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Upheaval in the Patent World? Potential Impact of U.S. Supreme Court Consideration of Inter Partes Review

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Expected within the next twelve months are two United States Supreme Court rulings that could, once again, significantly alter litigation strategies for both a patentee and an accused infringer in the United States. On May 22, 2017, the U.S. Supreme Court granted certiorari in the case of SAS Inst. Inc. v. Lee, 2017 U.S. LEXIS 3236 (U.S. May 22, 2017).[1] The single question accepted for consideration by the Supreme Court is:

Does 35 U.S.C. § 318(a), which provides that the Patent Trial and Appeal Board in an inter partes review “shall issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner,” require that Board to issue a final written decision as to every claim challenged by the petitioner, or does it allow that Board to issue a final written decision with respect to the patentability of only some of the patent claims challenged by the petitioner, as the Federal Circuit held?

Three weeks later, on June 12th, the Supreme Court surprisingly granted certiorari in Oil States Energy Servs., LLC v. Greene’s Energy Grp., LLC, 2017 U.S. LEXIS 3727 (U.S. June 12, 2017),[2] taking on the weighty constitutional question:

Whether inter partes review, an adversarial process used by the Patent and Trademark Office (PTO) to analyze the validity of existing patents, violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.

The answer to the question posed in Oil States may dramatically transform the patent landscape, far more than the answer to the question in SAS, as the Oil States question deals with the constitutionality of the entire system of post-grant validity challenges, including inter partes review (IPR), post-grant review (PGR), covered business method review (CBMR), and even PTO reexamination procedures. A decision by the Court that inter partes review[3] by the Patent Trial and Appeal Board (PTAB) is unconstitutional will moot any question about any procedural limits placed on the PTAB with respect to that particular type of review.

The Leahy-Smith America Invents Act (AIA), which became law on September 16, 2012, has already dramatically changed both the U.S. patent filing and U.S. patent litigation landscape in a number of ways. A primary purpose of the AIA was to reduce litigation costs and enhance innovation. In many respects, it has not achieved that purpose. Clearly the Supreme Court wants an affirmative and definitive say in patent matters and in AIA trial procedures—it will determine whether the procedures for institution of a review of patent claims by the PTAB are valid under the Constitution and, if so, whether there are limits on the scope of review ordered by the PTAB. Questions abound. Why would the Court decide to review a procedural issue if it was simultaneously considering whether to address a constitutionality issue that would completely moot the procedural one? Because the Supreme Court has accepted both questions simultaneously, how will the Court’s thinking in Oil States affect its thinking in SAS? Will the Court delay its decision in SAS to coincide with or follow its decision in Oil States?

Oil States: The Constitutional Issue. The United States Constitution provides for the separation of powers between three branches of government. Article I of the Constitution provides for the legislative branch (to make laws), Article II establishes the executive branch (to enforce laws), and Article III creates the judicial branch (to interpret laws). The Court of Appeals for the Federal Circuit is an Article III court. The PTAB is an Article II administrative law forum. So, the Oil States question boils down to what final appealable decisions the Article II forum should be allowed to exercise.[4]

In the past several years, with very few exceptions, the Supreme Court has tended to erode patentees’ rights when it gets the chance. If the Court now decides that the entire AIA scheme of administrative validity challenges is unconstitutional, the PTAB (and possibly the PTO)[5] will be hard-pressed to find any way to continue with patent validity proceedings of any kind once a patent issues. Litigation of patent validity would be strictly placed back in the federal courts. The whole AIA process will have been for naught, but some patentees will likely celebrate. Again, this raises more questions. Would extinguishing the PTAB’s ability to invalidate a granted patent claim make patent litigation more expensive than it is now or less expensive, given that many accused infringers and patentees are now litigating simultaneously in two forums? Also, what would be the status of all the patent claims that the PTAB has held to be invalid? Owners of patents with those invalidated claims will need to determine if those claims are indeed invalid or, suddenly, valid again. Will all of the PTAB invalidity decisions of the last few years be deemed unconstitutional and therefore nullified?

The possibility of a major change in litigation procedures also presents important strategic considerations for both patentees and PTAB petitioners in the interim. Potential petitioners over the course of the next year will need to assess whether to file an IPR petition, given that a decision in that forum may be rendered useless next year. Patentees also will need to assess whether to, in order to preserve the issue, argue the unconstitutionality of the PTAB system and any PTAB decision of invalidity, both in current Federal Circuit proceedings and in new cases in which it becomes involved, until the Supreme Court reaches a decision on the matter. For currently pending district court cases, patent owners and petitioners alike will need to evaluate whether they want to accelerate those cases or delay them.

It should be noted that the Supreme Court’s newest member, Justice Gorsuch, has written an extensive concurring opinion[6] espousing the importance of the separation of powers, and the necessity for judicial courts, not administrative bodies, to determine what the law is. When a codified legislative act—the U.S. Patent Act—has created the patent right for the patent holder, will an executive branch administrative tribunal be allowed to take away that property right? Time will tell. It may well turn out that Justice Gorsuch was instrumental in the Court’s decision to review the constitutional issue.

Should the Court determine that inter partes review by the PTAB is not constitutional, the IPR, PGR, CBMR, and possibly even PTO reexamination proceedings will disappear from the legal landscape. All pending PTO and PTAB validity challenges will be terminated, stays of litigation will be lifted, and all of those stayed district court cases will spring back to life, all at once. On the other hand, should the Supreme Court determine that an inter partes invalidity proceeding by an Article II forum is constitutional, then the Court will address the question of what claims that forum must include, or need not include in its discretion, in its final decision.

SAS: The Procedural Issue. The statute at the heart of the SAS question to the Supreme Court—35 U.S.C. § 318(a)—states:

(a) Final Written Decision.

If an inter partes review is instituted and not dismissed under this chapter, the Patent Trial and Appeal Board shall issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner and any new claim added under section 316(d).

The PTAB promulgated the following regulation:

42.108 Institution of Inter Partes Review.

(a) When instituting inter partes review, the Board may authorize the review to proceed on all or some of the challenged claims and on all or some of the grounds of unpatentability asserted for each claim.

37 CFR § 42.108(a).

This article will not attempt to argue various statutory interpretations, or the Congressional intent of the statutes, or whether “any” means “every,” or whether “claims challenged by the petitioner” has the same meaning as, or a different meaning from, “claims in the petition.” These are all relevant issues that could be (but are not) more clearly answered in the AIA itself and which the Supreme Court will concededly dissect, but we leave these issues for future discussion. Rather, the remainder of this article will summarize the current litigation practice under the AIA and discuss potential important ramifications that may occur if the Supreme Court ultimately finds inter partes review to be constitutional but requires final written decisions from the PTAB on every claim challenged by the petitioner.

Since September 2012, a petitioner (usually an alleged infringer) has been able to file a petition with the PTAB alleging that certain claims of a patent are invalid. Relying on Rule 42.108(b), the PTAB then selects which of those challenged claims it wants to institute in an IPR proceeding[7] and disregards those claims that it believes are not likely to be proven invalid. Under its current practice, the PTAB includes in its final written decision only those challenged patent claims for which it has chosen to institute an IPR trial proceeding (and which have not been terminated for other reasons prior to the final decision). Once the review ends, the PTAB then issues its final decision on only the actually reviewed claims. The PTAB has developed its own administrative process for the scope of that final decision. More explicitly, the PTAB now limits the scope of the final decision by the issues in the trial, and it limits the scope of the trial by the claims (and grounds) it chooses to institute in the first place. The claims “denied institution” at the outset are never included in the final written decision.

A Supreme Court rejection of the Federal Circuit’s SAS decision and a holding that the PTAB must either include every claim or reject every claim in a final decision—and not just a subset of the claims challenged by the petitioner—will have far-reaching implications for both patentees and patent challengers. It remains to be seen whether the PTAB would actually review those claims that it would otherwise not have instituted or provide just a one-line sentence of “not invalid” regarding those claims in its final written decision. It stands to reason that the PTAB would have many more final decisions of “not invalid” claims, but mandating that all challenged claims be included in a final decision does not necessarily require the PTAB to spend trial time on all challenged claims. Instead, the Supreme Court could merely require the PTAB to state that challenged but non-instituted claims are not invalid, a result that would have substantial consequences.

Potential Petitioner’s Viewpoint. Requiring all claims challenged in an IPR petition to be included in a final written decision would make IPRs both more and less attractive to potential petitioners, at the same time and for different reasons. On the positive side, an accused infringer would have the ability to appeal unfavorable PTAB rulings of “not invalid” for every challenged claim, potentially adding long delays to an infringement trial. If a stay of litigation had been granted in a district court case, the district court would likely keep the stay in place until the appeal process is complete because potentially all asserted patent claims will be affected. For the same reason, district courts may be even more inclined than they are today to initially grant stays, a development that could greatly reduce or eliminate piecemeal litigation in dual forums. Today, litigation of non-instituted patent claims is often immediately resumed in district court with the parties proceeding in dual litigation tracks in two forums. That scenario would likely come to an end.

It should be kept in mind, though, that IPR proceedings apply only to prior art in the form of patents and printed publications. Other invalidity defenses (e.g., on-sale bar, indefiniteness) would remain in district court. Alleged infringers, however, usually do not mind waiting on their other invalidity allegations, and a Supreme Court interpretation of PTAB Rule 42.108(b) requiring every challenged claim to be instituted will likely postpone a trial on infringement, to the alleged infringer’s advantage.

On the negative side, once the PTAB issued its final decision, the petitioner would likely be estopped (i.e., prevented) from asserting in any other trial forum any invalidity defenses (based on patents or printed publications) for PTAB-challenged claims. In simple terms, the estoppel effect on the petitioner will definitely be broader in scope, as it would include all challenged patent claims. The petitioner will thus need to take a hard look at exactly which claims it wants to challenge in an IPR petition.  The petitioner will need to weigh the risks involved in investing time and resources in asserting claims that might not provide a reasonable chance of success on the merits of invalidity. Petitioners will also need to more closely consider not only which asserted patent claims give them the greatest likelihood of a PTAB invalidity holding, but also those claims that will impact their noninfringement cases. Accused infringers may get only one opportunity to challenge validity and will need to decide whether that opportunity is better taken in the PTAB or in the district court. Given the current widely accepted preference to have validity determined in PTAB proceedings, the Court’s decision could theoretically result in the PTAB exclusively handling most, if not all, prior art patent and publication invalidity challenges.

The only scenarios in which an accused infringer might retain more than one chance to assert its invalidity defenses would be the following: (1) after a district court decides that asserted patent claims are not invalid, the petitioner could then petition the PTAB and challenge validity a second time; and (2) if the PTAB, upon the filing of a petition, determines that it will not institute any of the claims for review, and thus completely denies the petition for any reason, then estoppel will not arise because there is no “final written decision” and the petitioner will be free to litigate validity of the claims in the federal district court.

Patentee’s Viewpoint. First, when the PTAB institutes an IPR trial, it seems even more likely that a district court will be inclined to grant a stay, so the patentee may be forced to delay litigation of any infringement allegations until the IPR proceeding is finally concluded. It may lose the ability to argue that litigation of a particular non-instituted patent claim should continue, even while other instituted claims are reviewed by the PTAB. Second, the patentee will face a somewhat higher risk that the PTAB will decide to hear substantive argument on all challenged claims, even arguments on patent claims that the PTAB would, under today’s piecemeal procedures, not have considered. Given the more limited discovery and lower standard of proof of invalidity required by the PTAB than by a district court, and in view of current page limitations in PTAB proceedings, the patentee may face a greater chance of having more claims held invalid.

On the other hand, a Supreme Court reversal would give a patentee who is ultimately successful before the PTAB the benefit of far more comprehensive estoppel in both the federal district courts and in other PTAB proceedings. In many situations, this would likely prevent a petitioner from raising successive validity challenges against the same patent claims.

Conclusion. Much is at stake for both patentees and patent challengers as a result of the Supreme Court’s review of the Oil States and SAS cases. Decisions are expected in spring 2018.    Please let us know if you would like to discuss any issues presented in this article.

[1] The underlying case is SAS Inst. Inc. v. ComplementSoft, LLC, 825 F.3d 1341 (Fed. Cir. 2016) reh’g denied, reh’g, en banc, denied, 842 F.3d 1223 (Fed. Cir. 2016), cert. grantedSAS Inst. Inc. v. Lee, 2017 U.S. LEXIS 3236 (U.S. May 22, 2017).

[2] The underlying case is Oil States Energy Servs., LLC v. Greene’s Energy Grp., LLC, 639 Fed. Appx. 639, 2016 U.S. App. LEXIS 8870 (Fed. Cir. 2016), cert. granted, 2017 U.S. LEXIS 3727 (U.S. June 12, 2017).

[3] Inter partes review applies only to grounds raised under 35 U.S.C §§ 102 and 103 and only on the basis of prior art patents and printed publications.

[4] The underlying question for the Court to consider in Oil States is whether the right granted to the patentee is a private right or a public right.

[5] The PTO is also an Article II administrative forum whose administrative law judges grant and cancel patent rights.

[6] Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016) (Gorsuch, N., concurring). This is not a patent case.

[7] Federal Circuit law currently allows the PTAB to also pick and choose the grounds for a particular claim that it wants to hear. Shaw Indus. Grp. v. Automated Creel Sys., 817 F.3d 1293 (Fed. Cir. 2016). This question is not before the Supreme Court in SAS, but the issues and implications are similar to the ones presented in this article with respect to claims. Generally speaking, will the Supreme Court continue to allow the PTAB to pick and choose particular grounds that it will include for institution review but not pick and choose claims? Or will the Supreme Court eventually apply the same standard to grounds as it might do to claims, waiting for a case to consider and perhaps providing dicta now.