The problems with the PTAB

The problems with the PTAB

Five years of Patent Trial and Appeal Board proceedings show a flawed and biased administrative tribunal

Five years after the America Invents Act established the Patent Trial and Appeal Board (PTAB) at the US Patent and Trademark Office (USPTO), it is time to evaluate how this has negatively affected the patent system. The PTAB is an administrative tribunal that runs three new processes for invalidating patents: post-grant review, inter partes review and the temporary programme for review of covered business method patents. By design, the PTAB cancels property rights that the USPTO previously granted. According to its proponents, this was necessary to remove so-called ‘bad’ patents that had been erroneously issued by the USPTO. As a consequence, proponents argued that the PTAB would strengthen the patent system in its essential role of driving the innovation economy.

However, the reality has been far removed from this nirvana. The PTAB has been invalidating patents at an extraordinarily high rate, leading it to be dubbed a “patent death squad”. It has created both procedural and substantive rules that stack the deck against patent owners, placing a heavy thumb on the scale in favour of those who seek to undermine the patent system (and in the process, the innovation economy). As a result, the PTAB can be easily abused for strategic purposes that have little to do with the quality of the patents at issue.

The result is a cloud on the title of all patents. When venture capitalists, universities and companies working in the innovation industries make decisions on whether to invest R&D dollars in new products or services, they need a measure of legal certainty that the patent system will provide stable and effective property rights in the fruits of their investment. Given the threat posed by PTAB proceedings, the patent system is now infected with extensive legal uncertainty, which undermines the core economic function of how property rights incentivise investments and drive commercial innovation.

Patent death squad

The term ‘death squad’ for the PTAB was originally coined by former Chief Judge Randall Rader of the Court of Appeals for the Federal Circuit. Although seemingly heavy handed in its rhetorical flourish, it is revealing that the former chief judge of the PTAB, James Smith, has embraced this phrase as an accurate description of the PTAB’s purpose: “If we weren’t, in part, doing some ‘death squadding’, we would not be doing what the [America Invents Act] calls on us to do.”

Unfortunately, the data supports both Rader and Smith’s use of this term.

In a covered business method patent review, for example, when a patent is challenged as ineligible subject matter under Section 101 of the Patent Act, the PTAB grants the petition to hold a hearing 84.9% of the time and its hearings conclude that the patents are invalid 97.8% of the time. This is particularly concerning given the expansive definition of ‘business method’ originally adopted by the PTAB, which encompasses any patents on any technological processes that may have a financial impact. More notably, the high statistics in favour of one result in the operation of an adjudicatory system would give any statistician cause for concern. They do not reflect an institution balanced in its operations.

When one takes into account all the decisions by the PTAB since its inception, the numbers are not as starkly death squad-like as the covered business method kill rate, but the data is just as concerning. The latest Lex Machina PTAB report revealed that only 4% of proceedings ended with a final written decision in which the PTAB found all of a patent’s claims to be valid. Three times as many proceedings ended with all claims cancelled. At the petition stage, 50% of the petitions are granted and a significant portion result in no decision on the merits, reflecting either dismissals for procedural reasons or parties settling and withdrawing the petitions. Of course, given the high kill rates following hearings, a rational patent owner is likely to try to settle with a PTAB petitioner to avoid a hearing. Only 17% of petitions are denied.

In a properly functioning adjudicatory system between adversarial contestants, it is expected that over time, the results would be approximately balanced between the two opposing sides. In civil litigation, for example, win rates for both parties gravitate toward approximately 50% (this is known as the Priest-Klein hypothesis and is explained by selection effects that occur in the choices to file a complaint, litigate, appeal and settle given the information available to the litigants). Thus, the extremely high invalidation rates by the PTAB over the past six years suggest a system that is biased against patents.

Figure 1. PTAB petitions are instituted more than three time as frequently as they are denied

Structural flaws creates bias against patent owners

The death squad data raises a legitimate concern about bias, which is confirmed by the PTAB’s decisions to create systemic procedural biases that work to the disadvantage of the patent owners appearing before it. These procedural biases are important for two reasons. First, they explain the statistical data and thus indicate how to fix this problem before it does serious damage to the foundations of the US innovation economy. Second, in considering much-needed reforms to this administrative tribunal, the current situation is a warning bell. The PTAB exemplifies the unintended consequences that inevitably follow when an administrative agency is given virtually unbounded power to fulfil its mandate to eliminate property rights. It understandably becomes ‘captured’ by its own version of mission creep and becomes the subject of strategic abuse by petitioners due to its failure to create the checks and balances that rightly constrain governmental institutions.

Lack of standing requirement invites abuse by petitioners

A prime example of the PTAB’s structural problem and lack of constraint in fulfilling its mission to invalidate patents is that the America Invents Act grants anyone the right to file a petition at the PTAB. This is in stark contrast to other governmental institutions responsible for adjudicating disputes about legal rights, such as courts or even other administrative agencies such as the International Trade Commission. There, a plaintiff or a petitioner must establish standing – that is, the party asking for relief must have a basis for doing so that relates to its own legal status, such as being accused of infringement. However, at the PTAB there is no requirement to show standing: anyone can file a petition and prosecute their case against a patent. In fact, the only statutory limitation imposed on PTAB petitioners is that the petitioner cannot be the patent owner; again, confirming the structural bias against patent owners built into the PTAB by the America Invents Act.

The requirement of standing is so fundamental to the proper functioning of courts that lawyers rarely talk about the reasons for it. However, the lack of this requirement at the PTAB requires a review of this basic issue. First, standing ensures that a party’s motivation in filing a complaint or petition is actually tied to the legal right at issue, rather than some unrelated policy concern or even a personal pique. Second, standing ensures fairness, because no one should be permitted to just impose the costs of legal proceedings on other people. There must be an actual dispute that needs resolving.

The lack of a standing requirement at the PTAB has opened the door to its strategic abuse by individuals and companies seeking to harass patent owners, to use it as a negotiating tactic to force lower settlements in separate and unrelated lawsuits, or simply to profit via extortion of patent owners or gaming the stock market.

By now, scholars and researchers have found more than enough examples of all of these types of improperly filed PTAB petitions to establish that these abuses occur at this administrative tribunal. The most notorious example has been hedge fund manager Kyle Bass, who has repeatedly filed PTAB petitions targeting patents in the biopharmaceutical industry. Neither his hedge fund nor his PTAB-filing organisation makes generic drugs or commercialises any products or services in the pharmaceutical industry. Instead, Bass simply shorts the stock of companies that own the patents he challenges at the PTAB, because the market is aware of the PTAB death squad statistics. For a pharmaceutical or biotech company whose primary commercial asset is a patent, filing a PTAB petition against this patent can depress the stock price of the company and, if the patent is invalidated, the company’s stock price declines even more. In sum, Bass has found a legal method to manipulate stock prices that has likely resulted in millions in profits for his hedge fund.

If Bass tried to do this in court – say by filing a declaratory judgment lawsuit arguing that a patent is invalid – it would immediately be dismissed for lack of standing. There is no potential dispute because Bass is not doing anything in the financial world that would make him susceptible to a suit alleging infringement of a biotech or pharmaceutical patent. Similarly, there is no injury that Bass himself might suffer from the patent’s continued commercial use or assertion against infringers.

The function of standing would also prevent the strategic abuse of the PTAB by companies such as Unified Patents, which is paid by other companies to challenge patents at the PTAB (it does not disclose all 169 companies that pay it to do so). Thus, a company that is sued for patent infringement could ask Unified Patents to challenge the patent at the PTAB and, since there is no formal legal connection between the two, this does not prejudice or estop the company from itself filing the same or other challenges against the same patent at the PTAB. Similarly, some scholars have reported that RPX has engaged in similar tactics on behalf of the companies that also pay it to ‘defend’ them against patent assertions. The PTAB has not created any rules to stop this; further, it has not stopped other defensive aggregators like Iron Dome from filing PTAB petitions on unrelated patents when one of its members (companies paying it) is sued for patent infringement.

It was not a fait accompli that the failure to mandate a standing requirement in the America Invents Act would lead to these abuses of the PTAB. In the act, Congress required the USPTO to issue regulations that would prevent “abuse of process” such as to prevent the “harassment” of patent owners. Unfortunately, the PTAB has turned a blind eye to this requirement and to the abuses of its own processes that have occurred as a result. The creators of the PTAB laboured under a mistaken belief that this administrative tribunal would function in a nirvana of complete impartiality and neutrality in implementing this generalised requirement. Like other branches of government, experience has proven that explicitly specific checks and balances are always required to safeguard due process and property rights.

Figure 2. Final PTAB written decisions finding all claims unpatentable occur more the three times as frequently as decisions upholding all challenged claims

Serial challenges give petitioners multiple bites at patent invalidity apple

In the United States, everyone gets their day in court. If you win, you win. If you lose, you lose. No one is permitted the ‘do-over’ that young children always demand in the playground – except the PTAB, which allows it again and again in a game where the patent owner is the only person who can lose.

Repeat challenges to the same patent are incredibly common at the PTAB. These serial PTAB petitions are not being filed by multiple competitors of a patent owner challenging a patent on a breakthrough technology in the marketplace from different angles. Many of these serial PTAB petitions are brought repeatedly by the same challenger, often simply as variations on the arguments asserted in prior petitions. Even when the petitions are filed by different challengers, the arguments in their petitions are sometimes identical to those asserted in previously filed petitions by other challengers or to the arguments made by the patent examiner during prosecution. (The latter situation is especially troubling if only because the express function of the PTAB is to review new evidence presented to the USPTO on the validity of issued patents, and not to second guess the USPTO’s examination process in issuing the patent.)

Unfortunately, the PTAB has no rules prohibiting these abusive serial petitions, which create a cloud on the title of all patents. It is too easy for a company (or a group of companies) to overwhelm a patent owner with dozens of PTAB petitions attacking the same patent. While a patent owner has to win every challenge to preserve its property, the challenger need win only once to destroy it. No patent is secure or safe from threatened petitions or filings of multiple petitions, imposing real-world costs and substantial legal uncertainty on patent owners. The PTAB’s permissive and unrestricted rules on filing petitions destroy the ability of patent owners to use their property rights as a stable and effective platform for commercialising inventions or preventing companies from engaging in the increasingly common practice of efficient infringement.

Different and conflicting legal standards between PTAB and courts

In patent law, the claims define the boundary of the property right secured to an inventor in a patent. The interpretation of the meaning of claims is thus the fulcrum of any legal proceeding, whether applying for a patent or in a lawsuit for patent infringement. As Judge Giles Rich famously said: “The name of the game is the claim.”

It is an essential requirement of the rule of law that a legal document securing rights for private citizens be construed by government officials in the same way, whether a patent, contract or title deed – but this is no longer the case with patents. The same patent can be attacked by the same party making the same arguments; in court the patent may be found to be valid, while before the PTAB it may be found invalid. This is so because the PTAB has adopted a different legal rule for interpreting patent claims.

The PTAB uses a legal standard known as ‘broadest reasonable interpretation’ (BRI) and the courts use a legal standard known as ‘ordinary meaning’. This is not an academic distinction as it has real-world effects: the BRI legal standard leads to a broader and more wide-ranging interpretation of claims than the ordinary meaning standard used by courts, which means that it is easier for the PTAB to construe patent claims in ways that make them invalid in light of prior inventions or in terms of the clarity of the words. As a result of the different standards used to interpret patents, the PTAB has become subject to strategic abuse by petitioners and there are now conflicting decisions about the validity of the same patents between the PTAB and courts.

Figure 3. The PTAB’s invalidation rate of patents in covered business method proceedings decided on subject matter eligibility dwarfs all other outcomes at both stages of the proceedings

The conflicting decisions will not be resolved given the 2016 Supreme Court decision in Cuozzo Speed Technologies v Lee, which that held that the PTAB has the legal authority to use the broader BRI standard. The Supreme Court did not endorse the use of BRI as appropriate but instead applied general rules of administrative law in finding that the PTAB acted within the discretionary authority given to it by Congress in the America Invents Act to choose the legal standard it wants. In creating the PTAB the drafters of the act left it substantial discretion to structure its own procedural and substantive legal rules. They assumed that the PTAB would “do the right thing” in adopting fair and proper procedures and rules. This was a mistaken assumption. Congress made this administrative tribunal structurally flawed in creating a bias against patent owners and, under the general administrative law rules, courts are now powerless to correct the resulting abuses by the PTAB.

Worse yet, the strategic abuse of the PTAB by petitioners exploiting the different legal standards for interpreting patents between the PTAB and courts will continue. In court, judges rightly admonish parties to patent litigation which adopt different approaches to claim construction at different stages of the legal proceeding. For example, it is improper for an alleged infringer to adopt a broad claim construction in challenging a patent’s validity but then to adopt a narrow construction of the claim for determining whether the defendant is liable for infringement. This is rightly prohibited as the legal equivalent of wanting to have one’s cake and eat it too.

The PTAB institutionalises this strategic approach to claim construction. When an alleged infringer is sued in court, it can challenge the validity of the patent as a defence to the complaint and will deny that it is liable for infringement under the narrower standard used by courts. Under the America Invents Act, alleged infringers also file petitions in the PTAB to invalidate patents more easily under the broader BRI standard. Thus, alleged infringers can challenge patents at the PTAB based on a broad claim construction while benefiting from the narrower claim construction employed by courts to determine infringement. This is actually happening: researchers have confirmed that defendants in patent infringement lawsuits file a substantial number of PTAB petitions.

The PTAB and the courts also differ in the legal standards they use to evaluate the evidence submitted by the parties. Under long-established patent law, patents have a ‘presumption of validity’ given that they are examined before having been issued as patents. In court, this presumption of validity means that if an alleged infringer seeks to invalidate the patent, it must meet the highest burden of proof required in civil litigation – the ‘clear and convincing’ standard. However, in PTAB proceedings, a challenger need only prevail by the ‘preponderance of the evidence’ standard – one of the lowest evidentiary standards required of parties in legal proceedings. Similar to the difference between the BRI and ordinary meaning standards, the lower hurdle required by the PTAB means that it is the subject of strategic abuse, and it provides another basis for conflicting decisions concerning the validity of the same patent under the same evidence as evaluated by either a court or the PTAB.

As in Cuozzo, the PTAB’s decision to adopt a lower legal standard for submitting evidence than the standard required in court was itself the subject of a legal challenge. In Novartis AG v Noven Pharmaceuticals Inc the Federal Circuit faced a situation in which a court had previously ruled that the patent was valid, but the PTAB later ruled that the same patent – evaluated by the same evidence – was invalid. The Federal Circuit held that this conflicting legal result was justified simply because different legal standards were applied by the courts and the PTAB. It asserted that consistency in legal decisions is only an aspiration as an “ideal” – an odd thing for a court of law to say in a political and legal system dedicated to the rule of law. As a result, just like in Cuozzo, the PTAB is free to disregard completely the outcome of previous court decisions.

In regard to the rule of law, this is troubling. Property rights work to promote investment and drive economic growth in a flourishing free market only when they are secured equally to all owners under the rule of law. This is what it means when we say that property rights in patents provide a stable and effective platform for individuals to create jobs and grow the US economy. Now, US patent owners are subject to entirely different legal rules in which their property rights can be found valid or invalid based on the same arguments and evidence, simply depending on the government institution – a court of law or the PTAB administrative tribunal. This is the precise opposite of what historically made the US approach to securing property rights in inventions so successful as a driver of the innovation economy.

Same PTAB judges sit in judgment at different stages of proceedings

In creating the PTAB, Congress split PTAB proceedings into two phases: the decision to grant a petition challenging a patent as invalid (institution), and the proceeding to decide whether the patent is invalid (hearing). This followed long-established practice at the USPTO in prior administrative review programmes. Moreover, reflecting the approach highlighted above, the drafters of the America Invents Act gave substantial discretion to the USPTO in determining who would be the decision maker at each phase. The America Invents Act gives the USPTO director the authority to institute a PTAB proceeding and the PTAB the authority to conduct the hearing, but the director delegated both powers to the PTAB.

The result is that the same administrative law judges (called ‘administrative patent judges’ at the PTAB) both decide whether a petition challenging a patent is likely to demonstrate invalidity and sit in judgment of the patent’s validity in the hearing itself. To be blunt: the decision handed down after a hearing before the administrative tribunal is made by the same officials who formed initial opinions about the patent’s invalidity when they reviewed the petition to determine whether to hold the hearing.

Similar to the concerns about differing legal standards between the PTAB and the courts in evaluating the same patent with the same evidence, this situation raises serious due process and rule of law concerns. Since the same officials who are granting petitions are also deciding the merits of the petition, the PTAB hearing is little more than the officials confirming that they did a good job in deciding to grant the petition in the first place.

This also provides one of the more obvious explanations of why the PTAB has been dubbed a patent death squad with its inordinately high percentage of invalidity decisions. The commitment bias of a judge in deciding to grant a petition is reflected in the same judge later deciding that the patent is in fact invalid. The statistics confirm the inherent legal and policy problems in the USPTO director’s decision to delegate both phases of the administrative review of patents to the same officials in the PTAB.

Stacking panels of judges to reach desired result

After the PTAB began to hold hearings and hand down decisions, another structural failure in this administrative tribunal was dramatically revealed to patent owners. Judge Smith, the first chief judge of the PTAB, stacked the panel of administrative judges who sat in judgment of patents in the PTAB hearings. Again, the America Invents Act gave the USPTO discretion as to how to constitute the panels of PTAB judges, with the assumption being that it would determine the appropriate panel sizes and follow this decision as a basic requirement of the rule of law. The USPTO set the panel size at three judges, until panels started reaching decisions that the USPTO did not want them to reach. Then it exploited its discretionary authority to stack the panels by adding judges until the newly constituted panels reached the preordained right result.

In Target Corp v Destination Maternity Corp, for example, Smith expanded the PTAB panel twice after he concluded that the first two panel decisions had reached the wrong result in ruling in favour of the patent owner solely as a matter of statutory interpretation. He stopped adding PTAB judges to the panel of judges only when the third and final panel reached an acceptable result: the patent was deemed invalid. In this case, the original panel of three judges grew to five, and finally to a total of seven judges. Unfortunately, Target was not an outlier. The PTAB did the same thing in Nidec Motor Corp v Zhongshan Broad Ocean Motor Co.

It takes little imagination to predict the outcry that would occur if the three-judge panels hearing cases in appellate courts were successively expanded to include more judges for the sole purpose of reaching different decisions. In fact, this is not hypothetical: when President Roosevelt proposed his so-called ‘court packing’ plan in 1937 in response to the Supreme Court’s invalidation of his New Deal programmes, the outcry throughout the country against this popular president’s proposal was instantaneous and virtually unanimous. The violation of the rule of law was obvious.

It is a testament to current Chief Judge David Ruschke’s legal integrity that he has brought an end to this results-driven practice of stacking PTAB panels, but the structural problem remains. Nothing constrains the USPTO director or the next PTAB chief judge from again starting to stack panels of PTAB judges in hearing cases. The need to build into the PTAB the requisite structural constraints to prevent such abuses of power remains paramount.

Figure 4. Example of PTAB panel stacking in Target Corp v Destination Maternity Corp

Structural fixes: real patent reform

Before discussing the much-needed reforms that would address the myriad problems with the PTAB detailed here, it is important to focus on who should implement these reforms. The America Invents Act left substantial discretion to the USPTO – and imposed virtually no constraints on the use of this discretionary power –to create the procedural and substantive rules at the PTAB. The result has been a host of agency decisions creating extensive legal problems rooted in both patent law specifically and in a concern for the rule of law generally.

Some propose fixing these fundamental problems simply by having a new USPTO director issue new rules that countermand the rules and practices detailed here, just as Ruschke brought an end to Smith’s panel-stacking practices. This is insufficient. The legal uncertainty will remain – as will its negative effects on the innovation economy – because patent owners, venture capitalists and business people will know that the PTAB is a biased or unbiased administrative tribunal based on the fleeting fancy of who happens to appointed USPTO director by the president.

The PTAB must be fixed structurally, not merely in its operational rules and procedures. This much-needed reform can only be carried out by Congress amending the provisions of the America Invents Act that created the PTAB in the first place. Congress must bake into the structure of the PTAB the checks and balances imposed on all legitimate government institutions that prevent procedural abuses and substantive biases from infecting their day-to-day operations.

Below is a list of reforms that Congress should enact. This is not intended to be either exclusive of other reforms or even an exhaustive list; rather, it is intended to focus the discussion on true patent reform and to serve as a starting point for this discussion:

  • Congress should adopt a standing requirement for PTAB petitioners, such as requiring them to have a proper business or legal reason to challenge a patent.
  • Congress should prohibit serial filings of PTAB petitions.
  • Congress should harmonise the legal standards used by the PTAB with those used by courts when both institutions hear the same legal arguments with the same supporting evidence in contesting the validity of a patent.
  • Congress should mandate the separation of the USPTO officials who decide to institute a PTAB hearing from the PTAB officials who judge a patent in a PTAB hearing.
  • The courts should no longer defer to PTAB rules and decisions nor to its authority in structuring its procedures and substantive rules, or specific decisions concerning patent validity.

These and other much-need reforms are part of recently introduced US legislation, the STRONGER Patents Act. This bipartisan bill, introduced in the Senate by Chris Coons, Tom Cotton, Dick Durbin and Mazie Hirono, would structurally limit the PTAB, bringing an end to its abusive regulatory overreach and thus ending the legal uncertainty about patents and the bias against patent owners wrought by the PTAB and born of the America Invents Act.

The pending decision by the Supreme Court in Oil States Energy Services v Greene’s Energy Group could also result in the PTAB being declared unconstitutional, insofar as it revokes private property rights without providing the Seventh Amendment guarantee of a right to a jury trial. If the court does not find the PTAB to be unconstitutional in Oil States (the decision will likely be handed down in Spring 2018), the issue of whether the PTAB violates the due process rights of patent owners will still remain, as will the issue of whether it violates the constitutional separation of powers doctrine in its conflicting rules and decisions with courts. To avoid more court challenges, Congress should reform the PTAB to respect the legitimate expectations of patent owners to the stable and effective property rights that have long been secured to them in the US patent system.

Action plan

The structural flaws of the Patent Trial and Appeal Board (PTAB) have led to procedural biases against patent owners in its operation. As a result, it has been invalidating patents at an extraordinarily high rate, destabilising patent rights and creating legal uncertainty which imperils our innovation economy. To restrain the PTAB’s regulatory overreach, Congress should enact reforms to:

  • require PTAB petitioners to have standing;
  • prevent serial PTAB filings against the same patents;
  • harmonise the legal rules used in the PTAB with those used in federal court;
  • require the US Patent and Trademark Office to use different adjudicators for PTAB institution and merits decisions; and
  • end the deference accorded by courts to the PTAB’s decisions.

Adam Mossoff is a professor at the Antonin Scalia Law School at George Mason University and a founder and director of the Centre for the Protection of Intellectual Property (CPIP), Arlington, United States

David Lund is a John F Witherspoon legal fellow at CPIP, Arlington, United States

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