PUBLISHED:January 06, 2016

Patent Pending?

Patent Pending illustration with photo of two hands reaching for a patent stampNew options for post-grant challenges change the game for patent lawyers

James Smith ’86 had been a patent lawyer for a quarter-century when he joined the U.S. Patent and Trademark Office (PTO) in May 2011 as its chief administrative patent judge. Having spent 18 years in private practice and seven more in industry, most recently as chief intellectual property counsel at biopharmaceutical giant Baxter International, Smith knew the system for prosecuting and litigating patents inside and out.

That patent litigation was time consuming and expensive was a given. Patent challenges in federal district courts are frequently bundled with other issues, such as allegations of infringement and damages, and they generally take years to resolve, with discovery a key source of expense for litigants. “In the 10 years before I went in-house,” Smith says, “I can’t think of any case that didn’t involve between 500,000 and 1 million documents on any one side and didn’t end up costing between $5 million and $20 million per side.”

He arrived at the PTO to lead the Board of Patent Appeals and Interferences as sweeping reform that promised to impact every aspect of the U.S. patent system was nearing final passage in Congress. The Leahy-Smith America Invents Act (AIA), the first legislative overhaul of the patent system since 1952, received broad bipartisan support on Capitol Hill. When he signed it into law on Sept. 16, 2011, President Barack Obama hailed its potential to “speed up the patent process so that innovators and entrepreneurs can turn a new invention into a business as quickly as possible.”

“The ability of the Patent Trial and Appeal Board to get to an answer, at least on patentability, within one year, I think is revolutionary. I know that if I had been in practice, either in-house or at a firm, all the strategy discussions would have been different post-AIA.”

— James Smith ’86, former chief administrative patent judge at the U.S. Patent and Trademark Office

Much of the public’s attention focused on the shift in awarding of patent rights from the “first to invent” to the “first inventor to file” an acceptable patent application; critics claimed the change, coupled with ambiguities associated with the “grace period” patent applicants have to file after any public disclosure of their inventions, would set up a race to the patent office that advantaged large corporations with in-house IP experts over independent inventors. For many in the patent bar, though, another provision of the new law loomed even larger: an expansion of the PTO’s authority to adjudicate a range of post-grant patent challenges, including the establishment of a new patent court, the Patent Trial and Appeal Board (PTAB). Whereas the docket of the pre-AIA Board of Patent Appeals and Interferences was primarily filled by patent filers whose applications had been rejected by examiners, and most third-party disputes were left to federal district courts, the PTAB could handle several types of contested proceedings that challenge the validity of granted patents. Administrative judges with patent expertise would oversee the proceedings, making them less expensive and more efficient than traditional court challenges, and trials would have to wrap up within one year or, in exceptional circumstances, 18 months.

James Smith ’86 In 2015, James Smith ’86 received the Outstanding Public Service Award from the New York Intellectual Property Law Association and the Champion of Intellectual Property Award from the Intellectual Property Law Section of the Washington, D.C. Bar.

When the PTAB came into being in September 2012, Smith became its inaugural chief administrative patent judge. He spent the next three years building the new system, facilitating the addition of more than 150 new patent judges to the 95 already at the PTO, staffing four new satellite offices with the goal of reducing the agency’s backlog of appeals while also efficiently managing the new trial docket, developing new rules and guidelines, and holding frequent education and information sessions for members of the patent bar across the country. Although he maintained a punishing schedule, it was “the ultimate patent lawyer’s dream” to play a part in transforming the system, says Smith, who stepped down from his judgeship in July.

“The ability of the Patent Trial and Appeal Board to get to an answer, at least on patentability, within one year, I think is revolutionary,” he says. “I know that if I had been in practice, either in-house or at a firm, all the strategy discussions would have been different post-AIA.”

A mixed response

The system of administrative post-grant patent challenges ushered in by the AIA has, in fact, emerged as one of the hottest topics in intellectual property law. Many engaged with the patent system praise it as a venue for efficient resolution of disputes at a fraction of the cost and in far less time than traditional litigation entails. In this respect, they say, it has delivered on the promise of patent reform to remove roadblocks to innovation.

But others criticize the breadth of jurisdiction the law conferred on the PTO, particularly the procedures and standards for instituting patent reviews and resolving them. To these critics, the AIA has wrought a range of unintended consequences, even abusive actions that actually undermine the rights of inventors by introducing uncertainty about the validity of newly granted patents, and thus deterring potential investors.

At a high-level forum convened by the Duke Law Center for Innovation Policy in Washington, D.C., last June, PTAB Deputy Chief Judge Scott Boalick assured attendees that his fellow judges focus only on the strength of the arguments and evidence before them. “We decide cases under the law and regulations as they exist,” he said.

But in the event’s keynote address, Sen. Chris Coons, D-Del., argued that the tribunal has become far more powerful than Congress ever envisioned. Coons, who enthusiastically supported passage of the AIA, has co-sponsored a bill that would make it harder to invalidate a patent at the PTO. It is one of several “second round” patent-reform bills pending in Congress that include provisions to scale back PTAB jurisdiction and narrow the grounds for challenging patents and measures to limit administrative challenges perceived as abusive.

“The America Invents Act tried to address concerns about patent quality” by offering a safeguard against poor-quality patents slipping by patent examiners overwhelmed by the volume of applications, Coons said. “But a few years in, we are at a crossroads where there is a significant mismatch in legal standards that have led to confusion, uncertainty, delays in enforcement of patent rights, and steadily rising costs for both plaintiffs and defendants.” Given the importance of intellectual property to attracting venture capital investment in start-up companies, patents granted by the PTO should enjoy a presumption of validity, he said. “What matters is whether an investor today will decide to take a risk on a small team of inventors with a terrific idea that could change the world and save lives.”

Elvin R. Latty Professor of Law Arti Rai, who organized the forum as faculty co-director of the Center for Innovation Policy and is an expert in patent law and the biopharmaceutical industry, acknowledges that concerns about post-grant patent challenges run high, especially in that sector, where research and development is particularly costly.

“The research is very clear that especially for small companies operating in the life-sciences space, the patent is the be-all and the end-all,” she says. “Without a patent, small firms won’t get the venture capital they need for further development. And filing a patent application isn’t enough. Investors will watch closely to see how your patents pan out. But the counter-argument is that we don’t want to incentivize bad patents. The whole goal of the patent system is to provide incentives for good inventions, not trivial ones.”

While serving as administrator of the PTO’s Office of External Affairs from 2009 to 2010, Rai advocated for the establishment of a quick and inexpensive administrative process to challenge patent validity. She is now engaged in two empirical studies of how parties to patent disputes are factoring the PTAB into their litigation strategy.

“Before we start amending the system, we think it’s important to have actual data we can use to determine what the real problem is, and whether a problem exists at all.”

— Arti Rai, Elvin R. Latty Professor of Law

“My colleagues and I want to see what kinds of strategic decisions parties are making,” she says. “When defendants choose to challenge certain patents that have been asserted against them, how do they make the choice between challenging at the district court and at the PTAB? And if our goal is to promote innovation, is this ultimately creating strategic behavior that’s harmful to innovation?

“Before we start amending the system, we think it’s important to have actual data we can use to determine what the real problem is, and whether a problem exists at all.”

Mining the data from a complex system

A marquee element of the AIA was the transformation of the patent system from a first-to-invent to a first-inventor-to-file system. That change brought the U.S. into greater harmonization with the rest of the world, says Stephen Merrill, executive director of the Center for Innovation Policy, who had advocated for doing so in a 2004 blueprint for patent reform he co-authored as head of the National Academies Board on Science, Technology, and Economic Policy.

“Every other country had gradually moved to a first-to-file system,” says Merrill, noting that the emphasis on being the first to file a patent application promised to reduce evidence-heavy, contentious disputes over an invention’s provenance. Under first inventor to file, issues relating to origin would arise only if it was alleged that the filer of the patent was not, in fact, the inventor.

Many practitioners report that in spite of its legal importance, the move to a first-inventor-to-file regime has not significantly changed patent filing behavior, in terms of timing or content of applications. “It wasn’t a sea change for those of us operating with international patent law in mind,” says Pamela Sisson ’08, assistant general counsel at Monsanto, whose intellectual property docket includes managing product patent portfolios in more than 90 countries. She relies on the longstanding Patent Cooperation Treaty to facilitate simultaneous filings around the world, as do most other attorneys serving biotechnology and pharmaceutical clients that market internationally. And she advises even start-up entrepreneurs to think broadly in their patent strategy: “You can miss opportunities if you don’t have an IP strategy that thinks beyond the borders of the United States.”

The establishment and the trial authority of the PTAB represent a far bigger change to the system, says Sisson, and Merrill agrees. “That was probably the most significant change that we recommended in the 2004 report,” he says. The rationale: to establish a mechanism for double-checking patent quality that was faster and cheaper than litigation.

As structured in the AIA, the PTAB has authority to review patents granted both under the old first-to-invent regime as well as those granted since. In addition to handling appeals from adverse decisions by examiners (and hearing almost 9,900 in the fiscal year that ended Sept. 30, 2014), the tribunal has authority to hold trial proceedings in four specific types of challenges to granted patents. One type of challenge called post-grant review has yet to yield trials, as it applies only to patents with an effective filing date after March 16, 2013, when the AIA’s first-inventor-to-file regime came into effect. Another challenge, known as a derivation proceeding, represents a relatively rare dispute between inventors concerning the provenance of similar inventions in applications filed at different times.

It is the two other types of proceedings that have populated the PTAB trial docket and are at the heart of the current controversy: inter partes review (IPR), in which challenges to patent claims are based on prior art in patents or printed materials; and covered business method review (CBM), which allows challenges to be brought on a number of patentability grounds and primarily affects computer, communications, and mechanically related patents. Any party can ask for a trial under circumstances set out in the AIA, including those that have been sued for infringement, and once the PTAB decides the standards for granting review have been met, the matter has to proceed through to a final resolution. Both IPR and CBM can trigger stays of pending litigation on the same questions of validity. Those who challenge patents in an IPR cannot raise issues decided by the PTAB in future lawsuits; decisions of the PTAB can be appealed to the U.S. Court of Appeals for the Federal Circuit.

As it happens, this new system of administrative review came into being during a particularly unsettled period for patent law. The practice known as patent trolling — in which non-practicing entities buy patents in bulk (often questionable ones) and threaten or launch infringement suits in order to extract settlements — has proliferated, generating both wariness and weariness of litigation among patent holders and investors. And a recent series of Supreme Court rulings pertaining to patentability of subject matter — most notably Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc. (2012) and Alice Corporation Pty. Ltd. v. CLS Bank International, et al. (2014) — have caused consternation in certain sectors, such as the business-method software and biomedical-device industries.

What has prompted the high court’s recent interest in patent law? “I think most people would agree that some patents issued in the ’90s and early 2000s should not have been issued,” says Darrell Fruth, a partner and intellectual property attorney at Brooks, Pierce, McLendon, Humphrey & Leonard in Raleigh. As supervising attorney in the Law School’s Start-Up Ventures Clinic, Fruth helps students address clients’ intellectual property needs, among other matters. “Many patents of that era involved new computer and Internet applications for a range of activities and functions. You had this tranch of very broad patents, and in many cases, fairly indefinite patents. Maybe the floodgates were opened too widely.”

In Mayo, the Supreme Court found that a method for managing the dosage of drugs for an individual patient was not patentable, as the method in question was simply describing a “law of nature.” The Court then rejected patent claims on computer software used to facilitate financial transactions in Alice, on the grounds the claims covered “abstract ideas,” which are not patentable. Taken together, the cases offer a test for patentability, but leave a key question unanswered, says Rai, who teaches courses in administrative law, patent law and policy, and law and policy pertaining to innovation in the life sciences.

“First, you look at what’s claimed in the patent, and if it covers an abstract idea, a ‘law of nature,’ or a ‘product of nature,’ like a gene, because those things are not patentable in and of themselves. If the patent covers one of those three elements, you look to see if there is ‘something more,’ according to Alice. But the ‘something more’ has not been clarified, and that has everyone tearing their hair out.” Simply executing a business method via computer software on a general purpose computer, for example — the Alice scenario — does not render one of these inventions patentable, she says, but exactly what does remains unclear.

The PTO has released procedural rules and substantive guidelines offering the agency’s interpretation of these Supreme Court rulings and relevant Federal Circuit decisions, as well as its governing statutes for patent examiners, PTAB judges, filers, and attorneys. One concern is that defendants being sued for infringement will engage in what Rai refers to as a sort of “reverse-trolling” behavior: going to the PTAB with allegations that the patent in question is invalid simply for purposes of obtaining a settlement. In August, the PTO issued new rules, allowing judges to impose fee shifting if administrative challenges are used abusively.

Arti RaiArti Rai, the Elvin R. Latty Professor of Law and co-director of the Center for Innovation Policy.

“There is a lot of complexity in the system,” says Rai. “And every time you have complexity coupled with smart lawyers, you have strategic behavior.”

Litigants’ strategic behavior is the subject of groundbreaking research Rai began in January 2015 with Professors Jay P. Kesan of the University of Illinois Law School and Saurabh Vishnubhakat of Texas A&M Law School, a former fellow and postdoctoral associate at the Center for Innovation Policy who was, until recently, an expert advisor to the PTO chief economist. Mining a database of all district court filings since 2010 and all petitions for review to the PTAB from the time of its creation, they are undertaking the largest empirical study to date of post-grant administrative scrutiny into patent validity. Their first publication of three, forthcoming in the Berkeley Law & Technology Review, outlines how PTO administrative reexamination procedures are intersecting with federal court litigation in a number of ways, including who is petitioning the PTAB for review and what types of patents and claims they are challenging.

PTAB challenges are closely connected with infringement litigation, either threatened (through cease-and-desist letters) or real, their research has found. More than 86 percent of patents being challenged at the PTO are also being litigated, and about 13 percent of litigated patents are also being challenged in district court. As was the case with pre-AIA administrative challenges, “review requests frequently arise as a retaliatory tactic by defendants in infringement lawsuits,” they write. In particular, challenges to computer-related patents are primarily being brought by parties defending infringement lawsuits, they report. However, a significant minority of IPR challenges, on the order of about 30 percent, are brought by entities that have not previously been sued.

They also found that across all technology areas, IPR petitions that challenge the nonobviousness of a patent are more likely than not to be instituted. Subject matter-based CBM challenges, they found, “are overwhelmingly instituted, at a rate of 71 percent, whereas for all other grounds to challenge validity, decisions not to institute predominate by a statistically significant margin.”

Rai and her co-authors conclude that a critical question for their future research is whether challenges brought by those who have not been sued represent beneficial collective action against “bad patents” or potential harassment.

In a second empirical investigation, in collaboration with Associate Professor Jacob Sherkow of New York Law School, Rai is looking at how IPR is being used — or abused, as critics allege — to challenge a certain class of pharmaceuticals listed in the Food and Drug Administration’s “Orange Book.” Those drug patents are also covered by the Drug Price Competition and Patent Term Restoration Act (the Hatch-Waxman Act), which is designed to promote the manufacture of generic drugs by opening the patents to court challenges.

The duo reported on their findings in a letter solicited by the U.S. Senate Judiciary Committee last June as the committee considered further patent reform and an exemption from IPR proceedings for the biopharmaceutical sector. The letter addressed two specific questions about the PTO’s expanded jurisdiction: whether some hedge funds are abusing the system by simultaneously filing IPRs and short-selling securities in the pharmaceutical companies that own them (to improve their takeover prospects), and, more broadly, whether IPRs “have upset the balance between medical innovation and patient access” struck in the Hatch-Waxman Act.

The answer to both questions seems to be “no.” As of June 15, they reported, only four percent of IPR petitions had been challenges to Orange Book patents, and of the four written decisions the PTAB had made in those cases, it had upheld the validity of every claim at issue. One hedge-fund group, Hayman Capital, had in fact filed 16 IPR petitions against Orange Book patents, but it was the only hedge fund to do so, and nine of the patents were simultaneously being litigated by generic drug manufacturers in district courts. The PTAB had not, as of the date of the letter, decided to institute proceedings on any of the hedge fund’s petitions for review. What’s more, Rai and Sherkow reported, data showed that the availablity of IPR was not discouraging generic pharmaceutical manufacturers from asserting their rights under the Hatch-Waxman Act.

“Large-scale, technology-specific changes to IPRs should be made only if the evidence suggests a need for such change,” they wrote to the committee. “We fear that adding legal complexity to an already byzantine area of law stands to make the regulation of intellectual property in pharmaceuticals even more unwieldy and further subject to gamesmanship.”

Avoiding gamesmanship

In an August interview, former PTAB chief Smith, a member of the Duke Law Board of Visitors and the newly formed Center for Innovation Policy Advisory Board, also urges caution on the issue of sector-specific “carve-outs” from the system of administrative post-grant review. “The great effort and success in U.S. patent law has been uniformity of approach to all technologies, both those known and those yet to be developed,” he says. “It seems to me that if we change that approach to treat particular types of technologies differently, we need to have a pretty good reason to do that. The reasons should not be that the pocketbooks of any particular sectors of technology have more influence over legislators than some others.”

Smith says he is gratified that while some patent-reform efforts implicate the operations of the PTAB, none are attacking the quality of the tribunal’s work. Petitions for trials poured into the PTAB at three times the volume expected when the AIA passed — nearly 1,500 were received in fiscal year 2014, according to the PTO’s annual Performance and Accountability Report — and the tribunal met all related statutory deadlines, even reducing the number of backlogged appeals from rejected patent applications by about 4,000. And the overwhelming majority of PTAB decisions that have been appealed to the Federal Circuit since 2012 have been affirmed.

Still, Smith acknowledges that some in the patent bar feel the PTAB has not been sufficiently friendly to patent owners, such as those who disagree with the PTO’s application of CBM review to more than just a narrow type of software patents. If, in fact, the legislation has had a broader sweep than legislators intended, they can amend it, he says. But like Rai, he would prefer to give the system more time to mature before further changes are made.

Smith, who is now chief intellectual property counsel at Ecolab, says a question he received from a patent attorney at a CLE session in Detroit illustrated the extent to which some members of the bar may simply be overreacting to the changes introduced by the AIA.

“He asked, ‘What should we all do to revise our strategies so as to make our patents PTAB-proof, or IPR-proof?’ To me, that’s like asking ‘How do you actually make sure your inventions are patentable, and if they are unpatentable, how do you make sure that the un-patentability won’t be discovered?’ My advice was and is, ‘Be honest with yourself and don’t try to game the system.’

“The question people should be asking and answering honestly, all the time, is ‘Does my technology represent a patentable contribution under the law?’ If the answer is yes, you won’t have to worry about a patentability trial.”


by Frances Presma