Fundamental incongruities of PTAB operations affect the integrity of the patent system

Article I, Section 8 of the U.S. Constitution states a patent is an “exclusive Right”, the very essence of a property right. In 1882, the United States Supreme Court said in James v. Campbell that “[a patent] confers upon the patentee an exclusive property in the patented invention”. The same quote was cited by the Supreme Court as recently as 2015 in Horne v. Department of Agriculture. Eight sitting Justices on the Supreme Court have stated that a patent is a property right. And black letter law (35 U.S. Code § 261) states “patents shall have the attributes of personal property.”

For more than two centuries, the U.S. Constitution, black letter law and precedent construed a patent as a property right. This is important because it is the nature of property rights that enables investment in early stage startup companies,^[1] especially those with cutting edge technologies in highly competitive fields like pharmaceuticals, biotech, smart phones, enterprise software, internet, semiconductors and other technologies critical to our infrastructure, military and much more.

After passage of the America Invents Act (AIA), the United States Patent and Trademark Office (USPTO) unilaterally wrote rules of the Patent Trial and Appeal Board (PTAB) to radically favor petitioners over patent holders. While many objected at the time, few could predict the full extent of what would become the one-sided PTAB process. PTAB operations have devastated the patent system with more than 95% of patents subjected to a PTAB tribunal having at least one claim invalidated, which often destroys the enforcement value of the entire patent. The Federal Circuit has reprimanded the PTAB for acting arbitrary and capricious, and also for completely ignoring the statute and creating their own standards. The PTAB can and does refuse to consider timely-submitted evidence, and there is no right to amend despite the statute saying otherwise. Now in recent days we’ve learned one Administrative Patent Judge was even hearing cases and writing decisions favoring a former client he represented in patent infringement defense matters just a few years ago. The PTAB has gone rogue.

According the U.S. Chamber of Commerce in their annual report^[2] on patent systems, the U.S. patent system is now in 10^th place, tied with Hungary, and they attribute this drop from 1^st place in all previous years primarily to the PTAB.

The secondary market for patent assets has the effect of driving capital to startup companies as well.^[3] This is because investors are assured that in the event an invested company fails, the patents can be sold to recover the investment. Recently, patent purchasers Intellectual Ventures^[4] and WiLAN^[5] have both exited the patent market. The secondary market for patents is collapsing and this is having a negative effect on the capitalization of startup companies,^[6] particularly those who must protect their inventions with patents and those with talent in research & development that choose to invent, not make, products and services. This parallels other inventors such as Thomas Edison and John Moses Browning. The reason is simple, without the prospect of an exit strategy angel and VC investors choose to put money to work elsewhere. Who can really blame investors in patented technologies given the disaster that has become the U.S. patent system and the gauntlet of the PTAB allowing (if not encouraging) multiple parties to gang up on patent owners over and over again.

As the USPTO has weakened our patent system, China has strengthened its patent system. The resulting uncertainty is pushing venture capital that would have funded American startups to China, thus funding startups there.^[7] Along with that capital goes the great America innovation engine that has for centuries propelled the United States to lead the world in new technologies. Today China leads with twice the number of patent applications and twice the number of patent cases than the U.S.^[8] There is little doubt that our national security is being damaged as we will be forced to purchase Chinese technology for critical infrastructure and potentially our military.

MCM, Security People and Oil States are cases challenging the constitutionality of PTAB administrative tribunals. In short, they ask if a property right can be destroyed by an administrative tribunal without due process and without a jury. In full knowledge of the economic damage, the U.S. Constitution, black letter law and 220 years of precedent, the USPTO doubled down by arguing to the Federal Circuit and the Supreme Court that a patent is public right, not a property right, and as such the PTAB’s administrative tribunals are legitimately destroying patents.

This conduct by the USPTO defies its own mission – to promote the progress of science and the useful arts. USPTO policy is itself destroying that progress, yet the USPTO argues against judicial review in an attempt to continue its destruction of the patent system.

Fundamental incongruities exist within the operation of the PTAB that affect the integrity of the patent system, and the future of American innovation. For example:

• USPTO processes encourage institution of PTAB review. The decision to institute PTAB review is made by the same PTAB judges who perform the review. This encourages institution because PTAB judges must review a sufficient number of patents to remain employed. It also biases the decision to invalidate the patent because it is not likely for a person to institute a PTAB review by declaring the patent is more likely than not to be invalid, to then find the patent valid.
• No guidelines exist related to the institution of PTAB review. It appears no heed is paid to “take into account … the same prior art or arguments previously …presented to the Office.” (35 U.S.C. §325(d)) as PTAB reviews are instituted on the same art already evaluated in examination.
• No guidelines are available related to decisions to institute based on caseload or schedule, including consideration of the 12 month requirement.
• No guidelines exist relating to evaluating petitions for abuse or harassment like limiting the number of petitions considered by the PTAB on the same patent/family (e.g., 125 petitions on 7 patents held by Zond, 18 petitions of a single patent held by Paice).
• PTAB judges apparently have no code of conduct requiring recusal when they have previously represented a party.^[9]
• Former USPTO Deputy Director Russ Slifer recently posted a host of recommendations for the PTAB.^[10] The PTAB appears to have operated for 5 years without USPTO direction on these issues.
• The USPTO is stonewalling the industry. Freedom of Information Act (FOIA) requests are routinely ignored, refused or gamed. Recently, a FOIA request was submitted for the disclosure of standard operating procedures, prior versions of standard operating procedures and records indicating why changes were made to standard operating procedures related to assigning PTAB judges to panels for CBM or IPR reviews. The USPTO responded with 57 pages where 52 pages were withheld. The five pages not withheld were largely not informative and were partially redacted.
• Post Grant Review (PGR) provides a clear measuring stick of USPTO performance over the last 4 years since PGR was only available for patents filed after March 16, 2013. Therefore patents subjected to a PGR were examined entirely under the current Director’s tenure, with the latest case law and MPEP rules, and under the Enhanced Patent Quality Initiative. According to the USPTO’s own statistics, 58% of patents petitioned for PGR are more likely than not invalid. Even the Post Grant Outcomes pilot cannot solve the problem as examiners add PGR decisions invalidating a patent as references on continuations of the same patent and then issue the patent on the same subject matter despite the invalidation in the PGR.
• The PTAB exposes an issued patent to the same standard as in examination. There is no deference to or defense of the work of the examiner, which is contemptuous of the work done by the examiner and of the inventor who paid for examination. Inspection prior to issuance necessarily must be stricter than inspection after issuance. It is a basic premise of quality control (6 sigma, TQM, lean, etc.). Invalidating issued patents is not a form of quality control and does nothing to improve patent quality. Patent quality can only be improved in examination prior to issuance. Yet, the USPTO is diverting money paid for examination and maintenance to the PTAB where patents are destroyed.

The same agency that takes inventor money to grant patents takes infringer money to destroy them. This creates an appearance of double dealing, and inventor belief that the USPTO is breaching the “grand bargain” of the patent system. Inventor confidence is at an all-time low because inventors are lured away from using trade secrecy protection, but then given nothing in return for disclosure. The effect of PTAB on inventors is devastating. Since institution of PTAB, over 50% of inventors simply quit rather than suffer the financial and stressful indignation of post grant invalidation.[11]

The Trump administration has ordered elimination of duplicative and wasteful programs, recently outlined in the OMB memo “Comprehensive Plan for Reforming the Federal Government and Reducing the Federal Civilian Workforce”. It is clearly wasteful for an agency to invalidate more than 50% of its own output. The PTAB is also duplicative in light of §282 of the Patent Act.

The current management of the USPTO has wrecked the patent system. Immediate action is required.

• Cleaning up the PTAB and restoring integrity to the patent system requires a Director without a stake in the PTAB, and the current Director is responsible for the nightmarish results. A new Director must be willing to do whatever is necessary and permitted by law to reign in the PTAB.
• The USPTO must ask Congress to hold hearings on the issue of patents as property rights versus public rights before filing any more briefs. This is not a matter of agency discretion, but one that must be carefully deliberated by the legislative branch. Only Congress can navigate the public interest, the Constitutional limitation, and the case law that precludes removing the property status of patent rights.
• The Director should immediately stay all PTAB Trials and institution decisions until Congress or the Supreme Court have sufficiently addressed these issues.

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^[1] https://cpip.gmu.edu/2017/01/11/creative-upstarts-and-startups-how-ip-creates-opportunities-and-opens-doors/

^[2] http://www.theglobalipcenter.com/ipindex2017/

^[3] https://www.law.gmu.edu/assets/files/publications/working_papers/1517.pdf

^[4] https://www.iam-market.com/blog-entry/top-buyer-intellectual-ventures-announces-cessation-patent-purchasing-activities-leaving

^[5] http://www.iam-media.com/Blog/Detail.aspx?g=269aba10-bb5c-49a7-99bc-962024b56523

^[6] http://www.mercurynews.com/2017/04/04/silicon-valley-investing-slump-continues-fewer-startups-get-funded/

^[7] http://watchdog.org/283886/venture-capital-chases-patents-friendlier-climes/

^[8] https://techcrunch.com/2017/04/11/the-surprising-rise-of-china-as-ip-powerhouse/

^[9] https://ipwatchdog.com/2017/04/28/conflicts-of-interest-ptab-apple/id=82628/#comment-2738949

^[10] https://ipwatchdog.com/2017/04/11/how-to-improve-iprs/id=81946/

[11] http://www.nber.org/papers/w21769