America Invents Act (AIA)

Inter Partes Review – Sovereign Immunity and the Oil States Storm in the Supreme Court

201801 SCOTUS storm

IPR Under the AIA –

The America Invents Act, which is considered the most significant reform of patent law in over 50 years, became effective in September of 2011.  One of the major changes implemented by the AIA is inter partes review (IPR).  Under the IPR provisions of the AIA statute, a third party can challenge the validity of any claim(s) in a patent after nine months has passed from the issue date of the patent.

At the time that the AIA was being drafted, advocates of the IPR provisions argued that allowing post-grant challenges of patents would improve patent quality.  IPR was also seen as a barrier to “non-practicing entity” firms (also referred pejoratively as “patent trolls”) that were acquiring patents for the sole purpose of monetizing them via coercive licensing or litigation.

The PTAB “Death Squad”

Six years into the regime of the AIA, inter partes review has proven to be very controversial.  While IPR is highly favored by large companies, overall it has weakened patent rights, much to the detriment of small companies, startups, and even individual inventors.  It was intended to be a lower cost alternative to patent litigation, but instead has become a weapon used as a supplement to litigation.

IPR proceedings occur before the Patent Trial and Appeal Board of the United States Patent and Trademark Office.  IPR is conducted before a panel of three administrative law judges.  The judges consider arguments set forth by the third party (the “Petitioner”) that seeks to invalidate a patent, as well as counter arguments made by the patent owner.  The outcome of an IPR proceeding may be a finding that all of the claims are invalid, thus essentially revoking a granted patent.  Alternatively, only some of the claims may be found to be invalid, or all of the claims may be determined to be valid.

A major and controversial feature of IPR is that while the Petitioner carries the burden of proving unpatentability, the standard calls for providing “a preponderance of the evidence,” i.e., showing that a given claim in a patent is more likely than not unpatentable. This is a major difference from patent litigation in U.S. federal courts, where a patent has a statutory presumption of validity.  The challenger of a patent in court must prove that any given claim is invalid by “clear and convincing evidence.”

This lower standard of validity in IPR has resulted in a surge of IPR proceedings in the PTAB, with the rate of invalidity rulings being far higher than those in court.  Within two years after enactment of the AIA, the rate of invalidations of entire patents under IPR was greater than 80 percent.  At the October 2013 annual meeting of the American Intellectual Property Law Association, Federal Circuit Chief Judge Randall Rader referred to the PTAB IPR proceedings as “death squads killing property rights.”

Not surprisingly, IPR has become a useful tool for large companies that wish to ignore patent rights.  When a small company asserts a patent, the first step by the alleged infringer is to file an IPR petition in the USPTO.  Although IPR proceedings cost far less than litigation in court, in most cases, defending a patent through IPR is still a major cost to a small company, with a relatively low chance of a favorable outcome, based on past results.  Moreover, in negotiations of a license of a patent, the prospective licensee can threaten to file an IPR petition in order to obtain lower royalty payments.  In summary, the IPR provisions of the America Invents Act have significantly lowered the overall value of patents.  In turn, this has become a barrier to investment and growth of technology-based companies where significant portions of their valuations lie in intellectual property.

This stark situation notwithstanding, IPR may not remain the law of the land indefinitely.  The legal premise of an IPR “workaround” is being litigated in lower courts, and the IPR provision of the AIA is being challenged in the Supreme Court.

Sovereign Immunity?

Under a somewhat creative legal theory, the pharmaceutical giant Allergan is attempting to avoid an IPR challenge to its portfolio of Restasis® patents.  Restasis® is prescribed to patients who have dry eyes due to inflammation.  In 2016, revenue from Restasis® was reported to be $1.4 billion, so obviously the Restasis® patents have considerable value.

To circumvent any IPR challenge, in September of this year, Allergan transferred title of its Restasis® patents to the Saint Regis Mohawk Tribe in upstate NY.  Typically a transfer of title of a patent would be a sale; i.e., the buyer of a patent would pay money to the seller for an Assignment of title to the buyer.  Not in this case.  The Saint Regis Tribe claims that it has been paid $13.75 million to “buy” the patents and will receive up to $15 million in annual royalties as long as the patents remain in force.

“Having created the IPR mess, perhaps Congress ought not be surprised when creative minds look for ways to circumvent or eliminate it.”

In litigation, this Native American tribe is asserting that under sovereign immunity, IPR proceedings cannot be applied, and therefore, any patents that it owns cannot be invalidated by the PTAB.  The outcome of the litigation remains to be seen, but this action alone has stimulated a lot of negotiations between Native American tribes and companies with significant patent portfolios, as well as predictable outrage at the gambit by others.

Several members of Congress have also bloviated on the issue, and a bill to block sovereign immunity as an IPR defense has been introduced in the Senate.  Having created the IPR mess, perhaps Congress ought not be surprised when creative minds look for ways to circumvent or eliminate it.

The Oil States Challenge

In another case that is on the elimination side, Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, IPR is being challenged under the most basic premise: whether or not the IPR provision of the AIA is constitutional.  Oil States Energy Services, LLC is the owner of the patent in dispute, U.S. 6,179,053, which pertains to oil extraction and claims “an apparatus for securing a mandrel of an [oil] well tool in an operative position.”

Following issue of the ‘053 patent, Oil States sued Greene’s Energy for patent infringement in federal district court. Greene’s Energy responded by filing an IPR Petition, and was successful in getting the USPTO to invalidate the patent.  Oil States then began its constitutional challenge in lower courts, and continued to appeal up to the Supreme Court.  In June of this year, the Court granted certiorari, and the case has proceeded from that point.  The specific question before the Court is, “Whether inter partes review – an adversarial process used by the Patent and Trademark Office (PTO) to analyze the validity of existing patents – violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.”

This is a very significant patent law case.  In addition to briefs from the Petitioner and the Respondent, almost 60 amicus curiae briefs have been filed by third parties on both sides of the issue.  The Petitioner and its amici curiae contend that a patent grant is a private right, and that under the U.S. Constitution, disputes concerning private rights must be adjudicated by an Article III court (i.e., one that includes a jury).  A tribunal of three administrative law judges, operating with the USPTO, is obviously not such a court.   The position of the U.S. Government, as set forth in a brief by the Department of Justice, is that patents are simply “revocable privileges” or “governmentally-conferred franchises” whose creation is not associated with any natural right of an inventor.

On November 27th, the Court heard arguments from both sides, with substantial questioning and debate by the justices.  As with any case before SCOTUS, there is plenty of post-argument analysis and prediction as to how the Court might rule.  There is no consensus, but the analyses generally lean toward IPR being upheld.  A decision by the Court is expected by next June.  We hope that the Court strikes down IPR, and in so doing, restores the strength of our patent laws.  Either way, we will know soon.

GRAPHIC CREDIT:  © Can Stock Photo/mcgill. Reproduced under license.

Authors John M. Hammond P.E. (Patent Innovations, LLC and Robert D. Gunderman P.E. (Patent Technologies, LLC are both registered patent agents and licensed professional engineers.  Copyright 2017 John Hammond and Robert Gunderman, Jr.