invalidated Cuozzo’s speedometer patent on the grounds that it was obvious. Cuozzo argues that its patent would remain valid if the narrower Phillips standard was applied.

"Congress passed the AIA to make sure bad patents weren’t asserted against big companies in a way that stifled the market.”

“In obtaining a patent, a patentee discloses his invention to the public in exchange for a limited monopoly, as defined by the claims of the patent. To invalidate those claims using a different standard than one that considers the true meaning and scope of a claim would violate the bargain the patentee struck with the public,” Cuozzo states.

Carey Jordan, partner at law firm McDermott, Will and Emery, disagrees, saying the application of the BRI standard is logical when you consider that it has been the USPTO’s practice to use it for more than 100 years when examining patent applications.

Jordan explains that the America Invents Act (AIA) was passed under a heavy anti-patent troll climate in which some non-practising entities (NPEs) regularly made the headlines for asserting bad patents against big companies. The AIA was meant to serve as a remedy to this problem.

“When the AIA set up these procedures, there was a lot of press around patent trolls. Congress was getting heavily lobbied by a number of big companies. Congress passed the AIA to make sure bad patents weren’t asserted against big companies in a way that stifled the market.”

Maintaining the BRI standard, Jordan explains, makes sense in ensuring that such a forum could be used to knock out bad patents owned by NPEs in line with the intentions of legislators.

“Congress did not have an incentive to narrow that construction standard; they were just trying to get rid of bad patents,” she adds.

Raise the alarm

Despite this, Cuozzo has found support among influential trade groups, with the American Intellectual Property Law Association and Biotechnology Industry Organization (BIO) filing amicus briefs in support of the writ. BIO, for instance, noted that the application of the BRI standard is one reason patents are being invalidated at an “alarming pace” at the PTAB.

Jordan, however, is not convinced that the BRI standard is the reason the PTAB is popular. She points to the low costs and estoppel restrictions (such as time limits on discovery) and the fact that judges have a high level of technical knowledge.

The second question in Cuozzo’s writ concerns whether it is lawful to bar a review of a PTAB decision to institute an IPR.

This point arises from a widespread sense that a patent owner faces an uphill battle in protecting its patent once the three-judge panel has opted to institute the IPR, the argument advanced by Ethicon.

Neil Smith, a partner at law firm Rimon and a former PTAB judge, says while it is true that a judge may take the lead in a case, the influence is overstated by the likes of Ethicon. He says other circuit appeals courts take a similar approach about which nobody has complained.

“For the sake of efficiency, one judge may take more responsibility initially for the case, especially decisions about institutions. Some are relatively easy and unanimous, but all three judges are involved in making the decision and all three have to sign on the decision. The PTAB also permits dissenting opinions.”

Smith adds that the PTAB’s job is to focus solely on the legal arguments surrounding the patents. Judges can file a dissenting opinion if they disagree, but are ultimately accountable for the endorsement of any instituted IPRs or final written opinions to revoke patents.

PTAB judges are arguably under increasing pressure after the spotlight was pointed towards them following a number of challenges filed by hedge fund manager Kyle Bass and the Coalition for Affordable Drugs. Bass has stated that his mission is to end the process of ‘evergreening’ in the pharmaceutical industry—securing patent protection for slight modifications of an old drug.

Bass says that the granting of such patents has contributed to the artificially high price of life-saving drugs. The pharmaceutical industry has countered that Bass is using the IPR process to ‘short’ the stock of certain pharma and biotechnology companies. Celgene went as far as asking the PTAB to sanction Bass for filing an abusive challenge, but the three-judge panel declined the request last year.

A sense of outrage

The pharma industry has been outraged by Bass’s work—he has filed around 40 challenges—and has pressured legislators to preclude drug patents from the IPR process. Congressman Bob Goodlatte included an amendment to the Innovation Act that ordered parties filing an IPR to declare that they will “not acquire a financial instrument ... designed to hedge or offset any decrease in market value of an equity security of the patent owner” and that they had not been paid to file the challenge.

Smith is opposed to such amendments on the basis that he is confident the PTAB will always focus on the legal arguments and ignore the cacophony surrounding the challenging party.

“The rule is that any party can file an IPR. The party might be involved in short-selling, but that is not a reason they can’t do this. I applaud the fact that even though it was being done in the name of a limited liability company, they [the coalition] didn’t hide the fact that Bass is behind this. There is sunshine in the sense that the parties knew this. It wasn’t subterfuge.

“In the pharma industry there are some weak follow-on patents that have extended drug patents and resulted in higher drug prices in the US. Filing challenges against those is probably not a bad idea,” he adds.

With patent reform stalled for the foreseeable future, the Supreme Court’s ruling is set to be the biggest intervention into the PTAB this year. Jordan expects the court to “split the baby”, explaining that it will come up with a compromise that will introduce a reviewing mechanism of decisions to institute IPRs that are “definitively and objectively wrong”.

The death in February of Supreme Court Justice Antonin Scalia means predicting how the court will rule is a difficult task because the ideological balance of it is shifting from conservative to liberal. It’s possible that the BRI standard will be simply maintained, upholding the USPTO’s long tradition, while districts courts continue with a differing claim construction standard.

Nevertheless, the PTAB has been the subject of much scrutiny and its decisions to institute IPRs and issue rulings to revoke patents will attract increased attention in the coming years as the forum’s popularity continues to grow. This is especially true at a time when the villain is shifting from the patent troll to the hedge fund manager.

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