PTAB is ineffective---it fails to identify invalid patents and reduces investments---that forces innovator too offshore.

Whether one celebrates or decries the fifth anniversary of the America Invents Act, this much is clear: the law has had a dramatic impact on the value of U.S. patents and, in turn, the broader U.S. economy. Patent investors (be they innovators, implementers, or legal specialists) are no different than investors in any other asset class. They abhor uncertainty and charge a stiff premium for risk. In the wake of the AIA, the cloud of uncertainty hanging over patents is dark indeed. This uncertainty has depressed the value of patents and the returns to research and development, and may have broader ramifications that are yet to be seen.

Among its sweeping changes to U.S. patent law, the AIA transitioned the U.S. to a first-to-file system, expanded the definition of prior art, and most notably, created two new proceedings to challenge patents: the inter partes review (IPR) and covered business method (CBM) review. Both IPRs and CBMs are pseudo trials conducted by the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB). Congress hoped these proceedings would provide an efficient and inexpensive way to test the validity of a patent.

On that score, the AIA has succeeded. The PTAB decides whether to institute proceedings on IPR and CBM petitions within six months and completes the proceedings within a year from institution, reaching a validity determination far quicker than most district court litigation. And while PTAB proceedings cost more than initially projected ($300,000 to $500,000 on average, compared to the more modest $200,000 estimate), the expenditure still pales in comparison to the $1-4 million typically required to defend a patent suit through trial.[1] The new proceedings are also popular, with greater than 5,000 AIA petitions filed since the AIA went into effect in September 2012.[2]

But speed and efficiency do not tell the entire AIA story. The availability of speedy and low-cost review says nothing of the quality of the PTAB’s determinations. At a societal level, invalid patents impose unnecessary costs on consumers by allowing their holders to extract prices above marginal cost. A quicker and lower-cost means of cancelling such patents serves the public good. But valid patents—and the higher prices their owners command—also serve the commonweal. Finding solutions to complex problems requires significant investment, experimentation, and failure. Yet once a superior mousetrap has been unveiled, it can be reverse engineered and copied for a fraction of an innovator’s cost. Valid patents exist to prevent this form of freeriding and to ensure that innovators receive adequate returns on their R&D investments. So a low-cost, expeditious path to cancelling valid patents harms social welfare by discouraging valuable R&D. To properly grade the merits of the AIA, speed and cost are secondary considerations. By far the most important criteria is whether the PTAB is accurately cancelling invalid patent claims while confirming the validity of legitimate innovations.

On that front there is much debate, but the high-level statistics offer cause for concern. The PTAB has instituted proceedings on more than 70% of the AIA petitions to-date. Although this institution rate has moderated over the past few years, from 86% in FY 2013 to 66% year-to-date, it is still daunting. In 60% of proceedings that have advanced to a final written decision, the PTAB has found instituted claims unpatentable or the patent owner has cancelled or disclaimed such claims. This compares to an average invalidity rate of 18% for district court litigation for the years 2008 through 2015, based on Docket Navigator’s unstipulated patent determinations data.

Two key observations flow from the statistics. First, the PTAB plainly believes that a substantial number of issued patents—duly granted by the very same PTO and entitled to a presumption of validity—are invalid. While it is true that patent prosecution is a single-party endeavor, it is hard to believe that the adversarial nature of post-grant proceedings accounts for the spread between allowance rates on the front end and cancellation rates on the back end. Either the PTO is failing at an alarming rate to weed out invalid patents during prosecution or the PTO is erring substantially on the side of cancelling valid patents in post-grant proceedings. Neither possibility speaks well of the PTO, allows for stable and predictable investment, or generally serves the public good.

Second, there is a meaningful discrepancy between judicial and PTAB invalidity determinations. This gulf cannot be explained away by pointing to the different standards of proof (clear and convincing versus a preponderance of the evidence) or claim-construction approaches (Phillips versus broadest reasonable) in the different fora. So once again, there are two disconcerting possibilities: either the judicial system is failing to invalidate a significant number of invalid patents, or the PTAB is cancelling a significant number of valid patents. Faced with these two unacceptable possibilities, policymakers should conduct a systematic review to determine where the improper bias lies. From my anecdotal observations, I am firmly in the camp that believes the PTAB is invalidating valid patents at an alarming rate.

Equally disturbing, the putative cost savings of IPRs and CBMs are often illusory. IPRs and CBMs are typically filed in conjunction with litigation. Different courts proceed at wildly different paces, and take different approaches on whether and when to stay proceedings pending PTAB review. In many cases, the parties have the added cost and complexity of managing litigation and PTAB proceedings in parallel—including the possibility of multiple counsel, multiple protective orders, added motion practice and perhaps multiple trips to the appellate court. For patent owners with claims that survive IPR proceedings, there is the theoretical benefit of statutory estoppel. But the Federal Circuit held in Shaw Industries Group, Inc. v. Automated Creel Systems, Inc. that estoppel does not extend to any art raised in non-instituted grounds. And since CBM petitions can be brought at any point before or after a suit is filed, the uncertainty added by the AIA extends indefinitely.

Add to all of the above the fact that—even five years on—the AIA is relatively new and facing numerous legal challenges. The Supreme Court’s recent decision in Cuozzo is but one example. Although the Supreme Court upheld the AIA provision barring challenges to IPR institution decisions and approved the use of broadest reasonable interpretation, it also left the door open to certain constitutional and statutory challenges. Two pending petitions for writ of certiorari raise these sorts of challenges, and future petitions will no doubt do so. Moreover, Cuozzo seems to invite patent holders to lodge Administrative Procedure Act litigation, creating the specter for parallel district court litigation alongside both PTAB proceedings and the underlying patent suit.

At bottom, the AIA has added substantial risk, complexity and cost to determining the enforceability, and thus value, of U.S. patents. The resulting effect is multi-fold.

The uncertainty has dramatically devalued U.S. patents. The USPTO has reported decreased fees from patent renewals as owners accelerate portfolio pruning. Patent sale transactions, even those involving large portfolios, are being concluded for relatively small payments and perhaps a share of future licensing revenues. By contrast, the European Patent Office announced earlier this year that it saw increases in European patent applications in 2014 and 2015—driven by U.S. companies—while the USPTO reported a small decline in patent application filings in 2015 after years of steady increases. The lesson is not far to seek: capital is mobile, and if the U.S. offers a comparatively weak return to R&D investment, investors will innovate overseas where returns are more favorable.