Patent Reform: Keeping Inter Partes Review Strong

As you probably know, patent reform legislation is moving again. Bills in both the House and Senate have been passed out of committee with bipartisan support and are moving to their respective chamber floors. We are cautiously optimistic we could see a patent reform bill signed into law in 2015. However, some issues remain unsettled and they must be addressed in order for patent reform legislation to be effective in fighting the patent troll problem. We’ll be breaking down these issue areas for you in separate blog posts - they concern Inter-Partes Review (or “preserving the ability to more affordably challenge the validity of a patent outside the court”), venue (or “dealing with the Eastern District of Texas”), pleadings (or “including basic information in the plaintiff's initial complaint”), and discovery (or “limit unnecessary fishing expeditions for evidence before the validity and scope of the case has been determined”).

Patent trolls rely on two tools: low-quality, impossible-to-understand patents and the outrageous costs of patent litigation. Proposed legislation in the House (Innovation Act) and Senate (PATENT Act) would address the second problem by leveling the playing field and giving defendants a meaningful chance to defend themselves. Yet, throughout the legislative process, we have expressed concern that the bills fail to do anything to improve patent quality. In an unwelcome development, certain proposed legislative changes would actually further weaken patent quality.   

As part of the last update to patent law, 2011’s America Invents Act, Congress created a procedure called inter partes review (IPR). IPRs allow a party to challenge a patent’s validity at the Patent Office instead of in court. These proceedings were designed to move quickly, within a year, and are considerably cheaper than litigation. While IPRs remain too expensive for most small startups (with legal fees, an IPR can easily cost upward of $250,000), they represent smart policy that helps rid the system of bad patents. So far the procedure has been successful.

Despite this, reform opponents—the biotechnology and pharmaceutical industries, in particular—are demanding major changes that would upend the IPR program in exchange for their support for patent reform legislation. They allege that IPR proceedings are unfair to patent holders. They wrongly allege that the program has resulted in “overly high” invalidation rates, and that these rates reflect underlying defects in the proceedings.       

But as Professor (and former White House advisor) Colleen Chien recently noted the bogeyman of overly high invalidation rates is wildly exaggerated.  

To understand this numbers game, you first have to understand a bit about how patents work. The heart of any patent is a series of claims. Patent claims should spell out exactly what a patent covers and the claims–usually at least upwards of 10, sometimes more than 100 per patent–are what define the metes and bounds of the patent. When a patent owner alleges that its patent is infringed, it is essentially saying that certain claims are infringed. Likewise, when a patent’s validity is challenged either in court or at the Patent Office (where IPRs take place), the party challenging the patent is asserting that certain claims are invalid.

Next you need to understand a bit about the Patent Office’s IPR process. First, it was specifically designed  to protect a patent holder from frivolous attacks. A party challenging a patent’s validity needs to put forward its entire case at the very outset and essentially ask the Patent Office to take up the challenge. (This is the opposite of litigation, where a party claiming infringement or challenging a patent can actually use the legal system to prove out its case as the litigation progresses.) In fact, the law requires that the Patent Office only institute IPRs when a “reasonable likelihood” that one or more of a patent’s claims are invalid. This weeds out frivolous claims and weak challenges at the outset. The process also uses an “estoppel provision” that prevents a patent challenger from later making arguments in a court appeal that it made—or could have made—at the Patent Office. In other words, the challenger can’t get two bites at the apple. If the litigation system likewise protected startups and other defendants from frivolous challenges in the same way that IPR does for patent holders, we would not have the huge patent troll problem we have today.

Now, back to the numbers. Certain groups—again, largely the pharmaceutical and biotechnology industries—have claimed that IPRs are “patent death squads,” citing data that purport to show that patents are invalidated by IPRs at an overly high rate. And while it might be true that about about 80 percent of patent challenges that result in a full IPR proceeding (up to and including a final ruling) have at least one claim invalidated, that statistic is seriously misleading. For starters, this statistic excludes the very large number of cases that the Patent Office has declined to hear. The Patent Office has instituted IPRs in only approximately 47 percent of patent challenges to date, meaning about 53 percent of patent challenges were not instituted, dismissed, or settled. By declining to institute a proceeding, the Patent Office gold-plates a patent and renders it basically immune from any further challenge.

First, about half of the claims that the Patent Office actually reviews are settled or dropped by the parties. Moreover, of all claims that the Patent Office reviews, only 24 percent are invalidated (again, these are claims, not entire patents). And most of these patents are still partially—or largely—valid, even if some claims have been thrown out. And all the others have been “gold-plated.” So the Patent Office has actually gold-plated far more patent claims than it has invalidated.    

IPRs are good for the patent system and there’s no evidence that they are unfair. To the contrary, the Patent Office has been widely praised for the quality and timeliness of its work. And nearly every decision by the PTO Board has been affirmed when appealed in the courts.

In sum, it is clear that the IPR process is working; in fact, it’s working quite well. And, notably, it’s being used very effectively by the tech industry, the industry that faces the biggest patent troll threats. In fact, over 60 percent of petitions are being filed on computer or electrical based patents, while less than 10 percent are on biotechnology and pharmaceutical patents.

Congress has worked hard to balance the needs of all industries that use the patent system, and proposed language in the House and Senate has been narrowly tailored to address only the worst actors and behavior (specifically, abusive litigation by patent trolls) while preserving the rights of patent holders to enforce valid claims. That balance is now threatened by the insistence of certain industry sectors that changes be made to the IPR process. These proposals would change the claim construction standard that has been used by the Patent Office for decades in order to make it harder to invalidate claims. The Senate bill goes even further: it would establish a presumption of validity for patents that are challenged in IPR that does not currently exist. Those changes threaten to severely weaken the effectiveness of IPR proceedings for everyone.

We should not further open up negotiations that weaken IPR—or carve out whole industries from using the procedure at all—merely to appease opponents of patent reform. Successful patent reform legislation must be comprehensive in scope and must produce a level playing field for all innovators. It must also do nothing to weaken patent quality. So it must ensure that the Patent Office’s IPR proceedings remain a viable, efficient, and effective tool to rid the system of bad patents.

Despite the Negativity, Revised Patent Laws Improve the System

Procedures for challenging patents after they're granted have cut bogus claims.

This op-ed was originally published in the National Law Journal

When the America Invents Act was enacted in 2011, stakeholders cheered this major reform of the patent system. Negotiated and drafted with extensive involvement from patent holders and patent lawyers, the act established postgrant review proceedings to be conducted by expert administrative judges within the U.S. Patent and Trademark Office. These three new proceedings were touted as more cost-effective and quicker alternatives to litigation — making it easier to challenge, and invalidate, certain low-quality patents. Improperly issued patents are often used abusively by patent trolls against startups and others, and the America Invents Act created mechanisms for taking bad patents out of circulation.

But things have changed. These post­issuance proceedings are now under attack, often by the same entities that helped create them. The main target of criticism has been inter partes review, which allows an issued patent to be challenged, but only on the ground that it is not novel or nonobvious — in short, that it was not truly inventive.

'DEATH SQUAD' LABEL

These popular and effective proceedings have been labeled "death squads" of patent rights, and accused of bias against patent holders. Legislation has even been introduced to curtail these proceedings — all based on inaccurate and misleading statistics on invalidation rates, faulty inferences and conjecture.

Let's look at the facts. Some have ­complained that the inter partes review proceeding is more widely used than expected. Much has also been made of allegedly too high invalidation rates. It is sometimes wrongly asserted that 80 percent of patents are being invalidated. But the critics of inter partes review fail to point out that these proceedings were ­specifically designed to deter challenges to good patents.

First, the Patent Trial and Appeal Board only institutes proceedings if it has first determined that some of the challenged patents are "more likely than not" to be invalidated. Given this high bar, it should not be surprising that a high percentage of these patents are invalidated. If invalidation rates were low, that would indicate a real problem: It would reflect poorly on the board's decisions to institute proceedings, and would mean that too many good patents were being targeted for challenge.

These proceedings have a provision that discourages the filing of weak challenges. Once an inter partes review is instituted, the challenger is barred from seeking judicial review of any matter that could have been raised in the review. Filing an inter partes review without strong grounds will result in a denial of the petition, which effectively "gold plates" the challenged patent, rendering it very hard to attack in the future. In addition, the proceedings are designed to be costly and front-­loaded, another deterrent to weak challenges. Because these proceeding are engineered to take up only strong challenges, one would expect to see relatively high invalidation rates.

But the Patent Office's most recently published statistics do not support the meme of overly high invalidation rates. In reality, just more than 600 petitions (encompassing an aggregate 20,000 or so claims) have been concluded to date. The board has instituted proceedings against 68 percent of patent claims challenged, and declined to institute them against 32 percent. The board has invalidated 36 percent of these claims.

The invalidation rate of total claims challengers have sought to invalidate in these proceedings is even lower — 24 percent. So the board has actually "gold plated" far more patent claims than it has invalidated.

INVALIDATION OF BAD PATENTS

Lastly, the legal landscape has changed dramatically. Recent court decisions have significantly raised the bar for patentability in key areas, making it easier to invalidate bad patents.

And it is unreasonable to criticize the board for implementing the law. Moreover, as the board's decisions are appealable to the U.S. Court of Appeals for the Federal Circuit, time will tell whether anything is flawed about these proceedings. But thus far the court has upheld the board's decisions. None of this is to suggest that the inter partes review proceedings are perfect. From the time the Patent Office was charged with the huge task of implementing the law, Patent Office leadership acknowledged that it would not get everything right the first time. It conducted extensive outreach across the country to gather input from stakeholders, and its implementation of the America Invents Act has been a resounding success.

The board, too, has been widely praised for its professionalism and the quality — and timeliness — of its work. But neither the Patent Office nor the board are resting on their laurels. A change was recently made to the rules to raise the page limits for some filings, and other revisions are in the works. A rulemaking proceeding to address concerns about these proceedings is also pending

Despite that, critics are championing the STRONG Patents Act of 2015, which would upend these proceedings without much, if any, evidence that there is a real problem. This legislation is being presented as an alternative to patent reform, but it would do nothing to address the very real problem of patent-troll abuse. It would only make it much harder for startups and others to use these proceedings for their intended purpose.

We should wait for the Patent Office to conclude its rulemaking and make the changes it has indicated are in the works. In the meantime, we should just let the America Invents Act work.

***

Peter C. Pappas is a senior adviser to Engine Advocacy and the former chief of staff for the US Patent & Trademark Office, where he served from 2009 to 2013.

 

News from first-ever Patent Quality Summit

Last week the Patent Office (PTO) held its first-ever Patent Quality Summit – yet another indication of their focus on improving patent quality.  The two-day meeting was intended to take a hard look at patent quality, evaluate PTO proposals, and brainstorm other ways to address this significant problem.  This discussion is timely, as bad patents continue to stifle innovation. Startups have been victimized too often by patent trolls using low quality patents as fodder for sending baseless demand letters and threatening litigation to extort settlements.

At the conclusion of the summit, there was some general consensus among participants that:

1. Overly broad patent claims are extremely prevalent.  The former Chief Judge of the Federal Circuit went so far as to estimate that 70 to 90 percent of the patents he reviewed included at least some “grossly overbroad” claims, mixed in with solid and borderline claims. With about 3 million patents in force, this statistic underscores the extent of the patent quality problem.
2. Quality has to start with the application itself and the conduct of prosecuting the claims in it.   Patent prosecution lawyers are often overzealous in pressing for the broadest possible claims, even those that are clearly invalid.  The PTO allows for many opportunities to wear down the examiner into perhaps accepting borderline or weak claims.  
3. Poor and incomplete recording of the examiner interviews undermines patent quality.  Historically, the “record” has been lacking in sufficient detail. Patent lawyers press examiners into omitting things from the record so they can later claim that the patent covers more.  Examiners are at a disadvantage when arguing with trained, often aggressive patent counsel, and may too often give in to their demands as a path of least resistance.  As a result, startups -- and the public – are deprived of public notice of the specifics and scope of the patent that the law requires.
4. Claim clarity is essential to quality. A clear record is what enables a court to properly interpret the claims. But it is also essential to putting other innovators and the general public on notice about the scope of the patent. This has too often been overlooked.
5. Examiners need to make greater use of Section 112 - part of the law that ensures the “definiteness” requirement is met by the patent.  Section 112 has been historically underutilized, allowing too many vague and overly broad patents.                

Ultimately, examiners will need the strong support of the PTO’s leadership in order to effect any real change.  The patent prosecution bar is not necessarily keen to accept changes that may limit their room to maneuver around the system, and to pursue the broadest possible claims.  One speaker alluded to an “arms race of overly broad claims”. It is well past time to de-escalate this race, and shrink the often inflated scope of claims back to those that are valid.    

Though the PTO has proposed improving the quality of “customer service” provided to applicants, it must be emphasized that the ultimate customer is the innovation ecosystem and the public. An excessive focus on the applicant often works to undermine quality in obvious ways. Therefore, the PTO should be guided by a focus on the public interest in making new rules to improve quality.    

The Senate and Patent Reform: The Time Is Now

This post originally appeared in RollCall.

Recently, word from the Senate Judiciary Committee is that negotiators have reached a bipartisan agreement in principle on the key elements of a comprehensive patent reform bill. They are reportedly vetting and nailing down language and preparing the package for mark-up when the Senate returns. A deal appears close to being done, and it’s looking more like the House’s Innovation Act, which bodes well for final passage.

Yet time is of the essence as the clock is ticking on this Congress. Patent litigation abuse by trolls, entities that acquire patents for the sole purpose of shaking down actual inventors with dubious infringement claims, is a very real tax on innovation. A New York Times editorial calling on the Senate to move forward with robust legislation made it clear that abusive patent litigation costs the US economy billions of dollars a year. And, although we can debate the exact scope of the problem, there is no question that the patent trolling phenomenon is growing, and that it now targets retailers, small businesses, independent inventors,start-ups and consumers. Moreover, it has tarnished the reputation of the patent system at a time when innovation is such a critical driver of economic growth and global competitiveness.

Recognizing that patent trolls leverage the high risk and high cost of litigation to extract nuisance settlements, the House passed the Innovation Act by a lopsided 325-91 margin in December.

As the Senate Judiciary committee struggles to come to terms on some thorny provisions, they should bear in mind what Chairman Leahy said just last week: Patents are government-issued monopolies and the abuse of patents in litigation is qualitatively different and consequently warrants a higher level of congressional scrutiny. When bad actors send demand letters or file suits without any real basis for believing that their patent is infringed, they are abusing the system. This problem is exacerbated when many of the patents being asserted by trolls are vague or abstract software and business method patents that should not have been issued in the first place.

Current law and practice stack the deck in favor of trolls, who typically send out scores of form demand letters which make vague and unspecified assertions of infringement and request “licensing fees” while threatening litigation. The troll renders itself litigation-proof by creating shell companies with no assets, but a threatened start-up is faced with a dire choice: give in to what President Obama aptly called ‘extortion” or risk litigation, which would drain critical energy and resources from a fledgling business which can ill afford the cost or distraction of litigation.

To stem this tide, the committee should press ahead to finalize a package that will redress the existing imbalances in the patent litigation system. The bill must include provisions for:

• Transparency of ownership post-issuance and throughout the life of the patent
• Specificity in demand letters
• Heightened pleading standards that require the identification of claims asserted to be infringed. Any bona fide claim of infringement should be able to meet these reasonable standards, which even provide an exception in cases where the plaintiff is unable to access all the information
• Capping discovery costs by enabling the court to determine what the disputed patent covers and the scope of the claims before allowing broad-ranging, expensive, and potentially irrelevant discovery. This will prevent trolls from driving up costs in order to gain leverage in litigation
• End-of-case fee shifting in favor of a prevailing party while maintaining the court’s discretion to deny fee shifting if the losing party’s actions and conduct were objectively reasonable
• Provisions that enable the real party in interest to be held liable for any costs assigned to shell entities.

To be sure, infringement is also a very real threat to inventors and startups, so the Senate should take care to ensure that nothing in the legislation prejudices the ability of patent holders to commercialize patents or assert legitimate claims. The proposals that have been reportedly agreed upon reflect a keen sensitivity to balancing these interests and the bipartisan negotiators should be commended for taking such care in walking that fine line.

This legislation needs to be balanced but it also needs to be effective, so potential unintended consequences should not be exaggerated in an effort to water down or derail the bill. The bill, like any legislation, should be evaluated by its intended and likely effects, not by reference to potential consequences which are exceptional or unlikely.

It is clear that the current state of affairs enables abuse and is tilted too far in favor of litigation plaintiffs, who can essentially sue on a wholesale basis with impunity. The fulcrum needs to be restored to a position of balance so that the patent playing field is level for all innovators. The Senate Judiciary negotiators appear to have arrived at a fair and balanced set of reforms. Let’s hope the Senate seizes this chance to improve and strengthen the patent system.