The PREVAIL Act Won’t Work Unless PTAB Incentives are Balanced

The PREVAIL Act addresses current rules that enable gamesmanship at the Patent Trial and Appeal Board (PTAB) by huge corporations against small inventors, startups and other patent owners, and that increase invalidation rates. It introduces standing requirements, establishes a clear and convincing evidence standard to invalidate a patent, ensures a code of conduct is put in place for administrative patent judges (APJs), and more.

While these changes are well-intended, due to the PTAB’s perverse incentive structure, the PREVAIL Act will only be marginally effective, and may have no real effect at all. In order to balance the PTAB’s currently astronomical invalidation rates, one option is to allow patent owners to petition the PTAB to review their own patents.

The Backdrop

The PTAB was established in the U.S. Patent and Trademark Office (USPTO) by the Leahy Smith America Invents Act (AIA). Its intent was to serve as an alternative forum for challenging the validity of issued patents that is faster and cheaper than federal court.

However, the PTAB has proven to be an utter failure, invalidating 84% of the patents it fully adjudicates, adding years to court cases, and increasing costs by hundreds of thousands of dollars.

The reason for this failure is an incentive system that drives the PTAB to invalidate patents at extremely high rates just to maintain its operations. Without tackling this underlying problem, no legislation will fix this failing experiment on the U.S. innovation engine.

PTAB Incentives Drive Patent Invalidation

The PTAB is funded by fees it collects for Inter Partes Reviews (IPR) and Post-Grant Reviews (PGR). It cannot sustain its operations without a significant number of petitions for IPRs and PGRs.

Only those seeking to invalidate patents – infringers and their agents – are permitted to petition the PTAB to challenge a patent’s validity. Patent owners are explicitly barred from petitioning on their own patents. When a petition is filed, a patent owner must defend their patent or abandon it. This one-sided framework means that the PTAB’s sole customers are those who seek to invalidate a patent – infringers and their agents.

Because the PTAB’s only function is to invalidate patents, its invalidation rate is the PTAB’s value proposition to attract petitions. To encourage enough petitions, the PTAB must maintain a significantly higher invalidation rate than federal courts. Failure to do so would result in a lack of petitions, jeopardizing the PTAB’s existence.

These incentives heavily bias the PTAB towards invalidating patents at an exceptionally high rate, creating a system that cannot prioritize a fair evaluation of patent validity.

The USPTO Acts on the PTAB’s Warped Incentives

Driven by these incentives, the USPTO has demonstrated it will take actions to increase invalidation rates while ignoring actions that could reduce invalidation rates.

For example, petition fees do not cover the PTAB’s cost of conducting IPRs and PGRs by as much as 50%. The USPTO has refused to bring its fees in line with its costs, presumably because increasing fees would reduce the number of petitions filed. In addition, the USPTO introduced incentives for infringers to file petitions by offering substantial refunds of the infringer’s petition fees if the PTAB does not institute the petition.

In other examples, APJs have no code of conduct and handle cases where their former employer is a petitioner. A conflict of interest of this sort increases the likelihood of invalidating the patent. Any USPTO Director since 2011 could have put in place a code of conduct, yet none have. On multiple occasions, when an original panel of APJs refused to invalidate a patent, the USPTO stacked the panel with new APJs so it would invalidate the patent. The USPTO then retaliated against a whistleblower who brought this to light. Incredibly, the USPTO implemented a bonus program for APJs that incentivizes higher rates of invalidation – APJs actually receive higher bonuses to invalidate patents than they do to hold them valid.

These are just a few examples.

The PREVAIL Act Will Not Help Unless It Addresses These Problems

The list of possible rules, policies, and incentives (collectively “rules”) at the PTAB is virtually unlimited.

It is impossible for Congress to write all the possible rules that can affect invalidation procedures at the PTAB. What Congress doesn’t specifically codify is left to the discretion of USPTO management to make rules, which will ultimately determine the effectiveness of the PREVAIL Act.

The USPTO will continue to act on the perverse incentive structure to keep invalidation rates high and will form new rules to that end. The USPTO has demonstrated a reluctance to engage in Administrative Procedure Act (APA) rulemaking, which has resulted in Big Tech and US Inventor each suing the USPTO on different fronts, unsuccessfully demanding that the USPTO adhere to APA rulemaking. When the USPTO puts rules (not codified in PREVAIL) in place and those rules prove harmful, Congress must pass yet more legislation to correct the errant rules.

Unless the incentives are balanced, this will repeat itself year after year until all the possible rules that can be written are codified by Congress to force the PTAB into a fair tribunal.

It’s anybody’s guess how many years that will take. In the meantime, investors, overall a pretty smart lot, will not invest in startups because patents covering their core technologies can so easily be destroyed.

Balancing Incentives

Fixing the PTAB’s astronomical invalidation rates absolutely requires balancing incentives.

The first step toward balancing incentives is to create opposing customers for the PTAB so petitions can be generated from either party involved in a patent dispute. This can be done by allowing patent owners to petition the PTAB to review their own patents. By allowing both sides to file a petition, the PTAB’s invalidation rate can attract petitions from either side. If the invalidation rate is higher than the courts, infringers will be encouraged to file petitions. If it is lower, patent owners will be encouraged to file petitions. This opens the possibility to balance invalidation rates with the courts and not push the PTAB out of business.

This can be accomplished by deleting just eight words “who is not the owner of the patent” from §311 Inter partes review and §321 Post-grant review:

(a) In General.—Subject to the provisions of this chapter, a person who is not the owner of a patent may file with the Office a petition to institute an inter partes review of the patent. …

However, that doesn’t change the incentive structure because infringers have significantly greater financial resources to pay petition fees than most patent owners. Since more petitions can be filed by those with more money, the PTAB is still incented to produce high invalidation rates.

The second step creates that balance by requiring mutual consent of both parties to initiate a petition. When an infringer petitions the PTAB, the patent owner must consent, and vice versa. This aligns patent law with copyright law and, importantly, takes invalidation rates off the incentive table.

If PTAB invalidation rates are not in line with the court, it will lose petitions because one party or the other will choose to avoid the PTAB and instead stay in federal court. On the other hand, if the PTAB brings its invalidation rate in line with the court, the PTAB’s value proposition becomes that it is faster and cheaper, as it was set up to be in the AIA, and both parties will consent to the petition.

This can be accomplished in §312 Petitions and §322 Petitions, the requirements that must be met to institute a petition, by simply adding an additional requirement: “(6) All parties, including the patent owner, consent to the petition.”

Rebalancing incentives encourages the PTAB to become an impartial forum because invalidation rates can no longer be used as an incentive to attract petitions. Instead, the PTAB becomes an alternate venue that must use its ability to be faster and cheaper to attract petitions, finally fulfilling the original intent of the AIA.

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Author: maxkabakov
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