Quality over quantity: the evolution of post-grant reviews

The modern success of the US economy is based on a productive cycle of innovation. Transitioning to a services and knowledge-based economy has set the United States apart as an economic power and contributed heavily to its global geopolitical standing. In turn, future success depends on continuing to foster a culture of innovation with strong IP rights protection, the core of which is the US patent system. With intangible assets, largely consisting of patents, accounting for a core part of economic growth, the guaranteed strength and quality of those assets are essential.

In pursuit of those aims, in 2012 Congress implemented the Leahy-Smith America Invents Act, the first major reform of the US patent system in almost 60 years. The reform was designed “to establish a more efficient and streamlined patent system that will improve patent quality and limit unnecessary and counterproductive litigation costs”. Patent quality and litigation costs – the two core factors identified by Congress – remain central issues as stakeholders adapt to the new legal structure and Congress continues to consider further reform.

To improve patent quality and reduce litigation costs, action must be taken on two fronts. In the long term, patent quality is dependent on reform of the application review process during the examination period. However, in the short term, there are already a significant number of low-quality patents in the system. The primary approach for testing post-grant patent validity has traditionally been litigation – an expensive and time-consuming process which places a burden both on the legal system and on innovation. To address this short-term need, the act created the Patent Trial and Appeal Board (PTAB) to oversee a number of new post-issuance trial proceedings.

The new post-grant review process overseen by the PTAB has seen steadily growing take-up since its implementation, especially for inter partes review proceedings. This trend has significant implications for the patent system as a whole and its effects can already be observed at work.

Why the PTAB?

Since the early 1990s, there has been steady growth in the number of patent cases commenced in the United States, with a major additional spike beginning in 2010 (see Figure 1). A combination of factors account for this trend. The growth in the sheer number of patents being granted is at least a partial root cause. Throughout the 1980s, patents were granted at a rate of around 60,000 per year, peaking with 102,533 total patents granted in 1989. By the end of 2013, that number had risen to 302,948 total patents granted. Thus, there is a certain amount of proportional natural growth in the number of accompanying lawsuits to be expected, even if all other factors are constant.

However, the rise in the number of patents being granted is not enough to account for these trends alone. Since 2000 the relatively immature US IP market has begun to come into its own, taking the first steps towards becoming a healthy IP transaction market. A variety of companies across different industries began trying to take better advantage of valuable intellectual assets by capitalising on their patents – whether these originated with inventions developed in-house or were portfolios purchased from other companies. Both operating companies and non-practising entities (NPEs) began going to court over licensing fees and infringement damages. Heated patent battles emerged in certain industries, most notably the so-called ‘smartphone wars’. These ongoing conflicts contributed to increasing rates of litigation as companies tried to establish and defend their IP rights.

Figure 1. Number of cases commenced in US courts for intellectual property compared to patents issued

Year	Patent lawsuits	Patents issued
1993	1,553	107,331
1994	1,617	113,267
1995	1,723	114,241
1996	1,840	116,875
1997	2,112	122,975
1998	2,218	154,577
1999	2,318	159,161
2000	2,484	182,218
2001	2,520	187,817
2002	2,700	177,311
2003	2,814	189,590
2004	3,075	187,169
2005	2,720	165,483
2006	2,830	183,187
2007	2,896	184,376
2008	2,909	182,556
2009	2,792	190,122
2010	3,301	233,127
2011	4,015	244,430
2012	5,189	270,258
2013	6,497	290,083

Source for patent lawsuits: Judicial Business of the US Courts – supplemental tables, September 30 2013, www.uscourts.gov/Statistics/JudicialBusiness/2013.aspx

Source for patents issued: USPTO Performance and Accountability Reports, www.uspto.gov/web/offices/ac/ido/oeip/taf/ann_rpt_intermed.htm

Figure 1 is based on data by government fiscal year

Concern over the burdens placed on the court system spurred Congress to attempt reform. In the House Report on the America Invents Act, the committee highlighted both litigation and patent quality as the key factors in their decision, saying: “The need to modernize our patent laws has found expression in the courts, as well. The Supreme Court has reversed the Federal Circuit in six of the patent-related cases that it has heard since the beginning of the 109th Congress... The Court’s decisions have moved in the direction of improving patent quality and making the determination of patent validity more efficient. The decisions reflect a growing sense that questionable patents are too easily obtained and are too difficult to challenge.” Taking into account these issues, the final reform bill laid the foundation for a post-grant review system under the new PTAB in order “to create a timely, cost-effective alternative to litigation”.

PTAB’s implementation and growth

At less than two-and-a-half years old, the PTAB is still a relatively young institution. However, even during this brief period, several interesting trends have emerged. The PTAB is empowered to conduct several new types of trial proceeding, including:

• inter partes reviews;
• post-grant reviews;
• covered business method challenges; and
• derivation proceedings.

Figure 2. Inter partes review petitions filed

Source: USPTO inter partes review statistics – www.uspto.gov/ip/boards/bpai/stats/aia_statistics_01-22-2015.pdf

Figure 2 is based on data by government fiscal year

Figure 3. PTAB proceedings by type

Source: USPTO inter partes review statistics – www.uspto.gov/ip/boards/bpai/stats/aia_statistics_01-22-2015.pdf

Inter partes review petitions have proved to be by far the most popular. While filings got off to a relatively slow start, averaging 25 cases a month for the first six months, they quickly took off (see Figure 2). Based on the Patexia database, between September 16 2012 and January 31 2015 there were 2,702 total America Invents Act petitions. Of those, 2,399 (88.8%) were inter partes reviews. The remainder were composed of 291 covered business method challenges, eight derivation proceedings and four post-grant reviews (see Figure 3).

Figure 4. Actual versus projected inter partes review filings

Project filings source: USPTO report, “Changes to Implement Inter Partes Review Proceedings, Post-Grant Review Proceedings, and Transitional Program for Covered Business Method Patents; Final Rule” – www.uspto.gov/sites/default/files/aia_implementation/fr_specific_trial.pdf

Figure 4 is based on data by government fiscal year

The system has matured rapidly as defendants have come to realise that an inter partes review is a less expensive and relatively straightforward path to attempting to invalidate a patent that is being asserted against them. As a result, the real number of inter partes reviews filed has significantly surpassed the original estimates published by the US Patent and Trademark Office (USPTO) (see Figure 4).

Filings data source: USPTO inter partes review statistics – www.uspto.gov/ip/boards/bpai/stats/aia_statistics_01-22-2015.pdf

Figure 5. Number of PTAB petitions by USPTO patent technology centre (TC)

Methodology source: USPTO inter partes review statistics – www.uspto.gov/ip/boards/bpai/stats/aia_statistics_01-22-2015.pdf

Data source: Patexia’s inter partes review database – www.patexia.com/ip-research/lawsuits

Certain industries have also experienced a higher proportion of total filings. The electrical and computer industries, for example, have seen more than half of all petitions from January 2014 to present, as shown in Figure 5.

The growing maturity of both the court itself and the parties involved is illustrated by the data. Over time, the PTAB institution rate – which is based on “a reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged in the petition” – has fallen from its original 2013 high of 87% (see Table 1).

According to the data available, invalidation rates have stayed relatively stable, at between 40% and 50%. Some analysts have suggested that as usage has increased and the PTAB has continued to evolve, the invalidation rate on claims challenged before the court has fallen. However, the data available to us does not substantiate this claim in a statistically significant manner.

Impact on litigation rates

While the America Invents Acts and its associated post-grant review process were designed to reduce the burden of traditional litigation, certain factors may have complicated the issue. A portion of the additional increase in litigation seen since 2012 can be attributed to the act’s own restrictions governing the joinder of multiple defendants in a single case, resulting in the filing of multiple cases, whereas in 2011 a single case would have sufficed.

The use of post-grant review proceedings as an alternative to, or in combination with, patent litigation has grown in popularity. While in some cases inter partes reviews and other post-grant review options may be pursued as a direct alternative to litigation, which would be expected to reduce the overall litigation rate, they are also often pursued concurrently. Some companies, when notified of impending litigation, have begun to consider filing an inter partes review as a pre-emptive measure.

In light of recent Supreme Court cases, especially Alice Corp v CLS Bank International, additional new approaches have developed. One option commonly employed for certain types of case, such as those involving software, is to file a covered business method challenge or 101 motion as soon as a case is filed and then file an inter partes review if this proceeds to and beyond the issuance of infringement contentions. For IP attorneys, various post-grant review methods utilised alongside litigation have helped to reduce discovery costs and time spent in court.

However, the occasions when post-grant reviews do allow parties to avoid litigation – in conjunction with other factors such as Alice – have together been credited with the 20% fall in litigation rates observed since 2013. Figure 6 highlights the major decrease which took place in Q3 and Q4, directly following the issuance of the Alice decision in June 2014.

Figure 6. 2013 versus 2014 comparison of US patent lawsuits

Source: Patexia’s patent lawsuit database – www.patexia.com/ip-research/lawsuits

Figure 6 is based on data by calendar year

Inter partes review versus traditional litigation

As inter partes reviews increase in popularity, as either a supplement or an alternative to traditional litigation, it is important to look at some of the differences between the two and their respective costs and benefits, either alone or in combination. At a base level, there are often differences in terms of motivation behind the decision to file either an inter partes review or a lawsuit. Lawsuits are traditionally filed by patent owners, often seeking compensation for infringement or an injunction to prevent further infringement. Inter partes reviews, on the other hand, are generally started not with the goal of obtaining monetary compensation, but in the hope of invalidating a patent potentially being asserted against a defendant, making it more of a defence mechanism.

Cost is another significant factor. Inter partes reviews are much less expensive than traditional patent litigation. Based on data from the American Intellectual Property Law Association, an average patent lawsuit, with between $1 million and $25 million at stake, will cost around $1.7 million through the end of discovery, rising to $2.8 million through a trial. Thus, in order to reduce discovery costs, IP attorneys have been integrating post-grant reviews into their infringement defence approach by filing covered business method challenges or inter partes reviews in the hope of bringing an earlier conclusion to the case and reducing the time spent in district court. Even taken through the entire PTAB trial process, an inter partes review is still significantly cheaper than traditional litigation. Based on our survey, the total cost of an inter partes review without an appeal averages at around $350,000. With an appeal, that increases to about $500,000. Table 2 shows a breakdown of costs.

Other scholars have pointed out a significant difference in the rules and assumptions faced by a patent holder in an inter partes review versus traditional court. Some have asserted that in an inter partes review, the regulations are stacked in the challenger’s favour. In district court, there is a presumption of validity unless the challenger proves otherwise. However, there is no presumption of validity before the PTAB – the patent and its claims are entirely re-examined to determine validity and appropriate scope. The challenger must simply meet the evidence standard. As a result, in traditional litigation previously viewed art is rarely presented as evidence, because there is a presumption that the original examiner’s analysis was correct. However, in an inter partes review, previously viewed art that was originally dismissed by the examiner is often resubmitted for review and can play a crucial role in the outcome.

Another difference between validity determinations in an inter partes review as opposed to federal court is how the claims are construed. In federal court, claims are construed contextually, which is generally somewhat narrower and often far narrower than the standard in an inter partes review, where the “broadest reasonable interpretation” is used.

Another key difference is who decides the case. In traditional litigation the judge is an expert in law, but not necessarily in technology or the subject matter of the patent at hand. Some litigation cases are decided by juries, which are not made up of patent specialists. An inter partes review, on the other hand, is tried by a panel of administrative patent judges, who have the technical expertise to address cases with highly technical content or a large number of claims and references.

Time is also a factor. Inter partes reviews are relatively rapid. According to the guidelines set out by the America Invents Act, the USPTO must decide on a case within six months and then issue a final written decision within a year of institution – except in exceptional cases, where a six-month extension is possible. Even with an extension, the entire process cannot exceed two years. There is no similar guarantee for patent litigation in a traditional court, which can often drag on through a lengthy trial and appeals process.

That said, there are some cases where an inter partes review is not suitable – for example, if the issue is purely damages for infringement. Similarly, if a thorough validity search has been completed and no prior art or grounds for invalidation are found, then proceedings before the PTAB are not relevant and traditional litigation in district court is the only appropriate forum. Table 3 summarises and compares the differentiating factors in an inter partes review versus litigation.

New inter partes review-based approaches

The importance of the PTAB’s patent review process for the future of the IP system is reflected in various industry leaders’ integration of post-grant review proceedings into their business models. As the patent market has matured over the last decade, with more cases going to litigation in order to resolve validity and infringement disputes, a number of new models have developed. Patent aggregators such as RPX and Allied Security Trust are based on the idea that a single entity can defend against litigation and share the benefits with multiple stakeholders. The high cost of litigation for each defendant when a single portfolio is asserted against many parties reinforces the benefits of resource sharing. For this reason, the patent aggregator model has succeeded in a relatively immature market as a method of pooling defensive resources.

Patent aggregators continue to play an important role. With the growing importance of post-grant review – especially inter partes reviews – businesses that grew up around patent litigation defence have continued to adapt, following a natural progression and adding inter partes reviews to their business models. One example of a firm taking advantage of this new strategy is RPX. Through its subscription-based model, RPX has acted as a real party in interest, filing inter partes reviews that would be of benefit to its existing members. These companies have taken advantage of synergies available when there are multiple stakeholders.

Other types of organisation have moved into this space as well, including the Clearing House with its Patent Quality Initiative, which uses inter partes reviews to improve patent quality in the financial services sector. Unified Patents has pursued a similar approach, using inter partes reviews in an attempt to invalidate patents that might be asserted in specific subject-matter zones. Hedge fund Hayman Capital Management also recently announced its intention to use inter partes reviews to go after a number of pharmaceutical patents. Patexia has also moved into this space, expanding on its crowdsourced due diligence platform to perform validity analyses and file inter partes reviews for members on a case-specific basis.

This ongoing and increasingly broad attention to and use of inter partes reviews by different business models is indicative of the ongoing impact that the PTAB is having in the IP industry. It could also imply progress towards a more mature IP system with higher overall patent quality and greater long-term stability.

Influence on stakeholders

The systemic changes introduced as a result of the America Invents Act will continue to have a long-lasting and substantial impact on the US patent system. However, its influence, costs and benefits do not affect all stakeholders equally.

Numerous analysts have suggested that inter partes reviews provide a more pro-petitioner forum than traditional litigation. This is an advantage to defendants involved in a case where the outcome hinges on the validity of a patent asserted against them. By extension, it places a greater burden on the patent holder. This makes the inter partes review a strong tool for operating companies defending against NPEs or other patent assertion entities. Top inter partes review petitioners such as Apple, Google and Samsung have begun to make inter partes review filings a regular part of their process, often submitting a petition for any threat letter received or new case filed (see Figure 7). However, there are also some negative implications for all patent holders – even small inventors – who face greater difficulties defending their patent rights.

Figure 7. Top 10 inter partes review petitioners in 2014

Source: Patexia’s inter partes review database – www.patexia.com/ip-research/lawsuits

Figure 7 is based on data by calendar year 2014

Like all systems, the PTAB is open to potential abuses. Traditional litigation opened the way for patent holders to threaten costly lawsuits in order to extract settlements. The inter partes review system is not immune to such exploitation and the press has already warned of the advent of ‘PTAB trolls’. A small group of companies and individuals have begun to approach patent holders with the threat of filing an inter partes review, thus potentially invalidating or narrowing the scope of a valuable patent. The goal is to extract a settlement from patent holders afraid of the costs of an inter partes review and the risk of lost revenue should one of their key patents be invalidated.

As the PTAB has refined its process, petitioners and defendants have also become more savvy in their strategies with regard to inter partes reviews. Before the America Invents Act, patent holders would often license a single or small number of patents at a time. However, as inter partes reviews continued to grow in popularity, companies came to realise that it was relatively easy for a party wishing to use a patented technology to file an inter partes review for the relevant patent – potentially invalidating the asset at stake – rather than pay the licence fees. As a result, many patent holders have started licensing larger portfolios rather than single patents, as the greater number of patents makes the cost of filing an inter partes review for each one too high to be rational. However, this can create issues for small patent holders, which do not have the option of offering their inventions as part of a large portfolio and for which a single invalidation has a major impact. Patents are granted to give innovators the right to profit from their inventions and contributions to society. If the current trend goes too far and it becomes risky for any inventor to pursue an infringer because it will likely face an inter partes review – which costs time and money in addition to the risk of invalidation – then the system runs the risk of disincentivising innovation.

The industry has also seen an increase in demand for thorough due diligence prior to patent purchases. Third-party validity analysis has become a popular option for companies holding patents that they plan to assert, in order to add a reasonable degree of confidence that the asset will not be easily invalidated by an inter partes review.

Heart of the issue

The US patent market is in flux. The IP transaction market is maturing, but the high rates of litigation over the last 10 years, followed by congressional reform and now, less than five years later, discussions of further reform, demonstrate that it is far from stable. Long-term stability in the patent market will pave the way for continued economic success. A constructive licensing and exchange process for innovative ideas will allow inventors and those that wish to implement new products based on those inventions to mutually benefit. They will be able to complete transactions with reasonable certainty of the validity and value of the assets at stake, and will be appropriately compensated based on infringement and market growth rather than making decisions based on fear of litigation and settlement costs.

Patent quality lies at the heart of this issue. While the system matures, USPTO post-grant review proceedings – as an alternative to and in combination with traditional litigation – provide a valid mechanism to resolve the problem of low-quality patents already in the system. However, removing patents which should not have been issued or which are too broad in scope is only part of the battle. While these issues are being addressed, the USPTO also needs to ensure that new patents – being issued at a rate of over 300,000 a year – are not riddled with the same weaknesses as their predecessors. In that vein, continued work on the pre-issuance review process is critical.

Better review of patent applications leading to an overall increase in patent quality will have far-reaching benefits. As patent quality increases, invalidation rates for both the PTAB and litigation can be expected to fall accordingly. This will result in lower costs and burdens for both systems, as well as reduced incentives for stakeholders to go to court rather than engaging in regular asset transactions. These adjustments will reduce the burden on government and taxpayer resources, which can then be allocated elsewhere. Stability in the patent market will increase through clear valuation of assets without the constant risk of validity challenges.

The USPTO has been active in pursuing new best practices for effective use of the pre-issuance period. It is focusing specifically on better leveraging the opportunity for third-party submissions during pre-issuance, revised since the act came into force and laid out in 35 USC §122(e). The USPTO held two roundtables in 2014 to investigate the integration of crowdsourcing for a more thorough review of patent applications while placing a lighter burden on the examiners themselves. Additionally, the White House has now appointed Christopher Wong as presidential innovation fellow working on crowdsourcing initiatives at the USPTO.

Supplementing these efforts, Deputy Under Secretary of Commerce for Intellectual Property and Deputy Director of the USPTO Michelle Lee announced a new USPTO patent quality initiative in January 2015. The programme will take a three-pronged approach, working on:

• excellence in prosecution services;
• excellence in customer service; and
• excellence in patent quality.

The initiative will include in-depth analysis of best practices at other global patent offices, as well as better integration of big data. Lee has also created a full-time position overseeing patent quality issues and appointed Valencia Martin-Wallace as deputy commissioner for patent quality.

In the short term, the IP system should expect to see continuing growth in the use of post-grant review. However, in the medium to long term, it is expected that there will be a fall in both litigation and PTAB proceedings, as higher-quality new patents are issued and a growing percentage of low-quality patents already in the system are invalidated. This short-term growth followed by long-term decline will be reinforced with growth as new business models integrate post-grant review, but then stabilisation as they settle in as a regular part of the established system.

In addition, the industry should expect to see some new applications for inter partes reviews and other post-grant review proceedings. For example, companies considering licensing a technology might choose first to subject the patent to an inter partes review in order to see whether they can get it invalidated and use the technology for free. If the patent survives the review, then the licensor will have verified that the technology is indeed a valuable asset.

As confidence in patent quality grows, even creative uses such as these will eventually decline. As this occurs, the emphasis will shift to powerful validity review processes – conducted either in-house or by third parties. As an expectation of rigorous pre-issuance patent review becomes the norm, the focus will shift from post-grant validity analysis to the pre-issuance process. Confirmation of validity will be most crucial to innovators looking at patentability as they decide whether they have grounds to file an application at all, or within the USPTO itself as it reviews applications.

The rational progression of these developments will be the rise of a mature transaction market for intellectual property in the United States. The market will allow for the efficient allocation of IP resources and will also ensure the stability and value of intellectual assets. Patent portfolio valuation will continue to serve as a core part of market value for many companies. However, with greater certainty and transparency regarding asset validity and value, rational business decisions can be made and the United States can progress towards long-term systemic stability.