July/August 2016
IP Litigator
By Lionel M. Lavenue; W. Caroline Chen, Ph.D.; R. Benjamin Cassady; Saba N. Daneshvar
Authored by R. Benjamin Cassady; W. Caroline Chen, Ph.D.; Saba N. Daneshvar; and Lionel M. Lavenue
The 2011 Leahy-Smith America Invents Act (AIA) created the popular post-patent issuance proceedings conducted by the Patent Trial and Appeal Board (PTAB): (1) inter partes review (IPR), (2) post-grant review (PGR), and (3) transitional post-grant review for covered business methods (CBM). It also gave the U.S. Patent and Trademark Office (USPTO) broad regulatory authority to create and improve the PTAB practice rules governing those proceedings.
After four years of incubation, on August 20, 2015, the USPTO published a set of proposed amendments to the original PTAB practice rules for open commentary in the Federal Register. After the commentary period, the USPTO published the finalized set of new PTAB practice rules on April 1, 2016. These new rule amendments went into effect on May 2, 2016 and apply to "all AIA petitions filed on or after the effective date and to any ongoing AIA preliminary proceeding or trial before the Office."1
These new amendments mark the next phase in the evolution of post-patent issuance proceedings, modifying PTAB practice and procedure for a number of important topics including, but not limited to, claim construction, motions to amend the claims, patent owner’s preliminary responses, discovery, petitioner’s reply briefs, multiple proceedings, live testimony, Fed. R. Civ. P. 11 (Rule 11)-type certification towards papers filed with the PTAB, new word counts that replace page limits for major briefing, and confidential information.
This article analyzes newly amended 37 CFR § 42.11, which contains the "duty of candor" and good faith requirements, and now includes Rule 11-type sanctions for its noncompliance. Additionally, in an effort to shed light on how the PTAB could implement 37 CFR § 42.11 moving forward, several key post-grant proceedings that reflect how the previous version of the rule was construed are analyzed.
Prior to the USPTO’s recent overhaul, Section 42.11 simply recited that "[p]arties and individuals involved in the proceeding have a duty of candor and good faith to the Office during the course of the proceeding,"2 and the PTAB generally required aggrieved parties to request permission before moving for sanctions under the old rule. The PTAB also could issue sanctions sua sponte.
As stated above, under the old regime, parties needed to request PTAB permission before moving for sanctions, and authorization was not always granted. Parties often requested permission to move for sanctions during teleconferences with the PTAB where one party sought to reprimand the other for its allegedly improper conduct. The PTAB would decide to authorize such motions "based on a determination that briefing will facilitate development of a complete record and, thereby, will promote the just resolution of the issues raised by [the moving party]."3 Furthermore, the PTAB repeatedly emphasized authorization to file a motion is not a decision on the merits for any allegations of misconduct.4
The PTAB established a high bar for authorizing sanctions motions, and generally would not permit parties to move for sanctions for anything less than misconduct or seriously egregious actions.
For example, in Apple, Inc. v. THX Ltd., patent owner THX requested authorization to move for sanctions against petitioner Apple, specifically because Apple allegedly had taken inconsistent positions in the IPR proceedings and in another pending patent application.5 The PTAB refused to permit a sanctions motion based on these allegations.6
In a similar instance, the PTAB denied a request to file a sanctions motion when the petitioner alleged that the patent owner’s letters to the Under Secretary of Commerce for Intellectual Property and Director of the USPTO amounted to improper ex parte communications.7 The PTAB reasoned that considering sanctions based on the fact would have frustrated the PTAB’s ability to administer proceedings in a just, speedy, and inexpensive manner.8
Additionally, the PTAB refused to authorize motions for sanctions when the request for authorization was deemed to be untimely. For example, in Unified Patents, Inc. v. Custom Media Techs., LLC, the PTAB denied a request to file sanctions where the patent owner did not seek to file a motion for sanctions until after the PTAB had denied institution of the IPR petition.9 The patent owner filed a request for rehearing, and the PTAB expunged the second request as an unauthorized paper.10
The PTAB has recommended that the parties use avenues besides motions for sanctions to resolve their disputes. In one instance, a patent owner requested authorization to file a motion for sanctions concerning petitioner’s allegedly inappropriate witness coaching during a deposition.11 The PTAB denied the request, stating it would involve expenditure of party resources and had little chance of success.12 Instead, the PTAB proposed the coaching issue could be addressed by a motion to exclude all or a portion of the testimony, or by arguments regarding the weight of the testimony.13 Finally, the PTAB suggested that the issue would essentially be moot if the patent owner also could succeed "if it prevails on the obviousness."14
The PTAB has found the high bar for authorizing sanctions motions met in a few instances, including when a party was alleged to abuse the post-grant process, to violate a protective order, or a party’s conduct amounted to harassment. The PTAB requires that an authorized motion for sanctions must address three factors: (1) whether a party has engaged in conduct that warrants sanctions; (2) whether the moving party has suffered harm from that conduct; and (3) whether the sanctions requested are proportionate to the harm suffered by the moving party.15
The PTAB has allowed sanctions motions based on allegations that a party has abused the post-grant proceedings process. For example, Coalition for Affordable Drugs (CFAD), backed by hedge-fund manager Kyle Bass, filed multiple IPR petitions against patents owned by pharmaceutical companies, as a means to lower the prices for pharmaceutical drugs and manipulate stock prices, according to many critics.16 As part of this campaign, CFAD filed five IPR petitions against Celgene’s patents covering its marketing-exclusive drugs.17 By email, Celgene requested authorization from the PTAB to file a motion for sanctions in four of the proceedings. The board of four judges conducted a telephone conference to discuss the request, during which Celgene requested authorization to move for dismissal of the petitions as "a sanction for abuse of process by petitioner or its real parties-in-interest." The PTAB found these allegations serious enough to allow Celgene to move for sanctions.
In its motion, Celgene urged that the CAFD’s IPRs were driven entirely by an admitted "profit motive" whereby Bass and the real parties-in-interest (RPI) were merely attempting to benefit financially from the changes in stock prices cause by their IPRs.18 Celgene alleged the motives were unrelated to the purpose of the AIA because the RPI have no competitive interest in invalidating the patents, that the conduct amounted to abuse of post-grant proceedings, and that the IPRs should be dismissed.19
But even after allowing Celgene to move for sanctions, the PTAB decided in favor of the petitioner, adopting CFAD’s argument that "profit is at the heart of nearly every patent and nearly every inter partes review," and finding that "an economic motive for challenging a patent claim does not itself raise abuse of process issues."20 The PTAB also found that Congress did not limit IPR review to parties having a specific competitive interest in the technology covered by the patents.21 The PTAB further disagreed with Celgene’s argument that the purpose of post-grant proceedings is providing a less costly alternative to litigation. Rather, the PTAB noted that the AIA was designed to encourage the filing of meritorious patentability challenges in an effort to further improve patent quality.
The PTAB also has allowed sanctions motions based on alleged protective order violations. For example, in RPX Corp. v. Applications in Internet Time, LLC, patent owner Applications in Internet Time, LLC (AIT) shared RPX’s confidential information with individuals who were not authorized under the default "Standing Protective Order" in the Trial Practice Guide, and no specific protective order had been entered.22 After being granted authorization in a teleconference with the PTAB, RPX moved for sanctions to (1) compel AIT to identify the scope of the breach; (2) protect RPX’s confidential information going forward; and (3) compensate RPX for significant expense incurred in addressing AIT’s violations, and AIT argued that a motion for sanctions is premature because no protective order had been entered and no motion to seal had been granted. The PTAB granted RPX’s motion in part, ordering AIT to provide amended declarations from the three individuals, and authorizing RPX to file a motion for attorney fees.
But the PTAB did not always find alleged protective order violations sufficient to permit motions for sanctions. In Lifecell Corp. v. Lifenet Health, Lifenet Health moved for sanctions after authorization was granted, alleging that Lifecell Corp. violated a stipulated protective order entered in a related district-court litigation, and requested dismissal of the petition.23 The PTAB did not find that it had the authority to enforce a protective order from the district-court proceeding, and denied the motion for sanctions.24
The PTAB additionally has allowed sanctions motions based on harassment allegations. In Shire Development, LLC v. LCS Group, LLC, the inventor sent harassing and threatening emails to petitioner’s representatives, violating a PTAB order prohibiting him from contacting anyone associated with the petitioner.25 With the PTAB’s authorization, Shire filed a motion for sanctions, requesting an entry of judgment against LCS and an order for LCS to pay for Shire’s attorney fees. The patent was assigned to a new entity, and the counsel for the patent owner was terminated in the midst of the proceeding. The patent owner failed to file an opposition to the motion, and an adverse judgment was entered against the patent owner.
However, the PTAB has refused to permit sanctions motions based on a single incident of harassment. In Square, Inc. v. Think Computer Corp., an officer of the patent owner threatened to file legal actions and publicly shame the petitioner’s expert, because of the manner in which he presented testimony.26 Square, after written PTAB authorization, filed a motion requesting that, inter alia, the patent owner be barred from contacting Square’s expert or conducting further discovery into his testimony, the expert’s direct testimony be taken as fact, the cross-examination transcript and the officer’s declaration be expunged, and the patent owner pay Square’s attorney fees. Nonetheless, the PTAB denied the motion, postulating any harm based on the conduct of the patent owner’s officer most logically would have manifested itself by negatively impacting the testimony of the petitioner’s expert, but the PTAB did not find the expert’s testimony was affected.
The PTAB also imposed sanctions sua sponte under the old Section 42.11 regime, particularly when misconduct continued after earlier warnings. For example, the PTAB imposed sanctions when a party ignored or failed to comply with PTAB orders regarding filing papers without prior authorization, failed to confer with opposing counsel, and engaged in other conduct inconveniencing the PTAB and/or opposing parties.
In two CBM petitions filed by Dealersocket, Inc. against Autoalert, LLC, Dealersocket was more than two months late in correcting defects the PTAB recommended.27 Determining that Dealersocket did not show good cause for its delay, the PTAB refused to consider Dealersockets late corrections, found the petitions substantively defective, and dismissed the petitions as a sanction.28
Similarly, in a series of IPR and CBM petitions filed by SAP America, Inc. against Lakshmi Arunachalam,29 the pro se patent owner repeatedly filed papers without prior authorization, despite multiple warnings from the PTAB. The papers filed included a Request for Relief from Judge’s Financial Conflict of Interest, which contained sensitive information and unsubstantiated allegations about the judge who administered the proceedings. When the PTAB limited public access to these papers, Arunachalam published similar content on a Web site with altered pictures of the judge. Furthermore, Arunachalam filed another unauthorized paper entitled "Patent Owner’s Notice To PTAB About Denial of Due Process To Patent Owner and Motion To Recuse PTAB Judges."
The PTAB denied Arunachalam’s "motions," and imposed sanctions, including revoking Arunachalam’s access to upload documents to the Patent Review Processing System (PRPS), requiring filing by hard copies only with prior authorization, and requiring any counsel who wished to represent Arunachalam to seek authorization before using PRPS to upload filings.
In another scenario in Euro-Pro Operating LLC v. Acorne Enterprises, LLC, a patent owner filed a motion to exclude certain evidence in two proceedings, each motion missing a page.30 Then without authorization, the patent owner filed a second version of the motion, which was filed upside down. The PTAB advised patent owner to confer with opposing counsel before requesting the earlier "incorrect" filings to be expunged, but it failed to do so. The patent owner also previously had missed two scheduled conference calls, filed papers with typographical errors and sought to file replacement versions, filed papers that did not comply with the formatting requirements, and received a warning from the PTAB regarding his troublesome conduct. The improperly filed motions were the final straw, and the PTAB imposed sanctions sua sponte, ordering that the patent owner’s motions to exclude be expunged, and refusing to allow the patent owner to file further motions to exclude any evidence already of record.
The above case summaries highlight the difficulty in moving for sanctions under the previous regime, much less having them awarded. However, as of the May 2, 2016, effective date for the newly amended 37 CFR § 42.11, moving for sanctions will be easier, but there has yet to be any publicly available PTAB decisions addressing the duty of candor or sanctions under the new rule. Thus, while the tools are now in place for parties to seek sanctions and compensation for baseless positions advanced in AIA proceedings, it remains to be seen what impact the new rules will have, and how the PTAB will enforce such motions, e.g., will it use standards similar to those as the district courts now that Section 42.11 mirrors those standards.
On August 20, 2015, the USPTO published its proposed amendments to the PTAB practice rules to solicit public commentary regarding the proposed rulemaking.31 The proposed overhaul of 37 CFR § 42.11 was of particular significance.
Specifically, the USPTO announced that "in order to further attempt to prevent any misuse of the AIA proceedings, the Office proposes to amend 37 CFR § 42.11 (which prescribes the duty of candor owed to the Office in these proceedings) to include a Federal Rule of Civil Procedure 11-type certification for all papers filed with the [PTAB] in these proceedings, including a provision for sanctions for misconduct in connection with such papers."32 Also, under the proposed new rules the PTAB "may refer possible misconduct in the course of AIA proceedings to the Office of Enrollment and Discipline for investigation and, if warranted, further proceedings under 37 CFR § 11.19-11.61."33 Additionally, the USPTO proposed amendment to 37 CFR § 42.11 would "add 'signing papers; representations to the Board; sanctions' to the title of the section, to designate existing text as paragraph (a), and to add paragraphs (b) through (d) to include a Rule 11-type certification."34 Michelle Lee, Deputy Director of the USPTO, announced that the addition of such a requirement will "give the USPTO a more robust means with which to police misconduct."35 Such amendments also will make it easier than the previous regime for parties before the PTAB to move for sanctions.
Several critics contended that the proposed Rule 42.11 amendments were unnecessary or redundant of existing rules, and therefore should not be adopted. Addressing the criticism head on, the USPTO justified its proposed changes, stating that it saw the proposed Rule 42.11 amendment as preventative in nature, not redundant. Further, the USPTO emphasized that it did not expect the procedures in the proposed rule will be used often, but that the deterrent effect of having such a rule is important. The USPTO explained that the final rule provides greater detail on its expectations for counsel and parties participating in post grant proceedings and also provides a procedure for sanctions motions that did not previously exist.36
Disagreeing with criticism that the proposed rule will lead to an increase in investigations by the Office of Enrollment and Discipline (OED), the USPTO stated that requests for sanctions are relatively infrequent and highlighted that sanctions motions cannot be filed without PTAB authorization, even under the new rules.37 Additionally, some critics expressed concern that the proposed rule was ambiguous and conflicted with the sanctions provision of 37 CFR § 42.12. The USPTO disagreed, finding that the proposed rule is consistent with and specifically refers to Section 42.12.38
Despite much of the criticism being largely dismissed, the USPTO adopted some proposals made by commenters. For example, the USPTO adopted commentary suggesting that the sanctions provisions should not apply to law firms, agreeing that sanctions directed to practitioners and parties serve as sufficient deterrents.39 Several other comments suggested that providing mere written notice to the opposing party before moving for sanctions may not provide sufficient information to correct the allegedly sanctionable conduct. Heeding this advice, the USPTO explained that the final rule will require service of a proposed motion on the other party before seeking authorization to file a motion for sanctions, much as the requirements of Rule 11. The USPTO explained that such a change, however, will not dispense of the 21 day period to correct or withdraw the challenged paper or claim, which also mirrors Rule 11.40
After altering proposed Rule 42.11 to address the commentary, the USPTO published its final version, which went into effect on May 2, 2016.41
Rule 42.11 now recites in relevant part: "If, after notice and a reasonable opportunity to response, the Board determines that paragraph (c) of this section has been violated, the Board may impose an appropriate sanction on any attorney, registered practitioner, or party that violated the rule or is responsible for the violation."42 As referenced above, sanctions under 37 CFR § 42.11(d) are modeled after Rule 11, and just like Rule 11, their primary goal is deterrence, not punishment. However, unlike Rule 11 sanctions, sanctions under Rule 42.11 only apply to practitioners and parties, not entire law firms. Moreover, sanctions imposed under the PTAB rule "must be limited to what suffices to deter repetition of the conduct … and should be consistent with § 42.12.”43 Similar to Rule 11, the party seeking sanctions under Rule 42.11 must first offer a "safe harbor" and is required to serve a proposed motion on the other side at least 21 days before seeking authorization from the PTAB to file the motion.44 During this 21 day window, the nonmoving party has the opportunity to avoid sanctions by either withdrawing or appropriately correcting the challenged conduct.
37 CFR § 42.11, as amended, should be of particular importance to both petitioners and patent owners alike because it applies to all phases of the post-issuance proceedings (IPRs, PGRs, CBMs, and derivations), and specifically requires a Rule 11-type certification for all papers signed, filed, submitted, or later advocated by either party.45 Because new Rule 42.11 cross-references 37 CFR § 11.18, when signing, filing, submitting, or later advocating any papers, parties must bear in mind that they are assuring that papers are not being presented for any improper purpose, the legal contentions are warranted, and the factual contentions have evidentiary support.46 Violating any of these requirements will subject parties to sanctions that are consistent with 37 CFR § 42.12,47 including an order or orders establishing facts; expunging materials; precluding arguments, discovery, or evidence; awarding attorney fees; and/or entering judgment or dismissing the petition.48
The newly amended PTAB practice rules under 37 CFR § 42.11 clarify the procedures for aggrieved parties to seek sanctions during PTAB proceedings, instituting notice and safe-harbor requirements mirroring those of Rule 11 of the Federal Rules of Civil Procedure. Thus, the new rule removes some of the uncertainty that existed under the previous regime, where the sanctions motion practice rules often were set on a case-by-case basis. But because there has yet to be any publicly available PTAB case law addressing the implementation of the new 37 CFR § 42.11, it is hard to definitively say how this amendment will impact post-issuance proceedings. According to the USPTO, "requests for sanctions have so far been infrequent in AIA trial proceedings."49 Further, the new Rule 42.11, as does Rule 11, allows a party to cure an alleged violation before authorization to file a sanctions motion can be requested. If the intended deterrent effect of the new Rule 42.11 is achieved, sanctions motions before the PTAB will continue to be infrequent. But parties now have a clear roadmap, as new Rule 42.11 clarifies the obligations practitioners have before the PTAB, providing procedural consistency in addressing sanctionable conduct that was not present before.
1 81 Fed. Reg. 18750 (Apr. 1, 2016).
2 37 CFR § 42.11 (2015).
3 See, e.g., Coalition for Affordable Drugs VI, LLC v. Celgene Corp., IPR 2015-01092; Lifecell Corp. v. Lifenet Health, IPR 2015-01888.
4 See, e.g., id.
5 Apple, Inc. v. THX Ltd., IPR2014-00235.
6 Id.
7 IBG LLC, et al., v. Trading Tech. Int’l, Inc., CBM2015-00181.
8 Id.
9 Unified Patents Inc. v. Custom Media Techs., LLC, IPR2015-00516.
10 Id.
11 Flir Sys., Inc. v. Leak Surveys, Inc., IPR2014-00411; IPR2014-00434.
12 Id.
13 Id.
14 Id.
15 See RPX Corp. v. Applications in Internet Time, LLC, IPR2015-01750, paper No. 58, at 2.
16 63 UCLA L. Rev. Disc. 120, 131-132 (2015).
17 Coalition for Affordable Drugs VI, LLC v. Celgene Corp., IPR2015-01092; IPR2015-01096; IPR2015-01102; IPR2015-01103; IPR2015-01169.
18 E.g., Coalition for Affordable Drugs VI, LLC v. Celgene Corp., IPR2015-01092.
19 Id., citing 35 U.S.C. § 316(a)(6) and 37 C.F.R. §§ 42.12(a)(6)-(7).
20 E.g., id.
21 Id.
22 RPX Corp. v. Applications in Internet Time, LLC, IPR2015-01750; IPR2015-01751; IPR2015-01752.
23 Lifecell Corp. v. Lifenet Health, IPR2015-01888.
24 Id.
25 Shire Dev. Corp. v. LCS Group, LLC, IPR2014-00739.
26 Square, Inc. v. Think Computer Corp., CBM2014-00159.
27 Dealersocket, Inc. v. Autoalert, LLC, CBM2014-00142, CBM2014-00147.
28 Id.
29 SAP America, Inc. v. Lakshmi Arunachalam, IPR2013-00194; IPR2013-00195; CBM2013-00013; CBM2014-00018; IPR2014-00413; IPR2014-00414.
30 Euro-Pro Operating LLC v. Acorne Enterprises, LLC, IPR2014-00351, IPR2014-00352.
31 80 Fed. Reg. 50720 (Aug. 20, 2015).
32 80 Fed. Reg. 50721 (Aug. 20, 2015).
33 80 Fed. Reg. 50743 (Aug. 20, 2015).
34 80 Fed. Reg. 50744 (Aug. 20, 2015).
35 Ryan Davis, "BREAKING: USPTO Unveils New Rules on AIA Review Responses, Sanctions," Law360 (March 31, 2016), http://www.law360.com/articles/778708/uspto-unveils-new-rules-on-aia-reviews-sanctions.
36 81 Fed. Reg. 18760 (Apr. 1, 2016).
37 Id.
38 81 Fed. Reg. 18761 (Apr. 1, 2016).
39 Id.
40 Id.
41 81 Fed. Reg. 18765 (Apr. 1, 2016).
42 37 C.F.R. § 42.11(d)(1) (2016).
43 37 C.F.R. § 42.11(d)(4) (2016).
44 37 C.F.R. § 42.11(d)(2) (2016).
45 37 C.F.R. § 42.11(c) (2016).
46 37 C.F.R. § 11.18 (2016).
47 37 C.F.R. § 42.11(d)(4) (2016).
48 37 C.F.R. § 42.12(b) (2016).
49 81 Fed. Reg. 18760 (Apr. 1, 2016).
Reprinted with permission from the IP Litigator, published by Wolters Kluwer. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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