How PTAB proceedings are driving district court settlements

Analysis shows how institution decisions made by the Patent Trial and Appeal Board of the US Patent and Trademark Office are a critical point in post-America Invests Act patent disputes

In the initial months after the enactment of the America Invents Act, little was known about how the newly crafted post-grant procedures would affect patent litigation in federal district court. As the clouds parted and the Patent Trial and Appeal Board (PTAB) issued its first decisions, new beacons have emerged which are altering the way that parties navigate patent litigation. In particular, the decision to institute review has become a rising star of the PTAB, with its gravitational pull reaching beyond just “real parties in interest”, but also warping the litigation fabric for surrounding “related matters”.

Previous commentators have addressed a variety of statistics and trends at the PTAB, including institution, invalidity, settlement rates and district court stays. This study explores the PTAB’s ripple effects in district court and shows that there is a correlation between litigation settlement timings and PTAB institution decisions, even for defendants which are not real parties to the PTAB proceedings.

Our analysis focuses on district court litigation:

  • filed between January 1 2012 and December 31 2014;
  • that would have been identified as pending related matters in at least one inter partes review petition; and
  • that was likely settled as of November 1 2015.

Further, this analysis focuses only on inter partes reviews, which comprise more than 90% of all petitions filed at the PTAB. We show that, for the approximately 1,100 cases which fit this profile, the majority had settled within 180 days of the inter partes review petition filing date. We also explore plausible explanations for this trend and discuss its consequences.

Understanding institution decisions as perceived in 2012

Before September 16 2012 there was little information available to forecast the implications of the America Invents Act’s new post-grant proceedings or the significance of the PTAB’s institution decisions. US Patent and Trademark Office (USPTO) Director Michelle Lee acknowledged that even the USPTO did not accurately predict the implications of the new law, as “the total number of petitions filed [before August 2015] reflect around three times more than what [the PTO] initially expected”.

From a statutory perspective, the decision whether to institute proceedings involves a threshold inquiry into whether the petitioner, as a matter of law, has satisfied the requirements for review. The legal standard varies by the type of review sought. For inter partes reviews, the petitioner must show a reasonable likelihood that he or she should prevail on at least one challenged claim.

Similar to the reasonableness standard that appears in other areas of law, ‘reasonable likelihood’ as defined by the USPTO “is a somewhat flexible standard that allows the Board room to exercise judgment”. Although this appears to establish a relatively minimal burden of proof, it was clear from the outset that institution is not guaranteed.

The USPTO emphasised this point when it explained that the PTAB retains discretion to deny institution in certain circumstances, even if the legal requirements are satisfied. As the first institution decisions began to trickle out of the PTAB, the grant rates hovered slightly above 90%. However, by September 30 2015, institution rates had fallen to slightly over 70% as petitions rapidly accumulated on the PTAB’s docket.

Aside from legal standards, the inter partes review process offers only limited grounds for review and follows a strict timeline in order to expedite proceedings. The institution decision serves as the first major hurdle and is due no later than three months after the filing date of the rights holder’s response or six months after filing the petition (whichever is earlier). If review is instituted, the PTAB must produce a final written decision no later than 12 months from the date of institution, unless the parties otherwise terminate the proceedings.

Before enactment, observers understood that inter partes review proceedings would provide a faster venue for resolving patent validity than district court. However, few could have anticipated the frequency with which the PTAB would institute proceedings or invalidate claims, or how institution decisions might affect overall litigation strategies. Three years later, it is now possible to accurately evaluate the impact of the PTAB’s institution decisions.

Review of patent disputes between 2012 and 2014

The data from the first three years shows that the USPTO has received 4,239 new petitions (including 3,817 inter partes reviews). These disputes settled approximately 36% of the time, with approximately 795 total settlements since 2012; the majority of these occurred before institution.

Looking beyond USPTO proceedings, it appears that the PTAB’s institution decisions also substantially affect the timing of district court settlements.

Figure 1. PTAB reviews and related matters

Between 2012 and 2014, around 23,000 patent actions were filed in federal district court. By 2015, nearly 70% of those cases had settled, while the rest were still pending or had been terminated. About 1,100 of settled cases involved one or more patent claims that were the subject of an inter partes review petition. These 1,100 settled cases are the subject of this analysis.

For the 15,000 cases filed between 2012 and 2014 that settled before the end of 2015, the median duration was around 211 days. By contrast, for the much smaller subset of 1,100 cases which were identified as related matters to at least one inter partes review proceeding, the median overall duration was 420 days.

At first glance, this result seems counter-intuitive and contrary to the America Invents Act’s efficiency and cost-saving goals. However, a closer look at this subset of 1,100 related matters reveals that most settled within 180 days of the earliest inter partes review filing date. Specifically, the median adjusted duration for these cases was 163 days as of the end of 2015.

The distribution of adjusted durations shows a sharp concentration of cases being settled within 180 days of the earliest inter partes review filing, which is typically when the PTAB delivers (or would have delivered) an institution decision. Further, the evolution of this distribution reveals a trend over time. In 2012 the number of related matters was 286 and the median adjusted duration was 281 days. By the end of both 2013 and 2014, the sample size of cases grew to 828 and 1,100 respectively, while the median dropped to 197 and 163 days.

Figure 2. Overall duration of cases

Figure 3. Pending cases versus new filings

Figure 4. Pending cases versus institution rates and invalidity rates

Significance of institution decisions in prompting settlements

There are several plausible explanations for why institution decisions have become the centre of gravity in inter partes review proceedings. One explanation for the increase in pre-institution settlements may be that settling the dispute earlier allows patent owners to eliminate the risk that an adverse decision could be used as grounds for institution in a later case. Although the PTAB is not necessarily bound by its earlier decision, the patent owner’s incentive is rooted in the inherently precedential effect of a prior determination on institution.

A second explanation may be that defendant petitioners have an increased incentive to settle claims before institution due to the low rate of institution – although this seems less likely. Similar to the risk faced by rights holders, an adverse institution decision may estop defendants from making certain arguments or, at the very least, confer some degree of legitimacy to the patent. However, unlike the dilemma facing rights holders, district courts thus far have largely taken the position that a decision denying institution of an inter partes review does not support an inference of validity in a related civil matter. Some courts have gone so far as to prohibit the presentation of such evidence to the jury at trial.

Figure 5. Pending cases and methods of settlement

As a result, it seems unlikely that the risk of an adverse institution decision would encourage defendants to settle in the same way that it may incentivise rights holders. Even if it could be demonstrated that parties’ preference for settling before institution is attributable to some other incentive for defendants, the fact remains that in most cases defendants will benefit from faster settlements. Accordingly, because parties to an inter partes review petition are more likely to settle within six months, simply filing an inter partes review may provide some benefit to defendants in patent disputes.

A third explanation is that the high probability that an inter partes review, if instituted, will result in a final written decision that invalidates one or more claims of the challenged patent encourages rights holders to settle before an institution decision.

Figure 6. Resolution of district court cases for cases filed in 2012-2014

From 2012 through 2014, the probability that the PTAB would institute an inter partes review was relatively low; approximately two-thirds of all petitions were instituted. However, of the instituted petitions, there was a high probability – about an 89% chance – that the PTAB would invalidate one or more claims in a final written decision. As this trend emerged, rights holders likely recognised that their chances of escaping an inter partes review with all patent claims intact would decrease significantly if institution were granted. Accordingly, rights holders may have an increased incentive to limit this risk by negotiating a settlement before any institution decision.

Figure 7. Distribution of overall durations for litigations filed in 2012-2014

This is only one of several possible outcomes that could have resulted from the new post-grant procedures. One could readily imagine a scenario where institution decisions were little more than a formality or rubber stamp and did not affect incentives to settle. For example, imagine that, rather than a 66% institution rate, the PTAB instituted 99% of all inter partes review petitions. Further, imagine that only 50% of instituted claims were later invalidated in a final written decision. In this scenario, the institution decision would retain little significance and parties would be unlikely to consider settlement until around 18 months, right before the PTAB’s final written decision. Under such circumstances, petitioners and other defendants in district court would likely not receive the same degree of benefit from inter partes review petitions in resolving their civil litigation.

Figure 8. Overall durations versus adjusted durations for related matters filed in 2012-2014

Setting aside the potential explanations for the moment, the apparent consequence of this trend is that, regardless of whether the PTAB institutes an inter partes review, filing an inter partes review petition increases the likelihood that parties will reach a settlement before any institution decision is made. If, as suggested above, this trend is attributable to the rights holder’s desire to avoid certain risks associated with institution, this may be to the defendant’s benefit.

In particular, filing an inter partes review increases the likelihood that parties will settle more quickly – thereby reducing the costs associated with civil litigation – independent of their belief in the likelihood of institution. It is no surprise that patent litigation in district court can drag on for years before reaching any definitive resolution and that the resulting court costs and attorneys’ fees can be crippling. Because the America Invents Act requires the PTAB to issue an institution decision within six months of the date on which the petition is filed, this strategy can significantly reduce the litigation costs to defendants.

That said, filing an inter partes review also poses certain risks for defendants – for example, the possibility that arguments rejected in the inter partes review proceeding may estop the defendant petitioner from raising those arguments in the district court. Estoppel may not foreclose other defendants facing similar infringement contentions from raising in district court those arguments previously rejected by the PTAB. This may create a free-rider problem, especially in situations where the other defendants are competitors of the defendant-petitioner.

Figure 9. Evolution for adjusted durations for related matters filed in 2012-2014

Small procedures, big impact

There are certainly other explanations which may provide useful insight into the significance of the PTAB’s institution decisions and their impact on the timing of settlement agreements. However, these should not displace the importance of the observation itself. Put another way, the effect that the PTAB’s institution decisions have in driving parties towards earlier settlements remains significant, independent of any potential explanation.

As a result, institution decisions are important for both defendants and rights holders to consider in devising their litigation strategies. For defendants in particular, it is worth re-examining the value of filing an inter partes review petition. Even though the likelihood that a particular claim may be instituted is relatively low, the data suggests that defendants may be able to induce an earlier settlement by simply filing a petition.

Once again, the current situation is just one of many possibilities that parties could have predicted in 2012. Perhaps if the PTAB had received only 35 petitions per month, as originally estimated, the USPTO would have more resources to address each petition on the merits and the resulting institution rates would be higher. In that case, the PTAB’s institution decisions would exert less pressure on parties’ incentives to settle.

Beyond the effect on the timing of settlements, the analysis demonstrates the larger effect that seemingly small procedures at the PTAB may have on the patent system as a whole. Similarly, it is natural to infer that even modest changes to the existing framework have the potential to – for better or worse – distort distant corners of the patent universe.

Action plan

How can companies’ IP divisions adjust their strategy to account for the significance of the PTAB’s institution decisions?

  • Law makers and policy makers should consider the system-wide implications for proposed amendments or revisions to the current patent law framework.
  • All litigants should carefully evaluate the impact that an actual or potential inter partes review can have on their patent licensing strategy.
  • To other stakeholders, explore potential avenues to expose those areas where the PTAB influences the nature of patent litigation.

Sam Jaffna is director of analytics, Shawn Ambwani is chief operating officer, Jonathan Stroud is chief patent counsel and Robert Jain is an IP analyst at Unified Patents, San Francisco, California, United States

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