The ongoing battle over the proper remedy for Patent Trial and Appeal Board (PTAB) petitioner misconduct took a dramatic turn this past week. On October 4, USPTO Director Kathi Vidal issued a sanctions order against third-party challenger OpenSky Industries, taking the company to task over its behavior in an inter partes review (IPR) against a patent asserted by VLSI Technology LLC against joined petitioner Intel. Vidal found that OpenSky had abused the IPR process by making a set of unusual financial offers to both parties—offering to self-sabotage its IPRs and seeking payments from both VLSI and Intel—and by failing to comply with related mandatory discovery. However, although Vidal has barred OpenSky from further participation, she will allow its IPR to continue with Intel as lead petitioner, while floating the possibility that OpenSky may owe damages and attorney fees to VLSI. The decision has already cost OpenSky its PTAB counsel.

Controversy over OpenSky’s Offers Spurs More Controversy, Leading to Director Review

OpenSky and another PTAB challenger also hitting VLSI, Patent Quality Assurance (PQA), have stated that they were both formed as a response to the first verdict in VLSI’s litigation against Intel, which awarded VLSI $2.2B in March 2021, in order to file the IPR petitions here at issue. The petitioners cited the need to protect the “integrity of the patent system”, per the NHK-Fintiv rule, as justifying the PTAB’s exercise of its discretion to institute—citing concerns over the fact that the two challenged patents had led to large damage awards without ever having their validity tested. Substantively, both petitions largely mirrored the arguments from two earlier petitions from Intel that had been discretionarily denied under the NHK-Fintiv rule. The PTAB instituted the OpenSky IPR here at issue in December 2021, finding the move justified in spite of the NHK-Fintiv and General Plastic factors, the latter concerning the discretionary denial of follow-on petitions. Another Intel IPR was subsequently joined to OpenSky’s.

However, the OpenSky IPR soon became the target of broader public scrutiny, after VLSI disclosed an email that it received from OpenSky’s counsel in a related IPR in which the attorney proposed both that it work with VLSI to essentially undermine the PTAB proceedings between them in exchange for payment. Since PQA had also filed an additional IPR against the same patent, seeking joinder to OpenSky’s, the attorney further suggested that they sabotage the PQA IPRs by delaying the filing of its response, as well as related expert testimony, to short-circuit PQA’s joinder motion (and thus ensure that PQA’s IPR could not continue after an OpenSky/VLSI settlement).

By that point, the dispute had even attracted the attention of Congress. In April, Senators Mazie Hirono (D-HI) and Thom Tillis (R-NC) sent Vidal a letter expressing concern over the OpenSky IPRs and asking her to take action against such practices. This led Vidal to initiate director reviews in the OpenSky and PQA IPRs, doing so sua sponte (i.e., at her own initiative, without the request of a party) for the first time since that interim post-Arthrex program was created under her predecessor. Vidal then ordered the parties in the OpenSky and PQA IPRs to brief a series of questions related to VLSI’s allegations, asking for details on the petitioners’ purpose, management, and interested parties.

The resulting briefs in that director review proceeding revealed further allegations of misconduct, as Intel asserted that OpenSky had made it a series of unusual offers as well—at various points asking Intel to acquire OpenSky outright, proposing that Intel pay it “success fees” should the IPRs succeed, and requesting that Intel assist with the IPR after it encountered budgetary constraints. Intel explained that it had rejected all financial offers, opting only to draft the petitioner’s reply brief after it became clear that OpenSky would not otherwise “zealously prosecute” the IPR due to limited funds. Also briefed extensively was the issue of potential sanctions, hashed out in briefs from the parties as well as various other interested amici.

Vidal’s Director Review Decision: Discovery Violations and Abuses of Process Warrant Sanctions

-  Discovery Violations

Vidal’s October 4 director review decision began by detailing the “long and complex history” recounted above, turning next to OpenSky’s failure to comply with mandatory discovery. Vidal rejected each of OpenSky’s of various objections to that discovery—including arguments that it violated Arthrex (which Vidal found unsupported), exceeded the bounds of permissible discovery at the PTAB (to which Vidal noted that the “interest of justice” allowed by statute provides the necessary authority), and other procedural, Constitutional, and policy-based challenges. The Director then proceeded to find that OpenSky had failed to comply with the discovery obligations imposed by her July scheduling order in two overarching respects, each of which she found to be independently sanctionable.

First, Vidal found that “OpenSky refused to produce confidential documents under seal, or a privilege log of what was not produced”, taking particular issue with its assertion that it would not provide any privileged materials in direct contradiction to the scheduling order. Second, Vidal found that OpenSky’s responses to the interrogatories provided in that July order—including responses related to its corporate formation, communications with the other parties, whether it could be subject to infringement claims from VLSI, and whether others could be designated as its real parties in interest—“are inadequate and lack evidentiary support”. Vidal found that OpenSky’s narrative alleging falsehoods by VLSI was “largely unsupported”, determining in part that OpenSky had wrongly substituted its own determinations on relevance for the director’s; and that it had improperly sought to shield communications discussing settlements under Federal Rule of Evidence 408, which governs such evidence’s admissibility at trial and not its discoverability. Perhaps most significantly, Vidal flagged OpenSky’s argument that it had never conditioned any action related to this proceeding on payments or other consideration, finding that this was both unsupported by the petitioner’s own evidence and directly contradicted by material provided by VLSI and Intel.

Underscoring that “OpenSky should not be allowed to profit from its discovery misconduct”, Vidal “determine[d] that the proper sanction is to hold disputed facts as established against OpenSky”.

-  Abuse of Process

Vidal then turned to the question of OpenSky’s alleged abuse of process, asserting that the “[a]buse of [America Invents Act (AIA)] proceedings undermines” the “important” policy objects behind that law—and that “the Office will not tolerate it”.

One such goal undermined by conduct like OpenSky’s, per Vidal, is the “integrity of the patent system”. Here, Vidal found that the petitioner “was using IPR process to extract payment from either Intel or VLSI without meaningfully pursuing unpatentability grounds”, which she distinguished from typical adversarial settlement negotiations and found to be an “an abuse of process warranting sanctions”. Examples of such abusive conduct could be found throughout the record established by VLSI and Intel, Vidal found, including with respect to its proposals to VLSI, Intel, and then VLSI again; its scheme as to subverting joinder by PQA; and then its renewed push to convince Intel to pay it or help it with the IPR.

While Vidal noted that Congress did not establish a standing requirement for the AIA review regime, she found that “where a petitioner has not been sued for infringement, and is a non-practicing entity, legitimate questions may exist regarding whether the petitioner filed the petition for an improper purpose or one that does not advance the goals of the AIA or this Office”. Although Vidal further acknowledged that “it is not per se improper for a person not charged with infringement to file an IPR petition, the posture of a petitioner, in conjunction with other surrounding circumstances, could raise legitimate questions about whether the petition is reasonably designed to advance the beneficial aims of the AIA or this Office and whether, in addition, the filing amounts to an abuse of process”.

Such was the case for OpenSky, Vidal determined, finding that its deficient discovery responses counseled an adverse inference as to each of its factual assertions to the contrary with respect to its potential infringement liability and its stated goals. Also raising “legitimate questions” as to the propriety of OpenSky’s IPRs under the circumstances, per Vidal, was the proximity of its IPRs to the VLSI infringement verdict, particularly one of that size. Under the circumstances, that timing further “establishe[s] that OpenSky was formed for the express and sole purpose of extracting payment from VLSI or Intel”.

OpenSky’s payment requests also constituted abuse of process, Vidal additionally ruled. She contrasted the settlement offers common to litigation with the unusual behavior here: “[S]eeking compensation from both the patent owner and another petitioner in exchange for advocacy against whichever party does not pay” (emphasis in original). “[S]uch double-dealing suggests that a petition was filed purely to extract rents, in either direction, rather than for legitimate purposes”—a determination based on evidence that Vidal found to be “both strong and concerning”. That evidence included communications with Intel regarding OpenSky’s budgetary constraints: the fact that it “did not budget for litigating this proceeding throughout its expected life . . . establish[es] that it did not intend to pursue the patentability merits but instead intended to leverage the IPR’s existence only to extract a payout from one side or the other”. Further supporting such an inference of rent-seeking was OpenSky’s “focus on settlement or reimbursement”, as shown by the fact that it kept seeking payments from Intel rather than “vigorously litigating the IPR, as would be expected of a lead petitioner”.

Another point weighing against OpenSky under the facts at hand was its filing of a petition virtually identical to Intel’s, as well as its filing a copy of Intel’s expert declaration without advising/contacting that witness or securing his availability to testify. Under the circumstances, “this conduct suggests that OpenSky was attempting to file a petition with the lowest possible cost in an effort to generate leverage against VLSI, but without the intent or expectation of litigating the proceeding through trial”.

Taken together, Vidal concluded that “OpenSky’s conduct has been an abuse of the IPR process, the patent system, and the Office. The totality of OpenSky’s conduct evinces a singular focus on using an AIA proceeding to extort money, from any party willing to pay, and at the expense of the adversarial nature of AIA proceedings”.

-  Remedies for Abuse of Process

Vidal concluded by addressing the nature and extent of the sanctions to be imposed against OpenSky for its abuses of process. Notably, she declined to dismiss the IPR altogether, finding that the Patent Office’s “goals of securing reliable patent rights and removing patents that do not support innovation” outweighed the public’s interest in deterring abusive conduct. However, she established that OpenSky could no longer actively participate in the IPR, demoting it to a “silent understudy role for the duration of this proceeding”—thereby removing “its ability to leverage that control for or against a particular party”—and “temporarily elevating Intel to an active party”.

Vidal also found it appropriate to condition the question of whether to terminate “on the application of the compelling-merits standard”, a threshold that she detailed in her June guidance on discretionary denials—thereby only allowing the IPR to continue “if the panel determines that the unpatentability merits were compelling as of the time of institution and on the record as it existed at that time”. She then remanded for the Board to consider whether to continue under that standard, which she underscored is higher than the “reasonable likelihood” standard typically applied at institution.

After briefly denying VLSI’s request for in camera review of certain documents from the other parties, she proceeded to order OpenSky to “show cause as to why it should not be ordered to pay compensatory expenses, including attorney fees, to VLSI as a further sanction for its abuse of process”, requiring the two parties to each brief the issue within two weeks.

OpenSky will now have to find new representation as it contemplates a path forward, as its PTAB counsel has since moved to withdraw from the case over the petitioner’s “vehement…oppos[ition”—indicating that its continued representation could otherwise lead to a violation of USPTO legal ethics rules". The petitioner’s attorneys at Amin, Turocy and Watson LLP cited the extremely short available timeframe imposed by the director’s order, as well as by an intervening federal holiday, as allowing the firm to file its motion without leave from the Board.

For additional details on the OpenSky IPRs, including the allegations raised by VLSI and Intel, see “VLSI PTAB Challenger Sought Payments from Multiple Parties, Filings Suggest” (August 2022).