The PTAB’s Concerning Conflict of Interest is Laid Bare in New Vision Gaming

By Paul Morinville
March 29, 2021

“Fees are paid by the petitioner, making the petitioner the true customer of the PTAB. If the odds are small for favorable institution and final decisions, customers will not use the PTAB.”

https://depositphotos.com/129540160/stock-photo-cardboard-with-sign-conflict-of.htmlBuffalo is a small Texas town of less than 2,000 people. On the way into town, school zone signs flank both sides of a speed limit sign. I drove through on a Sunday, when school zones do not apply, so I didn’t slow down. Almost immediately, the police lights lit up and I was awarded a speeding ticket. When I started to fight the ticket, I was met with resistance at every level of city government. It quickly became clear that the speed trap was a significant source of revenue for the small town and that the judge, mayor, city employees and even the officer who pulled me over all benefited from that revenue. So, I just paid the ticket and walked away.

It is the very definition of a corrupt system when those who make the rules and decisions receive financial benefit from the results of their rules and decisions. New Vision Gaming v. SG Gaming, Inc. (Federal Circuit No. 2020-1399) illustrates this phenomenon as it applies to the U.S. Patent and Trademark Office’s (USPTO’s) Patent Trial and Appeal Board (PTAB).

A Tangled Web

Depending on the fee structure, government administrative agencies that charge fees or assess fines can be susceptible to this form of systemic corruption. In most agencies, fees are balanced and do not encourage systemic corruption, but when an agency’s fees are tied to the agency’s decisions, agency decision makers implicitly know that the decision to fine or not fine, or how much to fine, or whether to push a proceeding forward, affects revenue that the agency uses to pay staff and run the agency. If they do not generate enough revenue, people lose their jobs, which is probably the case in Buffalo. Systemic corruption is inevitable if employee compensation is tied to key employee decisions and milestones.

These financial entanglements violate Constitutional Due Process. The Supreme Court said that judges who serve double duty as mayors, so that the same person raises fines and spends them, are unconstitutional in Ward v. Village of Monroeville, 409 U.S. 57 (1972) and Tumey v. Ohio, 273 U.S. 519 (1927). The Fifth Circuit said that a judicial kitty funded by fees and fines, and used to pay court staff and judicial expenses, was unconstitutional in Cain v. White, 937 F.3d 446 (5th Cir. 2019)The First Circuit found that an Environmental Review Board whose non-salary expenses were funded by fines was unconstitutional in Esso Standard Oil Co. v. Lopez-Freytes, 522 F.3d 136 (1st Cir. 2008).

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The financial entanglements of the PTAB are similar. We’ve known this for years, and it was confirmed in late 2019 through US Inventor’s Freedom of Information Act request.  New Vision’s counsel (regular IPWatchdog contributors Matthew Dowd, David Boundy, and Robert Scheffel) connected the dots with their briefs (opening brief and reply brief) to the Federal Circuit.  I pull out some of the most relevant points from their briefs below:

The PTAB is a separate “business unit” of the USPTO. The Chief administrative patent judge (APJ) has separate revenue and cost responsibility for the PTAB business unit.

When someone wants to challenge the validity of a patent (called the petitioner), the petitioner pays a full fee for both institution phase and trial phase, about $45,000. Three APJs decide whether to institute the proceedings.

If they decide to institute it, the PTAB keeps the entire two-part fee. If they do not institute, the PTAB must pay back the portion of the fee that applies to the trial phase, which is about half the total fee. This means that revenue by the PTAB decreases if the petition is not instituted.

The same three APJs that decided to institute then preside over the trial phase and draw salary and bonus for it.

APJs have minimum production quotas for job retention and are paid bonuses. Bonuses are purported to be independent of whether the final decision is to invalidate the patent, but APJ compensation depends strongly on production.

These bonuses can be well over 20% of the APJ’s salary, which is certainly large enough to affect APJ decisions. For example, in 2016 APJ William Saindon had a salary of $168,700 and was awarded a bonus of $41,800. This brought APJ Saindon’s annual compensation to the level of an Article III federal circuit judge.

APJs are awarded “decisional units” for institution decisions and final decisions to support their bonus award. If there are not enough trial phase cases in the pipeline, then the supply of “decisional units” can fall too low to earn a bonus. If the supply of “decisional units” falls even lower, APJs will not make quota for job retention.

Furthermore, 40% of the PTAB’s trial budget, 25% of total budget, is generated from trial phase fees, which in turn depend on positive institution phase decisions. This puts a thumb on the scale of institution decisions by providing a direct financial and employment incentive for APJs to stuff their pipeline with institutions to keep their “decisional unit” count high enough to keep their job and earn next year’s bonus.

By law, the PTAB must be financially self-supporting. If revenue plunges, layoffs may be the only solution. For example, in 2002, the USPTO laid off over 100 trademark examining attorneys, 1/3 of the total, when trademark work fell off.

There can be no doubt that APJs know that their institution decisions determine the fate of their own pay, their own jobs, and the jobs of those around them.

Fees are paid by the petitioner, making the petitioner the true customer of the PTAB. If the odds are small for favorable institution and final decisions, customers will not use the PTAB. As with any business, APJs know who the customer is and how to satisfy the customer.

Taking the Scheme to Court

This overall effect is laid bare by US Inventor, via an amicus brief by a regular IPWatchdog contributor, Robert Greenspoon, analyzing the PTAB’s institution decisions, and describing an “October effect”. Institution decisions issued in September (the last month of the compensation year) are statistically lower than institution decisions issued in October (the first month of the compensation year). This difference shows that APJs stuff the annual pipeline to make production bonuses for the coming compensation year. The same difference is shown at a 95% confidence level, year, after year, after year.

New Vision argues that the PTAB’s fee and compensation scheme is unconstitutional with their briefs (opening brief and reply brief) to the Federal Circuit. Telephone oral argument is scheduled for April 9, 2021.

Image Source: Deposit Photos
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Copyright:gustavofrazao 

The Author

Paul Morinville

Paul Morinville is the Founder and former President of U.S. Inventor, Inc., which is an inventor organization in Washington D.C. that advocates strong patent protection for inventors and startups. Paul has been as executive at multiple technology startups including computer hardware, enterprise middleware and video compression software in the U.S. and China, and now medical devices.

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 as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 13 Comments comments.

  1. Anon March 29, 2021 8:48 am

    Excellent article, and while itself different, it is worth noting a corollary to how the government finally pulled down Al Capone.

    But perhaps an even more important lesson:

    The Means to any End (even and perhaps especially desired Ends) matters.

  2. TishaWashington March 29, 2021 10:45 am

    Shocking that it has taken 10 years for this obvious injustice to be considered.

  3. Pro Say March 29, 2021 1:12 pm

    Thanks Paul.

    “Abhorrent,” “Disgusting,” and “Immoral” don’t even begin to describe the PTAB and how it operates.

    There’s only one answer for this unconstitutional, innovation-killing this black sheep of the Patent Office:

    Abolition.

    Complete.

    Final.

  4. Paul F Morgan March 30, 2021 5:45 pm

    Neither the APJs or he PTAB get any of the fees for their activities, nor do they get paid any more for instituting IPRs than not instituting them. The APJs are all on straight civil service salaries. Just as for ex parte application appeals. The recent great increase in discretionary IPR institution denials once CAFC review was largely removed demonstrates an incentive for denials.

  5. Anon March 30, 2021 7:08 pm

    nor do they get paid any more for instituting IPRs than not instituting them.

    This has been objectively shown to be false.

    Stop the cheerleading.

    Please.

  6. Anon March 30, 2021 7:11 pm

    Any recent spate of institution denials NEED NOT show the proof that you allege.

    This reasoning too has been provided.

    You do your ‘credibility’ no favor by posting in complete disregard of past points presented.

  7. CluedIn March 31, 2021 7:29 am

    Paul Morgan @4 —

    On what do you base your assertions? The underlying compensation facts have been known for years to everyone in the PTAB bar. Did you read any of the Federal Register notices or documents produced by the PTO under FOIA? What did you do to educate yourself before this post?

    ALJs are on flat salary and have no quotas. APJs get bonuses based on production, and have a production quota that determines “successful” vs “unsuccessful” and thereby retention.

    The only thing that’s new here is connecting the facts to a principle of law.

  8. Robert H. Heath March 31, 2021 4:45 pm

    There are some serious issues with the study proffered by US Inventor.

    https://www.rpxcorp.com/intelligence/blog/data-analysis-amicus-brief-on-alleged-ptab-institution-bias-rests-on-shaky-foundation/

  9. Paul Morinville April 1, 2021 8:55 am

    Robert H. Heath, That is interesting. Please be specific. What are the issues?

  10. Anon April 1, 2021 11:51 am

    Mr. Heath – the first thing that jumps out is that this rebuttal is not coming from an objective source.

    That being said, I will venture to your linked information and read what you have to offer.

  11. Robert H. Heath April 7, 2021 10:10 am

    @Paul Morinville in 9.

    According to the RPX analysis, “The USI study suffers from a definitional error, plus questionable methodological decisions and application of statistical techniques to an extraordinarily small data set. In addition, the study’s focus on only two out of twelve months ignores normal random variation in the single statistic that USI purports to measure, causing the study to mistake random noise for signal. Finally, the USI study fails to consider other measures that strongly contradict its thesis of an ‘October Effect.'”

    An update of the analysis that includes Institution Decisions made in Sep and Oct 2019 show that the so-called “October Effect” didn’t occur in 2017, 2018 and 2019.

    See here: https://www.rpxcorp.com/intelligence/blog/new-data-undermine-claims-of-institutional-bias-at-the-ptab/

  12. Charles Ankner April 10, 2021 12:06 pm

    Very timely, thank you. Working on a Reply Brief as I type.

    https://www.linkedin.com/pulse/method-improving-growth-production-output-plants-us-ankner-cp/

  13. Erfinder May 3, 2021 11:39 am

    Pro Say @3.
    I couldn’t agree with you more!
    The PTAB, has stopped me dead in my tracks from persueing my inventions and inventing new products. The PTO should be required to include “a black box warning” about PTAB INVALIDATIONS!