Tech Companies’ Lawsuit Against USPTO – and Small Business Inventors’ Motion to Intervene – Highlight Need to Address NHK-Fintiv Factors Via Rulemaking

U.S. Patent and Trademark Office

On September 9, a panel of three administrative patent judges (APJs) at the Patent Trial and Appeal Board (PTAB) issued a decision denying institution of a petition filed by Apple seeking inter partes review (IPR) proceedings to challenge the validity of a patent owned by Unwired Planet. In denying institution to Apple’s IPR petition, the APJ panel relied on a discretionary multi-factor test referred to as NHK-Fintiv, which weighs the efficiencies of handling validity reviews at the PTAB when parallel proceedings on similar issues are ongoing in U.S. district court.

The NHK-Fintiv framework, which has developed as a series of decisions given precedential status by the PTAB, is at the center of a lawsuit filed by Apple, Google, Cisco and Intel against the U.S. Patent and Trademark Office (USPTO) in the Northern District of California. In the complaint, which challenges the PTAB’s adoption of the NHK-Fintiv framework as procedurally invalid under the Administrative Procedures Act (APA), the collection of major tech firms argue that the PTAB’s application of the NHK-Fintiv discretionary denial factors violate the America Invents Act (AIA), which contemplates that IPRs and other PTAB proceedings created under the AIA would “proceed in tandem with infringement litigation involving the same claims.”

On September 14, a number of “Small Business Inventors” (US Inventor; 360 Heros, Inc.; Larry Golden; World Source Enterprises, LLC; Dareltech LLC; Tinnus Enterprises, LLC; Clearplay, Inc.; and E-Watch, Inc.) also filed a Notice of Motion and Motion to Intervene and related Complaint in the California case. The Small Business Inventors argue that the disposition of the case will “have lasting impacts on their proprietary and legal interests” that are “distinct from the interests of the Original Plaintiffs, and of the Defendant.” The Small Business Inventors are seeking to enhance, rather than deplete, the ability of the Director to deny institution, in part by promulgating rules preserving and enhancing NHK-Fintiv discretion, rather than eliminating it.

The PTAB Develops the NHK-Fintiv Framework Through Precedential Decision-Making

The first of the two precedential PTAB cases serving as the foundation of the NHK-Fintiv framework is NHK Spring Co., Ltd. v. Intri-Plex Technologies, Inc., decided in September 2018 and designated as precedential the following May. In that case, an APJ panel denied institution of an IPR petition under two bases of discretionary authority. First, the APJ panel exercised its discretionary authority to deny institution under 35 U.S.C. §325(d) because of overlap between the IPR petition and arguments raised to the patent examiner during prosecution of the patent at the USPTO. The APJ panel went further in NHK Spring to determine that it could also exercise its discretionary authority under 35 U.S.C. § 314(a) to deny institution because related district court proceedings involving the patent-at-issue would reach jury trial about six months before the PTAB could be expected to render a final decision on an instituted IPR.

This March, Vice Chief APJ William Fink authored an order on supplemental briefing on Section 314(a) discretionary denial in Apple Inc. v. Fintiv, Inc. The order, which was entered as precedential, identified six factors relevant to the Section 314(a) analysis on parallel district court proceedings, including evidence of the district court’s likelihood to grant a stay, investment in the district court’s parallel proceeding, issue overlap between the proceedings and proximity between the court’s trial date and the PTAB’s final written decision date. Thanks to its precedential designation, the Fintiv order by Vice Chief APJ Fink has a much more widespread impact on supplemental briefing in PTAB trials where Section 314(a) issues are in play, which would now seem to include any PTAB trial where parallel district court proceedings are ongoing.

This impact of the NHK-Fintiv framework is keenly felt in the denial of Apple’s IPR petition challenging the validity of Unwired Planet’s U.S. Patent No. 9001774. Although the discretionary denial factors are enumerated in Fintiv, NHK Spring does specifically mention the “advanced state of the district court proceeding” as a factor weighing in favor of exercising Section 314(a) discretionary authority to deny IPR institution. In assessing the Fintiv factors and denying institution, the APJ panel noted that the jury trial in the parallel district court proceedings in the Eastern District of Texas had already concluded and a jury verdict had been rendered in August, factors which strongly favored the exercise of discretionary authority to deny IPR institution. The PTAB’s decision to deny institution of the IPR challenging Unwired Planet’s ‘774 patent leaves in place a jury verdict which awarded $506 million to Unwired Planet and PanOptis for Apple’s infringement of five patents, including the ‘774 patent. Unwired Planet and PanOptis had alleged that Apple infringed asserted patent claims covering technology essential to the 4G LTE wireless standard.

The district court litigation against the USPTO over the NHK-Fintiv rule was filed on August 31, more than a week prior to the PTAB’s IPR denial on the ‘774 patent, but the complaint includes a list of 18 PTAB decisions to deny institution of IPR petitions filed by the plaintiffs under the discretionary denial factors. Further, the major tech companies have other IPR petitions pending at the PTAB and the NHK-Fintiv factors are likely to be applied in many of those petitions, as well as IPR petitions that have yet to be filed.

NHK-Fintiv is Beyond Agency Authority, Adopted Without Notice-And-Comment Rulemaking

The tech companies argue that “[n]othing in the AIA authorizes the Director to deny IPR petitions based on perceived overlap with pending infringement litigation involving the same patent claims.” Indeed, the tech companies note that AIA provisions enabling the filing of IPR petitions by parties within one year of any district court lawsuits charging infringement indicate Congress’ intent that parallel district court proceedings do not pose a bar to IPR proceedings. Any authority granted the USPTO Director under the AIA to deny IPR petitions for parallel proceedings is more explicit, the companies argue, including 35 U.S.C. § 315(a)(1)’s discretionary authority to deny IPR petitions when the petitioner has started a civil action to challenge a patent’s validity, or in the case of multiple proceedings before the USPTO under Section 315(d).

The tech companies’ lawsuit raises three causes of action under 5 U.S.C. § 706, which codifies the scope of judicial review of agency action under the APA. The suit alleges that the NHK-Fintiv framework violates Section 706(2)(A) for being arbitrary, capricious and an abuse of discretion because it uses “vague and malleable” factors and because it requires the PTAB to speculate on the likely course of parallel district court proceedings. Another count alleges a violation of Section 706(2)(C) for action “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right” because “Congress left no room for the Director to otherwise deny a timely IPR petition based on parallel infringement litigation.” Finally, the suit alleges a violation of Section 706(2)(D) for agency action taken “without observance of procedure required by law” because adoption of the NHK-Fintiv framework occurred without the notice-and-comment rulemaking procedures required by 5 U.S.C. § 553 for such binding substantive rulemaking.

Judicial review of agency action is typically deferential to the agency’s interpretation of its claimed statutory authority to develop rules or issue an order, but the argument exists that the NHK-Fintiv framework has the kind of general applicability and future effect that would require the notice-and-comment rulemaking process under the APA. Certainly, the discretionary denial factors have factored into many cases since Fintiv was issued this March, including the IPR petitioned by Sand Revolution, which is at the center of a recent petition for mandamus filed with the U.S. Court of Appeals for the Federal Circuit.

The Small Business Inventor intervenors in the California case point to the same absence of rulemaking as a problem, but where the tech companies argue “that the Director has exercised too much discretion to deny institution in such scenarios[,] Small Business Inventors…point to the absence of rulemaking as part of their argument that the Director has not exercised discretion enough (or with enough clarity) to deny institution, for all discretionary scenarios.”

Ultimately, although the Northern California suit filed by the tech companies is premised mainly upon the effect of administrative law, the outcome of the suit could have a substantial effect on the PTAB’s discretionary authority to deny IPR petitions brought by petitioners that have already been sued for infringement in district court.