Sep 16, 2015

Patent Reform Over Patent Quality

Over the past few years, patent reform has rapidly escalated from a niche debate to a hot topic making headlines in the US and around the world. Fervor surrounding the business models of so called “patent trolls” and major lobbying efforts from the tech industry, pharma, academia, and others have put the spotlight on the US patent system. With Congress back in session, the debate shows no sign of dying down. Unfortunately, few have stopped to look at the facts, and question the reality behind the rhetoric. Is it really time for another legal overhaul only four years after the America Invents Act (AIA)?

Skyrocketing patent litigation rates were at the roots of the original reform push. Especially with several sensationalized cases capturing the public’s attention. To address the situation, Congress passed the AIA, bringing a number of systemic reforms to fruition. However, perhaps the most important change, and certainly the element at the center of today’s debate, was the introduction of the Patent Trial and Appeal Board (PTAB) and the post grant review procedures it oversees, including inter partes review (IPR).

With 2015 litigation rates looking likely to once again break record highs, many have begun to question if the AIA went far enough. Adding fuel to the fire is the controversy surrounding the PTAB. In its three years of patent review, the PTAB has been called a “patent death squad” and accused of making it too easy to strip patent owners of their rights. The steady stream of criticism has also included allegations that the system is being abused by bad actors.

Rather than jumping headlong into the debate, it is time to take a look at what is really happening with the patent system and the PTAB, and to rationally assess the pros and cons of more reform. To begin with, a look at the real statistics is necessary for a reasoned analysis.

From the PTAB’s first case through July 31st 2015, they have received 3,655 petitions, the majority of which were IPRs (3,277 petitions). Of those petitions, 1,389 have had trials instituted. Looking at the claims challenged in IPRs that have already been concluded, 25%, or 4,496 of 17,675 claims, were found to be unpatentable. While these rates are significant, they seems to speak to a long term issue with the initial patent application review process that allows weak patents to enter the system, rather than a “death squad” knocking out any claim that comes before the panel of judges.

Changes in the Works: Inside the System

While the public has loudly called for a massive, system-wide overhaul, incremental change is already taking place behind the scenes. The USPTO has not left the PTAB to muddle on alone and has always intended periodic reforms as time allows for an ongoing evaluation of the system.

The USPTO launched a first set of “quick fix” rules changes on May 19th, 2015. These updates came following a lengthy public feedback process and were composed largely of what the USPTO called "more ministerial" changes, reflecting administrative updates including changes to page limits and issues relevant to discovery and procedure.

Those changes were followed on August 19th with a much more substantive release of a 113-page set of proposed amendments to AIA post-grant proceedings. USPTO Director Michelle Lee discussed the proposal in a blog post which outlined the key changes and the reasoning behind them. There are important reforms included in the package designed to tackle some of the same issues raised by Congress for legislation.

First, to address concerns that the post grant review system is being abused, all filings parties would be required to provide a rule 11-type certification, meaning that they would have to certify that the filing “is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of the proceeding.” The certification also includes guarantees from the filer that the claims are non-frivolous and warranted by law, and that any factual contentions have evidentiary support. Other proposed changes include the adoption of the Phillips standard for claim construction for claims of any patent that will expire prior to the issuance of a final PTAB decision. The most controversial element to these changes was the USPTO’s decision not to include any update to current amendment practice, leaving many patent holders dissatisfied.

On August 25th, the USPTO also solicited comments on a potential pilot program to increase the efficiency of the PTAB review process. This new program, if it were implemented, would leave the determination of whether to institute an IPR to a single patent judge, with two additional judges to be assigned only if a trial is instituted.

When looking at whether either legal reform, or a major patent system overhaul is necessary, it is important to note these steps, and that the USPTO is engaged in a dynamic process of internal reform. The PTAB is a relatively new option, with only three years of casework under its belt, so it is to be expected that there are some kinks to be ironed out. However, does that call for a reworking of its legal foundation at the congressional level, or are the regular, incremental changes being implemented by the USPTO the better option to subtly adjust course?

Both current USPTO Director Michelle Lee and past director David Kappos have been diplomatic, but vocal in their concerns about the potential effects of additional congressional patent reform. Kappos has authored a number of strongly worded op-eds about the risks of weakening the patent system, both in terms of future innovation and economic impact. Lee, on the other hand, has confined her comments to official releases accompanying internal reform announcements but analysts suggest that her approach has been to demonstrate actions being taken as a message to Congress that additional help is not required.

Changes in the Works: External Forces

However, despite the changes in progress at the USPTO, external demand for reform remains strong. Congress is back in session and there are six reform options on the floor:

Congress has been targeted with serious lobbying on both sides of the patent reform debate, resulting in the current batch of reforms under consideration and the 14 bills that did not make it to law during the 113th Congress.

Coming down on the side of maintaining or strengthening the current system, we generally find the pharmaceutical industry, research based academic institutions, and companies with large revenue streams based on patent licensing. For these business models, the revenue from a single successful patent can fund the ongoing research for numerous new potential products. These businesses also tend to lobby for a weakened PTAB as the risk to their models of having even a single claim in a key patent invalidated is quite high. On the other side of the debate tend to be less mature technology companies and those frequently targeted for patent licensing who see the patents eliminated by PTAB as weak patents that should not have been granted in the first place, and now can no longer be used against them by non-practicing entities (NPEs) or others.

One key driver for patent reform in general, and PTAB reform specifically, has been the unforeseen use cases that have recently developed. The most important example by far has been Kyle Bass and his Coalition for Affordable Drugs (CAFD). The stated goal of the CAFD is to invalidate weak pharma patents at the PTAB, thus opening the way for more affordable generics. The flip side of the model is that Bass has been shorting the stocks of the companies whose products he has challenged, leading critics to claim an abuse of the system.

Bass’s rebuttal is that the patent industry is about money. Patent applications are filed to guarantee a monopoly on profits from an invention, and other parties challenge those patents so they will not have to pay licensing fees. Bass claims that he is just another part of the system, and if the patents are weak and get invalidated, it is irrelevant what other actions he takes. Critics respond that this was clearly a deviation from Congress’s goals for the PTAB when it was designed.

Bass has now filed a total of nineteen different IPR petitions against patents belonging to ten pharmaceutical companies. As Bass has proceeded resistance has grown, and the companies he challenges have started to call for sanctions against Bass. While the CAFD had some early success, its most recent attempts have been blocked. Petitions filed against Acorda and Biogen were both recently denied institution as the debate on the topic exploded. However, in both cases the PTAB denied the cases on the quality of the art, and dodged any precedent setting decisions about abuses of the system. If the PTAB were to decide that Bass’s petitions constitute an abuse of process, they could impose sanctions, including compensatory expenses or dismissal of the petition. However, thus far the Board has avoided an overt declaration of abuse or sanctions.

So What Now?

Given the facts, it is clear that there is room for improvement in the patent system. The overall litigation rate is extremely high and the PTAB is still working to define the appropriate use of its process. However, that doesn’t mean we should overact. Additional legislative reform at this point could easily be using a cannon where we need a fly swatter.

The patent system is evolving and the USPTO is very aware of the issues and is actively working to craft positive change. Within the patent system, they have held roundtables to explore crowdsourcing to improve the rigor of pre-issuance review, preventing future patents that would need to be invalidated by the PTAB. For the PTAB, they are in an ongoing review process with rounds of proposed changes followed by public commentary, leading to new policy. A major piece of legislation at this point could interrupt the process and take the system back to square one with new issues, loopholes, and unforeseen use cases to be addressed and requiring more reform.

In response to concerns about Kyle Bass and other potential abuses, perhaps they should be viewed as a service. Bad or low quality patents are harmful to every aspect of the system. They block new innovation in the space and lead to wasted resources spent on unnecessary litigation or licensing fees for a patent that should never have been granted in the first place. Let the PTAB test validity, no matter who is bringing the petition. If the patent is good, it will come out of the process stronger. If the patent was weak, then it is best for everyone when it is removed from the system.

At the end of the day, the core issues that should matter to reformers, in Congress and beyond, is patent quality. A strong patent system protects and promotes innovation, but only when the assets it approves can be trusted. Post grant reviews by the PTAB are a positive step towards higher patent quality overall. We shouldn’t allow sensationalized stories and lobbying push us towards unnecessary reform that could weaken or destabilize a cornerstone of the American economy. It is time to give the USPTO the space and resources it needs to clean up the system, not muddy the waters further.