Critical Technical Fix to CBM Statute Left out of Leahy Bill

Wasting no time…the Senate has quickly introduced a companion bill to H.R. 3309. The senate bill (here), sponsored by Senator Leahy of Leahy-Smith America Invents Act (AIA) fame, largely tracks the post grant related provisions of the existing house legislation — with one major difference. The Leahy bill does not include the technical fix to the Covered Business Method (CBM) provisions of the AIA, Section 18(a)(1)(C)(i). This fix is included in the Goodlatte bill to permit CBM challenges on prior art qualifying under 35 U.S.C. § 102(e). 102(e) is a critical class of prior art for business method patent challengers.

As explained previously, the exclusion of 102(e) was a drafting mistake of the AIA. This drafting error significantly degrades the appeal of CBM for business method patent challengers. While mark-up and evolution of H.R. 3309 /Senator Leahy’s Bill will certainly continue, it is disturbing that this critical fix was seemingly deliberately left out of the Senate bill.

Pro Software Lobby Drives Legislative Rewrite

Last week, the proposed patent reform legislation (HR 3309) was seemingly stalled for the remainder of 2013. This road block was primarily erected by the Business Software Alliance, and other pro software patent lobbyist that were taking issue with certain proposed changes to Section 18 of the America Invents Act (AIA). As a reminder, Section 18 of the AIA defines the Transitional Program for Covered Business Method (CBM) patents. The CBM proceeding is a post grant patent challenge program managed by the USPTO’s Patent Trial & Appeal Board (PTAB). The CBM program has proven especially successful in cost effectively combating and shutting down business method patent litigation.

The proposed changes to the CBM proceeding drawing the most heat were: 1) the recalibration of the definition of a business method patent to de-emphasize financial services aspect, while expanding the definition to embrace more generic software functionality; and 2) repeal of the “transitional” nature of the program (8 years) to make it permanent. Not surprisingly, large software patent filers were not at all enthusiastic.

Faced with the prospect of further hearings and delay, and with the White House ration-no-time-to-waste-on-patent-reform/”>clamoring for something, anything that can be spun as progress in the wake of the Obamacare fallout,  HR 3309 has been repackaged by dropping these controversial CBM provisions (existing mark-up here).

With additional mark-up expected in the coming days (although likely very minor), look for a companion bill to be introduced on the Senate side by Senator Leahy. As was the case for the AIA, conference can be avoided if the Senate follows the Goodlatte lead, which appears to be the plan.

Patent Reform for Christmas is looking like a distinct possibility.

Statistics Demonstrate Robust Demand for PTAB Patent Challenge Proceedings

Last week, the USPTO issued the official tallies/progress statistics for Inter Partes Review (IPR), Post Grant Review (PGR) and the Covered Business Method (CBM) proceedings. As of November 7, 2013 the Patent Trial & Appeal Board (PTAB) has received 627 IPR petitions and 78 CBM petitions, 709 petitions in total. (While the Office is showing one PGR as being filed, this was an incorrectly filed IPR). (Click to Enlarge)

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Not surprisingly, the vast majority of IPR petitions are in the predictable arts, significant concentrations being in consumer electronics and mobile communication technologies.

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Although difficult to gauge from the numbers due to the lag in filing of preliminary responses across yearly boundaries, it seems that preliminary responses are pursued in roughly 75% of proceedings.

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Based upon early numbers, the settlement rate appears to be leveling out at around 25%. As more proceedings mature toward written decision the rate may increase. Of course, it is within the discretion of the PTAB to continue to written decision for late stage settlements. (See CBM2012-00007)

Caution Urged by Members of House Judiciary Committee

With two previous working drafts circulated in the House of Representatives, the proposals of the Goodlatte Bill were thought to be thoroughly “baked in” from a legislative perspective. However recent commentary from the judiciary on the proposed district court pleading/procedural changes, taken together with the very limited history of the America Invents Act changes, has led some to urge caution on further reforms. Although the House Judiciary Committee has already conducted a hearing on the Bill to determine the need for mark-up, a number of committee members are now urging a second hearing to address growing concerns.

The Hill reports that a bipartisan group of committee members, including ranking member John Conyers (D-Mich.) and Reps. Doug Collins (R-Ga.) and Hank Johnson (D-Ga.) sent a letter to Chairman Goodlatte seeking a second hearing on the Bill. The letter is reported to explain that:

“The impact of the proposed legislation will be profound. . . . .many Americans who will be affected by it — from individual inventors to federal judges to investors in the nation’s largest corporations to small businesses — continue to express strong opinions about its merits” . . . . .the committee should “schedule another hearing in order to consider additional viewpoints before voting on legislation that will affect this vital part of the American economy”

With a sizable contingent of the House Judiciary committee throwing up a procedural road block this late in the game, there would seem to be little time left in 2013 to advance the effort further. Indeed, as it appears that the Senate is poised to follow the Goodlatte mark-up with a companion bill (to avoid conference), it would seem that delaying the mark-up will stall further progress for the remainder of 2013.

Early Statistics Show NPEs Seeking Escape Hatch from PTAB

The Patent Trial & Appeal Board (PTAB) has the power to terminate an Inter Partes Review (IPR), Post Grant Review (PGR), or Transitional Proceeding for Covered Business Method Patents (CBM) upon request of the parties. This discretionary power to terminate a patentability challenge by agreement (37 C.F.R. § 42.74) is a new concept for the USPTO. Historically reexamination proceedings could not be terminated by agreement. In reexaminations (inter partes) where the contesting parties settled their dispute, the challenging party would simply drop out of the inter partes reexamination, but the Office would continue with the reexamination in the interests of public policy.  (cf. terminating an inter partes patent reexamination by operation of estoppel).

Many wondered if patentees would find value in the ability to walk away from such a public proclamations of patent weakness by agreement. For example, where a PTAB trial is ordered for IPR, three (3) technically trained judges of the PTAB will have found at least one claim reasonably likely to be unpatentable. This public record undoubtedly places a considerable “cloud” over the challenged patent.

If 2013 statistics are any indication, non-practicing entities (“trolls” to lazy typists like me) are thankful to keep their suspect patents intact as long as possible.

Of the 44 IPR settlements for FY 2013, 75% of such involve non-practicing entity patentees. (Click to Enlarge)

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In some cases, the NPE IPRs settled were initiated by a single defendant of a Joint Defense Group (JDG). In these cases, settlement enables the NPE to continue their litigation against the other members of the JDG without fear of a follow-on IPR (as the coat tail riding defendants find themselves outside of the 12 month window for a quick follow-on IPR filing).

In JDG scenarios the cloud over the patent that is created by the incomplete IPR is insignificant compared to the asymmetrical, litigation cost burden. This imbalance is the  main club wielded by trolls. Patent strength is immaterial in the more abusive NPE assertion cases. As such, the ability to shake out a few more settlements from industry is far more valuable than clearing one’s name at the PTAB.

Court Denies Second Request to Revisit Controversial Case

The CAFC first considered the validity of Baxter International’s U.S. Patent 5,247,434 (the ‘434 patent) on appeal from a patent infringement litigation with Fresenius. In that first appeal (now commonly referred to as Fresenius I), the Court found the patent not invalid over certain prior art in 2009. After Fresenius I, the litigation dispute went back to the district court on a damages related remand.

Meanwhile, in May 2012 a patent reexamination that was filed by Fresenius USA Inc. in 2007 made its way to the CAFC. The reexamination was based on much the same prior art as previously considered in Fresenius I. This time, the CAFC affirmed the determination of the BPAI that the claims were obvious over the applied prior art applying the more liberal standards for USPTO challenges. En banc review was then sought, but declined in the Baxter reexamination appeal.

Thereafter, Fresenius II made it’s way to the CAFC to determine whether the outstanding damage award was enforceable in light of the CAFC’s decision in In re Baxter. The CAFC held that as the damage award was not yet final, it was essentially erased by the cancellation of the patent in reexamination, and once again, en banc review was sought last summer.

The holding in Fresenius II was a bit more controversial than In re Baxter (given recent cases like In re Construction Equipment). That is, the ability to effectively wipe out a damage award was big news, at least to those that had never heard of Translogic Tech v. Hitachi. Even so, Fresenius II was arguably distinguishable from Translogic as being the first case that: 1) wiped out both a previous damage award via a parallel USPTO attack on the patent, and 2) related to a patent previously considered by the CAFC and found not invalid on the very same art.

Today, the CAFC declined en banc review in Fresenius II (here), but provided quite a bit of commentary on the issues.

The dissent cautions:

The panel majority’s decision in this case goes a long way toward rendering district courts meaningless in the resolution of patent infringement disputes. It does so by creating a new regime wherein a district court’s final adjudication can be undone by later decisions of the Patent and Trademark Office (“PTO”).

Later concluding,

And, when trial courts come to understand the fragility of their judgments, stays in the face of reexaminations—which the PTO grants over 92% of the time—will become inevitable

The crux of the debate expressed in the majority and dissent is one of finality (note Judge Newman filed a separate dissent sticking to the Constitutional arguments she has expressed previously). The O’Malley dissent finds that the issue of validity was finally determined in Fresenius I, and,  therefore the damage award cannot be dislodged as to Baxter. On the other hand, the concurrence explains finality as the end of the litigation.

Next, up for the CAFC is SAP v. Versata, which presents largely the same procedural fact pattern, this time via the far speedier Covered Business Method (CBM) procedure of the America Invents Act (AIA). Next up for Baxter is a likely petition for certiorari….which Versata will almost certainly use to seek a stay of their CAFC appeal long enough to reach finality.

Dominion Dealer Solutions Confuses District Court Practices with PTAB

On March 28, 2013, Dominion Dealer Solutions filed 5 petitions for Inter Partes Review (IPR) against the patents of Auto Alert Inc. Dominion was sued by Auto Alert on October 1, 2012 in Central District of California for infringing 3 of the patents subject to the IPR filings (the other two IPR filings being directed to patents expected to be added to the suit).

On August 15, 2013 the Patent Trial & Appeal Board (PTAB) uncharacteristically denied all five petitions. The PTAB explained that the “real time” features of the claims had not been adequately addressed by the petitioner, or petitioner’s declarant, and that the obviousness analysis was lacking in requisite detail. In essence, the Board found that the mixing and matching of references in the claim charts (common in preliminary invalidity style charts of the district courts) was lacking in explanation as to reference interchangeability. Further the Board found the supporting declaration devoid of a developed rationale for combining the references (i.e., written in a notice style format of the district courts). Dominion sought rehearing arguing that since their declarant provided evidence that was not rebutted by the patentee, that the PTAB could not deny the petition. On October 10th the PTAB denied rehearing explaining that the declaration was indeed considered, but was found lacking in technical reasoning and substance. As the denial of an IPR petition cannot be appealed, the battle was over at the USPTO.

Days later, on October 15th, Dominion filed suit against the USPTO under the Administrative Procedure Act (APA). In their complaint (here) Dominion argues that where an IPR petition includes declaration evidence that stands unrebutted, it is arbitrary and capricious for the USPTO to deny such petitions. Yet, this evidentiary imbalance is present in virtually every PTAB preliminary proceeding by design.

As a reminder, 42.107/207 precludes declaration evidence from patentees in their preliminary responses. As a result, it is a best practice for a challenger petition to include declaration evidence as strong insurance against a denial, but the inclusion of such cannot be a guarantee against a denial. Perhaps in a district court setting the “lack of evidence from the other side” argument would be persuasive. Here, however, patentee evidence cannot be submitted until the trial is instituted. Further, the judges of the PTAB are not the generalist referees of the district courts. Rather, the judges of the PTAB have engineering and science training and routinely rebut the adequacy of such evidence.

One can only guess that the motivation to file suit against the USPTO is that the 12 month window to pursue revised IPR petitions is closed, thus, a lawsuit was the only avenue left to Dominion.

(Note: a more fruitful avenue of relief would have been to simply refile the petitions as Covered Business Method (CBM) challenges since the subject patents were classified as such by the PTO, appear to have covered claims, and there is no 12 month window for CBM challenges).

European Companies Familiar with Opposition Concept

As pointed out last week Japanese innovators have quickly recognized Inter Partes Review (IPR) as a cost effective tool to drive patent disputes to a timely resolution. European patent challengers have also recognized the benefits of IPR. Given the significant use of patent oppositions in Europe, the influx of European patent challengers is not surprising.

The chart below identifies the European entities (and their subsidiaries) actively involved in IPR proceedings. (Click to Enlarge)

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No-Cause Extensions Available for Patent Owner/Director Initiated Post Grant Patent Proceedings

Tucked away in last week’s Federal Register Notice is a significant change to patent reexamination/supplemental examination procedures at the USPTO. Currently, any extension of time sought in an ex parte patent reexamination (the only type of patent reexamination still in existence) requires a show of cause for the requested extension. This is not a trivial matter as the USPTO’s Central Reexamination Unit (CRU) can be quite strict in granting such requests. However, on December 18, 2013, this practice will change for some filers. (Federal Register Notice here)

Starting in December extensions of time for up to two months will no longer require a showing of cause in proceedings that were not initiated by a third party. That is, for Director/Patent Owner initiated reexaminations, extensions of time for up to two months will be available as a matter of right. This change would also apply to supplemental examinations, which are patentee requested and are largely conducted under the same reexamination rules. The version of 1.550(c) that takes effect on December 18, 2013 is shown below (applies to all filings in existence on that date).

§ 1.550 Conduct of ex parte reexamination proceedings.

* * * * *

(c) The time for taking any action by a patent owner in an ex parte reexamination proceeding may be extended as provided in this paragraph.

(1) Any request for such an extension must specify the requested period of extension and be accompanied by the petition fee set forth in § 1.17(g).

(2) Any request for an extension in a third party requested ex parte reexamination must be filed on or before the day on which action by the patent owner is due, and the mere filing of such a request for extension will not effect the extension. A request for an extension in a third party requested ex parte reexamination will not be granted in the absence of sufficient cause or formore than a reasonable time.

(3) Any request for an extension in a patent owner requested or Director ordered ex parte reexamination for up to two months from the time period set in the Office action must be filed no later than two months from the expiration of the time period set in the Office action. A request for an extension in a patent owner requested or Director ordered ex parte reexamination for more than two months from the time period set in the Office action must be filed on or before the day on which action by the patent owner is due, and the mere filing of a request for an extension for more than two months from the time period set in the Office action will not effect the extension. The time for taking action in a patent owner requested or Director ordered ex parte reexamination will not be extended for more than two months from the time period set in the Office action in the absence of sufficient cause or for more than a reasonable time.

(4) The reply or other action must in any event be filed prior to the expiration of the period of extension, but in no situation may a reply or other action be filed later than the maximum time period set by statute.

(5) See § 90.3(c) of this title for extensions of time for filing a notice of appeal to the U.S. Court of Appeals for the Federal Circuit or for commencing a civil action.

* * * * *

(e) If a response by the patent owner is not timely filed in the Office, a petition may be filed pursuant to § 1.137 to revive a reexamination prosecution terminated under paragraph (d) of this section if the delay in response was unintentional.

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Hearing to Consider Issues for Mark-up

Although the Innovation Act (H.R.. 3309) was only introduced last week, as expected, Congress is wasting no time pushing the “patent reform” issue forward. Today at 10AM the House Judiciary Committee will hold a hearing on the content of the Bill entitled: Improving the Patent System to Promote American Innovation and Competitiveness. The hearing will alert the committee of specific concerns prior to mark-up. One notable topic is the Bill’s proposed shift from the broadest reasonable interpretation (BRI) at the USPTO’s Patent Trial & Appeal Board (PTAB) to a district court style claim construction. The initial draft of the Goodlatte Bill referenced the entirety of 35 U.S.C. § 282, and along with it, a presumption that patent claims are valid (§ 282 (a)). This would have been an absolute boon to patent trolls. Fortunately, and as I predicted, the claim construction proposal no longer requires the application of the presumption of validity.

In the second draft, and now H.R. 3309, the general reference to § 282 has been changed to a contextual reference to § 282(b). In essence, the proposal would change little at the USPTO (plain and ordinary meaning is a component of BRI) other than perhaps an increased emphasis on prosecution history consistent with Philipps v. AWH. That said, the proposal still lacks consistency and leaves a possible opening for patent troll mischief.

Continue Reading Congress Debates USPTO Use of District Court Claim Construction Practices