Wednesday, May 24, 2023

USPTO Director Kathi Vidal's reforms of discretionary denial rules are fair and balanced: abuse of all sorts must be curbed, including extortion and circumvention of litigation estoppel

The USPTO under Director Kathi Vidal is on the right track with respect to PTAB IPR reforms, particularly with a view to discretionary denials. Probably many of you will disagree. Many of my esteemed readers are on one side or the other: net licensors (including pure licensing firms) as well as net implementers. I'm sympathetic to either side's legitimate concerns, and I have friends across the whole spectrum. When taking positions, I can't please everyone, nor can policy makers.

I think the USPTO has not had a more balanced Director in quite a while. I have great respect for Andrei Iancu, but his policies very much reflected his firm's predominant--if not exclusive or near-exclusive--client profile, i.e., the interests of the enforcing side. His predecessors in office knew the perspective of actual operating companies, with Michelle Lee coming from a net licensee (Google, which nevertheless considered patents very valuable in its early years) and David Kappos from a net licensor (IBM). Kathi Vidal's most important clients in private practice have been companies like Apple, i.e., PTAB IPR heavy users. But it would not be correct to claim that she was using her current position to just advance her former clients' interests.

I applaud the USPTO for its policy-making efforts, above all for the first section (on petitions filed by certain for-profit entities) of its April 21 advance notice of proposed rulemaking.

In light of the VLSI v. Intel case with the $2.4B verdict, Director Vidal correctly identified discretionary denials as a field in which decisive action was needed. Unfortunately, her predecessor--for the reason discussed above, which is unrelated to his track record as a litigator representing patent holders--had overshot in one way and not taken action against a more blatant form of abuse. That was comparable to pulling some healthy teeth while failing to identify a sore one. The USPTO is now likely to strike a far better balance.

The idea underlying the America Invents Act (AIA) was that patent owners should not get to overleverage their intellectual property rights in litigation. As a litigation watcher with a primary focus on U.S. cases, I can't remember if I've ever seen a case in which a jury held a patent invalid. Juries typically believe that the USPTO got it right. So the PTAB IPR system is important, and I'm in favor of it, but there is abuse from both sides.

Unified Patents' business model does raise serious issues, arguably even bigger ones than OpenSky. OpenSky, in case you don't remember, is the entity that essentially collected a ransom from VLSI in exchange for withdrawing a PTAB challenge that posed a serious threat to the aforementioned verdict. Some described this as "extortion" and I can see why, but if one thinks it through, Unified Patents' business model is way more problematic.

The USPTO has correctly identified that in the VLSI case, the party with a legitimate interest in challenging the validity of the patents-in-suit, Intel, was (at least temporarily) unreasonably restricted in its ability to defend itself, while someone with a business model that the AIA was never intended to enable profited from it. The only sound approach to policy making in such a situation is to address issues arising from an abuse of the system without overshooting to the detriment of actual defendants.

An end-justifies-means argument is not going to help, and the USPTO should not give it any weight. Sure, if a patent shouldn't have been granted in the first place, there must be ways of overturning it, and jury trials won't work. At the same time, well-resourced defendants should not be able to just outspend patent holders, and the purpose of the PTAB is not to give every defendant two bites at the apple, so if a PTAB challenge fails, defendants are reasonably estopped from re-raising the same issues in the related infringement litigation. If the end of defeating invalid patents justifies any means, then we must also celebrate OpenSky as heroes, allow multiple challenges in different fora (i.e., no estoppel), abolish or massively increase page limits for petitions, and so forth. That wouldn't result in good policy.

Here's the USPTO's proposal to curb abuse by entities like Unified Patents:

"The changes under consideration would make clear that the Board would discretionarily deny any petition for IPR or PGR filed by an entity that: (1) is a for-profit entity; (2) has not been sued on the challenged patent or has not been threatened with infringement of the challenged patent in a manner sufficient to give rise to declaratory judgment standing; (3) is not otherwise an entity that is practicing, or could be alleged to practice, in the field of the challenged patent with a product or service on the market or with a product or service in which the party has invested to bring to market; and (4) does not have a substantial relationship with an entity that falls outside the scope of elements (1)–(3). The Office contemplates defining 'for-profit entities' as entities that do not qualify for tax-exempt status with the Internal Revenue Service."

That makes a lot of sense to me. We're not talking about unreasonably restricting the ability of the companies that are Unified "members" to defend themselves: they can bring their own challenges in their own name and will then be reasonably subjected to litigation estoppel.

There are (at least) two key concerns over Unified Patents' business model, and either is enough of a reason in its own right to support the USPTO's proposal:

  1. Abusive circumvention of litigation estoppel:

    There simply is no need for the USPTO to condone Unified's business model, given that its "members" can bring their own petitions. The USPTO is not even against a pooling of resources: if you have a joint defense group, why not bring one challenge on behalf of everyone? The problem with Unified is that they say their members don't get to decide which patents they challenge. But obviously it's a pay-to-play system. They're not doing that work pro bono. Disallowing such petitions will increase transparency. Could transparency also be increased in other areas, such as patent ownership? Absolutely, but that is not a reason to tolerate a circumvention of litigation estoppel rules. I also don't think the USPTO should give any weight to claims that this is about singling out just one PTAB filer. It's a business model that others could also adopt.

  2. Extortionate effects:

    For the avoidance of doubt, I'm not alleging extortion, but I do see extortionate effects of Unified Patents' business model. Nice patents you have there... too bad if anything happened to them.

    • Philips' membership:

      While Philips does have an operating business, it's actually known as a rather aggressive enforcer of patents, including but not limited to standard-essential patents (SEPs). Philips has precisely the profile of the companies whose SEPs routinely challenges. Why is Philips a member? It cannot be ruled out that they primarily joined so that their patents would be left alone.

    • Unified's expansion into patent pool administration:

      While I've repeatedly given credit to MPEG LA with respect to other pools they run, their joint venture with Unified Patents named Alium has left me unconvinced so far. In particular, I find it hypocritical to say that Unified will help ensure "patent quality" in connection with O-RAN when they are not going to challenge Alium's own patents but only those belonging to patent holders who decline to contribute their patents to that pool. Here, again, you have that "racketeering" effect, presenting companies with a choice of being trolled or making Unified money.

    All of those issues are not unique to Unified Patents: others might implement their business model or similar models, even with a purely extortionate agenda.

There still is time to submit formal comments to the USPTO.