PART 3: EFFORTS TO CLARIFY PATENT ELIGIBILITY UNDER § 101

In this four-part series, we take a look forward at the cases, legislation, and other trends that are likely to have a significant impact on intellectual property law and practice in 2020.  In the first two parts of the series, we looked at the IP issues currently pending before the Supreme Court and possible changes to the law of patent eligibility.

In this third part of the series, we look at several issues related to inter partes review proceedings that we expect to be hot topics in 2020, including:

• Whether the appointment of Administrative Patent Judges on the Patent Trial and Appeal Board (the “PTAB”) violates the Appointments Clause of the Constitution;

• Whether the PTAB will allow a greater number of claim amendments under the Pilot Program announced in March 2019;

• Whether the deadline to file an IPR petition should continue to run when an infringement case is dismissed without prejudice;

• Whether invalidation of patent claims in an IPR should retroactively annul district court decisions on infringement and validity; and

• Whether the PTAB will be able to coherently apply the new standard for identifying real-parties-in-interest.

1. Constitutionality of the PTAB

On October 31, 2019, the Federal Circuit released a landmark opinion in Arthrex, Inc. v. Smith & Nephew, Inc. holding that the appointment of Administrative Patent Judges (“APJs”) under the AIA violated the Appointments Clause of the Constitution.  In particular, the court found that APJs are principal officers subject to appointment by the President and confirmation by the Senate.  As such, the court determined that appointment of APJs by the Secretary of Commerce was unconstitutional.  Rather than striking down the Board in its entirety, however, the court instead severed the statutory provision allowing the dismissal of APJs “only for such cause as will promote the efficiency of service.” Without such protections, the court reasoned, APJs could be dismissed at will by the Secretary or Director, ensuring proper supervision and oversight and curing the constitutional defect.

The Federal Circuit then vacated and remanded the Board’s decision on appeal because it was made by a panel of APJs that were not constitutionally appointed at the time the decision was rendered. The Court limited the reach of its holding, however, “to those cases where final written decisions were issued and where litigants present an Appointments Clause challenge on appeal.” The court also made clear that institution decisions were not impacted by its holding, because “the statute clearly bestows [institution] authority on the Director pursuant to 35 U.S.C. Section 314.” And the court saw “no error in the new panel proceeding on the existing written record . . . .”

After the panel’s decision, the parties – including the USPTO as intervenor – filed three separate petitions for en banc review.  The patent owner sought rehearing on the issue of whether the panel’s remedy was sufficient and argued that the IPR should be dismissed in its entirety. In contrast, the petitioner and the USPTO sought rehearing arguing that the APJs were already inferior officers and even if they were not, that the en banc court should fashion a different remedy.

Key Takeaway

As of the date of this article, an order regarding the petitions for en banc review has not yet issued.  However, given the constitutional implications of the dispute, and the relative rarity of successful Appointments Clause challenges, there is a chance the issue may need to be ultimately resolved at the Supreme Court.

2. Whether the PTAB’s Pilot Program Will Result in More Claim Amendments

On March 15, 2019, the PTO announced a new pilot program that allows patent owners in IPR proceedings to request preliminary guidance from the PTAB regarding motions to amend.  Upon receiving such a request, the PTAB provides the patent owner with a non-binding assessment of whether the motion satisfies formal requirements – e.g., whether the claim amendments respond to an instituted ground, enlarge claim scope, and introduce new matter.  The PTAB also provides its initial views on whether the amended claims are patentable in light of the petitioner’s opposition to the motion to amend.

After receiving preliminary guidance, a patent owner may elect to proceed in one of two ways. First, the patent owner may submit a reply in support of the previously-filed motion to amend. Alternatively, the Patent Owner may file a revised motion to amend that addresses any deficiencies that the PTAB or the petitioner has identified.  If a revised motion to amend is filed, the PTAB will issue a new scheduling order that provides additional time for the parties to fully brief the revised motion.

To date, the PTAB has provided preliminary guidance in fifteen IPRs.  In twelve of the fifteen instances, the PTAB advised that the amended claims were likely unpatentable. In one case, the PTAB advised that some of the claims were likely patentable, but also that the amendments were directed to new matter. See ZTE (SUA), Inc. v. Cywee Group, Ltd., IPR2019-00143, Paper No. 35, pp. 4-10 (Dec. 5, 2019). In the remaining two cases, the PTAB found some or all of the amended claims patentable.  See U.D. Electronic Corp. v. Pulse Electronics, Inc., IPR2019-00511, Paper No. 19, pp. 7-13 (Feb. 4, 2020) and Smartmatic USA Corp. v. Election Systems & Software, LLC, IPR2019-00527, Paper No. 23 pp. 7-10, (Feb. 18, 2020).

The largely negative guidance provided to-date is, perhaps, unsurprising given that the PTAB issues its views after receiving the petitioner’s opposition to the proposed claim amendments, but before the patent owner submits a reply to the opposition. Thus, the PTAB often only has one side of the patentability story when it issues its guidance. The PTAB has recognized this procedural oddity in each of the guidance decisions issued to date. See, e.g., ZTE (SUA), Inc. v. Cywee Group, Ltd., IPR2019-00143, Paper No. 35, p. 3 (Dec. 5, 2019) (“We emphasize that the views expressed herein are subject to change upon consideration of the complete record, including any revision to the Motion filed by Patent Owner. Thus, this Preliminary Guidance is not binding on the Board, for example, when it renders a final written decision”).

Of the ten cases where preliminary guidance has been provided and the due date for filing a revised motion to amend has been reached, the patent owners have filed revised motions to amend in seven. The PTAB has not issued final decisions in any of these matters.  As such, it is too early to draw conclusions on whether having two bites at the amendment apple will improve the very low success rates of motions to amend.  Notably, as of the PTAB’s March 2019 Update, fewer than 4% of motions to amend had been granted.

Key Takeaway

Under the Pilot Program, the PTAB has provided patent owners with useful preliminary guidance on their motions to amend, including whether the motions are likely to succeed based on the existing record in the IPR.  The ultimate success of the Pilot Program, however, will be judged based on whether the program gives patent owners the practical ability to obtain appropriate claim amendments.  As final written decisions are issued in the early Pilot Program cases, we will learn more about how patent owners can effectively use preliminary guidance to craft successful amendments.  Ultimately, we expect to see increasing reliance on the Pilot Program in 2020 and an increase in successful motions to amend (assuming that the program is not discontinued).

3. Whether the Deadline for Filing an IPR Petition Should Continue to Run When an Infringement Case is Dismissed Without Prejudice

In a series of opinions – including Wi-Fi One, LLC v. Broadcom Corp. (Fed. Cir. 2018) – the Federal Circuit has held that the time period for filing a petition for inter partes review under 35 U.S.C. § 315(b) begins to run upon the service of an infringement complaint, even if the complaint is later dismissed without prejudice.

The WiFi One rule creates a strong incentive for an accused infringer to file an IPR petition even after an infringement case is dismissed.  At the same time, patent owners may be incentivized to file infringement cases and then voluntarily dismiss those cases in order to trigger defendants’ deadlines for filing their IPR petitions.  We expect these arguably undesirable incentives to impact IPR decision-making in 2020.  The Supreme Court may even intervene if it grants certiorari in Bennett Regulator Guards, Inc. v. Atlanta Gas Light Co. (Fed. Cir. 2018).

The decision in Bennett Regulator Guards reflects the implications of the WiFi One rule in practice.  In 2012, Bennett served Atlanta Gas with a complaint alleging patent infringement.  The complaint, however, was ultimately dismissed without prejudice due to lack of personal jurisdiction.  In response to the original complaint, Atlanta Gas filed an IPR petition in 2013.  The PTAB, however, dismissed this initial IPR petition because Atlanta Gas had failed to update its disclosure of real-parties-in-interest.  Atlanta Gas then filed a second IPR petition in 2015 that fixed this procedural deficiency.  The PTAB instituted inter partes review and ultimately found that all of the claims of Bennett’s patent unpatentable.

On appeal to the Federal Circuit, Bennett argued that the second IPR petition was untimely under § 315(b) because the petition was filed more than one year after service of the original infringement complaint.  Even though the original complaint was dismissed for lack of personal jurisdiction over Atlanta Gas, the Federal Circuit held that the WiFi One rule applies.  The court reasoned that serving a complaint “unambiguously implicates” § 315(b) and that “the complaint’s subsequent success or failure” is irrelevant.

Atlanta Gas has petitioned for Supreme Court review, arguing that dismissal of a complaint without prejudice should reset the time-bar calculation under § 315(b). Atlanta Gas argues that a contrary result would have the effect of triggering the § 315(b) time bar when any fatally defective “complaint” is served, even where subject matter or personal jurisdiction are missing.

While this issue plays out at the Supreme Court, the PTAB’s Precedential Opinion Panel (POP) has recently followed the Federal Circuit’s reading of § 315(b) in GoPro v. 360Heroes, finding that § 315(b)’s language is “plain and unambiguous” and bars the filing of an IPR petition where the Petitioner was served with an infringement counterclaim more than one year before, even though the Patent Owner lacked standing to sue for infringement at the time of the counterclaim.

Key Takeaways

Under the WiFi One rule, dismissal of a complaint alleging infringement is not necessarily the end of the road for an accused infringer.  If the complaint is dismissed without prejudice – for example, for failure to state a claim under Fed. R. Civ. P 12(b)(6) – the patent owner may still file a new lawsuit in the future.  In the meantime, the accused infringer’s time to file an IPR petition continues to run.  While it may be unattractive to incur the cost of an IPR petition when no infringement case is pending, filing an IPR petition may be the only way to ensure the accused infringer access to an IPR proceeding if the patent owner later files a new lawsuit.

4. Impact of IPR Decisions on Parallel District Court Proceedings

As IPR proceedings have grown in popularity, it is increasingly common to have parallel cases before the district courts and the PTAB concerning the same patent.  In some instances, the district court may find that a patent is valid and infringed only to have the PTAB later issue a final written decision invalidating the same patent.  The risk of such inconsistent judgments is particularly acute where the pendency of the infringement actions is long, such as where there is a remand of an aspect of the infringement decision after appellate review.  Inconsistent judgments can also commonly arise where the patent owner files a series of lawsuits and the parties to the later-in-time lawsuits petition for IPR long after the earlier lawsuits were initiated.

The Federal Circuit’s recent decision in Chrimar Sys. v. ALE United States (Fed. Cir. 2019) provides a reminder of the risks that an IPR proceeding can pose to a patent owner even years after the patent owner succeeds in a district court infringement case.

In 2015, Chrimar filed suit against ALE USA, Inc. alleging infringement of four patents. Chrimar prevailed following a jury trial, overcoming ALE’s invalidity defenses. ALE appealed the district court’s claim constructions and several evidentiary issues. In 2018, the Federal Circuit reversed the district court’s claim construction for one of the four patents (the ’012 patent) and remanded, but did not otherwise criticize the district court’s infringement and validity findings.

While the district court trial and appeal played out, other companies challenged Chrimar’s patents before the PTAB.  Ultimately, the PTAB found all of the relevant claims of the four patents unpatentable. Chrimar appealed those decisions.

ALE sought a stay of the remand proceedings before the district court in view of the PTAB’s unpatentability decisions.  In response, Chrimar sought to insulate the prior judgment from further review by moving to dismiss its remaining infringement claims under the ’012 patent and granting a covenant not to sue ALE on that patent.  Chrimar argued that these steps eliminated all non-final issues from the remand proceeding.  Over ALE’s objection, the district court dismissed Chrimar’s infringement claims for the ’012 patent and issued a final judgment, reasoning that there was nothing left to decide or stay.  ALE appealed.

The Federal Circuit heard ALE’s appeal of the district court judgment and Chrimar’s appeal of the PTAB’s unpatentability decisions on the same day.  On September 19, 2019, the Federal Circuit issued a Rule 36 affirmance of the PTAB’s decisions.  In a non-precedential decision on the same day, the Federal Circuit held that the PTAB’s unpatentability determination had “an immediate issue-preclusive effect on any pending or co-pending actions involving the patent[s],” consistent with its holdings in XY, LLC v. Trans Ova Genetics (Fed. Cir. 2018) and Fresenius USA, Inc. v. Baxter Int’l, Inc. (Fed. Cir. 2013).  The court explained that an action remains pending until it is final (i.e., where there is “nothing for the court to do but execute the judgment”) and that “finality generally does not exist when a direct appeal is still pending.” As a result, IPR decisions issued nearly two years later effectively nullified district court determinations that Chrimar’s patents were valid and infringed.

But the result reached in Chrimar seems to be dependent on the wording of the order the Federal Circuit issues in connection with its remand decisions.  Indeed, the Federal Circuit appears to have reached the opposite result in the long-standing patent dispute between Apple and VirnetX. In this dispute, an Eastern District of Texas jury found that Apple’s Facetime and VPN on-demand products had infringed four of VirnetX’s network security patents in 2012, awarding VirnetX $368 million in damages. On appeal, the Federal Circuit largely upheld the original verdict, but remanded for a second damages trial in 2016, where a jury awarded VirnetX $439 million. Apple again appealed.

While the damages issues bounced between the trial court and Federal Circuit, Apple and others challenged VirnetX’s patents at the USPTO, via a host of reexaminations and IPRs. The USPTO eventually found unpatentable all of the claims infringed by Facetime and all but one of the claims infringed by the VPN on-demand product. VirnetX appealed the decisions from the USPTO.

The competing damages and unpatentability appeals were pending together at the Federal Circuit.  Rather than simultaneously deciding all the damages and patentability issues at play, the Federal Circuit first issued a summary affirmance of the district court’s damages decision on January 15, 2019.  The Federal Circuit then affirmed the various unpatentability decisions by the USPTO on June 28 and August 1, 2019.  Apple sought relief from the damages decision through various requests for rehearing at the Federal Circuit, which were all denied, and via a certiorari petition, which was also denied.  Apple has, however, filed another attack on the decision back at the district court via a Rule 60(b) motion.  The trial court has yet to address Apple’s motion.

Key Takeaway

We expect the frequency of inconsistent district court and PTAB judgments to increase as the number of parallel proceedings increases.  We also expect to see litigants test the boundaries of so-called Fresenius preclusion in 2020.  On the patent owner side, we expect calls for the Supreme Court to intervene and hold that the PTAB cannot override prior infringement and validity determinations rendered as part of an Article III court proceeding.  On the accused infringer side, we expect to see calls for the Federal Circuit to handle simultaneous district court and PTAB appeals in a consistent fashion.  Also, when there is a possibility of an intervening IPR decision, we expect accused infringers to attempt to slow the pace of district court proceedings and related appeals.

5. Difficulties in Determining a Real Party-In-Interest under the Current Standard

A petition for inter partes review must identify all real-parties-in-interest (“RPIs”) to the petition.  Since its inception, the PTAB generally focused its RPI analysis on whether a third party provided direct funding for, or asserted control over, an IPR.  In 2018, however, the Federal Circuit held in Applications in Internet Time LLC v. RPX Corp. that the PTAB must apply a more “flexible” approach to identify RPIs.  The Federal Circuit explained that this “flexible approach” looks at “both equitable and practical considerations, with an eye toward determining whether the non-party is a clear beneficiary that has a preexisting, established relationship with the petitioner.”

The Federal Circuit’s “flexible approach” to identifying RPIs has resulted in substantial uncertainty in the wake of the AIT decision. If read literally, nearly every corporate affiliate of a petitioner would have a “preexisting relationship” with the petitioner and stand to benefit from a successful IPR petition.  A petitioner’s business partners and customers would also likely fit this description.  Moreover, members of a traditional district court joint defense groups would also arguably satisfy the “flexible” criteria set forth in AIT.

Highlighting the potentially expansive (and ambiguous) nature of the AIT “flexible approach,” the PTAB has now identified Ventex Co. Ltd. v. Columbia Sportswear North America, Inc., Case IPR2017-00651 (PTAB Jan. 24, 2019) (Paper No. 148) as a precedential decision.  In Ventex, the PTAB found that a party to an indemnification agreement and exclusive manufacturing agreement with the Petitioner was an RPI that should have been identified in the petition.

Adding to the uncertainty, a different Federal Circuit panel recently addressed the RPI analysis. While the panel recognized the holding of AIT, it focused its analysis on the Patent Owner’s admission that there were no facts in the record that the allegedly missing RPI actually wrote the IPR petitions or controlled the IPR proceedings.  This would imply that, at least before some panels, that the old funding or control analysis still carries weight as part of the “flexible approach” mandated by AIT.

In the meantime, while PTAB panels refer to the “flexible” analysis of AIT, they generally hew closer to the old standard.  For example, PTAB panels have rejected arguments that an RPI relationship is created by (i) general membership in a patent defense group where there was no direct payment for, control of, or obligation to file the subject IPR; (ii) general business relationships; or (iii) extensive development and manufacturing relationships with the petitioner. In at least one case, however, the PTAB has held that a third party was an RPI based on a development agreement that included various provisions related to intellectual property protection and indemnification.

Key Takeaways

The Federal Circuit’s AIT decision has injected significant ambiguity into the identification of RPIs. As the PTAB’s Ventex decision illustrates, the analysis now goes far beyond whether a third party is actively involved with the IPR and now implicates situations where the third party simply has a relatively close business relationship with the Petitioner.  As 2020 unfolds, we expect to see further litigation, both at the PTAB and Federal Circuit level, as to the outer bounds of the RPI analysis. Patent holders will seek to build on cases like Ventex to implicate as many general business relationships as possible, while Petitioners will seek to keep the focus on factors akin to those at issue in the prior funding and control analysis.

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In the last installment of our four-part Intellectual Property Outlook series, we will look at possible IP-related legislation in 2020.