Guest post by Saurabh Vishnubhakat, Professor at the Texas A&M University School of Law and College of Engineering. Professor Vishnubhakat was formerly an advisor at the USPTO, but his arguments here should not be imputed to the USPTO or to any other organization.
This week, four iconic Silicon Valley technology companies—Apple, Cisco, Google, and Intel—sued the USPTO under the Administrative Procedure Act. The lawsuit challenges the USPTO’s so-called NHK-Fintiv rule, named after a pair of inter partes review decisions in the PTAB that the agency previously designated as precedential.
The 23-page complaint, docketed as Case No. 5:20-cv-06128 in the Northern District of California, is worth reading in full. Yet what is especially striking about the lawsuit, and worth considering more deeply, is a particular pair of arguments at the heart of the challenge. One is that the NHK-Fintiv rule is contrary to the policy and text of the AIA and therefore exceeds the Director’s authority. The other is that the NHK-Fintiv rule is procedurally infirm because it was not promulgated through APA notice-and-comment rulemaking.
The NHK-Fintiv Rule
The disputed USPTO policy allows the PTAB to deny institution of an inter partes review petition based on how far a parallel U.S. district court proceeding on the same patent has already gone.
NHK Spring v. Intri-Plex
The policy was first articulated in NHK Spring Co. v. Intri-Plex Techs., No. IPR2018-00752, Paper 8 (Sept. 12, 2018). There, a panel of the PTAB declined to institute NHK Spring’s petition against an Intri-Plex patent where a parallel infringement suit was already pending between the same parties in the Northern District of California.
In denying institution, the panel cited its discretion under 35 U.S.C. § 325(d) as well as under § 314(a). First came § 325(d), which empowers the Director to “determine the manner in which the post-grant review or other proceeding or matter may proceed, including providing for the stay, transfer, consolidation, or termination of any such matter or proceeding.” Here, the panel applied the nonexclusive factors of the PTAB’s prior informative opinion in Becton, Dickinson and concluded that the art and arguments now asserted in the PTAB were already considered (and overcome) during examination.
Though it found this analysis sufficient on its own, the panel then also went on to exercise its discretion under § 314(a), which makes a “reasonable likelihood” of invalidating at least 1 of the challenged claims a necessary—but not sufficient—condition for instituting review. Where review is permissible, the Director may still decide in his discretion to deny review, and the NHK panel found it compelling that the parallel proceeding in U.S. district court was “nearing its final stages”—with a five-day jury trial already set for six months before the PTAB’s own proceeding would conclude.
The principle of NHK—that the “the advanced state of the district court proceeding is an additional factor that weighs in favor of denying the Petition under § 314(a)”—forms the first part of the policy now being challenged.
Apple v. Fintiv
That policy was further elaborated in Apple Inc. v. Fintiv, Inc., No. IPR2020-00019, Paper 11 (Mar. 20, 2020). There, a panel of the PTAB ordered supplemental briefing at the institution stage of Apple’s petition against a Fintiv patent where a parallel infringement suit was pending between the same parties in the Western District of Texas. Fintiv had already argued in its preliminary response that the “advanced state” of the parallel proceeding warranted discretionary denial under NHK, as the same issues were before the district court and trial there had already been set. (The setting of a trial date had come after Apple’s petition but before Fintiv’s response, making additional briefing appropriate.)
The panel then set out a number of factors to consider when evaluating whether the state of a parallel proceeding warrants discretionary denial under NHK:
- whether the court granted a stay or evidence exists that one may be granted if a proceeding is instituted;
- proximity of the court’s trial date to the Board’s projected statutory deadline for a final written decision;
- investment in the parallel proceeding by the court and the parties;
- overlap between issues raised in the petition and in the parallel proceeding;
- whether the petitioner and the defendant in the parallel proceeding are the same party; and
- other circumstances that impact the Board’s exercise of discretion, including the merits.
NHK was designated as precedential in May 2019 and Fintiv in May 2020. Taken together, the NHK-Fintiv rule represents a policy of denying institution where a parallel district court proceeding is so far along and so substantially similar in art and argumentation that it would be best to conserve USPTO resources rather than undertake a largely or entirely duplicative review.
The Policy and Text of the AIA
That policy choice is firmly rejected in the opening argument of the APA challenge. The plaintiffs identify the inter partes review system as a “centerpiece of Congress’s efforts to strengthen the U.S. patent system” through post-grant error correction. By their account, the system of PTAB adjudcation responded to an environment where “questionable patents were too easily obtained and too difficult to challenge through existing procedures”—and, indeed, this language aptly cites the AIA House Judiciary Committee Report. Thus, to deny institution under the NHK-Fintiv framework weakens the very purpose of PTAB review through artificial limits that are “found nowhere in the AIA.” However, though there is much to agree with in the line of argument that follows, it suffers from at least two important weaknesses.
PTAB Review as an Alternative to the Courts
One weakness is that while the PTAB is desirable over the baseline of Article III courts, there are important and under-appreciated limits to this desirability. It is certainly true that the PTAB was intended as “an improved alternative to litigation” on questions of patent validity. Indeed, my coauthors and I have similarly argued that the PTAB offers a number of important advantages over the Article III courts, including lower barriers to standing, lower cost, lower delay, and lower rates of error.
However, it does not follow that PTAB review remains preferable regardless of what happens in the Article III courts. By the time court litigation has reached a stage advanced enough that the NHK-Fintiv doctrine would apply, much of the cost of litigation has already been sunk, especially by the close of discovery and the scheduling of trial, as in NHK itself. Meanwhile, the problem of delay is turned on its head, as it is the court that will now likely finish before the PTAB would. The problem of Article III standing is largely irrelevant, as the defendant can point not merely to the threat of suit but the actual suit itself. Much, though not all, of the marginal benefit from PTAB review relative to the federal courts is already dissipated.
Moreover, while it is true that decision making in the PTAB is done by administrative judges who have relevant technical as well as legal expertise, this benefit is also dissipated to some degree by a late-stage federal court proceeding. By that time, considerable effort and investment has already been sunk into educating the judge or jury. This, after all, is where much of the cost of litigation goes, and what makes expert administrative judges an attractive value proposition is that they do not require nearly so much education in each case. The more that such investments have been made anyway, the less that PTAB review is a clear cost-saving.
Finally, there is the problem inherent to error correction, a problem starkly highlighted by the legislative design of PTAB review. It is true, as the plaintiffs point out, that “while bad patents can be held unpatentable in IPR by a preponderance of the evidence . . . those same patents will survive litigation unless the challenger proves invalidity by clear and convincing evidence.” But as I have pointed out in testimony before the FTC, the same is also true of good patents—and there is no way to distinguish the good from the bad up front. If there were, error correction itself would be unnecessary.
Agency Discretion to Deny Review
The second weakness is that agency discretion carries not only significant structural benefits when protecting agreeable outcomes but also substantial obstacles when the outcomes go the other way. The crux of the case against discretionary denials under the NHK-Fintiv rule is that “no provision in the AIA expressly requires or even permits the Director (or the Board as his delegee) to deny IPR petitions based on pending litigation involving the same patent claims.”
It is repeated throughout the argument, too, that the principle of NHK and the additional factors enumerated in Fintiv are to be found “nowhere in the AIA” and are, for that reason, outside the Director’s authority. In this telling, what discretion the Director does have is limited to § 325(d), which is concerned more with managing multiple proceedings inside the agency itself than with doing so across an interbranch court-agency divide. This matters because the NHK-Fintiv framework is an elaboration of institution authority specifically under § 314(a), not of case management authority under § 325(d).
However, the principle that § 314(a) gives the Director discretion—broad discretion—to deny otherwise meritorious petitions is, by now, fairly well established in Federal Circuit and Supreme Court case law. For example, the two most significant cases involving the judicial unreviewability of the Director’s institution power—Cuozzo v. Lee in 2016 and Thryv v. Click-to-Call earlier this year—take just this view. The Court in Cuozzo held explicitly that “the agency’s decision to deny a petition is a matter committed to the Patent Office’s discretion” and cited § 314(a) with an explanatory parenthetical that there is “no mandate to institute review.” Likewise, the Court in Thryv expanded the scope of that unreviewable discretion to include conditions on institution as well—there, the condition in dispute was the one-year time bar of 35 U.S.C. § 315(b).
Indeed, some of the plaintiffs who now seek to cabin the Director’s institution-related discretion previously endorsed those very same positions before the Court. In Cuozzo, Apple submitted a brief as amicus curiae supporting the USPTO Director’s assertion of unreviewable discretion in matters of institution. Intel did the same in Thryv, arguing that a “decision not to institute review is committed to agency discretion.”
These complications in the case against the NHK-Fintiv rule cast serious doubt on the view that the policy choices embodied in that rule contradict the AIA.
The Choice of Rulemaking vs. Adjudication
Beyond the substance of the USPTO’s policy of sometimes denying inter partes review based on the status of parallel court litigation, there also lies an alternative argument that the policy is procedurally defective. Here, the challenge springs from the familiar APA values of public input and transparency, which are traditionally accomplished by notice-and-comment rulemaking. By contrast, the disputed USPTO policy was adopted “by designating the NHK and Fintiv decisions as precedential through a unilateral, internal process that involved no opportunity for public comment and no consideration by the Director of any public input.”
In this regard, the challenge to NHK-Fintiv certainly has merit as a matter of desirable administrative practice, but it is not at all clear that this makes the USPTO’s approach legally deficient. For over 70 years, the Supreme Court has left the form of policymaking up to agencies themselves. The Court’s 1947 opinion in SEC v. Chenery Corp. (Chenery II) explained that “the choice made between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency.”
In Chenery II, the Court recognized that “problems may arise in a case which the administrative agency could not reasonably foresee, problems which must be solved despite the absence of a relevant general rule.” The Court also pointed to a touchstone of agency practice that is especially important to the PTAB—expertise—and noted that “the agency may not have had sufficient experience with a particular problem to warrant rigidifying its tentative judgment into a hard and fast rule.” Both of these considerations point to adjudication as an acceptable mechanism for making policy.
To be sure, rulemaking offers significant benefits, and not only the public participation and transparency that the present APA challenge cites. Rulemaking also fosters greater predictability, both by specifying rules more fully in advance and by raising the agency’s own political costs from visibly changing course. For these reasons, I have argued in my own recent work about Patent Office policymaking that setting PTAB policy through rulemaking, such as the USPTO’s 2018 change to the PTAB’s claim construction standard, will often be preferable to shifting and incrementalist adjudications.
Still, a well advised preference is not the same thing as a legal requirement. Moreover, though notice-and-comment rulemaking is a direct and well established way of securing public input, it’s not as if PTAB adjudication does not allow for meaningful public input. The plaintiffs themselves note that members of the public are entitled to nominate PTAB opinions for designation as precedential.
Beyond this, the PTAB has accepted and, at times, even invited amicus curiae briefs in cases of public importance, such as whether tribal sovereign immunity defeats inter partes review. Similarly, under the current USPTO Standard Operating Procedure No. 2 (Rev. 10), cases before the agency’s Precedential Opinion Panel may also be opened for amicus curiae briefing. In short, where the USPTO exercises its prerogative to make policy through adjudication, it need not ignore public input to do so.
The APA challenge to the NHK-Fintiv rule, like much of the USPTO’s own recent policymaking, balances a range of important considerations and reaches a position that is coherent and reasonable. The weakness—if it can be called that—of the challenge is that it represents merely one reasonable position among several, especially given the Supreme Court’s views on agency discretion in general and USPTO discretion in particular. If the challenge eventually fails to dislodge the disputed policy, then the reason will likely be that, like most agencies, the USPTO enjoys wide latitude that is difficult to paint as unreasonable.