PTAB creates significant uncertainty by invalidating too many patents under shady criteria now due to it’s lower evidentiary standard. Congress is key to solve because it handles patent design.

Concerns raised by opponents of the PTAB to date are largely unpersuasive. However, underlying their concerns may be a more legitimate problem - ex post patent invalidation undermines reliance interests of patent owners that never would have developed if the patent had been rejected as unpatentable during ex ante patent examination. This is a potential problem of ex post patent invalidation generally, not the PTAB specifically, but has become more apparent as the PTAB has made ex post invalidation more common. The extent, source, and consequences of such reliance costs are questionable and require much more exploration and evaluation. These issues, however, would be a better focus for debates over the optimality of the PTAB generally, and its design choices specifically, than existing arguments focused on constitutional power, supposed procedural bias, and the PTAB's absolute invalidity rate. They also may be relevant to ongoing debates about whether it would be rational to expend more resources on ex ante patent examination.

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I. Introduction

Several Supreme Court justices recently expressed concern that a United States patent can be invalidated years after its issuance despite the patent owner's reliance on the patent's exclusive rights in investing tens of millions of dollars to develop the patented invention. 1Link to the text of the noteSimilar concerns have generated recent scholarly interest in making the validity of issued patents incontestable after a certain period of years. 2Link to the text of the noteAt first glance, these recent concerns are odd. Ex post patent invalidation, without regard to the length of time since patent issuance or patent owner investments made in reliance on patent protection, has been a fundamental feature of the American patent system since its origin in 1790. 3Link to the text of the note

However, recent concern about the effect of ex post patent invalidation on patent owner investments and reliance interests reflects the fact that ex post patent invalidation has become much more common in recent years. In the America Invents Act of 2011 (AIA), Congress created a series of adversarial administrative adjudications before the U.S. Patent and Trademark Office's (Patent Office) newly-created Patent Trial and Appeal Board (PTAB) to review and cancel issued patents that fail the statutory criteria of patentability and should never have been issued in the first place. 4Link to the text of the noteThe PTAB proceedings have been far more effective at invalidating issued patents than either district court litigation or prior administrative reexamination procedures, 5Link to the text of the noteor even than was anticipated at the time the AIA was enacted. 6Link to the text of the note

Perhaps for this reason, the PTAB is very controversial within the patent community. 7Link to the text of the noteOpposition to the PTAB often centers on constitutional arguments [*33] about the PTAB's power to invalidate issued patents, which tend to reflect, at worst, fundamental misunderstandings about constitutional law, and, at best, more general anti-administrative thought, not the current state of the law. 8Link to the text of the notePolicy-focused concerns assume that the PTAB's high invalidation rate is necessarily problematic. To reach this conclusion, opponents overlook the PTAB's effective threshold screening, ignore the perceived ineffectiveness of prior procedures that motivated the creation of the PTAB, contend with little support that the PTAB is indiscriminately invalidating "good" patents, deny any problem with "bad" patents, and/or assume that the interests of patent owners equate with social welfare. 9Link to the text of the noteFinally, PTAB opponents raise procedural concerns that the PTAB has stacked the deck against patent owners as compared to district court litigation or aggrandized its own power at the expense of the judiciary. Overlooked, however, is that prior administrative reexamination proceedings included most of the supposedly "stacked" procedures and yet were not seen as unfair to patent owners. These arguments also tend towards a general skepticism of administrative power and a preference for judicial power that is out-of-step with the modern administrative state, though perhaps consistent with recent anti-administrative trends generally. 10Link to the text of the note

This is not to suggest that the PTAB is problem-free. Like anything new, the PTAB has experienced growing pains as it explores the scope of its powers and optimal procedures, but these have generally worked themselves out through the normal processes of administrative decision-making and judicial review. By contrast, the more fundamental concerns expressed by PTAB opponents seem largely misguided. Underlying these concerns, however, may be a legitimate problem with ex post invalidation more generally: disturbance of patent owner reliance interests and imposition of costs on patent owners in the form of the lost value of investments made in reliance on patent protection, switching costs, foregone opportunities, etc. ("reliance costs"). 11Link to the text of the note. These reliance concerns are most obvious when a patent is incorrectly invalidated ex post but also exist for patents correctly invalidated ex post because, in theory, the patent owner would not have incurred these reliance costs if the patent had been properly rejected during ex ante examination. 12Link to the text of the note

The reliance concerns that are seemingly motivating the strenuous opposition to the PTAB are not a problem of the PTAB specifically but rather ex post invalidation generally. However, the PTAB has made these concerns more prominent and more acute because it is much more effective at, and popular for, invalidating issued patents than prior procedures. This higher rate of ex post patent invalidation generates more potential reliance costs. 13Link to the text of the note. To be clear, there are plenty of reasons to be skeptical about whether, and to what extent, reliance interests and reliance costs are actually a [*34] problem with ex post invalidation, or at least a problem worth addressing: uncertainty as to whether and to what extent patent owners have reliance interests that would be undermined by invalidation; the responsibility of the patent owner for its own reliance costs; and the need to weigh any reliance costs against the other costs and benefits of invalidation, in particular the benefits of eliminating invalid patents. 14Link to the text of the note

This Essay's limited conclusion is that reliance concerns seem to be motivating a lot of the opposition to the PTAB, are a more plausible problem with the PTAB than most of the arguments raised by opponents to date, and are a more productive focus for debates over the optimality of the PTAB. Focusing on reliance concerns would also properly shift the PTAB debate from one of power and legitimacy to one of policy, as Congress is entrusted with weighing and accounting for reliance interests in making design choices for the patent system. Finally, a greater focus on the reliance costs of ex post patent invalidation may be useful to the ongoing debate among patent scholars as to the optimal level of investment in the quality of ex ante patent examination. 15Link to the text of the note

This Essay proceeds in three parts. Part I introduces the debate over the PTAB and identifies and evaluates the supposed "problems" raised by opponents. Part II develops the argument that patent owner reliance costs are a plausible problem with the PTAB, but also provides reasons for skepticism. Part III connects Part II's debate over patent owner reliance costs to current PTAB and patent policy issues.

II. The PTAB Debate

Overview of the PTAB

The AIA substantially overhauled and expanded the Patent Office's power to reconsider the validity of issued patents and cancel patents that fail the statutory conditions of patentability and should not have been issued in the first place. 16Link to the text of the note. Prior reexamination procedures were similar to initial patent examination, occurring primarily between the patentee and the patent examiner, though varying in whether they allowed any participation by the requesting party. 17Link to the text of the note. Congress's goal in the AIA was to provide "a cheaper, more efficient, and faster system for invalidating bad patents." 18Link to the text of the note

The AIA created three new procedures for Patent Office review and cancellation of issued patents. Inter partes review allows any party to challenge an issued patent [*35] for lack of novelty or non-obviousness based on printed prior art from nine months after the patent issues through the life of the patent. 19Link to the text of the notePost grant review allows any party to challenge a patent on any basis within nine months of issuance. 20Link to the text of the noteA temporary covered business method patent review program lasting until 2020 allows a party accused of patent infringement to file a challenge in the Patent Office on any basis for patentability, but only if the patent covers a non-technological "method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service." 21Link to the text of the note

Unlike examination or reexamination, these new proceedings are adversarial proceedings involving both the patentee and requester that include limited discovery, an oral hearing, and some other features more reminiscent of litigation than traditional examination or reexamination. 22Link to the text of the noteThey are also resolved by three administrative patent judges (APJ) of the newly-created PTAB, rather than by a patent examiner. 23Link to the text of the note

The Criticism of the PTAB

The PTAB proceedings have proven very controversial, perhaps largely due to the combination of their popularity as a forum for challenging issued patents and the frequency with which patent rights have been invalidated. 24Link to the text of the noteThe criticisms of the PTAB fall into three main categories, none of which is particularly persuasive.

The PTAB's Power

First, much of PTAB opponents' focus has been on a series of constitutional challenges and complaints about the PTAB's basic power to invalidate issued patents. In Oil States Energy Services, LLC v. Greene's Energy Group, LLC, the Supreme Court squarely rejected the contention that doing so violated the patent owner's Article III right to a judge with security of employment and salary or Seventh Amendment right to a jury. 25Link to the text of the note. The only real surprise in Oil States was that two dissenting justices would have held otherwise, 26Link to the text of the note ,which is probably better explained [*36] by general anti-administrative attitudes than anything about the PTAB specifically. 27Link to the text of the note

Drawing on Oil States' statement that "our decision should not be misconstrued as suggesting that patents are not property for purposes of the Due Process Clause or the Takings Clause," 28Link to the text of the note, PTAB opponents contend that the PTAB's invalidation of an issued patent constitutes a taking in violation of the Fifth Amendment that requires compensation from the government. 29Link to the text of the noteFor patents issued after enactment of the AIA, the takings argument is almost certainly foreclosed by Oil States' conclusion that the Patent Act "qualifies any property rights that a patent owner has in an issued patent, subjecting them to the express provisions of the Patent Act. Those provisions include inter partes review." 30Link to the text of the noteOwners of patents issued before enactment of the AIA face an uphill battle in showing that PTAB administrative cancellation is different enough than the reexamination administrative cancellation to which their patents were subject at the time of issuance to both change the nature of their patent property right and do so in a way that rises to the level of a taking under the Supreme Court's restrictive jurisprudence in this area. 31Link to the text of the note

Before and after Oil States, PTAB opponents have raised Fifth Amendment due process concerns in challenging the PTAB. Some of the due process arguments against the PTAB reflect a fundamental misunderstanding of the due process guarantee. 32Link to the text of the noteAt its core, procedural due process guarantees notice and an opportunity to be heard before an impartial decision maker. 33Link to the text of the noteThe PTAB undoubtedly provides constitutionally adequate notice and an opportunity to be heard. 34Link to the text of the note

More plausible concerns with the impartiality of the PTAB's APJs, 35Link to the text of the note, who are [*37] not statutorily-protected administrative law judges but instead are appointed, supervised, and controlled by political appointees. 36Link to the text of the note. These concerns are exacerbated by past examples of "panel-stacking," where the Patent Office administration added judges to PTAB panels in the hopes of obtaining particular results. 37Link to the text of the note. Notably, this panel-stacking has only been used to insure procedural uniformity, not to influence invalidity determinations for particular patents, 38Link to the text of the note, and "individual PTAB members decide the case without agency leadership directing administrative patent judges to vote a certain way." 39Link to the text of the note. While perhaps troublesome from an optimal design perspective, these impartiality issues are unlikely to constitute an unconstitutional deprivation of due process. 40Link to the text of the note. Non-ALJ administrative judges subject to political supervision and control are commonplace in the modern administrative state. 41Link to the text of the note. Likewise, the agency head's power to review and change initial decisions reached by agency adjudicators is a defining feature of modern administrative adjudication, one that is seen as crucial to the administrative state's legitimacy. 42Link to the text of the note. The limited differences between APJs and these other non-ALJ adjudicators are unlikely to rise to the level of a constitutional due process violation. 43Link to the text of the note

The PTAB's Outcomes

Opponents make various objections to outcomes at the PTAB. "To some, the [invalidation numbers] suggest that the Board is out of control. As Randall Rader, once chief judge of the Federal Circuit, put it, the judges of the PTAB are "acting as death squads, killing property rights.'" 44Link to the text of the note. These opponents often rely on statistics like the fact that 81% of instituted PTAB proceedings result in at least some challenged claims being invalidated, with 63% resulting in all challenged claims being [*38] cancelled. 45Link to the text of the note. In fact, if any outcome other than complete confirmation is treated as adverse to the patent owner, 87.4% of outcomes for instituted petitions are adverse to the patent owner and only 12.6% are favorable to the patent owner. 46Link to the text of the note

But these numbers are misleading because they ignore that the PTAB has a strong threshold screen requiring "a reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged in the petition" before a PTAB proceeding is instituted. 47Link to the text of the note. The PTAB has denied institution in 28% of petitions. 48Link to the text of the note. These denials are the functional equivalent of complete confirmation of the patent, meaning that patent owners obtain completely favorable outcomes - non-institution or no claims invalidated - in 38% of PTAB proceedings and adverse judgments in 62%, even treating every settlement and dismissal as adverse to the patent owner. 49Link to the text of the note

These outcomes are far less dire than PTAB opponents often portray, though are the inverse of district court litigation, where 43% of invalidity decisions result in invalidation. 50Link to the text of the note. However, this is to be expected since PTAB proceedings were "intended to make it systematically easier to invalidate patents generally - so that patents of questionable quality will be more likely to fall." 51Link to the text of the note. Thus, the PTAB's 62% adverse judgment rate is not in and of itself a problem, as it could reflect success at addressing the concerns that motivated the PTAB's creation - a prevalence of "bad" patents failing the statutory criteria and the inadequacies of existing procedures for addressing this problem. 52Link to the text of the note. Or it could reflect significant recent judicial changes in substantive patent law that have rendered a large number of patents now-invalid even if properly issued under then applicable law. 53Link to the text of the note

Beyond absolute invalidity rate, PTAB opponents contend that "the PTAB has gone too far with its charge of eliminating bad patents" and "is now invalidating [*39] patents in a willy-nilly fashion." 54Link to the text of the note. This claim of indiscriminate invalidation is hard to evaluate, and ultimately somewhat circular, because there is no good criteria for whether a patent is "bad" or "good" independent of validity determinations. 55Link to the text of the note. PTAB opponents point to the fact that some of the patents invalidated in the PTAB were upheld in prior reexamination or litigation; that many PTAB proceedings rely on prior art that was before the examiner; and that patents invalidated in the PTAB covered meritorious inventions. 56Link to the text of the note. Putting aside questions about the representativeness of this evidence, the merits of the invention do not equate with the merits of the patent, as patent prosecutors often draft patents broadly, ambiguously, and vaguely to capture more than the inventor's actual invention. 57Link to the text of the note. Moreover, there is no reason to think the contrary results in the prior reexaminations or litigations were "right" and the PTAB results "wrong," rather than vice-versa. 58Link to the text of the note. To the contrary, the PTAB has the adversarial component missing from reexamination and unique technical and legal expertise missing from either litigation (with legally, but not technically, trained judges and lay juries) or reexamination (with technically, but not legally, trained examiners). 59Link to the text of the note. Without other evidence, it is more likely that the expert decision makers in an adversarial proceeding are reaching the right result, 60Link to the text of the note, which may explain the Federal Circuit's high affirmance rate in PTAB appeals. 61Link to the text of the note