In the final months of 2022, USPTO Director Kathi Vidal issued an increasingly severe set of sanctions over alleged gamesmanship before the Patent Trial and Appeal Board (PTAB)—but she has now walked back some of those punishments. In October, Vidal demoted third-party inter partes review (IPR) petitioner OpenSky Industries to a silent understudy role for its abuse of the IPR process by making a set of unusual financial offers designed to “extract rents” from patent owner VLSI Technology LLC and joined copetitioner Intel, among other offenses. December saw Vidal double down, dismissing OpenSky entirely and doing the same to another third-party challenger, Patent Quality Assurance (PQA), for similar behavior and making additional misrepresentations. However, on January 27 and February 3, Vidal issued a new pair of orders in which she restored both PQA and OpenSky as petitioners, also ordering OpenSky to pay attorney fees and costs to VLSI.

OpenSky and PQA have both stated that they were formed as a response to the first verdict in VLSI’s litigation against Intel, which awarded VLSI $2.2B in March 2021. Each petitioner contended that by ensuring that a patent involved in such a large verdict would undergo a validity review, their IPR petitions would protect the “integrity of the patent system”. Yet in spring 2022, after the PTAB had already instituted trial in both actions, allegations of unscrupulous behavior came to light: VLSI disclosed that OpenSky had offered to sabotage its own IPRs in exchange for payment, prompting widespread outcry and leading Vidal to initiate director review in those proceedings. It was soon revealed that OpenSky had also sought payments, and even an acquisition offer, from Intel. Vidal issued a sweeping sanctions order against OpenSky in October as a result, finding that it abused the IPR process through this behavior and by failing to comply with discovery ordered during the director review. However, Vidal stopped short of dismissing OpenSky altogether, barring it from actively participating and making Intel the lead petitioner for remand proceedings.

In December, though, Vidal issued two follow-on sanctions orders that went even further. With the benefit of “additional time to consider this case” alongside PQA’s, Vidal now determined that “the best course of action is to dismiss OpenSky from its IPR to ensure that OpenSky does not benefit from its abuse of the IPR process”. This time Vidal also sanctioned PQA and dismissed it as well, concluding that it also had abused the IPR process—based on similar findings that PQA had also improperly sought to extract payments from VLSI and failed to comply with mandated discovery. Further justifying sanctions, Vidal held, was PQA’s misrepresentation that its engagement with an expert had been exclusive, as a result of which OpenSky was unable to separately retain that expert for crucial testimony—which led the Board to deny its petition. The rulings left Intel as the sole petitioner in both proceedings.

Vidal issued a third set of director review decisions in those IPRs on February 3, reinstating both of the petitioners to their respective proceedings. The director’s ruling as to PQA went into more detail as to the reasons why: As recounted by Vidal, her decision to reinstate PQA stemmed from a disagreement as to the USPTO’s jurisdiction over the petitioner. At first, PQA asked the director for the opportunity to show cause why it should not be dismissed and potentially be held liable for fees, a request the director granted. However, PQA then switched gears, filing a mandamus petition on January 24 that asked the Federal Circuit to review Vidal’s December director review decision against it and to lift the Board’s stay of the underlying IPR proceedings. Soon after, PQA “declin[ed] to further participate in its request for rehearing, now arguing that ‘as an unlawfully dismissed party,’ it is ‘no longer subject to the Office’s jurisdiction’” (as summarized by the director).

Vidal’s decision to vacate the portion of her December opinion related to dismissal, thereby reinstating PQA, was designed to prevent any attempt to avoid sanctions by not participating:

Now that I have vacated the portion of my order dismissing PQA from this proceeding, the predicate for PQA’s stated basis for declining to continue to participate in the rehearing proceedings it initiated (which are grounded in its lack of continuing party status) no longer holds true. While it may choose not to show cause, because PQA’s party status has been restored and because it has indisputably now received notice that it is facing possible sanctions, including a possible order requiring it to pay VLSI’s fees per 37 C.F.R. § 42.12(b)(6), PQA cannot avoid possible sanctions through continued non-participation.

Vidal further noted that while she had previously thought that PQA wanted to resolve the sanctions issue before the PTAB issued its final written decision (FWD), the petitioner’s mandamus request—which, as noted above, asked the court to lift the Board’s stay in order to proceed toward an FWD, “makes clear that is not the case”. As a result, Vidal lifted that stay without the Federal Circuit’s prompting, remarking that she had stated in the December order that she did “not consider a stay necessary while resolution of the sanctions question remains pending”. The decision did not deal with any other issues beyond those of the stay and reinstatement.

As for the OpenSky order, which began by also reinstating that petitioner, Vidal appeared to merely incorporate her analysis from the PQA decision by reference: After noting that she had restored PQA to its proceeding, the director briefly held that “[s]imilarly” she was “vacat[ing] the portion of her decision . . . dismissing OpenSky from this proceeding” (docket entry citation omitted).

The remainder of the order dealt with the issue of attorney fees, first addressing OpenSky’s various arguments challenging the director’s authority to impose fees in the first place. In particular, the petitioner had first argued that under the American Rule, each litigant must pay their own fees unless otherwise required by statute. However, Vidal countered that this was a sanctions order, not a fee shifting order, and that the American Rule does not apply when a party commits sanctionable misconduct. Additionally, OpenSky had asserted “that no statute authorizes attorney fees during an IPR proceeding” and “that the relevant statute regulating the conduct of IPRs (35 U.S.C. § 316(a))” contemplates sanctions but “does not mention attorneys’ fees”. Vidal responded that the regulation enacted pursuant to the authority granted by this statute, 37 CFR Section 42.12, expressly empowers the PTAB “to issue sanctions to punish and deter a wide range of misconduct”—including “an award of ‘compensatory expenses, including attorney fees’” (Section 42.12(b)(6)).

Second, OpenSky argued that it had not been afforded due process under the US Constitution and the Administrative Procedures Act. Specifically, it claimed that it had not been given notice that the director would consider abuse of process as a legal issue and that it was not provided the factual basis for this determination. OpenSky further asserted that the director had failed to define the standard for abuse of process here being applied and that it had not been apprised that its motivation for filing the IPRs, allegations of rent-seeking, or its apparent lack of participation in the IPR in the absence of such rent payments would serve as the basis for the sanctions ruling. Nor, it argued, was it given the opportunity to offer new evidence.

Vidal disagreed on each point, observing that her scheduling order “unambiguously explained that [she] would be investigating VLSI’s claims of abuse of process by OpenSky”—and that this order specifically asked whether the evidence (i.e., the evidence of misconduct submitted by VLSI and Intel) showed any abuse of process. OpenSky had failed to offer any new evidence in its favor, citing just one piece of evidence already on the record.

Third, OpenSky asserted that Vidal should not have made adverse inferences based on information it failed to produce, arguing that there was no evidence that any relevant documents were actually missing. The petitioner also insisted that it should have been offered the ability to cure after it objected to the need to file a privilege log (which would have detailed the privileged documents that the party had withheld and the reasons why).

Yet the director was unmoved, countering that the reason OpenSky had no time to cure was that it had filed its objection on the day discovery was due, rather than doing so earlier—and that, in any event, OpenSky had “indicated that it did not intend to produce a privilege log regardless of any ruling on its objections”. Nor was Vidal convinced that there were no relevant documents to produce, as some of the “missing documents” had been separately produced by VLSI and Intel. Moreover, Vidal again reminded OpenSky that she had “specifically warned” it that the failure to comply with mandated discovery would result in adverse inferences—noting that “[d]espite that explicit warning, OpenSky chose noncompliance”.

Vidal then proceeded to evaluate the impact of OpenSky’s misconduct, first rejecting its counterargument that it is immune from sanctions because its petition was meritorious. To the contrary, the director found that this argument ignored the intent behind the America Invents Act, which in part is to ensure the integrity of the patent system. Moreover, Vidal reiterated that it was OpenSky’s post-petition litigation misconduct, not the merits of the petition, that was the source of the sanctions. Later in the decision, Vidal also rejected OpenSky’s argument that its intent behind the petition—i.e., its profit motive—was the sole basis, and an impermissible one, for her sanctions against it. While “its intent informed [her] analysis”, Vidal explained, this was just one of many factors considered in her decision to impose sanctions, a decision she would have reached even in the absence of such intent.

Vidal further found that OpenSky’s misconduct had harmed VLSI, in addition to the previously identified harms to the patent system. While OpenSky argued that VLSI would have had to spend the same attorney fees during the IPR regardless of its misconduct, Vidal disagreed—noting that the patent owner raised arguments on the impact of that misconduct throughout the IPR, and that the entire director review process occurred as the result of said misconduct. The director also found that VLSI had suffered harm to due OpenSky’s discovery misconduct, as VLSI (and the director) had to evaluate the petitioner’s misconduct based on an incomplete record.

The director then concluded by ordering OpenSky to compensate VLSI for attorney fees during the IPR that resulted from its misconduct, as well as those incurred during the entirety of the director review process. However, Vidal limited these fees to the IPR in which the director review occurred (IPR2021-01064) and not a set of related IPRs. VLSI had also sought fees for two petitions that sought joinder to the -1064 IPR, but Vidal noted that the circumstances behind them were distinct: she found that it would not be appropriate to award fees for the one filed by Intel (IPR2022-00366) because “Intel appears to be another target of OpenSky’s misconduct” rather than having engaged in misconduct of its own. Meanwhile, the other IPR (IPR2022-00480) was filed by PQA, the misconduct of which was already under consideration in the director review discussed above (IPR2021-01229). Vidal additionally declined to award fees for two other OpenSky IPRs because they were not raised in the director review, though she noted that there may have also been misconduct in at least one of those proceedings (IPR2021-01056): OpenSky’s failure to engage a key expert indicated its intent to use the IPR as leverage against VLSI “but without the intent or expectation of litigating the proceeding through trial”.

Finally, Vidal opted to assess sanctions against OpenSky itself and declined to hold its counsel “jointly and severally liable”, as VLSI had requested—though the director reserved judgment as to the issue of whether OpenSky’s attorneys had “individually committed misconduct”.

Six days after that ruling against OpenSky, Vidal addressed an unusual dispute over an “unsolicited anonymous and improper ex parte communication regarding this proceeding” (as described by a USPTO supervisory paralegal) that had been sent to the US House Oversight Committee and the US Senate Judiciary Committee. The communication had been forwarded to the USPTO’s Patents Ombuds Office, which placed it on the record (in the form of two exhibits) under seal. A fight soon erupted over the proper treatment of those exhibits: PQA argued in a letter to the PTAB that they should be expunged from the record altogether, asserting that they “contain false and libelous allegations that are contrary to the record and are wholly unsupported” (though it did not detail those allegations). The petitioner further raised concerns that allowing such statements to remain on “the record sets bad precedent that would encourage shenanigans at the Patent Office”, under which a party could use the same tactic to “anonymously provide “self-serving (and unverifiable) statements” to the Patents Ombuds Office and then cite them in its proceeding.

Intel supported PQA’s request to expunge, per a statement included within PQA’s letter. In particular, it characterized the allegations as “false and malicious” and raised concerns that the sender could be linked to VLSI: “Without attribution it is unclear, for example, if the anonymous document was authored or commissioned by an entity that stands to gain from disrupting this proceeding, including VLSI, Irell & Manella and other attorneys for VLSI, Fortress (the hedge fund that controls VLSI), or one of VLSI’s ultimate investors—who VLSI has been unwilling or unable to disclose in district court proceedings”.

VLSI disagreed, first asking PQA to hold off on sending its letter and remove the above language until the parties could further meet and confer (a request that PQA apparently rejected, having already sent the letter). In a follow-up letter, VLSI alleged that one of the exhibits “contains serious and detailed allegations of misconduct on the part of PQA and Intel and raises new, material information directly relevant to the Director Review and this proceeding”. VLSI further contended that this exhibit was not an improper ex parte communication, as it had not been sent to the Board, but instead forwarded to it by Senate Judiciary Committee staffers. (The patent owner also described the exhibit with slightly more particularity as “an anonymous letter with attached evidence addressed to the Chair and Ranking Member of the House Oversight Committee”.) For these reasons, because the documents were not marked as confidential and had been been possessed by committee staff members with no ensuing restrictions, and in light of the public’s interest in the proceeding, VLSI argued that the exhibits should be made public. In response to Intel’s arguments, VLSI stated, “we do not know who prepared or submitted Exhibit 3030, and prior to reading it ourselves after the Director made it of record on Friday, had never seen it”.

Vidal denied both requests, however—concluding briefly, after recounting the above history, that the documents would merely remain under seal.

See here for more on Vidal’s October sanctions order, and here for further details on the follow-on order she issued in December.