What Vidal’s Sua Sponte Director Review of Unprecedented PTAB Sanctions Order Could Mean for PTAB Practice

If a sanctions order is the stuff of a Patent Trial and Appeal Board (PTAB) practitioner’s bad dreams, then the issuance of sanctions outright cancelling a client’s patent(s) qualifies as their worst nightmare. That nightmare happened to Longhorn Vaccine (“Longhorn”) in April of this year, when the PTAB canceled five  of its patents as sanctions for Longhorn’s violation of the duty of candor relating to withholding test data that the PTAB deemed relevant to the patentability of the challenged claims. A month later, U.S. Patent and Trademark Office (USPTO) Director Kathi Vidal sua sponte ordered Director Review of PTAB’s sanctions order. We now await her decision. This article examines the PTAB’s unprecedented sanctions order in the context of Director Vidal’s recent crackdown on inter partes review (IPR) abuses and provides guidance as to what practitioners can do now to avoid accusations of misconduct before the PTAB.

Spectrum v. Longhorn IPRs

On April 26, 2021, Spectrum Solutions (“Spectrum”) brought five IPRs challenging Longhorn’s patents after it filed suit against Spectrum in federal district court alleging patent infringement. Spectrum Solutions LLC v. Longhorn Vaccines & Diagnostics LLC, IPR2021-847, -850, -854, -857, -860. Spectrum’s invalidity challenges centered on a prior art reference, “Birnboim,” in combination with other references. After institution, Longhorn submitted laboratory test results pertaining to a composition disclosed in Birnboim in response to those invalidity challenges. However, Longhorn resisted Spectrum’s attempt to obtain any additional testing data generated by the same laboratory for Longhorn. After Spectrum complained, the Board ordered further discovery, which revealed that Longhorn had withheld additional test data pertaining to the Birnboim composition. Spectrum moved for sanctions for Longhorn’s violation of its duty of candor to the PTAB under Rule 42.11. In its defense, Longhorn asserted that it had been justified in withholding the test data because: (1) it was not inconsistent with its own arguments/claim construction and thus was not required to be disclosed under 37 C.F.R. 42.51(b)(iii); and (2) it was properly withheld as work product.

In its May 3, 2023, Order, the Board resoundingly rejected these arguments and held that by withholding the test data—which the Board deemed material—and making arguments inconsistent with such data, Longhorn had proffered intentionally misleading evidence. Addressing Longhorn’s first argument, the Board explained that the test data was inconsistent with Longhorn’s positions, but even if it was not, such data was relevant to patentability of the challenged claims under the Board’s preliminary claim construction in its institution decision and, thus, should have been produced. The Board also held that Longhorn could not rely on the work product doctrine to shield factual information such as test data. According to the Board, if Longhorn was unclear that the test data was work product, they should have filed the exhibit under seal for in camera review.

The Board concluded that Longhorn’s actions demonstrated that it failed to comply with the duty of candor as required by USPTO rules. The Board further held that Spectrum’s requested sanction of entry of adverse judgment holding Longhorn’s patents unpatentable was needed to create sufficient deterrence against such conduct in the future. The Board also explained that the sanctions were also proportionate to the harm, which was the risk of an unjust result in the IPR, as well as the use of additional PTAB and party resources, coupled with delaying a final decision in each IPR.

Independent of the adverse judgment, the Board also found all but 8 of the 183 challenged claims to be unpatentable.

The Board rejected Petitioner’s request for other sanctions. This included Spectrum’s request for compensatory attorneys’ fees. The Board explained that an award of attorney’s fees would not be a sufficient deterrent for parties who decline to meet their duty of candor but are willing to pay compensatory fees as a cost of doing business and that adverse judgment alone creates sufficient deterrence. Lead Administrative Judge Braden disagreed and argued in her concurrence that attorneys’ fees would compensate the petitioners for the time and money spent uncovering the misconduct, as well as act as a further compounding deterrence.

Vidal Steps In

A month later, Director Vidal sua sponte ordered Director Review of the Longhorn sanctions decision without any explanation. Sua sponte Director Review is typically reserved for issues of exceptional importance. Vidal’s decision to take this matter up was not entirely unexpected given her recent pains to curb IPR abuses.

Director Vidal’s crackdown on IPR misconduct began in the summer of 2022, only months after receipt of a scathing letter from Senators Tillis and Hirono criticizing the USPTO for its failure to take steps to address perceived abuses of the IPR process in two IPRs filed by OpenSky and Patent Quality Assurance (“PQA”), respectively, against VLSI Technology. Because these IPRs were filed by newly formed entities with no apparent business function immediately after VLSI was awarded a $2.2 billion judgment against Intel, it was suspected they were filed simply in an attempt to extort money from VLSI. Those suspicions were confirmed in an email revealed by VLSI in which OpenSky’s counsel proposed a scheme in which it would actively work to undermine the IPR it filed in exchange for monetary payment. Aside from critiquing PTAB failure to curb such abuses, the Senators asked what sanctions the USPTO can impose on parties that file IPR petitions in bad faith and if the USPTO has exercised this authority to date.

Director Vidal’s response was swift. In a September 21, 2022, letter, Vidal affirmed the USPTO’s power to order sanctions for acts of misconduct, including “abusing discovery” and “abusing process.” She explained that the sanctions should be selected to “ensure compliance with the Board’s rules, to deter others from such conduct and, if appropriate, render whole the aggrieved party.” Vidal also provided historical data revealing that the PTAB has issued sanctions in 31 instances out of 59 cases in which sanctions were raised. However, these 31 cases equate to about only about 0.2% of all PTAB trials conducted since enactment of the American Invents Act. The data also revealed that the most frequent sanctions imposed have been orders to expunge documents, with the PTAB awarding attorneys’ fees in only three instances, and never entering adverse judgment on patentability.

Not even a month later, Vidal issued a precedential decision sanctioning OpenSky for numerous transgressions, including discovery misconduct, failure to follow Director Vidal’s orders, abuse of the IPR process and unethical conduct. OpenSky Indus., LLC v. VLSI Tech. LLC, IPR2021-1064, Paper 102 (PTAB Oct. 4, 2022) (precedential). Vidal concluded that OpenSky’s actions warranted “sanctions to the fullest extent of [her] power,” which in the end resulted in her ordering OpenSky to show good cause as to why they should not be ordered to pay compensatory expenses to VLSI. Vidal later issued a similar precedential order against PQA. Patent Quality Assurance, LLC v. VLSI Tech., LLC, IPR2021-01229, Paper No. 102 (PTAB Dec. 22, 2022). However, Vidal did not terminate the IPRs; instead, she allowed the challenges to continue, first with Intel as the petitioner, and later added back both OpenSky and PQA for jurisdictional purposes.

Vidal’s crackdown was not limited to the petitioners. Vidal separately formally admonished patent owner, VLSI, for making “misleading statements of law and fact” but concluded that such conduct did not rise to the level of a fee award. OpenSky Indus., LLC v. VLSI Tech. LLC, IPR2021-1064, Paper 138 (PTAB June 27, 2023) Ultimately, the OpenSky and PQA IPRs proceeded to final written decision in August 2023, with the Board holding VLSI’s patents unpatentable in both cases. Briefing on the issue of attorneys’ fees continues in both cases.

What Now?

Now that Vidal has turned her attention to the Longhorn sanctions, speculation abounds as what actions she will take. One distinct possibility is that Vidal will lift the sanction of adverse judgment. The Board’s only cited support for this sanction is a Federal Circuit appeal dating from 1994 (Abrutyn v. Giovanniello, 15 F.3d 1048, 1050-51 (Fed. Cir. 1994)) but the facts of that case are not analogous. In Abrutyn, the Federal Circuit upheld the PTAB entering a default judgment against a junior party in an interference for deliberately failing to comply with a filing deadline. The Board’s use of Abrutyn in support of its sanctions is thus not persuasive—rendering default judgment against a non-responsive junior party is not readily comparable with the Board canceling five patents as sanctions for a patent owner’s withholding of relevant evidence in five IPRs. Given this weakness in the Board decision, Vidal could reverse the adverse judgment, deciding that it is largely moot and perhaps not proportionate to the harm since the Board concurrently held all but eight patent claims invalid.

In any event, there is a reasonable likelihood that Vidal will order an award of compensatory attorneys’ fees to Spectrum in view of her sanctions decisions against OpenSky and PQA. As noted above, the Board specifically rejected attorneys’ fees as appropriate sanctions on grounds that they would not be a sufficient deterrent. This argument, however is in tension with Director Vidal’s recent precedential orders and Judge Braden’s concurrence. Puzzlingly, the Board focused only on the injury to the USPTO and the public of Longhorn’s conduct when determining appropriate sanctions and ignored the injury to Spectrum in expending time and money in bringing the withheld evidence to light.

Director Vidal may also weigh in on the merits of the Board’s holding that work product protection is inapplicable to scientific data in proceedings before the USPTO if it is material to patentability. A rule that all material factual work product is discoverable in proceedings before PTAB has raised significant concern among litigation counsel about the freedom to perform factual investigations to support one’s case without risking disclosure. This ruling also appears to be in tension with Federal Circuit precedent and Federal Rule 26(b)(3) which deems factual work product only discoverable if “the party is unable without undue hardship to obtain the substantial equivalent by other means.” Likewise, such holding does not square readily with 37 C.F.R. 42.51(b)(1)(iii) which provides that the requirement to serve relevant information that is inconsistent with a party’s position does not make discoverable anything otherwise protected by legally recognized privileges such as … attorney work product.”

Avoid the Nightmare

Whatever action Vidal takes in Longhorn, the PTAB’s recent sanctions orders serve as a warning that the Board is ready and willing to sanction litigants severely for misconduct. While we await Director Vidal’s ruling, what can practitioners do now to avoid the nightmarish fate of sanctions?

First, it should go without saying, but litigants before PTAB should be highly cognizant of PTAB discovery rules and orders and abide by them to the letter. If in doubt, raise your concern or disagreement directly with PTAB rather than privately interpreting a rule or order to your advantage. Litigants should also be exceedingly careful not to misquote or stretch an interpretation of relevant case law or the content of PTAB orders.

Second, PTAB litigants cannot rely on their own claim construction positions or their own arguments to avoid the duty to disclose material information. And, if in doubt as to relevance and/or as to whether work product or attorney client privilege protection applies to certain information, practitioners should openly raise their objection to disclosure at the time of filing of the relevant response with the Board.

Third, practitioners should be wary of the risks of performing testing in connection with PTAB/PTO filings. If test results are relevant to the patentability of the claims at issue under any argument or claim construction made by one’s opponent or the Board, such results are likely material and should be disclosed. Likewise, a party that has performed litigation-related testing prior to involvement in any post-grant proceedings at the USPTO should carefully examine whether the results of such testing should be disclosed to PTAB.

Image Source: Deposit Photos
Author: Momius
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