Ignorance of the Law is No Excuse for Cost of the USPTO’s High ex parte Appeal Reversal Rates

As previously reported, the past year of ex parte appeals data from the Patent Trial and Appeal Board (PTAB), shows the USPTO’s Examining corps generating a consistently high reversal rate.  This high reversal rate is likely the result of a confluence of many different factors and the goal of this post is not to propose solutions.  However, these reversals are costing applicants big money. This is regardless of whether the reversal rates reflect the overall quality of the examination process (each reversal is a “defect”) or whether each reversal is a statistically random data point from PTAB judge panels non-uniformly applying the patent laws. This article shows the monetary effects of these high reversal rates.

With overall ex parte appeal pendency at 18.4 months (from the PTAB’s Aug, 3 2017 presentation to the PPAC) applicants filing a notice of appeal today can expect to spend about two years from start to finish on the process.  Most of that time is spent waiting.  While patent term adjustment can compensate on the backend, for many applicants (particularly startups and small companies), the sooner the patent protection the better. For one, investors are often more likely to invest when business has a definitive right of protection. For another, with patent protection the business can stop infringing use and sue for damages sooner.  This, and the costs of filing an appeal typically disincentivize patent applicants from taking the PTAB ex parte appeal route.

While societal and macroeconomic cost of PTAB appeals is for the economists, there is an estimable direct cost to patent applicants for every appeal filed—what they pay their lawyer to draft the appeal documents.  Earlier this month, AIPLA released its 2017 Report of the Economic Survey, in which respondents were asked to provide their fee for preparing an appeal.  The questionnaire asked for input from those who had actually filed an appeal in the last 12 months.  According to the Report the median fee to prepare an appeal without oral argument (which represents the vast majority of ex parte appeals) has remained quite consistent across the 14 year window from 2004 through 2016.  See p. 30. In 2004, the median fee was $3,600 while in 2016, the cost had risen to $4,200.  While this is a median fee, meaning 50% of appellants paid more, and 50% paid less, it represents probably the best objective measure of the average cost of an appeal to any particular patent applicant we have access to.

In attempting to estimate total cost of the process, it is important to be aware of some data caveats.  More appeals get filed than are docketed at the board since prosecution can be reopened or RCEs can be filed after the Examiner’s answer to take newly allowed subject matter.  Furthermore, since on p. 34 of the 2017 Report of the Economic Survey the graph shows the current mean cost for an appeal being something slightly north of $5000, both of these pieces of information suggest that any estimates in this article using median values very likely underestimate the total dollars spent by applicants on their lawyers involved in ex parte PTAB appeals.  The data in this post therefore represents a very conservative estimate.  Also excluded are the government fees from this data set, which are a significant cost, as the appeal forwarding fee for each appeal ranges from $500 for micro entities to $2000 for large entities.

An ex parte appeal may involve just one issue of law or multiple issues of law.  However, for the patent applicant to get a patent, the applicant must prevail on ALL the issues of law on appeal for at least one claim on appeal.  Currently, the USPTO’s published appeal statistics do not reflect what happens to each legal issue on appeal in each case—the USPTO’s statistics are based ONLY on the overall outcome of the appeal.  A reversed decision from the USPTO means the applicant won on all issues in appeal; an affirmed-in-part decision means the applicant lost at least one issue for at least one claim (there is no telling which from raw USPTO data), and an affirmed decision means the Board agreed with the Examiner for ALL the issues on appeal.

When an appeal is brought to the Board, the appellant/applicant is asking the Board rule that the Examiner’s position on a particular issue is erroneous.  There are many affirmed-in-part appeals that issue from the Board where the only issue affirmed is obviousness type double patenting which the appellant did not challenge (think terminal disclaimer), but where the Examiner was reversed on the actually substantively argued issues (35 USC 102, 103, 112, 101, etc.).  Because of the existence of these kinds of cases, an appellant is benefited when the Board reverses the Examiner for any substantive issue, as it finally (in many cases) resolves that particular issue between the Examiner and the applicant.

For this reason, for the purposes of this analysis, the assumption is made that a reversal by the Board on any individual issue is a benefit to the applicant worth paying the entire attorney cost of the Appeal to get.  This oversimplifies the situation to an extent, but is a fair approximation, given that the applicants were willing to pay for a resolution of most of the issues by the Board in an appeal in the first place.

Table 1 shows data using a median attorney fee appeals cost of $4000 per appeal.  Since the appeals being decided today were filed about two years ago, and the median cost of an appeal was $4000 in 2014, the total cost to Applicants of appeals decided today would be best measured in 2014 dollars.

Since a fair number of appeals involve more than one issue, the total cost number in the table only represents the total error cost to Applicants to overturn erroneous rejections made by the Examiners across all the issues.  To attempt to estimate the approximate total error cost, 372 of the 11458 ex parte appeals decisions from 8/23/2016 to 8/23/2017 were randomly reviewed to determine which were single issue vs multi-issue decisions.  This sample size was designed to provide a 5% margin of error at a 95% confidence level.  The observed percentage of multi-issue cases was 40.59%, which, taking into account the margin of error, means that between 35%-45% of ex parte appeals considered in this dataset involved more than one issue.  Reducing the total costs in Table 1 by this percentage to weed out double counting of costs means that applicants spent between $31.09 and $36.74 million in total on attorney fees for appeals and that the resulting attorney fee cost of USPTO reversal error during the year was between $13.91 million to $16.44 million.

These are not minor sums of money, particularly since all of this money was spent by applicants in just one year.  Patent attorneys do not have fee schedules like the USPTO where they charge micro, small, and large entities different fees based on how much the inventors earn.  Because of this, the cost of appeals as a percentage of gross income accordingly falls disproportionately on independent inventors and startups when compared with large entities.

Some would argue that Applicants only appeal cases that they think they can win.  However, what is quite clear from this data is that the Examiners (and the supervisors who participate in the appeal conferences) are not as good as might be anticipated at picking winning cases for the USPTO—and applicants are paying tens of millions of dollars per year as a result.

As the old saying goes, “Ignorance of the law is no excuse.” So there seems to be no good reason that the Examining corps’ inability to apply the law to the facts in ex parte appeals should be costing applicants this much money yearly.  We should not have 2X higher reversal rates for novelty and obviousness than statutory subject matter.  However, until something changes about how the USPTO decides to take cases to the board, it is apparent that patent applicants will continue to have to be patient and pay.