Inter Partes Review: Who is a “Privy” of the Petitioner?
|Written by Allard Chu
Posted: February 5, 2014 @ 2:59 pm
There is a time limit for preventing certain petitioners from initiating an IPR proceeding against a patent, and there is currently a petition for writ of mandamus to the Federal Circuit as to the scope of petitioners covered by the time bar. This issue arises because 35 U.S.C. §§ 315(b). 35 U.S.C. §§ 315(b) states that “[a]n inter partes review may not be instituted if the petition requesting the proceeding is filed more than 1 year after the date on which the petitioner, real party in interest, or privy of the petitioner is served with a complaint alleging infringement of the patent.” Unfortunately, the critical question regarding who exactly is covered by “privy of the petitioner” is not defined by the statute and is subject to great debate.
With a large number of products being sold by one company and manufactured by another, a clear definition of privy of the petitioner for time limitations on initiating IPR proceedings is essential. In the often litigated high technology industries, many companies sell products either manufactured by or incorporating components from another company. One example of this would be the Samsung Galaxy S smartphone, which was manufactured by Samsung and resold by communication service providers under various names such as AT&T Captivate and T-Mobile Vibrant. On the other end of the supply chain, Samsung incorporated components into the Galaxy S from a variety of suppliers including Wolfson Microelectronics. Arrangements for manufacturing by one company for another can be seen across the consumer electronics industries. For example, in addition to Apple, Foxconn has manufactured products for clients including Acer, Dell, and Microsoft. Within these relationships, differing interpretations of privity and the availability of invalidating a patent through an IPR proceeding may mean a difference of millions of dollars in terms of potential royalty fees and litigation expenses.
Petition for Writ of Mandamus in In Re MCM Portfolio LLC
Against this backdrop is the current discussion over the scope of the term privy of the petitioner which has been petitioned for a writ of mandamus to the Court of Appeals for the Federal Circuit in In Re MCM Portfolio LLC. As of January 31, 2014, the Federal Circuit has not yet acted on the petition.
The petition for writ of mandamus for In Re MCM Portfolio LLC resulted from Hewlett-Packard Co. v. MCM Portfolio, LLC, IPR2013-00217, an IPR proceeding instituted by Hewlett-Packard (“HP”) against U.S. patent 7,162,549. In Re MCM Portfolio LLC concerns the sale of Digital Picture Frames (“DPFs”) manufactured by Pandigital, Inc. (“Pandigital”) and sold by HP. While HP resells the DPFs under its own brand name, HP did list Pandigital as its supplier and directed customers to Pandigital for customer care support.
MCM notified HP of alleged infringement in 2008 and 2010. MCM then proceeded to sue Pandigital in the Eastern District of Texas on August 24, 2011 and served Pandigital on September 21, 2011. On the date of filing, MCM also notified HP of the suit against Pandigital. On March 28, 2012, MCM filed suit against HP. HP then initiated the IPR proceeding in question on March 27, 2013, one day before the one year date of MCM Portfolio’s (“MCM”) filing of suit against HP. However, this was more than a year past the serving of the complaint to Pandigital. MCM opposed the IPR on the basis of a time bar due to privity, but the Patent Trial and Appeal Board (PTAB) held that HP was not a privy of Pandigital.
In adjudication of the issue, the PTAB has based their view to construe privity on an interpretation of a six factor test set forth in the 2008 Supreme Court case of Taylor v. Sturgell. Taylor v. Sturgell, 553 US, 890 (2008). The PTAB looked to the six Taylor factors of:
1) the existence of an agreement that the non-party be bound by a determination of issues in an action between the parties,
2) the existence of a pre-existing substantive legal relationship between the non-party and a party,
3) representation in an action by someone with the same interests as the non-party,
4) the assumption of control over an action by the non-party,
5) re-litigation of issues through a proxy, and
6) the existence of a special statutory scheme.
In its analysis based on the Taylor factors, the PTAB denied the finding of privity in the specific action as HP did not exercise control over Pandigital in the Texas action. By focusing on the lack of control over Pandigital, it appears that the PTAB applied a balancing test emphasizing the fourth factor over the other five factors of Taylor. The PTAB held that MCM provided “no persuasive evidence that HP could have exercised control over Pandigital’s participation in the Texas Action. Thus § 315(b) does not bar HP from commencing an inter partes review as being untimely.”
Consequently, MCM filed the petition for a writ of mandamus to the Federal Circuit alleging the PTAB is systematically misinterpreting Taylor. MCM asserts that the PTAB’s requirement to establish privity is an improper balancing test and too narrow. MCM asserts that the Federal Circuit should issue a writ of mandamus as:
1) the PTAB’s interpretation of § 315(b) privity is incorrect as a matter of law,
2) the systematic denial of Taylor’s second ground for establishing privity is an usurpation of power, and
3) the order to institute an IPR cannot be remedied by reversal on appeal.
In the petition, MCM asserts that the HP and Pandigital operate in a distribution agreement sufficient to establish privity under Taylor. Furthermore, MCM asserts that Taylor, contrary to the PTAB’s interpretation, is to be viewed under a common consideration test and does not allow for a balancing test as allegedly used by the PTAB. The PTAB decision addressed the fourth factor of Taylor without the other five factors, and MCM alleges that the emphasis on the fourth factor demonstrates a balancing test of the Taylor factors. MCM argues that Taylor rejects use of a balancing test and requires consideration of all six factors. Lastly, MCM asserts that failure to correct this harm would result in harm that cannot be undone by appeal as an erroneous IPR is not reviewable by normal appeal.
Depending on the Federal Circuit’s actions, there may be far-reaching economic consequences for businesses based on the findings regarding time bars for IPR proceedings. Denial of the writ or affirmation of the PTAB will preserve IPR as a litigation tactic for resellers. However, a reversal of the PTAB may serve to limit the use of IPR as a tactic by time barring businesses.
In the first option of denial of the writ, patent holders will remain exposed to the potential of IPR proceedings initiated by resellers even after the one year mark of initiating a suit against a manufacturer. With a high threshold of “exercising control” in order to establish privity, it appears unlikely that many resellers would be found to be a privy of a manufacturer. Based on the cases where privity has not been found by the PTAB, patent holders should be concerned with the risk of resellers initiating IPR proceedings. Accordingly, in order to mitigate the risk of IPR proceedings, patent holders may end up filing additional lawsuits against resellers as well as the manufacturer in order to start the time bar on IPR proceedings. This may ultimately raise the costs of litigation as patent holders seek to limit the avenues of patent invalidity by alleged infringers.
On one hand, with the wide range of relationships between suppliers, manufacturers, and resellers today, a broader finding of privity may result in dramatically limiting the availability of IPR proceedings as a cost-effective litigation tactic. A time bar on resellers to raise IPR proceedings to invalidate a patent based solely on filing suit against a manufacturer may be unduly burdensome to the reseller by requiring that they initiate an IPR proceeding when a wholly separate company issued for infringement of a particular patent. If resellers are barred from initiating IPR proceedings based on lawsuits brought against them, the resellers will be forced to commit to much more expensive court litigation.
In either case, the potential monetary ramifications of patents being held invalid and licensing royalties are significant. For example, a settlement agreement regarding Digital Picture Frames between Curtis International Ltd. and Technology Properties, Ltd. in 2012 resulted in royalty rates of 1.8 percent of net consumer product sales and 7.2 percent of net commercial product sales with a minimum annual licensed product royalty of $50,000. In 2007, Pandigital sold 2.2 million frames in North America and had revenues of just under $200 million. When the potential costs of royalties are taken in view with verdicts ranging into the millions of dollars in patent infringement cases, the ability or denial of using IPR proceedings as another method to invalidate a patent should be carefully watched by companies in potential privity with manufacturers.
Whether the Federal Circuit decides to accept the petition or not stands to substantially affect litigation tactics by evaluating the availability of IPR proceedings by potentially adverse parties more than a year after a first suit is brought against a manufacturer.
PLEASE NOTE: The views expressed herein are exclusively those of the author.
About the Author
Allard C. Chu is an associate with Sughrue Mion, PLLC, where he practices in the firm’s Electrical/Mechanical Group. His practice focuses on the prosecution of patent applications before the U.S. Patent and Trademark Office. He has experience across a range of mechanical and electromechanical technologies. Allard received his J.D. from The George Washington University Law School, where he served as a notes editor on the Federal Communications Law Journal. Allard earned his B.S. in Mechanical Engineering from the University of California, Berkeley. As part of his dual-degree engineering program, Allard also received a B.A. in Business Management Economics from the University of California, Santa Cruz. Allard speaks fluent Cantonese Chinese.
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