Patent Review in an Article I Tribunal is Unconstitutional Under the Public Rights Doctrine

By Neal Solomon
October 3, 2017

EDITORIAL NOTE: This is the first in an 8-part series examining the constitutionality of the Patent Trial and Appeal Board (PTAB) under the Public Rights Doctrine. We will publish this series — over 18,000 words in total — throughout the month of October. The publication schedule can be found at the end of this article. Stay tuned!

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In 2011, Congress passed legislation authorizing the Patent and Trademark Office (PTO) to institute an inter partes review (IPR) of issued patents. Congress sought to solve a problem driven by a narrative that criticized low patent quality and suggested that the solution would be after grant patent reviews in the PTO.

This experiment in patent validity review in the PTO, an executive agency, and the Patent Trial and Appeal Board (PTAB), an Article I tribunal in the PTO, has been unsuccessful. The evidence shows that 76% of patents in which a patent review is instituted result in cancellation of challenged claims in the PTAB, compared to 28% of patents invalidated in U.S. district courts.

The main reason for the disparity in patent invalidity rates lies in the application of low standards for due process in the PTO. Unlike in the Article III courts, which maintain high standards for due process, PTAB sustains minimum standards of due process.

The justification for patent validity review in an executive agency lies in Congressional power to establish an Article I tribunal to resolve matters that may involve a public right. The public rights doctrine is specified in a line of Supreme Court cases from Murray’s Lessee (1856) to Stern (2011). While a strong case can be made that patents embody private property rights, that patent disputes are between private parties and that patents are adjudicated in common law in federal courts by judges and juries, even if one grants the argument that patent validity review in an Article I tribunal may be made according to the public rights exception jurisprudence, the actual procedures employed by PTAB illustrate that IPRs are unconstitutional according to any standard of application of the public rights doctrine.

The chief constraints of the public rights doctrine involve consent and due process by an Article I tribunal and review of tribunal determinations by an Article III court. None of these features are present in the PTAB review of issued patents. In fact, the PTAB has shown a massive number of institutional abuses of IPRs that have undermined its legitimacy and negated its determinations.

This series elucidates the public rights doctrine by reviewing in detail the Supreme Court jurisprudence. The argument is advanced that even if the public rights doctrine is applicable – an assumption that is historically unjustified in light of the application of private rights in common law to patent validity review in the last two hundred and twenty five years – the PTO and the PTAB do not satisfy any of the public rights tests of legitimacy. Consequently, the review of patent validity in an Article I tribunal such as PTAB is unconstitutional. The Court should restore the exclusive domain for patent validity review to Article III courts in order to preserve the independence of the judiciary and the separation of powers.

 

Is Patent Validity Review in the PTO constitutional?

In the first decade of the 21st century, a lobby of large American technology companies developed a narrative critical of the U.S. patent system. According to this narrative, the U.S. Patent and Trademark Office (PTO) granted many patents of poor quality because of its limited examination resources. Enforcement of these supposed poor quality patents, particularly in the software arts, caused the technology incumbents to be excessively charged with patent infringement. As a consequence of this narrative, Congress enacted the America Invents Act (AIA) to solve the problem of poor patent quality by allowing the removal from federal district courts and juries the issue of testing the validity of issued patents. The AIA created the Patent Trial and Appeal Board (PTAB) to review issued patents in an administrative tribunal in the PTO. These reviews are organized in inter partes review (IPR), post-grant review (PGR) and covered business method (CBM) review. The tribunal panels are organized to emulate a trial court as a finder of fact in an adversarial setting, with the final patent validity decisions of the tribunals reviewable only by the Court of Appeals for the Federal Circuit (CAFC).

In the ideal, the application of an administrative tribunal for patent validity review has superficial appeal. First, the PTO has specialized expertise that is valuable to apply to patent examination and patent validity determinations. Second, the work of the tribunal determination process ought to be relatively expeditious. Finally, removing patent validity tests to an administrative tribunal should be more cost efficient and less cumbersome than litigation. The combination of these supposed advantages derive from the ideal of agency tribunal review of matters that require specialized expertise in the public rights exception, a region of jurisprudence that enables Congress to enlist executive agencies to determine specialized matters.

In retrospect, the notion of patent validity review in an agency tribunal may have been a Trojan horse. From an original intention to review a small percentage of supposedly “poor” quality patents, the PTAB has effectively created a second window of review for a majority of patents enforced in the federal courts, a ubiquitous review protocol that far exceeds its original purpose of inspecting and correcting a few “bad” patents. The PTO was never conceived as an alternative to federal courts for validity determinations.  For instance, the PTO itself was surprised that infringers requested four times more IPRs than it originally planned. Once a patent review is instituted, there is a 76% chance that all challenged claims will be cancelled. Since only 28% of patents are held to be invalidated in the federal district courts, there is an almost three-fold greater chance of invalidation in IPRs at the PTAB than in the courts. Although the focus in this paper is on IPRs, the same logic applies to post-grant review (PGRs) and covered business method (CBM) review.

While the ideal of engaging patent validity reviews in the agency originally empowered to examine and grant patents had the supposed advantage of expertise, speed and cost effectiveness, none of these features would come to bear on patent validity reviews in the PTAB. The ordinary time for processing an IPR is 1.5 to 3.5 years, including the CAFC review, substantially elongating – in some cases tripling – the adjudication process. In addition, the cost of defending an IPR is typically twenty times on average higher than the cost of the original patent examination, proving a substantial burden and a regressive tax on patent holders. It should also be no surprise to discover biases by PTAB judges that the evidence shows tend to be hostile to patent holders, suggesting that these so-called experts are not necessarily neutral. Finally, patent holders have limited power in settlements when IPRs risk extinguishing all rights.

Historically, patent validity has been adjudicated in common law in Article III courts. Patents have been treated as private property rights between private parties. Further, in many cases, patent validity and infringement are determined by juries as finders of fact. The courts employ a set of procedures that are intended to level the playing field between the parties.

The AIA procedures in the PTAB dramatically change the rules for review of patent validity. For example, patents are no longer presumed to be valid in the PTAB. The PTAB applies a set of rules for review of patents that are clearly antagonistic to patent holder rights as reflected in the extraordinarily high invalidation rates.

The public rights doctrine provides an exception to the traditional federal district court review of some types of disputes. Originally conceived to supply a separate forum for adjudicating disputes involving the U.S. government as a sovereign power, the public rights doctrine has evolved to empower executive agencies with the capability to resolve specialized disputes involving statutorily created rights within agency tribunals. However, there are critical conditions that are required in order for the public rights exception to remain legitimate. These conditions include consent, due process and Article III court review. Neither the AIA nor the PTAB satisfies any of these three crucial conditions. Consequently, the notion of patent validity review in an Article I tribunal is unconstitutional.

It should be clear that the issue of the proper forum for patent validity review involves vital issues of the separation of powers. Since the legislative branch is susceptive to political influence and to large corporation commercial influence, Congress must be constrained from making laws that exhibit the exercise of arbitrary power that destroys the rights and liberties of individuals. Without these constraints, there would be a takeover of government by commercial interests to establish government sponsored mechanisms for corporate self-interest. These commercial influences are common in developing countries. Given these separation of power issues, it is important to recognize the independence of the judiciary from outside influence in its ability to adjudicate matters between private parties. In addition, it is important to recognize the critical value of the jury system to resolve controversies in common law. These core features of an independent judiciary and jury system are essential for applying due process elements embedded in the Constitution.

The evidence shows that about half of IPRs are instituted by a small group of large technology companies. This reveals a bias of IPRs towards an oligopoly of tech companies, with antitrust implications. IPRs have emerged as a tool to attack market entrants and to manipulate markets by driving up costs and driving down returns. In the name of patent quality, Congress has empowered an executive agency to impose an involuntary tax on innovation and simultaneously enables free riding for infringers.

Ultimately, it will be shown that PTAB has vastly worse patent validity review results than federal district courts because of a blatant disregard for due process. As a consequence of these observations, it should be clear that the PTO is susceptible to political influences by the powerful technology lobby’s false narrative of poor quality patents that resulted in creation of a sanctimonious mechanism for patent validity review to constrain competition from market entrants, with an effect to promote technology incumbent profits. See Dolin, G., Dubious Patent Review, Boston Col. L. Rev., Vol. 56, Issue 3, 881, 2015, demonstrating empirically that Congress failed to consider costs in the AIA legislation. One key issue is that Congress initiated the IPR protocol by adopting the myth of poor patent quality without sufficient evidence to support the narrative. See also Solomon, N., The Myth of Patent Quality. IPRs have thus emerged as a second-window of patent review placing high burdens on innovators without justification.

The issue could not feature larger economic stakes. The patent system has historically been the foundation for incentives to invest in risky technology. The patent bargain is disrupted when disclosure of inventions is not rewarded with essential rights. When claims from over half of patents that are enforced are shown to be invalidated, the incentives to invest in technology are substantially diminished. The stability of the patent system is thus rendered less certain. As the patent system is destabilized, patents are devalued. IPRs have been a ticket for infringers to artificially devalue patents of rivals. See Solomon, N., Policy Solutions to the Productivity Growth Crisis, SSRN, 2016.

With uncertain rights caused by an asymmetric patent validity review mechanism at the PTAB, infringers are emboldened to hold out and to refuse to deal with patent holders. There is now a perverse incentive for infringers to engage in efficient infringement, ignore patents and wait to be sued. Why engage in a voluntary patent licensing market when an infringer can free ride with impunity? Infringer hold-out forces patent holders to enforce patent rights in the federal courts, with infringers then filing IPRs to force patent holders to invest substantial sums to defend the patent in an IPR in a time-consuming review in the PTO. Consequently, patent enforcement costs and time to resolution are substantially increased. Dramatically higher costs place a burden on patent holders and represent a substantial regressive tax on innovation.

When patent system reliability is reduced, markets are distorted, with advantages for infringers and high financial costs for patent holders. In fact, IPRs have emerged as an artificial barrier to the patent system that unilaterally benefits infringers, particularly large technology incumbents, at the expense of market entrants.

Since costs are increased, patents are devalued and infringers protected, investments in technology decline. This economic mechanism explains the dramatic decline in business start-ups to a record low as well as the decline of business investment. The decline in technology business investment explains the dramatic decline of productivity growth in the last six years. The Fed, among others, recognizes that productivity growth declines have been the main cause for the anemic economic growth of the last few years. Consequently, the IPR regime, naively instituted under the guise of solving a minor problem of poor patent quality, has effectively undermined the growth of the U.S. economy.

Because the core argument justifying the government’s position to maintain IPRs in the PTAB involves the public rights doctrine, this paper reviews in parts I and II the classical and modern public rights jurisprudence to show a continuity of criteria that specifies the constraints that must be met in order to maintain legitimate agency tribunals. Since patents have historically possessed private rights that are adjudicated in federal courts, the paper reviews in part III the traditional processes for patent validity review, including the Seventh Amendment jury trial right. In part IV, the PTAB procedures are reviewed to show the clear biases against patent holders, the combination of procedures of which reveal a total lack of due process. The argument is then proffered, in part V, that without any of the public rights exception criteria – viz., consent, due process or Article III court review – applied to IPRs, the patent validity review mechanism in the PTAB is unconstitutional.

The Supreme Court is reviewing the question of the constitutionality of patent validity reviews under the public rights doctrine in an Article I tribunal in Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, suggesting that these issues are both timely and important.

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The Author

Neal Solomon

Neal Solomon is CEO of Advanced System Technologies Inc. A prolific inventor of technologies involving semiconductors, communications, data management, imaging, robotics and healthcare, he holds degrees from Reed College and the University of Chicago.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 11 Comments comments. Join the discussion.

  1. Jim Ruttler October 3, 2017 12:40 pm

    Excellent article and points. Looking forward to the next in the series.

  2. Edward Heller October 3, 2017 4:24 pm

    Good start.

  3. Edward Heller October 3, 2017 4:27 pm

    We should all recognize that even if the PTO provided due process in IPRs, the primary reason the big corporations want to move patent validity out of the courts is to keep validity away from juries.

  4. Gene Quinn October 3, 2017 5:53 pm

    Edward Heller-

    I wonder if it is as much about keeping away from juries as it is about the creation of a tribunal that could so easily be influenced. Under the control of the Director and with no procedural due process requirements afforded both sides in federal court.

    -Gene

  5. Edward Heller October 3, 2017 6:19 pm

    Gene, I have been giving a lot of thought to this, as you have, over the last several years. Indeed, one move after another seems centered on a desire by the big companies to assure control of the patent system for their exclusive benefit.

  6. Mark H Martens October 4, 2017 12:50 am

    There is also the possibility that they have one additional follow-up strategy;

    After devaluing outstanding patents they rush out to the markets, buy a bunch of them cheap, then allow the IPR process to be reversed, restoring IP values and making them easier to defend.

  7. Night Writer October 4, 2017 9:57 am

    @5 Edward: and you ridiculed me for years on that other blog as I said this for about the last seven years. And, when I started saying about 5 or 6 years ago that Google was coming after the patent system.

    (Although, I give you that you figured out that the Scotus was going to use Rader’s dissent.)

  8. Paul F. Morgan October 4, 2017 10:42 am

    IPRs are not going to get eliminated by accusations that are not clearly proven. Lack of “due process” can be and has been raised in appeals from IPR decisions to the Fed. Cir. in several cases. Yet only 2 o 3 have been sustained out of all the IPRs in the past 5 years, not even by Fed. Cir. panels containing judges known to dislike IPRs. Nor in the Sup. Ct. Cuozo decision.
    Nor has there been any actual proof of allegations of political influence over IPR APJs. Also, numerous IPR decisions have been issued in time periods where there was no politically appointed PTO Director with no significant changes in the rate IPR declarations or IPR claim rejections.

  9. Anon October 4, 2017 11:26 am

    Mr. Morgan, your cheerleading is duly noted.

  10. Gene Quinn October 4, 2017 12:47 pm

    Paul Morgan-

    You referring to an “accusation” of a lack of due process not clearly proven is astonishing. We’ve gone chapter and verse here on IPWatchdog explaining over and over again all the many transgressions of the PTAB that deny procedural fairness. The PTAB refuses to consider evidence that is timely submitted — that is not an accusation that is a fact. The PTAB has allowed Judges with clear conflicts of interest to take vested property rights away from property owners. The Office has admitted that the Director has stacked panels to achieve outcomes that she alone deemed appropriate. The list is endless, and in each instance that we’ve published the growing list we’ve provided fact, not accusation.

    If operating a tribunal as a Kangaroo Court isn’t a denial of due process we might as well just do away with the concept of due process insofar as Article I tribunals is concerned.

    The fact that Judges of the Federal Circuit have not agreed that there are due process violations doesn’t mean that there are not due process violations. It just means that the Judges of the Federal Circuit are doing their best to play the part of the Emperor without any clothes. And they are succeeding remarkably well. Perhaps the decision in Aqua Products earlier today will mark the beginning of a new era in how the Federal Circuit deals with the PTAB and the USPTO.

  11. Night Writer October 4, 2017 1:35 pm

    Paul Morgan >Also, numerous IPR decisions have been issued in time periods where there was no politically appointed PTO Director with no significant changes in the rate IPR declarations or IPR claim rejections.

    That is a very long stretch. As if the procedures and people the director put in place are going to carry on. Plus, it does not speak to other types of biases, e.g., NPE get burned.

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