Whether one celebrates or decries the fifth anniversary of the America Invents Act, this much is clear: the law has had a dramatic impact on the value of U.S. patents and, in turn, the broader U.S. economy. Patent investors (be they innovators, implementers, or legal specialists) are no different than investors in any other asset class. They abhor uncertainty and charge a stiff premium for risk. In the wake of the AIA, the cloud of uncertainty hanging over patents is dark indeed. This uncertainty has depressed the value of patents and the returns to research and development, and may have broader ramifications that are yet to be seen.
Among its sweeping changes to U.S. patent law, the AIA transitioned the U.S. to a first-to-file system, expanded the definition of prior art, and most notably, created two new proceedings to challenge patents: the inter partes review (IPR) and covered business method (CBM) review. Both IPRs and CBMs are pseudo trials conducted by the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB). Congress hoped these proceedings would provide an efficient and inexpensive way to test the validity of a patent.
On that score, the AIA has succeeded. The PTAB decides whether to institute proceedings on IPR and CBM petitions within six months and completes the proceedings within a year from institution, reaching a validity determination far quicker than most district court litigation. And while PTAB proceedings cost more than initially projected ($300,000 to $500,000 on average, compared to the more modest $200,000 estimate), the expenditure still pales in comparison to the $1-4 million typically required to defend a patent suit through trial. The new proceedings are also popular, with greater than 5,000 AIA petitions filed since the AIA went into effect in September 2012.
But speed and efficiency do not tell the entire AIA story. The availability of speedy and low-cost review says nothing of the quality of the PTAB’s determinations. At a societal level, invalid patents impose unnecessary costs on consumers by allowing their holders to extract prices above marginal cost. A quicker and lower-cost means of cancelling such patents serves the public good. But valid patents—and the higher prices their owners command—also serve the commonweal. Finding solutions to complex problems requires significant investment, experimentation, and failure. Yet once a superior mousetrap has been unveiled, it can be reverse engineered and copied for a fraction of an innovator’s cost. Valid patents exist to prevent this form of freeriding and to ensure that innovators receive adequate returns on their R&D investments. So a low-cost, expeditious path to cancelling valid patents harms social welfare by discouraging valuable R&D. To properly grade the merits of the AIA, speed and cost are secondary considerations. By far the most important criteria is whether the PTAB is accurately cancelling invalid patent claims while confirming the validity of legitimate innovations.
On that front there is much debate, but the high-level statistics offer cause for concern. The PTAB has instituted proceedings on more than 70% of the AIA petitions to-date. Although this institution rate has moderated over the past few years, from 86% in FY 2013 to 66% year-to-date, it is still daunting. In 60% of proceedings that have advanced to a final written decision, the PTAB has found instituted claims unpatentable or the patent owner has cancelled or disclaimed such claims. This compares to an average invalidity rate of 18% for district court litigation for the years 2008 through 2015, based on Docket Navigator’s unstipulated patent determinations data.
Two key observations flow from the statistics. First, the PTAB plainly believes that a substantial number of issued patents—duly granted by the very same PTO and entitled to a presumption of validity—are invalid. While it is true that patent prosecution is a single-party endeavor, it is hard to believe that the adversarial nature of post-grant proceedings accounts for the spread between allowance rates on the front end and cancellation rates on the back end. Either the PTO is failing at an alarming rate to weed out invalid patents during prosecution or the PTO is erring substantially on the side of cancelling valid patents in post-grant proceedings. Neither possibility speaks well of the PTO, allows for stable and predictable investment, or generally serves the public good.
Second, there is a meaningful discrepancy between judicial and PTAB invalidity determinations. This gulf cannot be explained away by pointing to the different standards of proof (clear and convincing versus a preponderance of the evidence) or claim-construction approaches (Phillips versus broadest reasonable) in the different fora. So once again, there are two disconcerting possibilities: either the judicial system is failing to invalidate a significant number of invalid patents, or the PTAB is cancelling a significant number of valid patents. Faced with these two unacceptable possibilities, policymakers should conduct a systematic review to determine where the improper bias lies. From my anecdotal observations, I am firmly in the camp that believes the PTAB is invalidating valid patents at an alarming rate.
Equally disturbing, the putative cost savings of IPRs and CBMs are often illusory. IPRs and CBMs are typically filed in conjunction with litigation. Different courts proceed at wildly different paces, and take different approaches on whether and when to stay proceedings pending PTAB review. In many cases, the parties have the added cost and complexity of managing litigation and PTAB proceedings in parallel—including the possibility of multiple counsel, multiple protective orders, added motion practice and perhaps multiple trips to the appellate court. For patent owners with claims that survive IPR proceedings, there is the theoretical benefit of statutory estoppel. But the Federal Circuit held in Shaw Industries Group, Inc. v. Automated Creel Systems, Inc. that estoppel does not extend to any art raised in non-instituted grounds. And since CBM petitions can be brought at any point before or after a suit is filed, the uncertainty added by the AIA extends indefinitely.
Add to all of the above the fact that—even five years on—the AIA is relatively new and facing numerous legal challenges. The Supreme Court’s recent decision in Cuozzo is but one example. Although the Supreme Court upheld the AIA provision barring challenges to IPR institution decisions and approved the use of broadest reasonable interpretation, it also left the door open to certain constitutional and statutory challenges. Two pending petitions for writ of certiorari raise these sorts of challenges, and future petitions will no doubt do so. Moreover, Cuozzo seems to invite patent holders to lodge Administrative Procedure Act litigation, creating the specter for parallel district court litigation alongside both PTAB proceedings and the underlying patent suit.
At bottom, the AIA has added substantial risk, complexity and cost to determining the enforceability, and thus value, of U.S. patents. The resulting effect is multi-fold.
The uncertainty has dramatically devalued U.S. patents. The USPTO has reported decreased fees from patent renewals as owners accelerate portfolio pruning. Patent sale transactions, even those involving large portfolios, are being concluded for relatively small payments and perhaps a share of future licensing revenues. By contrast, the European Patent Office announced earlier this year that it saw increases in European patent applications in 2014 and 2015—driven by U.S. companies—while the USPTO reported a small decline in patent application filings in 2015 after years of steady increases. The lesson is not far to seek: capital is mobile, and if the U.S. offers a comparatively weak return to R&D investment, investors will innovate overseas where returns are more favorable.
The added cost and risk to U.S. patents has, perversely, had the concomitant effect of driving up the costs of patent monetization. The ability to license patents, even by “good” patent owners that practice the inventions they originated, is virtually impossible without litigation. Where patent litigation is feasible, settlement negotiations are protracted, with IPR and CBM costs often serving as an initial ceiling, meaning that more litigation is lasting longer and thus costing more.
As one might expect, law practices are not immune to the post-AIA environment. Litigation departments are experiencing declining revenues as clients become more selective about the suits they file (or choose not to file at all). Clients are also seeking to offload risk onto their law firms, via discounted billing and alternative fee arrangements. And navigating the dual PTAB and district court tracks can be a legal risk in and of itself, even where the firm has the necessary expertise or brings in a specialist law firm to assist.
Like so much well-intended regulation, the AIA may have undermined the very system it was aimed at improving. While well capitalized players may be able to ride out the current storm—or even take advantage of it—many others have been irrevocably harmed by these changes. It is also possible that innovators will increasingly turn to trade secret protection in lieu of patents, thereby eliminating the beneficial quid pro quo offered by the patent system: inventors receive limited-time monopolies on their inventions in exchange for fully disclosing—and empowering others to build upon—their innovative work.
As a founder of a firm that specializes in underwriting legal and regulatory risk, I know we are able to adapt to this new normal. Indeed, in this environment, a risk-sharing partner may be more valuable than ever, whether you are a patent owner or a lawyer. But our capital is as mobile as the R&D budgets of the tech and pharma industries. If the AIA had ultimately strengthened U.S. patent rights, it would have spurred more domestic innovation. The opposite is also true.
 2015 Report of the Economic Survey, American Intellectual Property Law Association.
 Patent Trial and Appeal Board Statistics, USPTO, July 31, 2016.
Join the Discussion
6 comments so far.
Jeffrey DixonSeptember 13, 2016 05:37 pm
The article as a whole is interesting and informative. However, I must quibble with the statistical analysis.
We are given the following observations:
(1) The PTAB institution rate for petitions is 70%;
(2) In 60% of cases with a final written decision, instituted claims have been found unpatentable, canceled, or disclaimed; and
(3) The average invalidity rate is 18% for patents in District Court litigation from 2008 through 2015.
From these observations, the author identifies two discrepancies (call them (A) and (B)), for each of which he concludes that there can only be one of two possible explanations
(A) The “spread between allowance rates on the front end and cancellation rates on the back end”, can only mean that “[e]ither the PTO is failing at an alarming rate to weed out invalid patents during prosecution or the PTO is erring substantially on the side of cancelling valid patents in post-grant proceedings.”
I have three quibbles with (A) and how it is presented.
First, no percentage is given for “allowance rates on the front end,” so we don’t even know what the “spread” is.
Second, we are not given the percentage (presumably miniscule) of issued patents for which IPR/CBM petitions are filed in the first place.
Third, and most importantly, the population considered for “allowance rates at the front end” is presumably *all* patent applications, and the population considered for “cancellation rates at the back end” is only the (presumably miniscule?) fraction of issued patents for which IPR and CBM petitions are filed. In each of those cases, somebody made the determination up front that the likelihood of success of a petition justified a considerable filing fee and attorney fees. Accordingly, why would you expect the success rate of such petitions (which, by the way, is 70%*60%=42%, a calculation left out of the article) to be the same as or less than the up-front allowance rate of all patent applications? Admittedly, the patents subject to IPR/CBM petitions are drawn from a population of granted patent applications, from which a lot of chaff has already been removed by rejections and abandonments. Also, many considerations drive petition filing decisions (like the value of the claimed subject matter, leading to the petitioner either already wanting to infringe the patent or not wanting to stop infringing it in lieu of challenging its validity), but surely likelihood of success is a major consideration, which tends to weed out the “stronger” patents from the IPR/CBM pool. To me, this “self-selection” factor would seem the most likely reason for a “high” overall success rate (again, that’s 42%, which is arguably not that high).
(B) The “gulf” between judicial and PTAB invalidity determinations can only mean that “either the judicial system is failing to invalidate a significant number of invalid patents, or the PTAB is cancelling a significant number of valid patents.”
Quibbles with (B):
First, we are not told what “the average invalidity rate of 18% for district court litigation” means. Is this taken out of all cases filed? Does it include settled cases, where a decision of invalidity is never made? Does it include cases where the court decided non-infringement before reaching any invalidity defense or counterclaim? Does it include cases where no invalidity defense or counterclaim was even raised? Admittedly, the latter is presumably pretty small, as a colorable obviousness defense can almost always be asserted, but by the same token, a colorable obviousness defense that is just “thrown in” along with a strong noninfringement defense may not involve (or justify) much additional effort or expense, which may be less than that which would go into an IPR/CBM petition and proceeding.
Second, if any of those cases are included in the denominator of the 18%, why should we be surprised that the invalidity rate in district courts, where infringement is also being considered, is lower than for a proceeding that only addresses validity?
Third, why is the “invalidity rate for district court litigation” taken for a period of 2008-15, spanning before and after the creation of IPR/CBM? The very premise that IPR/CBM are patent killers (which I’m not disputing), would seem to lead to the expectation that many litigants would choose those proceedings over (or concurrently with) invalidity defenses or counterclaims, thereby justifying separate treatment of pre-AIA and post-AIA time periods.
angry dudeSeptember 12, 2016 08:51 pm
Forgive me for being an idiot (which I am btw for trusting US patent system back in 2002) but…
doesn’t “exclusive right” mean the right to actually exclude others from making, selling blah blah blah ?
That was the whole premise of my “business model” based on pure IP back in 2002: invent and patent a fundamental piece of tech, not a product in itself, but a potential indispensable part of hundreds of products in several industries..
Then wait until some big company wants to buy my patent to cripple competitor’s products (by excluding them from making, selling etc)
“Fool me once – shame on you, fool me twice – shame on me”
Prizzi’s GlorySeptember 12, 2016 04:27 pm
PTAB APJs lie on official government documents at the behest of senior USPTO officials.
In other words the PTAB and the USPTO is tainted with the federal crimes of falsifying documents (treated as grave as perjury) and conspiracy. The PTAB and the USPTO must be considered corrupt and criminal organizations.
Obviously IPRs and CBM reviews in this situation can not be considered legitimate until the USPTO and the PTAB are purged of criminality and a good number of USPTO officials are sitting in jail.
See my comment on Constitutional and Economic Policy Problems Raised by Inter Partes Review (IPR) Suggest Congress Should Consider Acting.
MoocowSeptember 12, 2016 11:51 am
I don’t know what to make of this article. It seems to me that entities like Gerchen Keller thrive on business risk – in fact, the more business risk is injected into the patent system, the better for them. Take Congressional proposals for “loser pays” fee shifting, which was widely believed to increase the risk of patent enforcement for smaller businesses or research institutions. GKC responded by offering “fee shifting protection” products for a cut of a potential damages award. Similarly, GKC does not seem to view the business risk created by unfair IPR proceedings as necessarily a bad thing. In fact, they are actively contributing to business uncertainty by bringing IPR petitions themselves. Mind you, they can’t be blamed for seizing business opportunities – it’s legal, and it’s the American way. But one wonders how the long-term interests of patent owners align.
Randall RiddSeptember 12, 2016 11:23 am
This is an excellent article and hits the nail right on the head! One of the resulting effects of the current system is that a small innovative company with limited resources can never defend it’s patents against the pirating of larger well funded companies which stifles innovation.
Ron HiltonSeptember 12, 2016 09:37 am
As a 3-time entrepreneur, it has always been my impression that much of the value of a patent is based on the overall commercialization effort of which it is a part. It is box that must be checked off for attracting investment in an associated start-up venture, but standing alone as a pure IP investment it may be worth far less, absent some compelling business interest on the part of the buyer. Has AIA really changed the overall IP investment picture that much?