Patent Trial and Appeal Board Procedures for IPR Fail to Satisfy the Fifth Amendment

EDITORIAL NOTE: This article is the sixth installment of an 8-part series exploring the constitutionality of the PTAB under the public rights doctrine. To begin reading from the beginning please see: Patent Review in an Article I Tribunal is Unconstitutional.

___________

The due process clause of the Fifth Amendment addresses the requirement for due process to support individual rights and liberties: “No person shall . . . be deprived of life, liberty, or property, without due process of law . . .” This clause governs adjudication of disputes in the courts between private parties involving private property and establishes the legitimate constraints of fair procedures for both judges and juries. Due process is an essential condition for a fair proceeding involving a matter in which property rights are in dispute. Unfortunately, there is no interpretation of PTAB procedures under which due process applies. PTAB omits due process and is fundamentally unfair. As a consequence, the PTAB conclusions, and the structure and process of PTAB determinations, are unconstitutional.

Objectives and Methods of the America Invents Act

The origins of PTAB rules lie in the AIA. The statute specifies a set of procedures for the PTO to administer IPRs or PGRs in order to review patents. The focus of review in IPRs is novelty (35 U.S.C. § 102) and non-obviousness (35 U.S.C. § 103). The main impetus for this focus lies in the narrative of big tech companies that the PTO grants patents of low quality that require a second review with substantial resources. These assertions, however, lacked evidence.

Interestingly, inter partes means “among parties.” Patent critics maintain that since a patent grants a monopoly, the public must be protected from an improper monopoly. However, note that the public is rarely involved in IPRs. Almost all IPRs are instituted by large companies against small entities, inventors or competitors in the context of private disputes. The IPRs are initiated by companies that are sued in federal court when patent holders enforce the patents in private disputes. It is deceptive for these technology corporations to claim to represent the “public” in these disputes. Even in rare cases in which public interest institutions – often funded by big corporations to attack small entity technologies – or the PTO itself institute an IPR, the effect is to benefit a technology company, not the public. In fact, the public is benefited by a strong patent system that incentivizes disclosures, promotes progress and becomes public domain in a limited time.

Before the AIA, Congress passed a statute in 1980 to institute ex parte reexams and inter partes reexams in the PTO modeled after patent reissues that originated in the 19^th century to repair patent errors. The data on ex parte reexams show that about 25% of patents reviewed remain unscathed, about 63% require only minor claim amendments and about 12% are unrepairable and beyond rescue. These data show a very different story from the application of IPRs, in which 76% of challenged claims are invalidated after institution of an IPR.

One problem with earlier inter partes reexam procedures was that these reexams were time-consuming and indeterminate. The Federal Circuit reviewed the legitimacy of instituting ex parte reexams in Patlex (Patlex Corp. v. Mossinghoff 758 F.2d 594 (Fed. Cir. 1985)) and Joy (Joy Technologies, Inc. v. Manbeck (959 F.2d 226 (Fed. Cir. 1992)). These decisions allowed the PTO to institute reexams in order to “correct errors” in the original patent examination process. However, the procedures for these reexams resemble a continued examination in light of new prior art that may serve to narrow claims. For a critique of reexams as unconstitutional since patent validity tests require a Seventh Amendment jury trial right, See Keane, M., Patent Reexamination and the Seventh Amendment, op cit., critiquing the reasoning in Patlex and supporting the view that, following McCormick, once issued, only an Article III court can invalidate a patent.

The AIA calls for the PTO to establish an adversarial forum for IPRs in which alleged patent infringers may challenge issued patents. Once a request for review is made, the PTAB will make a decision on whether to institute a review within 6 months of the initial request. The PTAB then takes from 12-18 months to review the patent claims based on novelty or obviousness. Either party may appeal the decision, but only to the CAFC. Although the AIA specifies that patent holders may amend claims, the PTAB has only allowed amendment in less than 1% of cases. The PTAB effectively holds a trial between the patent holder and the alleged infringers, which includes nominal discovery, pleadings and interview of expert witnesses. A three judge panel of administrative law judges determines the outcome of the trial.

IPRs are instituted based on the “likelihood of prevailing” standard. This probability of success standard, however, relies on very low standards of review, thus making the institution decision a self-fulfilling prophesy suffering from the deprivation of due process. In addition, the discovery procedures are biased against patent holders.

It should not be shocking to recognize that the PTAB notions of discovery differ markedly from federal court interpretations. Board authorization is essential for discovery beyond the most rudimentary request for documents and examination or cross-examination of witnesses. In order to obtain permission from PTAB to proceed with discovery beyond the simple request for documents and experts, the board must grant discovery requests based on whether there is a high probability of finding information that will be determinative, whether the information requested affects the opposing party’s litigation strategy, whether the information is obtainable in other ways, whether the request contains simple instructions and whether the request is extraordinarily burdensome. It is rare that PTAB allows discovery beyond the most rudimentary documents or testimony. Discovery in PTAB is purposely truncated, and, by its expeditious nature, meets no standards of federal court discovery procedures.

The PTAB trial is itself very abbreviated. While a federal district court trial involving patent infringement takes several days or weeks, PTAB “trials” – which consist merely of attorney oral arguments – take a few hours.

The AIA effectively removes from the federal district courts the patent validity component of the patent infringement trial. In most cases, the trial court stays the proceedings of a patent infringement case pending a review of patent validity by the PTAB.

The ideal of instituting patent validity review in the PTO was to find a cost-effective and speedy resolution of patent validity in a specialized agency that has expertise in the field. However, none of these assumptions have been true in reality because IPR proceedings in PTAB are very expensive and time consuming, thereby prolonging the time for a hearing of the dispute in the courts. For instance, a minimum of 18 months in PTAB (and 24 months in the CAFC) lands the controversy back in federal district court for an average three year wait to trial (and another trip to the CAFC). Moreover, IPRs appear to be no less expensive than litigation when assessing the cost of determining the issue of patent validity, with prices for defense ranging from $500K to $1M per matter. See Dolin, G., Dubious Patent Review, op. cit. Thus, IPRs effectively double the time to trial, from about 3 years to 7 years. In fact, IPRs appear to be a mechanism for harassing patent holders, with high costs of defense and a second bite of the apple for infringers. In sum, IPRs were intended to be speedy and cheap, but are in reality the epitome of patent purgatory.

In Cuozzo, the Court supplied a cursory review of PTAB on the issue of claim construction standards and deferred to agency interpretation of the statute by applying the classic Chevron deference. Further, in B&B Hardware, Inc. vs. Hargis Industries, Inc. (135 S. Ct. 1293 (2015)), the Court reviewed TTAB, the trademark review board in the PTO and agreed that TTAB’s final determinations were preclusive. However, the B&B Hardware majority decision improperly relied on state court precedence rather than Article I agency precedents. The Court did not review separation of powers issues. Further, trademarks originated in statutory law in 1870, not in the Constitution, illustrating a justification for administrative review under the public rights doctrine, revealing a marked difference between patents and trademarks. The Thomas dissent in B&B Hardware, on the other hand, provided a persuasive argument for limits of issue preclusion drawing on separation of powers doctrine and a suggestion to allow Article III court review of administrative decisions. Rather, the Court’s precedence applies in Astoria Fed. Sav. & Loan Ass’n v. Solimino (501 U.S. 104 (1991)) and shows the limits of preclusion.

Note also the view that decisions from the ITC, as an Article I tribunal, must be reviewed by Article III courts (Texas Instruments Incorporated v. Cypress Semiconductor Corporation (90 F.3d 1558 (Fed. Cir., 1996)). See Pearson v. Williams 202 U.S. 281 (1906); Churchill Tabernacle v. FCC 160 F.2d 244 (D.C. Cir., 1947); U.S. v. Raddatz 447 U.S. 667 (1980); and Perez v. Mortgage Bankers Assn 135 S. Ct. 1199 (2015).

There are solutions to control the abuses of PTAB. These include only instituting IPRs in rare circumstances that meet the clear and convincing standard of Microsoft v. i4i, allowing amendability in all cases to repair any deficiencies and applying procedures of due process found in the federal courts in order to provide consistency between fora.

Ironically, allowing amendments to “correct” claims in light of newly discovered prior art would cure 80% of patents subject to IPRs. Instead, an amendment practice occurs in ex parte reexams, which has the effect of substantially prolonging the process for patent holders. In fact, the lack of amendment procedures epitomizes abuse of discretion in the PTAB since amendment is disallowed in all but exceptional circumstances.

A Review of PTAB Procedures

The key to understanding the absence of due process in PTAB lies in identification of the procedures applied in IPRs. The PTAB procedures for IPRs include:

• Application of the “broadest reasonable interpretation” (BRI) review standard;
• No realistic opportunity to amend claims;
• No real estoppel procedures, including ignoring estoppel of prior art previously reviewed;
• Supplying an institution decision (that cannot be appealed) using the same panel that reviews the matter;
• Application of the lower evidentiary standard of preponderance of evidence (POE) rather than the “clear and convincing” (C&C) standard applied in courts;
• Stacking panels by the PTO director with a clear bias of judges to infringers;
• Application of a broad interpretation of “obviousness”;
• Allowing a group of companies to cooperate to successively attack patents;
• Removal of federal district courts from review of PTAB decisions;
• Allowing forced settlements in PTAB between the parties on unfair terms;
• Allowing an appeal only to the CAFC with an effect to prolong determinations;
• Requiring high asymmetric costs to defend a patent for the patent holder;
• Failure of panels to supply a final determination on all challenged claims;
• Failure of panels to consistently supply reasoning for their determinations;
• Allowing any third party, including parties without standing or not involved in a dispute, to challenge a patent; and
• Ignoring the presumption of validity in a patent.

The sum of these procedures shows a clear lack of due process, enabling a systematic attack on patents in an Article I tribunal that sabotages a fair playing field for the parties. It is argued that PTAB requires “parental oversight” in the federal district courts so as to prevent abuses.

The combination of these procedures suggests a strong bias against patent holders. For instance, applying the BRI claim interpretation standards (rather than the Phillips standards applied in federal courts that are tailored to mapping infringement) to the overly-broad obviousness standards demonstrates inclusion of a very wide set of prior art that is applied to kill patent claims. This PTAB approach to review is much wider than the procedures applied by the PTO in the initial patent examination and wider than the procedures applied by the federal courts. [See Solomon, The Myth of Patent Quality, SSRN, 2017.]

Procedural and Substantive Due Process Requirements of the Fifth Amendment

According to Judge Henry Friendly, Some Kind of Hearing, (123 U. Pa. L. Rev. 1267 (1975)), due process rights that apply to both civil and criminal matters include:

• An unbiased tribunal.
• Notice of the proposed action and the grounds asserted for it.
• The opportunity to present reasons for the proposed action not to be taken.
• The right to present evidence, including the right to call witnesses.
• The right to know the opposing evidence.
• The right to cross-examine adverse witnesses.
• A decision based only on the evidence presented.
• Opportunity to be represented by counsel.
• The tribunal to prepare a record of the evidence presented.
• The tribunal to prepare written findings of facts and the reasons for its decision.

The key elements of due process include notice, an opportunity to be heard and a fair hearing by a neutral decision maker. In addition to notice, timeliness and the right to present evidence, the most crucial elements of due process lie in the tribunal itself. Due process requires (a) impartial fact finding, (b) a decision on the merits that is not unreasonable or capricious and (c) a written decision that states the reasons for the decision.

The Fifth Amendment due process clause was stimulated by the arbitrary exercise of government power as the U.S. declared its independence from a tyrannical monarchy. The declaration of independence specifies a list of grievances that reflect the arbitrary exercise of government-sponsored power. The creation of an independent judiciary with life tenured judges was intended to create a critical forum for maintaining fairness and impartiality of disputes.

The requirement of a fair hearing aimed to supply a neutral forum for making judicious determinations without arbitrary takings of property or liberty. A hearing is a “basic aspect of the duty of government to follow a fair process of decision making when it acts to deprive a person of his possessions. The purpose of this requirement is not only to ensure abstract fair play to the individual. Its purpose, more particularly, is to protect his use and possession of property from arbitrary encroachment.” (Fuentes v. Shevin, 407 U.S. 67, 80-81 (1972)) Furthermore, an impartial tribunal is an essential right.

“The neutrality requirement helps to guarantee that life, liberty, or property will not be taken on the basis of an erroneous or distorted conception of the facts or the law . . . At the same time, it preserves both the appearance and reality of fairness . . . by ensuring that no person will be deprived of his interests in the absence of a proceeding in which he may present his case with assurance that the arbiter is not predisposed to find against him.” (Marshall v. Jerrico, 446 U.S. 238, 242 (1980))

The burden is on those arbitrators or adjudicators to show that they are free from conflicts of interest. A judge must recuse himself if there may be “a direct, personal, substantial, pecuniary interest” (Tumey v. Ohio, 273 U.S. 510 (1927)) in a matter that shows a tendency to be biased. The Fifth Amendment guarantees immunity from bias.

In addition to procedural due process, elements of substantive due process may apply to common law cases as well. For instance, IPRs have demonstrated a clear government agency intrusion on private property rights by compelling involuntarily the expenditure of great costs to defend a patent after its issuance by a government agency. The AIA appears to disrupt the right to privacy in a patent by the patent holder by instituting patent validity review in a government agency against the will or interest of the patent holder. Patent holders have the liberty not to be relentlessly attacked by typically large technology company infringers employing asymmetric economic advantages in IPRs. The existence of IPRs transform a patent from an asset to a liability, forcing patent holders to incur a great cost (of six to seven figures) to defend. In brief, IPRs constrain the patent holder’s liberty to own a patent without molestation by a government entity. Consequently, substantive due process protects patent holders from undue incursions by the legislature to establish Article I tribunals to attack patent validity. The profound adverse effects of IPRs on the economy, viz., substantial declines in technology investment and the consequent declines in productivity growth, show that IPRs are illegitimate.

TO BE CONTINUED… 

Other series articles:

• Patent Review in an Article I Tribunal Under the Public Rights Doctrine (Tues. 10/3)
• The Classical Public Rights Doctrine: Growth of the Administrative State (Thurs. 10/5)
• The Modern Public Rights Doctrine (Tues. 10/10)
• Private Rights and the Sanctity of an Independent Judiciary (Thurs. 10/12)
• Separation of Powers Constrains of Patent Invalidation (Tues. 10/17)
• IPRs Unduly Harm Patent Holders and Benefit Big Tech Infringers (Tues. 10/24)
• AIA and PTAB Unconstitutional Under the Public Rights Doctrine (Thurs. 10/26)