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The PTAB’s dramatic effect on patent value and corresponding disincentives to capital allocation

October 23, 2019
Katharine Wolanyk

This week marks the sixth anniversary of the Leahy-Smith America Invents Act, and thus the fifth anniversary of that statute’s most debated creation: the Patent Trial and Appeal Board. Whether one celebrates or decries the PTAB, there can be little doubt that it has worked a profound effect on the value of American patents—and, concomitantly, on incentives to invest in research and development. As a Managing Director at Burford Capital, I lead a team that evaluates opportunities to monetize patent assets, often through litigation. In conducting our analysis, we are tasked not with making normative judgments about how the PTAB performs its work (though I obviously have an opinion on that score), but instead with assessing how the Board affects the probability and size of any prospective litigation or licensing recovery. With that perspective in view, I offer three observations as the PTAB turns five.

First, the statistics now conclusively establish what many observers initially noted: The PTAB invalidates patent claims at a far higher rate than Article III tribunals (district courts and the Federal Circuit) in parallel proceedings.  Several supplemental thoughts flow from this difference.

For one thing, I do not attribute the difference in invalidation rates to the competing renditions of the burden of proof (clear and convincing evidence in court, preponderance of the evidence in the PTAB) or the alternative ways to construe claims (Phillips in court, broadest reasonable interpretation in the PTAB). Those different standards are mere makeweights, tipping the scales only in the most marginal circumstances. From the hundreds of cases I have observed, the more cogent explanation for the statistics is personnel: Compared to their judicial counterparts, PTAB judges are biased in favor of invalidity. Personnel differences also explain a more disturbing phenomenon, mainly, that the Patent and Trademark Office seems to be at war with itself. Frequently, the PTAB invalidates claims based on prior art that examiners considered during initial prosecution. The only explanation for such discordant outcomes is that PTO examiners take a more pro-patent view of validity than the judges who make up the PTAB.

Second, the PTAB’s bias in favor of invalidity seems wrapped within a more general bias in favor of parties challenging patent claims. Ambiguities in the AIA are almost universally construed against the patentee, and the PTAB takes a capacious view of its statutory authority. For instance, Federal Circuit Judges Dyk and Wallach recently raised “serious questions” about the PTAB’s practice of allowing an otherwise time-barred petitioner not only to join an IPR, but also to raise new grounds not contained in the instituted petition. In a similar vein, the PTAB has embraced a very wide (and largely unreviewable) definition of “a financial product or service,” allowing a host of claims to fall within the ambit of a “Covered Business Method Patent.” That, of course, is significant, as CBMs are subject to additional invalidity grounds—including under Section 101—that are not available in petitions for inter partes review.

Third, district courts largely have determined that interests of efficiency and judicial economy favor deferring to the PTAB once a decision to institute a proceeding has been made. Most parallel proceedings in district court are stayed once an IPR or CBM is instituted. The upshot is that the supposed savings in time and litigation costs that were heralded by proponents of the AIA have not materialized. Patent cases are filed in district court; defendants typically wait close to a year to file IPRs; institution decisions issue six months later; and final written decisions follow another six to 12 months after that. As a result, litigants bear 12-18 months of litigation expenses, followed by a year or more of costs at the PTAB, with litigation (or appeals) proceeding thereafter depending on how the PTAB rules. Not exactly the hoped for picture of efficiency or economy.

Taken together, these observations have produced predictable results. The value of a patent is the expected value it will produce in litigation, discounted to the present based on the time it will take to extract a judgment (or judgments). By definition, when the expected value of litigation goes down and the time to final judgment goes up, the asset is less valuable. Moreover, the PTAB has placed a heavy enough thumb on the scales that accused infringers almost always will pursue PTAB proceedings before considering settlement options. As a result, patent litigation today is more of a binary bet, as opposed to one where parties can reach reasonable settlements at various points during the life cycle of a case. That is not to say that no cases settle. Some do. But on the margin, the trend is to gear up for a fight that will go the proverbial distance—increasing the expected cost of litigation, extending the time to money, and raising the price of investor capital.

A related consequence of the point just made is that investors must focus on the rare class of path-marking innovations (where validity is less of a question) that nevertheless have been adopted quickly enough to support a substantial volume of infringement and thus an asymmetric return. Such patents do of course exist. But the far greater class of inventions that marginally improve over the prior art are essentially un-investable. The risk-reward associated with pursuing infringers of those claims will almost always steer capital away.

If one believes that most patents are low quality, that marginal patents deserve little to no return (and thus that the innovation behind them should not be pursued), that patents were previously overvalued, or that lower costs for goods and services today are worth trading a slower embrace of what otherwise would be tomorrow’s R&D-driven innovation, then the PTAB’s fifth birthday is a milestone to celebrate. But I suspect Congress did not hold these beliefs when it enacted the AIA and does not hold them now.  Any assessment of the Act should confront head-on its dramatic effect on the value of intellectual property assets and the corresponding incentives (or disincentives) to allocate capital to innovation.