USPTO Proposes Formal Revamp of PTAB’s Discretionary Denial Practices

April 23, 2023

The USPTO has published a long-promised rulemaking proposal that would formalize and build on recent changes at the Patent Trial and Appeal Board (PTAB). That proposal, released on April 21, focuses in particular on the PTAB’s practice of discretionary denials in America Invents Act (AIA) reviews—most notably, those invoking the NHK-Fintiv rule, which allows petitions to be denied based on the status of parallel district court litigation. In addition to codifying some of NHK-Fintiv and the related “compelling merits” exception introduced last year, the rulemaking proposal would impose new corporate disclosure requirements on parties and revisit the Board’s approach to “repeated validity challenges to patent claims”. Among other changes, the USPTO is also considering whether to require that settlements and related documents be filed with the Board upon dismissal of an AIA review proceeding, and to allow institution to be denied for petitions from certain “for-profit entities” with business models that run counter to the intent behind the AIA.

The groundwork for the USPTO’s new proposal was laid by a Request for Comment released by the agency in October 2020 under then-Director Andrei Iancu. That brief notice explained that the Patent Office was “considering the codification of its current policies and practices, or the modification thereof, through rulemaking”. In particular, the notice signaled that the agency would seek to codify the NHK-Fintiv rule as well as other decisions from the PTAB’s Precedential Opinion Panel that allow the Board to deny institution based on so-called “follow-on” or parallel petitions (General Plastic and its progeny). More than 800 comments were submitted by the December 2020 deadline.

The most significant intervening changes to NHK-Fintiv, though, came soon after the April 2022 confirmation of current USPTO Director Kathi Vidal. That June, Vidal issued an interim guidance that in part sought to mitigate the impact of one of the rule’s most hotly debated factors—one that allows the PTAB to reject a petition if a district court’s scheduled trial date falls too close to the deadline for the Board’s final validity decision. Vidal’s memorandum also stated that in light of comments received through the October 2020 Request for Comment, the USPTO was “planning to soon explore potential rulemaking on proposed approaches through an Advanced Notice of Proposed Rulemaking”.

The resulting rulemaking proposal—as noted above, published in the Federal Register on April 21—contemplates far more sweeping changes than those in the guidance, seeking to “build on and codify existing precedent and guidance on Director’s discretion to determine whether to institute an” inter partes review (IPR) or post-grant review (PGR). These changes are intended to “better align the practices with the USPTO’s mission to promote and protect innovation and investment in the same, and with the congressional intent behind the [AIA] to provide a less-expensive alternative to district court litigation to resolve certain patentability issues while also protecting against patentee harassment”.

Required Disclosure of Corporate Relationships and Outside Funding

Given that multiple proposed reforms would require closer consideration of the relationships between certain parties, the USPTO took the opportunity to examine the current approach used by the PTAB in other contexts. Here the Patent Office noted that the Board considers “corporate structure, contract, or financial interest” in making real-party-in-interest/privy or estoppel determinations, and that it makes similar considerations in the context of discretionary denials. The PTAB also considers, under the General Plastic factors, whether parties are district court codefendants or whether one party joined another’s IPR petition. These criteria may no longer be sufficient, the USPTO argued: “[T]he current party relationship concepts applied in the discretionary denial context are arguably too limited in certain circumstances”.

As a result, the Patent Office proposes to adopt an overarching “substantial relationship” test that folds in the above factors as well as certain other considerations. Among those additional considerations would be to treat parties that are “involved in a membership organization, where the organization files IPRs or PGRs, as having a substantial relationship with the organization”. Here, the USPTO explained that “[t]here may be instances in which entities may pool their resources to challenge a patent. For example, where multiple entities are defending infringement claims in district court litigation, or have related interests in challenging the patentability of patent claims, they may join together to file a single challenge to the subject patent claims before the PTAB”.

Another related proposal being considered involves the mandated disclosure of information on corporate control and funding, broadly similar to the rules imposed last April, with some ongoing pushback, by Delaware Chief Judge Colm F. Connolly. That proposal would:

. . . requir[e] a patent owner and petitioner to disclose anyone with an ownership interest in the patent owner or petitioner, any government funding related to the patent, any third-party litigation funding support (including funding for some or all of the patent owner’s or petitioner’s attorney fees or expenses before the PTAB or district court), and any stake any party has in the outcome of the AIA proceeding or any parallel proceedings on the challenged claims.

Such requirements would possibly serve as a precondition for requesting discretionary denial. As detailed further below, the disclosure of third-party or government funding would also potentially be required to take advantage of proposed exemptions that would insulate small businesses from AIA review altogether.

The “Compelling Merits” Exception

Another aspect of the USPTO’s June guidance that would be codified under this proposal is the “compelling merits” standard, which essentially provides an exception to the NHK-Fintiv rule. As first detailed in that guidance and reiterated in the new proposal, this exception establishes that “when a challenge presents compelling merits the proceeding will be allowed to proceed at the Board even where the petition would otherwise potentially be a candidate for discretionary denial”. A petition presents “‘compelling merits’ when the evidence of record before the Board at the institution stage is highly likely to lead to a conclusion that one or more claims are unpatentable by a preponderance of the evidence”. The petitioner would have the burden to present evidence that leaves the PTAB with “a firm belief or conviction that it is highly likely that the petitioner would prevail with respect to at least one challenged claim”. Compelling merits is a higher standard than the “reasonable likelihood” one required for institution generally, the USPTO explains, and is also higher than the “preponderance of the evidence standard (more likely than not) that applies to final determinations of patentability at the close of trial”.

The rulemaking proposal further asks stakeholders whether compelling merits is the most “appropriate” standard for evaluating whether a petition presents sufficient merits to avoid a discretionary denial. Several potential qualifiers are also addressed: the proposal asks whether and to what extent compelling merits should apply “if the patent owner raises a factual question that cannot be resolved at institution (e.g., presenting evidence of secondary considerations of nonobviousness)”, what presumptions should apply, and “whether pre-institution discovery would be appropriate”. Additionally, the USPTO asks whether compelling merits should provide an exception to all potential avenues for discretionary denial, as detailed elsewhere in its proposal, whereas the currently used version of this standard does not in certain circumstances (such as for petitions challenging patents already finally adjudicated in AIA review or before a district court, as well as so-called “serial” petitions).

Petitioner Misconduct; For-Profit Entities

The rulemaking proposal also includes several provisions allowing discretionary denials based on concerns over a petitioner’s conduct or business model.

First, the proposal establishes that the USPTO would retain the “discretion to deny institution as a sanction or in response to improper conduct or gamesmanship”. This issue was recently the focus of considerable debate as a result of an evolving set of sanctions that Vidal imposed against two third-party challengers, OpenSky Industries and Patent Quality Assurance (PQA), over allegations that both had committed misconduct before the PTAB. In October 2022, Vidal demoted OpenSky 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 PQA for similar behavior and making additional misrepresentations. However, on January 27 and February 3, Vidal restored both PQA and OpenSky as petitioners and ordered OpenSky to pay attorney fees and costs to VLSI. On April 4, the PTAB then denied VLSI’s motion to terminate Intel, which had been designated lead petitioner—agreeing with Intel that claim preclusion does not apply here.

Second, the proposal cited concerns raised in response to the October 2020 Request for Comment that “some petitions are filed by for-profit entities who . . . may not have an apparent reason for challenging validity of patent claims”. Vidal had raised similar concerns in her sanctions rulings against OpenSky and PQA—in particular, with respect to the underlying motivation behind their IPR petitions. As a result, to lessen the impact of “abusive filings”, the USPTO stated that it was considering rules that “would limit institution on filings by for-profit, non-competitive entities that in essence seek to shield the actual real parties in interest and privies from statutory estoppel provisions”. Discretionary denial would be allowed for any petition filed by an entity that:

(1) is a for-profit entity; (2) has not been sued on the challenged patent or has not been threatened with infringement of the challenged patent in a manner sufficient to give rise to declaratory judgment standing; (3) is not otherwise an entity that is practicing, or could be alleged to practice, in the field of the challenged patent with a product or service on the market or with a product or service in which the party has invested to bring to market; and (4) does not have a substantial relationship with an entity that falls outside the scope of elements (1)–(3).

An entity would be “for-profit” if it does not qualify as tax-exempt under IRS rules; the USPTO is additionally considering whether to count a real party in interest or privy of such an entity as itself being for-profit, as well as an entity with any “substantial relationship” (as defined above) with a for-profit entity. Also on the table, per the Patent Office, are limits to the second factor above (“has not been sued”) that would allow petitions where a company has been threatened with litigation or otherwise has a reasonable apprehension of suit based on litigation already filed “against similarly situated companies”.

As for element four, the “substantial relationship” limitation, the USPTO floated the possibility that it would provide an exception for parties that “pool resources to challenge a patent”: as noted above, these would be entities that are “defending infringement claims in district court litigation, or have related interests in challenging the patentability of patent claims, [that] may join together to challenge the subject patent claims before the PTAB”. The proposal explained that such activity may still be consistent with the USPTO’s mission and the goals of the AIA “so long as the entities are real parties in interest or in privy”, or are not otherwise seeking to avoid provisions such as those governing estoppel. Moreover, the USPTO stated that it was considering whether to allow the “compelling merits” standard to override the “for-profit entities” exclusion altogether.

Small Business Exemption from AIA Reviews

To encourage innovation from startups, the USPTO has also proposed certain exemptions from AIA review for small businesses: For companies that qualify as “micro or small entities” at the time of a patent’s issuance, that are still “under-resourced” (based on an income threshold) at the time a petition is filed, and are commercializing the “subject matter of a challenged claim”, the petition should be discretionarily denied at the request of the patent owner unless there are compelling merits. This exemption would potentially require the determination of whether an entity has government funding or third-party litigation funding—possibly, by allowing the PTAB to inquire into “inquire into all ownership interests”—to prevent entities with such outside backing from “using this section to attempt to insulate their patents” from review.

Prior Adjudications of Validity

The USPTO has additionally proposed another set of changes related to parallel district court validity challenges. Under this provision, institution would be discretionarily denied when a district court or the PTAB has issued a final adjudication on the validity (meaning, a final decision on the merits that may be appealed) of claims that “substantially overlap the challenged claims” in the petition at issue. This would not apply where the petitioner has standing to pursue its validity claims in district court or “intends to pursue commercialization”, where the petitioner was not a real party in interest or privy of the prior petitioner, and where the petition meets the compelling merits standard.

The USPTO’s proposal also offers two proposed definitions for what would constitute a “substantial overlap” of claims. One proposal would find such overlap when at least one claim in a first claim set is “substantially the same” from a claim in another claim set—meaning, that the difference(s) between the claims being compared are not “material to patentability”. Also under consideration is a more flexible version of this test where overlap is assessed on a case-by-case basis.

Serial Petitions and Parallel Petitions

Further refinements would impact how the Board handles “repeated validity challenges to patent claims”. Given concerns that these so-called “serial and parallel petitions” can “potentially result[] in conflicting outcomes and overburden[] patent owners”, the Patent Office explained that it is “considering further modifying and clarifying circumstances in which the Board will deny review of” such petitions.

This practice is currently governed by General Plastic, a 2017 precedential decision that lays out the circumstances in which review can be discretionarily denied where a petitioner files multiple IPRs against the same patent. Such a determination is based on factors including whether the petitioner has previously targeted the same claims, whether it should have known about the prior art asserted in a follow-on petition, whether it had received the patent owner’s response in the first petition before filing the follow-on petition, and other considerations related to the timing between petitions. Subsequent decisions have extended certain aspects of General Plastic to encompass follow-on petitions from a first petitioner’s district court codefendant (Valve I) and a previously joined PTAB copetitioner (Valve II), and have placed limits on discretionary denials where the prior petition was also discretionarily denied.

The revised approach would replace the General Plastic factors with a version of its first factor alone (concerning petitions targeting the same claims):

Under the proposal, the Board will discretionarily deny . . . any serial IPR or PGR petition (with at least one challenged claim that is the same as a challenged claim in a previously filed IPR, PGR, or CBM petition) that is filed by one of the following: the same petitioner, a real party in interest or privy to that petitioner, a party with a significant relationship to that petitioner (as discussed in Valve I), or a party who previously joined an instituted IPR or PGR filed by that petitioner (as discussed in [Valve II]).

There would be two exceptions to this rule. First, discretionary denial would not occur if the earlier-filed petition was discretionarily denied or otherwise not resolved on the merits. Second, discretionary denial would not occur under certain “extraordinary circumstances”, such as where the patent owner changes the scope of the claims, the petitioner could not have reasonably known of the newly asserted prior art, or the petitioner raises a statutory challenge that is being raised for the first time with a “justifiable explanation”.

Meanwhile, for parallel petitions—those “filed against the same patent by the same petitioner or by a petitioner who has a substantial relationship with another petitioner challenging the same patent”—the USPTO’s proposed rule provides that “the Board will not institute parallel petitions unless the petitioner has made a showing of good cause as to why parallel petitions are necessary”. However, the USPTO acknowledged that there are circumstances that can justify parallel petitions, such as “when there is a dispute about a priority date or two different claim constructions, requiring arguments under multiple prior art references or mutually exclusive unpatentability theories”. The Patent Office’s proposed solution would include allowing impacted petitioners to pay higher fees for an expanded word limit, thereby allowing them to file “effectively two petitions as one long petition”; and to exempt sections addressing discretionary denial issues from the word limit altogether.

Validity Arguments Previously Considered by the USPTO

The Patent Office has also proposed changes related to discretionary denials where the USPTO has previously considered the asserted prior art or arguments, as provided under 35 USC § 325(d). Currently, those determinations are made based on a two-part framework established by the PTAB’s precedential Advanced Bionics v. Med-El Elektromedizinische Geräte decision, using a set of non-exclusive factors interpreting that ruling from its Becton, Dickinson v. B. Braun Melsungen decision. Three of the Becton, Dickinson factors ((a), (b), and (d)) “relate to whether the art or arguments presented in the petition are the same or substantially the same as those previously presented to the Office”. The other three ((c), (e), and (f)) “‘relate to whether the petitioner has demonstrated a material error by the Office’ in its prior consideration of that art or arguments”.

The proposed changes would “reflect many of the underlying principles” from those decisions but would supersede them and take a narrower view of which art and arguments are deemed to be “previously addressed”. Here, Section 325(d) would only apply where the USPTO “evaluated the art or arguments and articulated its consideration of the art or arguments in the record”: for example, if the record reflects that “the art was the basis of a rejection where the rejection was withdrawn or overcome by an amendment, was distinguished in a notice of allowance, or was discussed during an examiner interview”. This limitation on Section 325(d) would serve to “increase[] efficiency and lower[] the cost of proceedings for parties and the Board by providing a clear test that reduces unnecessary briefing”.

Other restrictions under discussion would limit such considerations to the challenged patent as well as “any parent application or other family member application of a challenged patent, but only if the claims of the parent application or other family member application contain or contained substantially the same limitations as those at issue in the challenged claim”. Limitations would be “substantially the same” only if the previously addressed prior art disclosure “contains the same teaching relied upon in the petition and that teaching was addressed by the Office”.

Discretionary Denials in Light of Parallel Litigation

The USPTO also seeks to codify practices related to discretionary denials based on the status of parallel district court litigation, by “proposing rules to install Apple v. Fintiv and related guidance”—including the June 2022 guidance—“with additional proposed reforms”.

Among those “additional proposed reforms” would be a rule that gives different treatment to post-grant reviews (PGRs), which may only be filed within nine months of a patent’s grant and allow a broader range of invalidity grounds (including Sections 101 and 112). Since the estoppel that attaches to a PGR is “broader than the statutory estoppel from an IPR proceeding”, this “lessen[s] the risks of conflicting decisions arising between the PTAB and district courts”. As a result, the USPTO is considering whether to exempt PGRs from discretionary denials based on discretionary denials.

The proposed rules would also bar discretionary denials based on the status of investigations at the International Trade Commission (ITC). As also contemplated in the June guidance, this is because the ITC cannot invalidate patent claims, and its patent invalidity rulings do not bind the USPTO or district courts—thereby eliminating the possibility of conflicting decisions.

If neither of those two circumstances counsels against discretionary denial, the USPTO would then follow one of two proposed approaches. Under the first, “discretionary denial determinations [based on parallel litigation] are governed solely by a clear, predictable rule”: the PTAB would deny institution in light of a parallel district court action “involving at least one of the challenged claims if the Board determines a trial in the district court action is likely to occur before the projected statutory deadline for a final written decision”. That determination would be based on median time-to-trial statistics for the district in question as well as factors including the judge’s caseload and the “availability of other case dispositions”.

While this broadly matches the current practice under the June 2022 guidance, an alternative rule provided by the USPTO would be new—under which an IPR would not be discretionarily denied based on a parallel district court proceeding if it is filed within six months of the service of the district court complaint. Rather than supplanting the one-year statutory bar, this would “instead merely offer an incentive for a petitioner to proceed promptly with any IPR petition”.

Under the second proposed approach, the “clear, predictable rule” detailed above would exist alongside a “streamlined version of one or more of the other current Fintiv factors” upon which parties and the PTAB would be able to rely. The USPTO explains that in light of the “highly fact-variant” nature of district court litigation, this approach could help avoid an “unduly harsh outcome” by limiting discretionary denials on this basis to the bright-line rule alone. Those remaining Fintiv-derived factors would include “(1) [p]ast and future expected investment in the parallel proceeding by the district court and the parties”, which resembles Fintiv factor three; “(2) [t]he degree of overlap between the issues in the petition and the parallel district court proceeding”, akin to Fintiv factor four; and “(3) [a]ny other circumstances that the parties contend are relevant to the Board’s exercise of discretion”, which is “similar to Fintiv factor 6”.

For both approaches, the USPTO explains that two safe harbors would apply. First, the PTAB would not discretionarily deny institution based on the status of parallel litigation “when the petitioner files a stipulation agreeing not to pursue potentially overlapping grounds in district court”. This safe harbor would codify another aspect of the June guidance, one that itself endorsed part of an existing practice that had developed at the PTAB: as the Board held in its precedential Sotera Wireless v. Masimo decision, no discretionary denial should occur in light of the parallel proceeding if a petitioner stipulates that it will not pursue “any ground raised or that could have been reasonably raised in an IPR” in the district court litigation. Such a stipulation “effectively minimizes concerns related to the overlapping issues and duplicative efforts that may result from parallel district court litigation”, the USPTO explained. The Patent Office is also considering removing this exception in favor of “making a Sotera stipulation a necessary but not sufficient basis for institution”. Alternatively, the proposal even contemplates replacing Fintiv “entirely by a Sotera stipulation requirement”.

The second safe harbor relates to district court stays: Under the rulemaking proposal, the PTAB will not discretionarily deny institution where the district court action has been stayed and is expected to remain so until the end of the IPR trial. “Alternatively, the district court can adopt a schedule that allows it to avoid unnecessary rulings on potentially overlapping issues and to take advantage of Board rulings while still permitting litigation to move forward”.

Parties Must File All Settlement Agreements

Finally, the USPTO proposes rule changes that would require parties to file copies of all settlement agreements, including pre-institution settlement agreements and understandings as well as collateral agreements referenced within. The proposal states that these suggested changes would “align” with President Joe Biden’s July 2021 executive order on promoting competition, and that “[h]aving a depository of all settlement agreements in connection with contested cases, including AIA proceedings, in the USPTO would assist the Federal Trade Commission (FTC) and the Department of Justice in determining whether antitrust laws were being violated”.

This change would build upon existing requirements that mandate the disclosure of post-institution settlements (35 USC §§ 135(e), 317(b), and 327(b)). The USPTO notes that PTAB panels have not consistently enforced those existing post-institution requirements, and underscores that under the proposal, “all settlement agreements between the parties made in connection with, or in contemplation of, the termination of an AIA proceeding would need to be in writing and filed with the Board”. That said, it is considering whether to allow a binding term sheet to be filed along with the notice of settlement as long as the full agreement is ultimately provided.

What Comes Next: Public Comment Period; Ongoing Litigation

Vidal has indicated that not every proposal contained in this notice of rulemaking will necessarily be reflected in the final rules. In a statement to IPWatchdog, Vidal indicated that the document reflects both the USPTO’s own proposals and those from stakeholders:

Some of these proposals are things we’re proposing, some came from the public that we want to hear responses on—we’re not necessarily going to move forward on every single thing or in exactly the way it’s articulated. So now is the chance for the public to comment at a high level, conceptually, and the next round of comments are going to be on the rules as drafted.

The USPTO will accept public comments on the proposal through June 20, 2023, and suggested to Bloomberg that it does not expect to extend this deadline—with Vidal stating, “We are going to try and move forward as swiftly as possible while being very deliberate and careful in what we do”.

The publication of a wide-ranging proposal that includes both the USPTO’s chosen reforms and those suggested by certain stakeholders could reflect a shift away from Vidal’s prior preference for interim guidance as a policy-shaping tool. In a late February interview with IAM, Vidal expressed the view that there remains value in pursuing changes at the PTAB both through formal rulemaking as well as through interim guidance, characterizing the latter as a halfway point between rulemaking and the use of her post-Arthrex director review power to unilaterally set policy, in terms of those mechanisms’ level of formality and finality. The director emphasized that rulemaking is valuable because it is “important to memoriali[z]e these types of things so that they don’t change over time” and gives the “public some certainty”. However, she also observed that beginning the reform process with an interim guidance allows the PTAB to consider the practical impact of changes before they are formalized: “The way we’ve done it is interim until final, and that’s worked really well because it’s taught what has worked well and what could be improved. By the time we go to rulemaking, we’ve lived with some of this for a little while”.

However, on March 13, the Federal Circuit partially revived a case filed by Alphabet (Google), Apple, Cisco, and Intel, alongside Edwards Lifesciences, with respect to their claims that the NHK-Fintiv rule is procedurally unsound—and should thus be set aside—because it was not implemented via notice-and-comment rulemaking in the first instance. It is possible that the use of interim guidance as a policy-testing approach could face obstacles depending on the outcome of this litigation, which is now back before the Northern District of California as to the rulemaking issue.

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