The PTAB’s Concerning Conflict of Interest is Laid Bare in New Vision Gaming

Buffalo is a small Texas town of less than 2,000 people. On the way into town, school zone signs flank both sides of a speed limit sign. I drove through on a Sunday, when school zones do not apply, so I didn’t slow down. Almost immediately, the police lights lit up and I was awarded a speeding ticket. When I started to fight the ticket, I was met with resistance at every level of city government. It quickly became clear that the speed trap was a significant source of revenue for the small town and that the judge, mayor, city employees and even the officer who pulled me over all benefited from that revenue. So, I just paid the ticket and walked away.

It is the very definition of a corrupt system when those who make the rules and decisions receive financial benefit from the results of their rules and decisions. New Vision Gaming v. SG Gaming, Inc. (Federal Circuit No. 2020-1399) illustrates this phenomenon as it applies to the U.S. Patent and Trademark Office’s (USPTO’s) Patent Trial and Appeal Board (PTAB).

A Tangled Web

Depending on the fee structure, government administrative agencies that charge fees or assess fines can be susceptible to this form of systemic corruption. In most agencies, fees are balanced and do not encourage systemic corruption, but when an agency’s fees are tied to the agency’s decisions, agency decision makers implicitly know that the decision to fine or not fine, or how much to fine, or whether to push a proceeding forward, affects revenue that the agency uses to pay staff and run the agency. If they do not generate enough revenue, people lose their jobs, which is probably the case in Buffalo. Systemic corruption is inevitable if employee compensation is tied to key employee decisions and milestones.

These financial entanglements violate Constitutional Due Process. The Supreme Court said that judges who serve double duty as mayors, so that the same person raises fines and spends them, are unconstitutional in Ward v. Village of Monroeville, 409 U.S. 57 (1972) and Tumey v. Ohio, 273 U.S. 519 (1927). The Fifth Circuit said that a judicial kitty funded by fees and fines, and used to pay court staff and judicial expenses, was unconstitutional in Cain v. White, 937 F.3d 446 (5th Cir. 2019)The First Circuit found that an Environmental Review Board whose non-salary expenses were funded by fines was unconstitutional in Esso Standard Oil Co. v. Lopez-Freytes, 522 F.3d 136 (1st Cir. 2008).

The financial entanglements of the PTAB are similar. We’ve known this for years, and it was confirmed in late 2019 through US Inventor’s Freedom of Information Act request.  New Vision’s counsel (regular IPWatchdog contributors Matthew Dowd, David Boundy, and Robert Scheffel) connected the dots with their briefs (opening brief and reply brief) to the Federal Circuit.  I pull out some of the most relevant points from their briefs below:

The PTAB is a separate “business unit” of the USPTO. The Chief administrative patent judge (APJ) has separate revenue and cost responsibility for the PTAB business unit.

When someone wants to challenge the validity of a patent (called the petitioner), the petitioner pays a full fee for both institution phase and trial phase, about $45,000. Three APJs decide whether to institute the proceedings.

If they decide to institute it, the PTAB keeps the entire two-part fee. If they do not institute, the PTAB must pay back the portion of the fee that applies to the trial phase, which is about half the total fee. This means that revenue by the PTAB decreases if the petition is not instituted.

The same three APJs that decided to institute then preside over the trial phase and draw salary and bonus for it.

APJs have minimum production quotas for job retention and are paid bonuses. Bonuses are purported to be independent of whether the final decision is to invalidate the patent, but APJ compensation depends strongly on production.

These bonuses can be well over 20% of the APJ’s salary, which is certainly large enough to affect APJ decisions. For example, in 2016 APJ William Saindon had a salary of $168,700 and was awarded a bonus of $41,800. This brought APJ Saindon’s annual compensation to the level of an Article III federal circuit judge.

APJs are awarded “decisional units” for institution decisions and final decisions to support their bonus award. If there are not enough trial phase cases in the pipeline, then the supply of “decisional units” can fall too low to earn a bonus. If the supply of “decisional units” falls even lower, APJs will not make quota for job retention.

Furthermore, 40% of the PTAB’s trial budget, 25% of total budget, is generated from trial phase fees, which in turn depend on positive institution phase decisions. This puts a thumb on the scale of institution decisions by providing a direct financial and employment incentive for APJs to stuff their pipeline with institutions to keep their “decisional unit” count high enough to keep their job and earn next year’s bonus.

By law, the PTAB must be financially self-supporting. If revenue plunges, layoffs may be the only solution. For example, in 2002, the USPTO laid off over 100 trademark examining attorneys, 1/3 of the total, when trademark work fell off.

There can be no doubt that APJs know that their institution decisions determine the fate of their own pay, their own jobs, and the jobs of those around them.

Fees are paid by the petitioner, making the petitioner the true customer of the PTAB. If the odds are small for favorable institution and final decisions, customers will not use the PTAB. As with any business, APJs know who the customer is and how to satisfy the customer.

Taking the Scheme to Court

This overall effect is laid bare by US Inventor, via an amicus brief by a regular IPWatchdog contributor, Robert Greenspoon, analyzing the PTAB’s institution decisions, and describing an “October effect”. Institution decisions issued in September (the last month of the compensation year) are statistically lower than institution decisions issued in October (the first month of the compensation year). This difference shows that APJs stuff the annual pipeline to make production bonuses for the coming compensation year. The same difference is shown at a 95% confidence level, year, after year, after year.

New Vision argues that the PTAB’s fee and compensation scheme is unconstitutional with their briefs (opening brief and reply brief) to the Federal Circuit. Telephone oral argument is scheduled for April 9, 2021.

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