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Foley Hoag, New York
The United States patent system continues to be popular for companies around the world looking to protect their intellectual property. Earlier this year, the US Patent & Trademark Office (USPTO) issued US Patent Number ten million. The rate of patent issuance has steadily increased, proceeding at a rate of one million issued patents every three-to-four years. The top ten patent recipients, including companies like IBM, Samsung, LG, Facebook and Alphabet, each received patents numbering in the several thousands.
Background: the need for patent reform
Patent infringement litigation also remains robust in the United States. Patent infringement is a strict liability offence. There is no requirement to prove that the infringer knew of the patent or was negligent in overlooking the patent. With so many patents out there, it is not difficult for an operating company to unwittingly infringe a patent. Many companies have found themselves surprised to receive a notice letter with a request to take a patent license to avoid alleged infringement. Adding to the heartache for some was the realisation that the patent claims technology that should not have been granted in the first place.
In recent decades, patent assertion has become more widespread. Chafing at this new cottage industry of patent assertion companies, the technology industry argued that there were numerous patents of ‘dubious’ quality being asserted improperly by non-producing entities who sought to extract unreasonable royalties. Congress picked up this theme in debating patent reform measures. What resulted was the Leahy-Smith America Invents Act, Pub. L. No. 112-29, 125 Stat. 284 (2011) (AIA).
The AIA arrived on the scene during that time of increased US patent litigation. The US had begun experiencing a sharp rise in the number of filed patent infringement cases since 2008. The number of filed patent infringement suits rose in the US from 2573 in 2009 to 3596 in 2011. That number climbed to 6130 in 2013.
In enacting the AIA, Congress established inter partes review (IPR). IPR allows anyone except the patent owner to challenge the validity of a patent claim through an administrative proceeding within the PTO. For a defendant in a patent infringement action, this allowed for administrative review of the patent rather than litigating the claims in a district court. Prior to 2011, the only way a third party could challenge a patent in an administrative proceeding was through the patent re-examination procedure which, if instituted, would proceed in a manner similar to initial patent examination.
This new IPR process for patents was a fairly radical departure, providing patent challengers with a new and expanded weapon with which to challenge issued patents. For example, the AIA lowered the threshold to institute IPR in contrast to re-examination, allowing review if there was a reasonable likelihood that the petitioner would prevail in demonstrating the unpatentability of at least one of the challenged claims. Once instituted, the Board would determine validity on the basis of the preponderance of the evidence. By contrast, district courts weighed validity challenges under the higher ‘clear and convincing evidence' standard.
IPR gave interested parties a faster, less expensive avenue to challenge a patent. Legal costs associated with IPRs typically run into the hundreds of thousands of dollars, versus a federal district court action that can typically total several million dollars through trial. IPR also provided time certainty, with a 12-month deadline from the date of institution in which the USPTO is required to issue a final written decision. District courts have also been relatively accommodating in granting stays of infringement litigation once an IPR is instituted.
Most of these provisions are more to the benefit of the challengers than the patent holders, but patent holders do obtain one advantage. Petitioners are estopped against using the same arguments in district court that had already been considered (or could reasonably have been considered) and rejected in the IPR.
AIA achieves its objectives
The AIA has been quite successful from a patent-invalidating perspective. Overall institution rates have been high, from 87 per cent (on a small sample size) in 2013 to 62 per cent in 2018. Once instituted, patent holders face an uphill battle. Where IPRs have been instituted, all claims have been invalidated 65 per cent of the time, and some claims have been invalidated 16 per cent of the time. Less than 20 per cent of patents under review come out unscathed. Since the inception of IPRs, there have been 8,605 petitions filed, with over 4,400 petitions instituted. The Patent Trial and Appeal Board (PTAB) has invalidated all claims in 1,400 patents and at least some claims in another 349.
During the years in which IPRs have been available, the number of filed patent cases has decreased. Since hitting a high of 6,130 filed cases in 2013, the number of filed patent cases has been dropping, with 4,045 new cases filed in 2017 and about the same number expected for 2018 based on filings to-date. While there may be a number of factors involved in the declining litigation filing rates, some responsibility must be held by the availability and use of IPRs.
The IPR system has given rise to more patent invalidations. Some commentators have observed the high invalidation rate from the Board with some dismay. The Board has had to fend off accusations that it has become a patent ‘death squad'. There is a concern that IPR has made it easier to kill not only patents of poor quality, but also seemingly strong patents as well.
The life sciences industry, in particular, has been affected by the use of IPRs in challenging patents in patent litigation under the Hatch-Waxman Act. Patents directed to life science inventions represented between 11 per cent and 12 per cent of challenged claims from 2016 to 2018. The institution rate for these claims was 61 per cent in 2016, 63 per cent in 2017, and 60 per cent in 2018. The commercial significance to a life science company of having a single patent challenged can be much more significant than that for a single patent in another type of technology, because a single patent can be the basis for a billion dollar drug program. Uncertainty in the strength of the patent portfolio will negatively affect the company’s ability to raise capital for these programmes.
The availability of AIA challenges also gave rise to behaviour that would not have been considered a goal of the legislation. For example, financiers began to file petitions to invalidate patents on companies with the apparent aim of affecting that company’s stock prices. One such hedge fund manager became notorious in patent circles for a short-selling scheme, whereby he would file and then publicise the filing of petitions in the hopes that the negative publicity would drive down the stock price, with mixed results.
Finally, following the theme of IPRs being perhaps too successful at invalidating patents, some petitioners have filed multiple petitions on the same claims in a patent, or on overlapping claims on the same patent. A third of the patents challenged had at least two petitions filed against them. Until recently, this practice had been allowed to take place unchecked. In one particularly egregious example, a company had to defend a total of 23 petitions filed against one of its patents, and ultimately lost all claims. The institution rate on a per-patent basis increases by about six or seven percentage points (70 per cent in 2018, for example) when counted this way. Putting aside the merits of any particular petition, having to defend multiple petitions will drain a patent owner’s resources quickly.
Because the law is relatively new, several open questions have required litigation, and some of those questions have gone all the way up to the US Supreme Court. The Supreme Court has now weighed in on several issues arising in IPRs:
In Cuozzo Speed Technologies LLC v Lee, the Court held that the proper claim construction standard under the statute is the standard used in patent examination, ‘broadest reasonable interpretation,’ rather than the district court standard. This standard is broader than the standard used in district court litigation, which means that claims may be construed more broadly by the PTAB than the district court and consequently it would be that much easier to invalidate the claim in an IPR.
In Oil States Energy Services LLC v Greene’s Energy Group LLC, the Court held that there was no right to have validity claims heard by an Article III court rather than an administrative body such as the PTAB. This means that the IPR regime is not going anywhere in the near future.
In SAS Institute v Matal, the Supreme Court held that all grounds that are raised in a petition for IPR must be addressed in the final written decision or in the decision not to institute. This ended the practice of partial institution that the Board had been using to streamline its review process.
The United States Court of Appeals for Federal Circuit, which reviews appeals of any decisions coming from the PTAB, has also provided guidance on the AIA. In a recent example, the full en banc court in Aqua Products, Inc v Matal held that the Board’s practice toward claim amendments during IPR was too restrictive, with the effect that the burden of proof appeared to be placed on the patent owner for seeking to amend claims.
Some parties have attempted to use recent precedent to skirt IPRs altogether. In several cases involving state universities, the Board determined that the state enjoyed sovereign immunity under the 11th Amendment which precluded the Board from reviewing the patent in an IPR. A creative patent owner sought to exploit and expand on the holding by assigning patents to a Native American Nation (tribe) and thus take advantage of sovereign immunity granted to foreign sovereigns. Unfortunately for the patent owner, the Board refused to terminate the proceedings on the basis of tribal sovereign immunity.
Attempts to address shortcomings
There have been recent movements to address a number of the perceived shortcomings of IPRs. Several of the movements have come from within the USPTO:
The Board has provided guidance on amendment practice within IPRs to ensure that the burden of proving a patent invalid stays with the petitioner. It should now be easier for patent owners to propose amendments to claims as a way to overcome challenges.
The Board has provided guidance to assist current parties to IPRs regarding the implications of SAS decision.
The Board has made precedential a recent decision that provides a non-exhaustive list of factors to consider for follow-on petitions on the same patent. The expectation is that Board panels, armed with this guidance, will scrutinise follow-on petitions more closely, and that the practice will wane as a result.
The USPTO is proposing a change in the claim construction standard from broadest reasonable interpretation to the standard used in district court proceedings. A broader interpretation of a claim term results in more prior art potentially available to apply to the reference. This tends to make it easier to invalidate a claim in IPR than would be the case in a district court proceeding, without also accounting for the lower burden of proof in IPRs.
Other proposals have been directed to Congress. In one notable instance, the pharmaceutical industry has been lobbying Congress to amend the AIA to prevent a generic manufacturer from using the provisions of the Hatch-Waxman Act and, at the same time, file a petition for IPR. In response, Senator Hatch has proposed the Hatch Waxman Integrity Act of 2018, which would require a generic manufacturer to choose either IPR or Hatch-Waxman litigation.
Finally, there are some who still wish to abolish AIA altogether. Congressman Thomas Massie (R-KY) introduced a bill in the House entitled, Restoring America’s Leadership in Innovation Act of 2018, which would, among other things, abolish the PTAB.
After five years, IPRs have proven to be effective in invalidating patents that would otherwise have consumed significant litigation resources. IPRs are most likely here to stay, but the process will continue to be reformed to address perceived inequities for patent owners. We should expect that IPRs will continue to shape patent litigation in the US for years to come.