The America Invents Act “Mini-Trials” are the Next Battleground for Resolving Patent Disputes and Shifting Fees to Patent Owners

Inter Partes Review and the Covered Business Method Patent Program are the new O.K. Corral and it is High Noon

There is a battle cry against abusive litigants in the patent industry.  Among the tactics suggested is a “loser pays” system to try to mirror Europe, where this type of abuse is minimal. The Congressional Research Service presents that 92% of companies who assert but do not make products (over broadly and derisively called “trolls”) lose litigation that reaches judgment on the merits. [i] So far, direct fee shifting has received criticism under US jurisprudence, but the US Supreme Court on Sept. 30, 2013 agreed to hear cases involving the award of attorneys’ fees in patent litigation.[ii]  Also, several of the proposed bills in Congress support more aggressive fee awards for bad conduct and enhanced rules. In particular, Rep. Bob Goodlatte’s Innovation Act recently cleared the House Judiciary Committee with a specific focus on cutting down on abusive patent litigation.

The America Invents Act (AIA), the first patent reform in decades, created a new forum to resolve patent disputes that effectively shifts fees. The AIA created the Inter Partes Review (IPR) and the Covered Business Method (CBM) program, which are  “mini-trials” before an appeal board of specialized legal and technical expert judges.  In these proceedings, the board takes a second look at patents the USPTO has already granted to determine whether they are valid. The judges on the USPTO Patent Trial and Appeal Board (PTAB) have been prolific in decisions clarifying the rules of engagement.  The result?  Up front costs for patent owners where 85% of the IPR/CBMs involve parallel litigation in court, and 66% of the time, the litigation is stayed pending the PTO proceeding.  This can increase the overall cost of litigation for patent owners, while increasing the alternatives for defense strategies – pay up extortion fees or pay the PTO IPR/CBM fixed and potentially higher initial fees.  However, the defendant then triggers the same level of fees for the patent owner now taking the defense in IPRs/CBMs.

The average cost of preparing filing and responding to the patent owner’s response can run into the hundreds of thousands of dollars, even for a small subset of claims of a single patent.   The costs on the defendant’s side also are impacted, with costs for filing the IPR running as much as $300,000, less than half of the minimum $650,000 for a court challenge.[iii]   The AIA has a year and two months under its belt, and the statistics on a run rate basis are clear.  There were 563 petitions filed in the fiscal year ending 2013. In just the first month and a half of the fiscal year ending 2014, there are on average 3.5 filings per business day.  On a run rate basis, that is 910 filings for fiscal year 2014.  In August 2013, the USPTO estimated that if the post grant proceedings are treated as a dispute resolution forum akin to court, then the PTAB would be the forum with the fourth highest volume with 364 petitions.[iv]   In order of highest filing, the Eastern District of Texas had 1266, the District of Delaware had 995 and the Central District of California had 514.  If the number of filings in district courts remains relatively the same, the PTAB would jump to the third top district.   Where both the court and the PTO are progressing in parallel, 66% of the time, the court will be stayed pending the outcome at the PTO.   The PTO therefore takes precedence.

Patent owners have a new Wyatt Earp.  Defendants can call upon the PTO to trigger up front fee shifting for the patent owner and an accelerated PTO determination on the validity, even potentially before the court analyzes it.  But there’s more.  IPRs and CBMs can be used to drive settlement, either before or after filing.  Pre-filing, a drafted petition can be shown to the patent owner as a basis to settle.  The statistics are difficult to compile because the public record would not include a PTO filing.  Settlement also is a new feature of IPRs/CBMs with the petition being disposed of based on settlement.  About 22% of petitions with instituted trials settled in fiscal year 2013.[v]  The exacting analysis of the scope of claims also can drive settlement.  An oft-cited abuse by the trolli’sh type of PAE is asserting that a patent covers much more than a direct reading of the claims.  Typically within months of a PTAB filing, the board construes key terms.  The board’s standard for claim scope is the broadest reasonable interpretation. While not required for adoption by the trial court, the board’s construction of key terms is strong evidence that can disrupt an abusive litigant’s plans,if the board reins in the patent owner’s position.

However, one caveat for this fledging forum is the need for the highest quality work product and substance in the petition.  The 3 Es for the success of post grant proceedings are Evidence, Experts and Excellence in legal representation.  An Inter Partes Review is twice as likely to be rejected on filing as its predecessor proceeding, the Inter Partes Reexamination.  This is likely due to the need to present substantively the strongest case within very strict page limitations and before sophisticated jurists on the PTAB.  These proceedings are about substance, and the patent practitioner before the PTAB needs to use the highest quality tools in evidence and experts.

What does this mean for the overall battle zone?   The notion of fee shifting generally occurs later in the litigation when the court evaluates bad conduct.  With the timing of one year from filing of patent litigation as a limitation for IPRs and CBMs and the potential of stays, these petitions will be filed early.   An early petition means a patent owner will incur greater costs up front than traditionally incurred.  It is not a surprise therefore that patent owners see the post grant proceedings as an attack on their patent rights.  One indication of this is the notion of multiple IPR/CBM filings, including one where a third party files the exact same petition. It is interesting to reflect upon however, the general impetus for filing these proceedings being an attack by the patent owner against a potential infringer.

Where could this all go?  Defendants now have a significant weapon in their stockpile in IPRs and CBMs. They are not without cost, however.  The decision upon receipt of a complaint rests on the value of spending up front funds, likely more than the extortion settlement amount in many cases, thus making the best defense a strong offense.  This is especially true for IPRs and CBMs where the parties may settle thus ending the proceeding.   Now the patent owner is facing financial and patent asset risk, and potentially with a stay the delay in any relief in district court.

For the strong and upright stakeholders in the industry, there is a strong point of commonality in looking at the quality of patents the PTO issues in the first place, thereby obviating the need for these post grant trials.   Patent applicants have a role in the quality of their filings.  They can be sure to search the prior art comprehensively and provide the PTO with the best evidence to determine the patent rights correctly in the first place.

It is clear that better conduct by all stakeholders during the patent lifecycle contributes to reducing the likelihood of poor quality patents and related conflict. This is important because what is really at stake is the quality of the U.S. patent system.  The AIA is about patent quality.  Ensuring our patent system produces and maintains the highest quality patents in which all stakeholders have an interest.  Now the USPTO has a targeted forum to assist while Congress, the FTC, the judiciary and the White House march on.