Among the fallout from the new Leahy-Smith America Invents Act (AIA) are the fees established by the Patent and Trademark Office for initiating any of the new or modified procedures for reconsidering the validity of an issued patent. For many, these fees were a true eye-opener. However, with political considerations and the AIA itself driving financial policy for the PTO to be self-supporting (making users pay for the services provided by the PTO), it should have come as no surprise that the fees for the extensive PTO involvement in these post-grant procedures would be of a different order of magnitude than historical PTO fees. And they are.
This raises two questions:
• Are the new government fees justified?
• Will the total cost of these new procedures be justified, as perceived by prospective litigants?
We believe the answer to both of these questions is yes.
The new rules for implementing the post-grant procedures, post AIA, became effective September 16. As has been widely reported, the AIA did away with inter partes re-examination and replaced it with post-grant review and inter partes review. Both types of proceedings allow third parties to challenge the validity of issued patents on many of the same grounds available to patent challengers in federal court, provide for a scheduling order and sequenced discovery to facilitate this process, and impose strict timeframes for their completion. On the whole, the AIA’s post-grant and inter partes review processes envision a more thorough and efficient vetting of patent validity than that available under the previous PTO regime.
As suggested in PTO public announcements, the modified validity proceedings under the AIA should provide a timely, cost-effective alternative to district court litigation. One reason for the PTO’s optimism is the availability of focused discovery, including (a) mandatory initial disclosures, (b) routine discovery, and (c) additional discovery. Although discovery in these post-grant proceedings is not as open-ended as in federal court patent litigation, it bears many similarities.
The mandatory initial disclosures are modeled after Rule 26(a)(1)(A) of the Federal Rules of Civil Procedure, but parties to post-grant proceedings may also agree to provide additional information, including early disclosure of information relating to nonpublished public disclosures and obviousness. Routine discovery requires (1) production of any exhibit cited in a paper or testimony, (2) cross-examination of the other side’s declarants, and (3) relevant information that is inconsistent with a position advanced during the proceeding. Unlike district court litigation, the obligation to disclose relevant, inconsistent information extends beyond parties to inventors, corporate officers and persons involved in the preparation or filing of the documents or things.
The third category is a catchall that allows for any discovery not contemplated by routine discovery or initial disclosures. This additional discovery can be obtained by agreement of the parties or upon filing a motion to the PTO, and includes all the discovery devices available under the Federal Rules of Civil Procedure, e.g., requests for production of documents, interrogatories, etc. The PTO expects that authorization for additional discovery will be limited in practice, but it is there for the patent challenger to take advantage of, should circumstances dictate. To add teeth to the mandatory disclosure and other discovery requirements, sanctions may be imposed for abuse of process, or any other improper use of an inter partes review, such as to harass or cause unnecessary delay or an unnecessary increase in the cost of the proceeding. By using these discovery processes, it is expected that parties to post-grant proceedings will be able to create a more meaningful and robust record for the PTO to assess validity, similar to the type of record the parties might create in a federal court action.
The shortened timeframe for obtaining a decision in a post-grant proceeding is another reason challengers might consider opting for a PTO adjudication of validity over district court litigation. Prior to enactment of the AIA, it could take several years, if not more, for the PTO to reach a decision in an inter partes re-examination. Under the AIA, by rule, post-grant proceedings are to be resolved by the PTO within one year from the time they are instituted. In the mere days since the new rules were instituted, we have already seen several such proceedings initiated. Based on the large number of comments received by the PTO in response to the new post-grant rules package, the public is giving these post-grant procedures serious consideration.
Will these very high fees for post-grant procedures disincentivize prospective requests for their use? We think not, even when one factors in the much larger cost of these procedures, apart from government fees.
Under the new rules, the fee for filing a request for ex parte re-examination, a procedure unchanged by the AIA, jumped from $2,250 to $17,750. According to the 2011 AIPLA Economic Survey, the total cost for an ex parte re-examination in 2010 averaged about $19,000. The difference between that total cost and the government fee at that time reflects a level of effort within the PTO, now to be paid by the requestor, comparable to that of the patentee in traditional ex parte re-examination. Taking into account the much more elaborate procedures of post-grant review and inter partes review established by the AIA, it should also come as no surprise that the new rules set the government fees for these procedures at $35,800 and $27,200, respectively.
By comparison, the government fee upon filing a complaint for patent infringement is $350. While this fee pales in comparison to the PTO’s post-grant fees, courts are not self-supporting and their internal costs are borne by taxpayers generally, not users. In that regard, the inclusion of limited discovery in the new post-grant procedures will add significantly to their overall cost.
Not surprisingly, many individuals have voiced concern over the sharp fee increases, with some suggesting that it will chill the use of AIA proceedings. Indeed, the PTO estimates that the typical cost for merely preparing a petition for inter partes review will approach $46,000, excluding the filing fee. This figure is based on the current estimates for preparing a request for inter partes re-examination.
At this point, one can only speculate what the total cost will be for post-grant and inter partes review. However, the 2011 AIPLA Economic Survey averages for the pre-AIA procedures for inter partes re-examination and interferences may be a good indicator.
Inter partes re-examination presumably dealt with issues much like those to be faced in the new post-grant procedures, but it was conducted by special patent examiners and included no discovery. In contrast, interference procedure, as in the new post-grant procedures, was controlled by a panel of administrative patent judges that ultimately also decided on the merits of the interference. Also like the new post-grant procedure, that procedure included some limited discovery.
The average costs reported in the 2011 AIPLA Economic Survey for interference ($322,000 through the end of the motion period and $631,000 through final appealable decision) and inter partes re-examination ($128,000 through final appealable decision) suggest that the costs, apart from government fees for either post-grant review or inter partes review will likely be well over $250,000. More probably, the total cost entailed for a party engaged in these procedures will be in the range of $750,000 to $1 million, including government fees, assuming the parties do not settle before receiving a final written decision. On this basis, the new government fees for post-grant procedures are consistent with the level of effort required by all parties involved in these proceedings.
Compared to the costs and total expenses incurred in litigating patent validity in the federal courts, the costs and fees associated with the modified AIA proceedings do not seem unreasonable or disproportionately excessive. As to whether these new procedures will be cost justified, and therefore used, by actual or prospective litigants, the prospective cost of these proceedings may be compared with the median litigation costs reported in the 2011 AIPLA Economic Survey to litigate a patent controversy in federal court. Specifically, nearly $2.5 million for an amount in controversy between $1 million and $25 million and nearly $650,000 for an amount in controversy of $1 million or less. More often than not federal court litigation takes longer than the one-year period mandated for proceedings in the PTO, contributing substantially to these high costs. In light of these figures, challenging patent validity in a district court proceeding is likely to be a far more expensive proposition than contesting validity in the PTO modified proceedings.
From an economic perspective alone, the incentive for testing patent validity via the PTO’s modified post-grant procedures seems readily apparent. Only time will tell whether these procedures will supplant district court patent challenges as the primary vehicle for testing patent validity. In the meantime, for cost reasons alone, it is worthwhile to consider utilizing the modified post-grant procedures made available under the AIA.
Paul F. Prestia is senior counselor and strategic adviser at RatnerPrestia, the firm he co-founded and led as CEO for many years. His current practice is focused largely on IP counseling for risk management due diligence, strategic IP protection and IP value realization.
Thomas G. Southward is a shareholder in the firm’s Washington, D.C., office, where he specializes in intellectual property litigation matters.