PTAB Rearranging the Face of Patent Litigation

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1 PTAB Rearranging the Face of Patent Litigation By Thomas King 1 and Jeffrey Wolfson 2 It has been over a year since the Patent Trial and Appeal Board (PTAB) began directly accepting petitions from third parties to review and invalidate patents. In the first year, approximately 600 petitions for inter partes review have been filed, mostly for patents that are being asserted in concurrent district court litigation. The entrance of PTAB review marks a major change in the interplay of patent rights and U.S. patent litigation one that could have a dramatic impact in the years to come. Understanding PTAB review will be critical for all parties enmeshed in patent litigation. This article attempts to address many of the open questions about PTAB review that still remain. Because PTAB review is so new, there are many fundamental questions that remain to be answered, including issues that overlap with traditional district court litigation. Nevertheless, over the last year, a variety of district court, Federal Circuit, and PTAB decisions have clarified various open issues and provided many insights on how PTAB review operates in practice. Understanding PTAB review will be critical for all parties enmeshed in patent litigation. This article attempts to address many of the open questions about PTAB review that still remain. PTAB Review Basics There are three main types of PTAB trial proceedings: Inter Partes Review (IPR), Post-Grant Review (PGR), and Covered Business Method Review (CBM). Each of these proceedings starts with a petitioner (typically a defendant in a patent lawsuit) filing a petition asking the PTAB to invalidate one or more patent claims. The petition is assigned to a panel of three administrative patent judges. The patent owner then has three months to provide a preliminary response to the petition explaining why review is inappropriate. Two months later, the PTAB issues a preliminary determination on whether the petition should go forward to the trial phase (and in nearly all cases so far, the answer is yes ). 3 The decision also identifies which grounds will be included in the trial. The trial phase is not a typical courtroom trial, although it does include a pre-decision hearing at the U.S. Patent & Trademark Office (PTO). Instead, the parties have about seven months after the preliminary decision to collect evidence, conduct a limited number of depositions (usually expert depositions), and submit additional briefing. As a practical matter, most of a petitioner s evidence is submitted with the initial petition, while the patent owner s evidence is submitted after the trial has started. Hearings on routine issues are conducted via teleconference with the panel. The pre-decision hearing may be conducted live, but so far, it appears that these hearings will generally involve oral argument only, without any presentation of witness testimony. In most cases, the PTAB is required by law to issue a final written decision within one year after it issues its preliminary decision instituting the review, although the PTAB can extend this period for six months for good cause. Although the three main types of PTAB review are similar in most respects, there are important differences. A petition for IPR may be filed against any U.S. patent for which a PGR cannot be filed; 1 Thomas B. King is an associate in the Orange County, California office of the law firm of Haynes and Boone, LLP. His practice emphasizes all phases of litigation. He may be reached at thomas.king@haynesboone.com or Jeffrey A. Wolfson is a partner in the Washington, D.C. office of the law firm of Haynes and Boone, LLP. His practice emphasizes intellectual property transactional matters. He may be reached at jeff.wolfson@haynesboone.com or In a few instances, the Board has found that a petition does not have a reasonable chance of success on any claim. Those petitions are denied by the Board with no right of appeal, but no estoppel either. A petitioner whose petition is denied may, in theory, file a second petition presenting new grounds.

2 however, the grounds for invalidity are limited to prior art patents and publications. If the petitioner is also a defendant in a patent lawsuit, the IPR petition must be filed within 12 months of service of the complaint to help ensure judicial/pto efficiency. At the conclusion of the IPR, the patent claims in the proceeding are either invalid, or the petitioner is estopped from challenging the validity of the patent claims on any ground that was raised or reasonably could have been raised during the IPR. In contrast, a petition for CBM may raise any ground for invalidity, including invalidity under 112 and 101. CBM, however, applies only to patents covering data processing for a financial product or service, although there has been Congressional discussion about expanding CBMs to a broader class of subject matter. There is no time limit to when a CBM may be filed. Similar estoppel provisions apply to CBM as with IPR. Petitions for PGR have not yet been used because this proceeding applies only to patents issued under the new first-to-file rules as of March 15, 2013 (no such patents have issued yet). Like CBM, PGR will permit petitioners to raise any challenge to the validity of a patent, including challenges under 101 and 112. And, similar to IPR, PGR applies to both financial and non-financial patents. PGR, however, is only available for the first nine months after a patent issues. It remains to be seen whether competitors will monitor patent issuances for the purpose of bringing PGRs early. The risk of estoppel suggests that most entities will not expend resources on this kind of proactive approach to patent infringement litigation except in rare cases, but to the extent they do monitor, we expect it to occur generally only with respect to close industry competitors. Impact of PTAB Review in Pending District Court Actions Now we consider some of the more important open questions. Most practical discussions about PTAB review boil down to how will it affect my case at the district court? And that question is usually distilled further to two issues what is the estoppel impact of a PTAB proceeding at the district court, and will the district court case get stayed during the PTAB review. Although there are no concrete answers to these questions, several cases and experiences now allow patent litigants to predict the roadmap more confidently. Estoppel Long before PTAB review in fact, ever since Congress adopted inter partes reexamination defendants have asked themselves to what extent they would be estopped by an adverse ruling at the PTO. That is, if the PTO finds the patent valid, can a defendant raise different anticipation or obviousness arguments at the trial court that were eligible for, but not part of, the reexamination? Defendants are still asking themselves that question, since the Federal Circuit has never addressed the scope of estoppel after an inter partes reexamination has concluded. And the same question applies to PTAB reviews, which contain similar estoppel provisions to those in inter partes reexamination. This question may never be answered for inter partes reexamination, which is being phased out. On the other hand, the expedited review schedule for the new PTAB proceedings, and the fact that petitioner estoppel attaches immediately after a PTAB decision, means that the Federal Circuit will soon face this question. Although the definitive answer to the scope of estoppel question remains open, there are several recent signposts that provide guidance. The first signpost is Belkin v. Kappos, a case regarding inter partes reexamination procedures. There, the PTO barred a third party requestor from using prior art that was not part of the substantial new question of patentability raised in the request and accepted by the PTO at the outset, despite longstanding PTO guidance to the contrary. 696 F.3d 1379, 1385 (Fed. Cir. 2012). On appeal, the requestor argued that the PTO s new art-limiting procedures were improper, because estoppel attached to any argument that the requestor raised or could have raised during the reexamination, thus requiring the requestor to put 2

3 forward all eligible prior art or face estoppel. Id. The Federal Circuit disagreed with this broad view of estoppel, however, stating that the courts have the final say on unpatentability of claims, not the PTO. Id. The Federal Circuit went on to say that the decision of the Board as to which references to include in an inter parties reexamination was not a final determination of validity or patentability that would give rise to a statutory estoppel. Id. These statements, though dicta, suggest that in the reexamination context, the scope of estoppel will be fairly narrow. This Belkin narrow-estoppel analysis seems to carry over to the PTAB review context. First, the PTAB has strict page limits that prevent a party from submitting too much art as a practical matter. 37 C.F.R Another signpost is that, in its decisions commencing review, the PTAB tends to limit the amount of prior art references that become part of the review by eliminating invalidity theories that it views as redundant before the trial phase of the review commences. As in inter partes reexamination, PTAB review includes substantial restrictions on the amount of prior art that the Board considers. Notably, estoppel attaches only to a ground that a petitioner raised or reasonably could have raised during [the] review. 35 U.S.C. 315(e). According to PTAB regulations, the review does not start until after the Board s decision to institute the review. 37 C.F.R (see also definition of trial in 42.2). PTAB regulations also state that the grounds of the trial are set by the notice of institution. This also suggests that a fairly narrow estoppel will apply to PTAB review. Still, PTAB regulations also permit the petitioner to submit supplemental information (with the Board s consent), which could conceivably include new grounds. 37 C.F.R So the issues that the Federal Circuit will inevitably face in determining the scope of estoppel are: (1) whether prior art that was not part of the PTAB review reasonably could have been raised during the review notwithstanding PTAB regulations barring consideration of that prior art; and (2) whether the supplemental information provisions of PTAB regulations reasonably permit a petitioner to raise a new ground during the review. In the absence of guidance from the Federal Circuit, most observers expect the district courts to apply estoppel fairly broadly, to avoid perceived gamesmanship or unfairness to the patent owner. Still, the language of the statute and the PTAB rules and practices may force a far narrower type of estoppel than most observers anticipate. Litigation Stays One of the main policy factors driving the adoption of PTAB review was the possibility of streamlined dispute resolution including deferred or avoided attorneys fees. On average, PTAB review is expected to cost each side an additional 10-15% of the cost of a district court action. If the district court stays its case pending PTAB review, then the parties will realize significant cost-savings on their attorneys fees. Early reports suggested that courts were staying cases about 50%-60% of the time. More recently, however, most courts are declining to stay cases before the first PTAB decision initiating the review. In any event, it is expected that most courts will stay litigation if the PTAB initiates review on all claims, and will allow the litigation to go forward if it does not. Nevertheless, parties who wait until the last day of the 12-month IPR period can expect to have their stay request denied where the litigation is already well underway. PTAB Claim Construction Last year, how the PTAB would address claim construction was another significant open issue. We now have some answers. One of the surprising features of PTAB review is that de facto claim construction orders are issued as the review is initiated. These orders were surprising because: (1) they are not addressed by PTAB regulations; and (2) the timing of the orders requires the petitioner to anticipate the claim construction issues that the patent owner will raise in its preliminary response. The PTAB s use of its initial decision to determine claim construction thus raises some important questions, including whether those constructions will control the entire proceeding and what the PTAB s approach to claim construction is generally. 3

4 The PTAB s first issued final decision, SAP v. Versata, provides partial answers to these questions by devoting a large portion of its opinion to explaining how and why it uses the broadest reasonable interpretation (BRI) construction standard for claim interpretation. According to the PTAB, [t]here are... two claim construction standards: the Office s BRI construction and the district court standard set forth in Phillips v. AWH. SAP American, Inc. v. Versata Dev. Group, Inc., at 7 (PTAB, June 11, 2013). The Versata opinion goes on to assert the PTAB s adoption of the BRI standard as an exercise of the PTO s substantive rulemaking authority. In Versata, the PTAB found that the district court s claim construction was not the broadest reasonable construction, and applied its own different interpretations (notwithstanding that neither party appears to have appealed those district court constructions to the Federal Circuit). The PTAB s constructions came in two phases. First, the PTAB construed several necessary constructions in its decision to institute. Next, in its final decision, the PTAB considered the parties criticisms of several of its constructions, but found that the constructions were nevertheless appropriate, i.e., they appear to have only been preliminary interpretations until further argument was presented by the parties. Throughout, the PTAB applied its own reasoning and did not rely on the district court s analysis. It is unclear whether the Board s constructions actually impacted the outcome of the case, but Versata has filed a district court action to invalidate the PTO s BRI standard. Versata has also identified the Board s claim constructions under the BRI standard as one source of error in favor of reversal of the PTAB s decision. Although it is possible that the Federal Circuit will force the PTAB to abandon the broadest reasonable interpretation standard, it is more likely that the Federal Circuit will simply keep the two claim construction standards as close as possible. Indeed, even now, it is difficult to say how the two standards are different, if at all. Under the Phillips standard, a claim is given the full scope of its plain and ordinary meaning unless the patentee explicitly redefines the term or disavows its full scope. Thorner v. Sony Computer Entm t Am. LLC, 669 F.3d 1362, (Fed. Cir. 2012). This seems very close, if not identical to the BRI standard. See also MPEP 2111 (describing the BRI standard in terms very similar to the Phillips standard). And, in fact, the Federal Circuit recently reversed a PTAB decision for applying an overly broad construction under the BRI standard, finding that the Board s construction should have applied a narrower, specification-based construction. In Re Giuffrida, Slip. Op. at 7, (Fed. Cir. July 18, 2013). This broadening of the typical Phillips standard and the narrowing of the BRI standard suggests that the two standards have, or will soon, converge to a single standard, at least for PTAB proceedings. Giuffrida is also interesting because it suggests that the Federal Circuit is sending coded messages to the PTAB. Giuffrida was an ex parte appeal from the PTO that, on its face, has little to do with the trial side of the PTAB. Nevertheless, the panel opinion goes out of its way to refer to the portion of the PTAB regulations governing the BRI standard in CBMs. Id. at 7. In doing so, the Federal Circuit pointed out that the BRI standard is not the broadest reasonable interpretation in the abstract it is the broadest reasonable interpretation in light of the specification as it would be interpreted by one of ordinary skill in the art. Id. (emphasis in original). This appears to be responsive to the portion of the PTAB Versata decision that focuses on the broadest reasonable interpretation part of the BRI standard without mentioning the in light of the specification portion. To the extent there is a policy dispute between the PTAB and the Federal Circuit here, it may boil down to questions of deference. If the PTO has authority to promulgate its own claim construction standards via the rulemaking process, then it will be more difficult for the Federal Circuit to effectively merge the BRI and Phillips claim construction standards, because the PTO may overrule the Federal Circuit via rulemaking (which the Federal Circuit may later have to interpret). Moreover, the Federal Circuit may even owe deference to the PTAB s application of the BRI standard. The Federal Circuit has already recognized that its standard for reviewing BRI determinations from the PTAB is confusing and requires 4

5 clarification. Flo Healthcare Solutions, LLC v. Kappos, 697 F.3d 1367 (Fed. Cir. 2012) (see additional views by Judges Plager and Newman). By enshrining the BRI standard as a regulation, the PTO seems to be trying to ensure that any clarification of the standard of review results in deference to its decisions, separate and apart from the Federal Circuit s upcoming en banc review of the de novo review standard in Lighting Ballast Control LLC v. Philips Elecs. North America, (Fed. Cir.). Still, litigants should be aware that, until the Federal Circuit provides additional guidance on the BRI standard, constructions from the district court are unlikely to transfer to the PTO or vice versa. Amending Claims During PTAB Review One issue of significant concern to both petitioners and patent owners is the extent to which a patent owner can amend claims during PTAB review, as in an EPO opposition proceeding. For example, in U.S. reexamination, it is common for a patent owner to begin the process with 15 claims and end the process with 85 claims (usually to the Defendant s dismay). Because these amended claims are subject to estoppel, the possibility of amended claims is a potential deterrent to the use of IPR. Thus far, however, it appears that the risks associated with amended claims are fairly modest. PTAB regulations permit a patent owner to withdraw a claim and provide a substitute claim. But the rules appear to presume that there will be a 1:1 correlation between withdrawn and substitute claims, absent a good reason. Thus far, no one has identified a good reason. Unlike reexamination, the rules do not permit the patent owner to add new claims to the patent only substitute claims are permitted. The Board s recent decision in Idle Free v. Bergstrom, IPR (PTAB 2013) also places limits on a patent owner s ability to amend claims. In proposing substitute claims, the patent owner must: (1) ensure that each substitute claim is narrower than the claim it replaces; (2) identify the portion of the specification supporting each element of the claim, not just the new elements; (3) explain how the substitute claim(s) address the grounds of unpatentability, and (4) confirm that the claim(s) are distinguishable over the closest prior art. Thus, patent owners cannot easily obtain a totally new scope of claim coverage by cancelling everything but the broad independent claims and then prosecuting a different claim set. (The apparent 1:1 claim constraint raises the question of whether a resourceful patent owner might pursue a concurrent ex parte reexamination proceeding to pursue additional claims, something we have not yet seen occur.) The Board s decision to deny pro hac vice status in SAP v. Versata also impacts the risks associated with motions to amend claims. In Versata, the patent owner s lead litigation counsel requested pro hac vice status. Petitioner opposed, arguing that the district court protective order barred lead litigation counsel from participating in the review (presumably out of a concern that allowing trial counsel to participate in the review after reviewing confidential information would lead to prejudice the petitioner if the patent owner tried to amend the claims). Although the PTAB ultimately denied pro hac vice status on other grounds, the Versata case nevertheless shows that protective order and prosecution bars will have an impact on the actual or potential amendment of claims. As a practical tip, petitioners for PTAB review might consider using separate teams for the litigation and for the PTAB review to avoid the increased cost and delay of this sort of strike-out. Impact of PTAB Review on Already-Decided Cases Perhaps the most surprising development in PTAB reviews so far is that, in the PTAB s first final decision, it invalidated a heavily-litigated, Federal-Circuit-approved, patent. And it did so under circumstances that most observers would describe as procedural gamesmanship. The district court action in SAP v. Versata involved two trials and a $345 million verdict that was upheld on appeal. About the same time as SAP filed its appeal, however, it requested a CBM on 101 grounds an issue that SAP dropped during the 5

6 trial stage. A few weeks after the Federal Circuit substantially upheld the district court decision (while remanding for additional injunction proceedings), the PTAB found the patent invalid under 101. Under a traditional Article III perspective, most observers would expect a post-trial 101 challenge to fail badly, and to incur sanctions. Indeed, referring to the PTAB s Versata decision, a district court judge recently complained to a room of experienced Silicon Valley IP litigators: What is so special about patent law? Why do you all get 5 billion do-overs? Vanessa Blum, What s So Special About Patent Law, Judge Asks, The Recorder, June 19, Notwithstanding this expected criticism, the PTAB decision in Versata reflects none of the concern for finality and efficiency that one expects to see from Article III courts in response to aggressive and belated procedural moves. Indeed, the PTAB does not even discuss the issues of res judicata and claim preclusion, which would ordinarily feature prominently, and perhaps dispositively, in a similar district court action. To the contrary, the PTAB s decision effectively disregards the procedural posture of the district court case and independently decides the 101 issue on the merits. Versata will surely appeal the PTAB decision as it tries to collect on its $345 million jury verdict. Whether it succeeds will depend in part on how the Federal Circuit and the district court apply the Federal Circuit s recent decision in Fresenius USA. v. Baxter Int l. Fresenius was decided less than two weeks after the PTAB s Versata decision. Like Versata, Fresenius involved parallel litigation and reexamination proceedings. In 2009, the Federal Circuit affirmed the district court s finding of validity, but remanded the case for additional damages proceedings. Meanwhile, the PTO found the claims invalid in the concurrent reexamination proceeding, a finding that the Federal Circuit affirmed on appeal. Baxter sought to collect on the district court judgment, arguing that the judgment was final and that it could execute on the damages award. The Federal Circuit rejected this under the principles of res judicata, finding that the district court s judgment was not sufficiently final to permit execution and was nullified by the final PTO decision of invalidity. As a result, Baxter took nothing, despite more than eight years of patent litigation and several Article III final judgments in its favor. The Fresenius opinion is unlikely to be the last word on inconsistent judgments between the PTAB and the courts. As Judge Newman argued in her dissent, the Fresenius approach glosses over significant constitutional and administrative law problems arising when parallel proceedings at the district court and the PTO interact. Judge Newman s views probably won t prevail in Fresenius because infringement litigation and ex parte reexaminations involve nominally different parties, they avoid the high-level systemic issues discussed in her dissent. But for inter partes proceedings involving identical parties, Judge Newman s arguments may carry the day particularly that the Federal Circuit s application of res judicata in Fresenius is far out of step with well-established principles in the regional circuits. Impact of Fresenius and Versata on Future Litigation Fresenius and Versata involve scenarios created by the adoption of the AIA that are unlikely to be repeated a year from now. Still, the decisions provide guidance to petitioners for PTAB review and to litigants alike in the event such issues arise going forward. Assuming a typical district court/ipr parallel proceeding, there is a strong possibility of conflicting decisions that arise about two to three years after litigation commences. Some courts are attempting to avoid conflicting decisions by staying the underlying district court cases until PTAB review is completed. In most cases so far, however, the district court has allowed the litigation to proceed concurrently with the PTAB review, leading to a substantial risk of conflicting decisions. The impact of a decision in one forum on the parallel matter in the other forum will depend on a number of interrelated legal principles, as shown in the table below: 6

7 PTAB Rules First If: PTAB finds patent valid while district court case pending Then: Defendant cannot contest validity at the district court on grounds that were raised or could have been raised during the IPR. 35 U.S.C. 315(e)(2). If: PTAB finds patent invalid while district court case pending Then: Unclear whether Plaintiff can pursue claims pending appeal of PTAB decision. The statute is silent on this issue and res judicata principles require careful review before affording preclusive effect to judgment of administrative court. See Restatement of Judgment (2d) 83. But: Truly inconsistent decisions unlikely because most district courts would stay the litigation pending appeal of PTAB decision. District Court Rules First If: District court finds patent valid while PTAB proceeding is pending Then: Under Fresenius and Versata, PTAB is free to consider patent validity de novo. Inconsistent PTAB decision will control if upheld on appeal. If: District court finds patent invalid while PTAB proceeding is pending Then: Unknown whether a plaintiff can establish validity at PTO or which decision would control in case of inconsistent decisions. Fresenius suggests that a plaintiff can continue pursuing the validity of the claims during appeal of IPR; 315(e) states and that an inconsistent PTAB decision would control. But: Truly inconsistent decisions unlikely since PTAB uses a lower invalidity standard of more likely than not rather than clear and convincing. The Federal Circuit will need to deal with each of these scenarios as they arise over the next 2-3 years as a result of inconsistent PTAB and district court decisions. Opportunities for Dispute Efficiency Improvement Not enough PTAB reviews have been completed yet to truly identify the most important areas for improvement. Nevertheless, there are several opportunities for improvement or reform of the PTAB review process. We propose a few below. First, PTAB review does not yet appear to be a viable option for most parties participating in or anticipating Hatch-Waxman pharmaceutical litigation. Although a few pharmaceutical entities have filed IPRs seeking to invalidate claims that presumably cover a proposed generic or 505(b)(2) New Drug Application (NDA) product, far more parties appear to be waiting on the sidelines. Given that Hatch- Waxman litigation tends to be among the most expensive, this is an opportunity for reform. The main barrier to using IPRs in Hatch-Waxman scenarios is the provision relating to the 180-day exclusivity period granted to the first generic applicant to file a paragraph IV certification in an Abbreviated NDA (ANDA). These provisions were not drafted with the more recent opportunity for PTAB review in mind, and thus, filing an IPR does not give rise to the 180-day exclusivity period for the first filer. Such an IPR might even eliminate a patent that creates a basis for the exclusivity and consequently remove the only impediment to additional ANDA Applicants coming on the market at the same time with a generic pharmaceutical product. For later ANDA filers, a PTAB review final decision is not an (aa) or (bb) trigger causing forfeiture of the 180-day exclusivity under the Hatch-Waxman statutory regime. 4 4 If you don t know what an (aa) or (bb) trigger is, don t worry yourself. For those who absolutely need to look it up, see 21 U.S.C. 355(j)(5)(d)(i)(I)(aa)-(bb)). 7

8 Second, given the breadth of the PTAB s decisions to institute review, the Board should consider revising its rules to allow the petitioner to respond to the arguments raised in the patent owner s preliminary response. The current rules require the petitioner to correctly anticipate the arguments that the patent owner will make and the claim construction issues that it will raise, but without any advance knowledge. Those rules seem to result in an inequitable and unrealistic advantage to the patent holder, and the Board s decisions to institute reviews will be better formulated if they allow the petitioner a brief reply at an early stage. The current PTAB rules provide for sufficient time between the preliminary response by the patent owner and the initial Board decision to permit a short reply brief by the petitioner without delaying the proceedings. Third, it is long-since time for Congress, the Federal Circuit, and the PTAB to set forth clear, understandable, and predictable rules regarding the scope of estoppel in PTO inter partes proceedings. The continuing failure to do so has extended a longstanding massive unpredictability that undermines the role of PTAB review in the U.S. patent system, and may often result in heavier than needed use of the Article III courts and more cost in resolving patent disputes. Finally, the Board should consider revising its rules to require live expert testimony at its hearings. Thus far, it appears that most, if not all, PTAB trials will not involve the presentation of evidence or witnesses in front of the judges instead the trials will conclude with a brief oral argument. This process requires the judges to rely solely on the written transcript and prevents them from more easily evaluating the experts demeanors as they testify live. Moreover, most experts are far more forthcoming when a judge is in the room than they are during a deposition. Allowing for live witness testimony is one way to help the PTAB review process achieve more reliable results by filtering out some of the most troubling expert arguments those that appear plausible on paper but which are revealed to be deeply misguided when presented live. Live testimony would likely also increase the deference the PTAB receives than when deciding issues simply on the papers. The PTAB already has an expedited observation of testimony procedure that, with slight modifications, would allow the parties to comment on the testimony presented at the hearing without devolving into full-blown post-trial briefing that could jeopardize the required timing. 8