Will Contesting Parties Embrace the New Post Grant Settlement Provision?

One of the more intriguing provisions of the new post grant patent proceedings of the America Invents Act (AIA) is the ability to settle these patentability disputes by agreement. Unlike existing patent reexamination practices, the USPTO will terminate an Inter Partes Review (IPR), Post Grant Review (PGR), or Transitional Proceeding for Covered Business Method Patents (TPCBMP) upon joint request of the parties. (cf. terminating an inter partes patent reexamination by operation of estoppel).

Certainly, the USPTO would greatly benefit from the ability to terminate post grant patent proceedings. This is because agency resources could moved away from proceedings that are no longer commercially relevant (as to the present parties) to those newly initiated. In this way, the USPTO would operate in much the same way as a court, no longer being responsible for continuing the patentability proceeding on behalf of the public.

But, will contesting parties embrace the new provision as written?

The settlement provision of the AIA provides:

§ 317. Settlement

(a) IN GENERAL.—An inter partes review instituted under this chapter shall be terminated with respect to any petitioner upon the joint request of the petitioner and the patent owner, unless the Office has decided the merits of the proceeding before the request for termination is filed. If the inter partes review is terminated with respect to a petitioner under this section, no estoppel under section 315(e) shall attach to the petitioner, or to the real party in interest or privy of the petitioner, on the basis of that petitioner’s institution of that inter partes review. If no petitioner remains in the inter partes review, the Office may terminate the review or proceed to a final written decision under section 318(a).

(b) AGREEMENTS IN WRITING.—Any agreement or understanding between the patent owner and a petitioner, including any collateral agreements referred to in such agreement or understanding, made in connection with, or in contemplation of, the termination of an inter partes review under this section shall be in writing and a true copy of such agreement or understanding shall be filed in the Office before the termination of the inter partes review as between the parties. At the request of a party to the proceeding, the agreement or understanding shall be treated as business confidential information, shall be kept separate from the file of the involved patents, and shall be made available only to Federal Government agencies on written request, or to anyperson on a showing of good cause.

(emphasis added)

The IPR statute above is expressed in proposed PTAB Rule 42.74, covering PGR and TPCBMPs. As emphasized above there are a few points worth considering. First, settlements agreements must be in writing, and submitted to the USPTO before the USPTO will terminate the proceeding as a matter of right. While the USPTO will maintain the settlement as business confidential, any person can, at least in theory, access to the agreement for good cause shown.

Is good cause satisfied if a member of the public points out that they have recently been accused of infringement, are in licensing negotiations pertaining to the patent, seek to establish a reasonable royalty in a related case, etc? In a litigation context, such agreements are very rarely made available to outside parties. As such, it seems very unlikely that parties will find a discretionary mechanism, controlled by the government, at all attractive.

Alternatively, the statute additionally notes that the USPTO may terminate a proceeding where no petitioner remains. In such a case, however, it may be that estoppel would still apply to the “no show” petitioner. Of course, as is the case when current inter partes patent reexamination challengers walk away, there is typically a settlement in place that moots the present and future assertion of the patent at issue. A fair reading of the statute (and proposed rule) is that filing of the settlement agreement is only required if termination is desired as a matter of right. On the other hand, a challenger can simply settle their dispute and walk away….and depending upon how close the proceeding is to a written decision, the USPTO may also choose to walk away from the dispute. In such cases, parties would be able to maintain control over the disclosure of their confidential settlement terms.

It would seem that rather than risk disclosure of confidential business agreements, contesting parties are far more likely to settle their dispute privately, and simply alert the USPTO to the lack of further participation by the challenger. In order to encourage this practice, the USPTO would be wise to liberally exercise their discretionary termination power.

Contingency Model Undermined by New USPTO Post Grant Proceedings

Non-practicing entities or “patent trolls” are generally those plaintiffs that seek to enforce patent rights against an industry in which they themselves do not compete. Stated another way, an NPE’s only business is patent litigation.

Often times the patents an NPE is enforcing were purchased from a traditional technology company for the sole purpose of exacting royalties from the relevant industry. In the hands of an NPE, which has no technological industry subject to a patent counter suit by their industry targets, the NPE patents become especially powerful weapons of economic coercion.  

Over the last decade, law firms have recognized the efficacy of NPE litigation campaigns and have signed on in great numbers to get a piece of the action. Typically, an NPE will team up with a law firm that will conduct the campaign on their behalf in exchange for a contingent fee arrangement. (i.e., percentage of the collected settlements)

NPEs team up with law firms, at little to no cost, to launch patent assertion campaigns against entire industries. This profiteerring business model has lead to a significant proliferation of patent infringement suits in the last decade. As litigating a patent infringement suit can take years, and cost millions of dollars, a counter-suit for settlement leverage is not possible. Coupled with the fact that some plaintiff friendly jurisdictions like the Eastern District of Texas (EDTX) routinely return damage verdicts in the tens (if not hundreds) of millions of dollars, most defendants will settle relatively quickly for significant sums of money. For this reason, contingency relationships for even a single, seemingly weak patent are almost always worthwhile for law firms. Whether or not the patent is invalidated years down the road by one of a multitude of defendants does not detract from the easy, short term profits.

But the NPE landscape will forever change on September 16, 2012

On September 16th, 2012 the new post grant patent proceedings of the America Invents Act (AIA) become available for patent challengers. The speed of these new proceedings will be a game changer for the traditional NPE contingent fee business model.

Although patent reexamination has long existed to challenge patents at the USPTO, and is far, far, less expensive relative to litigation, reexamination takes years to complete. As such, unless the lawsuit is stayed pending patent reexamination, (relatively uncommon in EDTX or ITC, for example) relief will not come in time for many defendants. So, law firms, especially the small ones that seem to dominate EDTX filings, are still clamoring to take a chance on almost any patent lawsuit. 

In plaintiff friendly jurisdictions like the EDTX, judges are loathe to delay their determination for the 5-7 years it will take a patent reexamination to run its course. However, once patent challengers begin utilizing the new AIA proceedings, namely Inter Partes Review (IPR), Post Grant Review (PGR), or Transitional Program for Covered Business Method Patents (TPCBMP), courts will need to stay their proceedings for only 12-18 months. This is because, IPR, PGR and TPCBMP must conclude within that time by statute.

It would seem very unlikely that even judges of the EDTX or ITC will not be forced to stay newly initiated infringement suits for 12-18 months while three judges (all with engineering or science backgrounds) of the Patent Trial & Appeal Board make a patentability determination that could moot the case, or at least greatly simplify the necessary invalidity analysis. Indeed, with many courts taking 12-18 months (or longer) to even get to a Markman Order, the ability to stay a lawsuit pending a USPTO proceeding is greatly enhanced by the speed of the new proceedings, if not flat out guaranteed for TPCBMP. (significant legislative history suggesting such, as well as interlocutory review of a stay denial)

So, law firms considering a contingency arrangement to enforce a small, or weak NPE portfolio, will now have to account for the likelihood that the dispute will almost certainly transfer over to the unfamiliar USPTO forum. Once there, the cost to conduct the proceeding for a challenger will be on the order of 10-20% of the cost of patent litigation. With the litigation stayed and the corresponding cost pressure off the challenger, and with the added benefit of the lower standards of proof accepted by the USPTO to prove unpatentability, plaintiff attorneys may find that the risk of investing in such NPE portfolios is no longer a worthwhile bet.

USPTO Explains Appeal Fee Setting

The America Invents Act (AIA), Section 10 provides fee setting authority to the USPTO. As a result, the Office has been busy preparing new fee proposals that will take effect in early 2013. For example, the new USPTO fee setting authority permits the USPTO to revise the fees set by Congress under 35 U.S.C. §§ 41 (a) and (b) based on the aggregate costs of funding the USPTO, which in some cases has led to proposals to dramatically raise certain filing fees.

The USPTO has also proposed a recalibration of appeal fees and payment timing. In a post on the USPTO web site yesterday (here) the Director explained that upon further investigation, some of the initial appeal fee proposals are unfeasible.

In constructing our preliminary fee proposal, our initial thought was to refund most appeal fees if the application did not proceed to the BPAI. However, this proved to be a non-viable option as the law does not permit us to provide refunds of appeal fees.

As an alternative, the Office presented an option during the preliminary proposal at the PPAC hearings that included two components: (1) Shifting the payment timing for some of the appeal-related fees, and (2) Offering a combined $0 PGPub and Issue fee if the examiner withdraws a Final Rejection prior to an appeal being forwarded to the BPAI.

The second aspect of the initial proposal ($0 PGPub and Issue fee) raised implementation issues. As originally envisioned, a $0 PGPub and Issue fee would have been considered if the examiner withdrew a Final Rejection prior to an appeal being forwarded to the BPAI. However, withdrawing the Final Rejection can happen under many circumstances, including times when there is no error in prosecution by the examiner. For example, examiners often properly consider After Final amendments filed after notice of appeal, resulting in an allowance. Assessing when a $0 PGPub and Issue fee would be proper would require the USPTO to review the circumstances of each withdrawal of Final Rejection on a case-by-case basis, increasing the cost of patent operations.

Another consideration is that a $0 PGPub and Issue fee would eliminate the need for the notice of issue fee payment. Applicants often use this notification to decide if there is a need to file a continuing application. So after reviewing the resources that would be required to consider these situations on a case-by-case basis, and the possible negative impact applicants would experience, this particular piece of the initial proposal will not be pursued.

However, the Office does plan to maintain the first component in our rulemaking proposal as a means to provide savings to applicants—shifting the timing of when some of the appeal-related fees are paid. This approach provides the benefits related to the staging and timing of fee payments, without creating potential harm to applicants or additional implementation issues.

Examination Guidelines & Reexamination Determination Issued

Last week, the USPTO issued examination guidelines in light of the ruling in Mayo v. Prometheus this past March. The guidelines are entitled “2012 Interim Procedure for Subject Matter Eligibility Analysis of Process Claims Involving Laws of Nature. ” (here) The notice explains that the new guidelines will primarily apply to Art Unit 1600, and supersede the initial memo issued by the USPTO to the Examining Corps. on March 21, 2012.

As a reminder, this notice is directed to patent examination, not reexamination. Patentable subject matter issues may not serve as a basis for patent reexamination. There is currently no vehicle (at least until September 16, 2012) for a patent challenger to pursue 101 arguments before the USPTO. This is because patent reexamination is initially limited to patents and printed publications only. As discussed this past May, submitting such challenges in patent reexamination is often litigation inspired, but not without risk of collateral damage to other arguments.  In the request filed last May, all of the proposed SNQs pertaining to the intervening art theory were denied, even those that did not rely upon the 101 theory. In a simple dismissal of the 10 page effort of the Request, the Office explained:

90012276

Fortunately for the Requester, SNQs that did include intervening prior art were accepted by the Office. Order in 90/011,276 (here)

Final Satellite Locations Selected

Yesterday, the USPTO announced the final locations of the satellite offices it is required to open by September 14, 2014. In addition to the Detroit office opening this month (July 13, 2012), the USPTO will maintain three regional offices in Denver, Dallas and Silicon Valley.

In yesterday’s announcement (here) the USPTO noted that:

The USPTO is working to develop concept of operations for the three newly-announced locations based on the Elijah J. McCoy Detroit Office and will develop best practices based on this model over the coming months and years. The Detroit office will employ approximately 120 individuals in its first year of operations. The USPTO also seeks to identify and maximize the unique regional strengths of all four offices to further reduce the backlog of patent applications and appeals.

One would expect the Detroit office to focus on automotive technologies and Silicon Valley on computer related technologies. Dallas and Denver appear to have been selected based upon geographical and/or economic considerations. It remains to be seen exactly how the regional offices will serve the Agency and be integrated with the existing infrastructure.

Preliminary Success Warrants Extension

As detailed previously, the USPTO has launched a new, internal pilot program entitled “After Final Consideration Pilot” (AFCP) for patent applications. The program is designed to foster compact prosecution by encouraging examiner entry of an amendment submitted in response to a final rejection, in limited situations. (note this program does not apply to patent reexamination)

If you have submitted such a filing to the USPTO since March 26th, the examiner will determine whether he or she should take advantage of the additional examining time authorized by the pilot to consider the response. Examiners will use their professional judgment to decide whether the response can be fully considered, including any additional search required, within a three hour time limit in order to determine whether the application can be allowed. There is no need to file any special request for consideration of an amendment under this pilot program.

Preliminary reports indicate that the program has been an effective tool through June. (previously  scheduled to end June 16th). As a result, the program has been extended to September 30th.

Reduction in Incoming Requests & Inter Partes Workload to Free Up Resources

Much attention has been given to the contested proceedings of the newly formed Patent Trial & Appeal Board (PTAB) since enactment of the America Invents Act (AIA) last fall. Starting in September of 2012, these new patentability trials (Post Grant Review (PGR), Transitional Program for Covered Business Method Patents (TPCBMP) and Inter Partes Review (IPR)) will become available, and must conclude by statute within 12-18 months of initiation. The pendency of the new trial proceedings is a significant improvement relative to existing patent reexamination and is expected to be a significant driver behind filings concurrent with litigation.

As a result of the new options for contested proceedings, the law eliminates inter partes patent reexamination. So, going forward, the Central Reexamination Unit (CRU) will lose a significant, resource intensive stream of work. While it is true that the CRU will remain responsible for legacy inter partes reexamination filings, the 100+ examiners will necessarily have extra time on their hands post-AIA.

Absent a replacement stream of work, the remaining stream, ex parte patent reexamination filings, may benefit from the newly available bandwidth.

While it is true that the CRU will be responsible for a new stream of work, Supplemental Examination (SE), the volume of this work will be negligible. Simply stated, post-Therasense, many inequitable conduct defenses are falling at the summary judgement stage. Likewise, the filing of an SE will only serve to create further inequitable conduct accusations. Therasense has largely eliminated the need for this proceeding outside of the most limited of circumstances.

So, post-AIA, the CRU will eventually be left with a docket of ex parte reexamination cases. Absent a reduction in head count at the CRU, it is expected that the pendency of these proceedings will decrease in a fairly significant manner as examiners increasingly turn to these cases. This increase in speed may also be helped by a 10-20% decrease in filings of ex parte reexamination requests resulting from the fairly significant fee increases coming in the months ahead.

Another potentially significant wild card is the Lingamfelter v. Kappos case now before the CAFC. If the CAFC should decide that third parties may not file declaration evidence during the prosecution of inter partes patent reexaminations, the last bubble of inter partes patent reexamination filings expected prior to September 16th could shrink considerably.

In the years ahead ex parte patent reexamination may become significantly faster than it is today. As such, rather than venture into the relatively higher cost realm of PTAB proceedings, challengers not under the pressure of a co-pending litigation may first take a shot at one or more serially filed, ex parte patent reexamination challenges.

Discussion of AIA Legislative History

For those that may have missed the Patently-O post on the topic last week, Mr. Joe Matal, Judiciary Committee Counsel to Senator Jon Kyl, recently published a comprehensive guide to the legislative history of the AIA in the Federal Circuit Bar Journal. Since the AIA was the result of years of congressional and political wrangling, competing bills, and confusion, the complete history is especially difficult to navigate. Part II focuses on the post grant aspects of the AIA, links below.

Part I

Part II

June 14th PPAC Meeting Tracks USPTO Progress

The Patent Public Advisory Committee (PPAC) convened a week or so back at the USPTO for their quarterly meeting. During the meeting, the USPTO presented an update on office operations and AIA implementation status. Of note, the USPTO has announced another round of road shows for presenting the final rules (expected in August 2012). Stops include: Minneapolis 9/10; Alexandria 9/12; Los Angeles 9/14; Denver 9/17; Detroit 9/20; Atlanta 9/24; Houston 9/26; and New York 9/28.

The USPTO will also announce the locations of the last two satellite offices this summer.

Notable updates include:

Legislative Update (materials here)
America Invents Act, Implementation Update (materials here)
Board of Patent Appeals & Interferences Update: (materials here)

USPTO Clarifies Stance on BRI Application to Post Grant Proceedings

During yesterday’s hearing of the Senate Judiciary Committee, Director Kappos explained the various initiatives ongoing at the USPTO with respect to AIA implementation, efforts to address drafting errors in the AIA, and backlog reduction efforts.

Toward the end of the hearing, Director Kappos was asked to justify the use of the broadest reasonable interpretation (BRI) in the new post grant proceedings. This same comment was earlier submitted to the USPTO by the major bar associations (for reasoning that has long escaped me). Director Kappos explained that the AIA requires the USPTO to assess patentability, not validity. In this way, the Agency is simply following the mandate of the legislation. 

Shortly thereafter, the Director issued an expanded rationale on his blog. The Director correctly explained that:

. . . .[P]atent claims serve an important public notice function. An essential purpose of the broadest reasonable claim interpretation standard in the amendment process is to encourage an inventor to fashion clear, unambiguous claims. Patent owners in inter partes and post grant reviews will be afforded opportunities to amend their claims commensurate with their contribution to the art. Only through the use of the broadest reasonable claim interpretation standard can the Office ensure that uncertainties of claim scope are removed by the inventor. In contrast, patents before a district court are presumed valid with a heightened “clear and convincing” standard of proof to demonstrate invalidity. Consistent with this heightened presumption of validity—and as there is no opportunity to amend and resolve ambiguities—district courts construe claims to uphold validity. The Office however, is not so limited in its approach to claim interpretation, given its authority to amend patent claims.

Some have expressed a concern that applying the broadest reasonable interpretation standard tointer partes and post grant reviews could lead to double standards between ongoing patent litigation and the Office’s reviews. The AIA however, addresses this concern. Specifically, the AIA imposes limitations on a petitioner’s ability to file a review when there is ongoing district court litigation, while providing time limits for the Office to complete its reviews. By placing limits on the filing and completion of the reviews, and encouraging coordination between the Office and district courts, the AIA provides improved mechanisms to avoid conflicts. 

On the other hand, inconsistent results would become a major issue if the Office adopted a standard of claim construction other than the broadest reasonable interpretation for post-grant reviews. Specifically, the AIA contemplates that there will be multiple proceedings in the Office, and thus requires the Office to establish rules concerning the relationships between the various proceedings. For example, there may be an inter partes review of a patent that is also subject to an ex parte reexamination, where the patent is part of a family of co-pending applications all employing the same claim terminology. Major difficulties would arise where the Office is handling multiple proceedings with different claim construction standards applicable. In this world, the same amendment made in an inter partes review and a pending application could result in an allowance in one case and a rejection in the other. Or, the introduction of narrower language in a pending application and broader language in an inter partesreview could result in an allowance of the broader language and a rejection of the narrower language. Clearly, these examples and many others would produce bizarre results, unhelpful to patentees, applicants, the public, and the system.

To avoid the potential of having distinct alternative claim constructions for a claim term arising in the various proceedings before the Office and the inconsistent results flowing therefrom, the Office has chosen to continue to employ a single standard, the broadest reasonable interpretation standard, for proceedings before the Office. Continued use of the broadest reasonable claim interpretation will ensure the Office serves the patent community and makes full use of its resources in processing patent claims efficiently, effectively and consistently.

While we await the final rules packages for the PTAB proceedings, it is clear that the long standing use of BRI by the USPTO will not change.

Also of interest during the hearing, Senator Coburn made clear that any change to the estoppel of PGR would not qualify as a “technical ” change, but require full debate of all stakeholders. Other non-technical changes considered are in the areas of prior user rights and the definition of prior art under some of the revised 102 sections.