Cisco is a strong supporter of the US patent system. We own over 16,000 US patents, protecting our right to profit from the fruits of the $6 billion dollars we spend each year inventing new ways to connect the world and protect the safety of the Internet. Yet today, we, along with our peer companies Apple, Google and Intel, have sued the United States Patent and Trademark Office to stop the PTO from implementing rules – adopted without following federal law for issuing regulations – that undermine the agency’s ability to correct its own errors through invalidation of patents which should never have been granted in the first place. We also asked an appeals court, in a case in which a foreign company sued us in US court claiming we infringed its patents, to order the PTO to follow federal law -rather than these ill-conceived rules – in determining whether those patents should be reviewed for error.
We filed both of these actions because we believe an effective patent system is one that rewards innovation while being careful not to grant a 20 year legal monopoly – with the costs passed on to consumers – to those who have not met the tests for innovation that Congress and the courts have established. That’s why we were strong supporters of the America Invents Act, which passed in 2011 with considerable bipartisan support. The AIA created an “inter partes review” or “IPR” process to allow experts in the patent office to reevaluate the validity of patents. The law says the IPR process is available even when those patents are the subject of court litigation, as long as the IPR is initiated within a year of the start of the litigation. The IPR process is limited to narrow grounds for challenging a patent. Importantly, however, the law directed the PTO to conduct its review using a similar standard of proof to the one that it applied in determining whether the patent should ever have been granted – in contrast, in court proceedings a patent is afforded a strong “presumption of validity”, making invalidation of wrongly granted patents much harder.
Standing up for the inter parties review process
The IPR system has been a tremendous success. By eliminating patents that should never have been granted, the AIA directly contributed to innovation by allowing true innovators to proceed without the risk of being held up by litigation from non-practicing entities (NPEs), sometimes called “patent trolls” – companies that buy up portfolios of weak patents and then engage in litigation speculation. Owners of strong patents have little to fear from IPR, since an IPR can only be initiated if the PTO believes it more likely than not that at least one claim of the patent is invalid. The proceedings have been so effective, however, in eliminating the weak patents often bought up by litigation speculators that a previous surge in NPE litigation subsided significantly in the years following the AIA’s implementation. The impact of IPR has been narrowly focused on precisely the patents that caused wasteful litigation and should never have been granted. There are over 3.6 million patents in force; of those, only 6,827 have been challenged under the IPR program, a mere 0.19%, and of those challenged, less than a third, 2,170, were invalidated. The conjecture of critics – that the IPR process would be a “patent death squad” – has not been borne out.
Moreover, PTO Director Andrei Iancu has made important changes to the IPR process to ensure that it is fair to patent holders. He instructed his agency to make it easier for patent holders to defend the “novelty” and “nonobviousness” of claimed inventions, gave patent owners new tools to amend their patents to survive the IPR process, and made it harder to bring serial challenges against the same patent. Although I may have differences with some of the details of these changes, I have generally welcomed addressing patent owner concerns to broaden support for IPR.
Following Congress’s Intent in the America Invents Act
Unfortunately, one new PTO rule goes too far: contrary to Congress’s clear intent, the PTO is now refusing to institute some IPRs where the determinative factor is the PTO’s judgment that district court litigation involving the same patent might finish before the PTO acts. The PTO claims that this change avoids duplication of effort. But Congress made a clear choice to allow IPRs to proceed concurrent with district court litigation, expressly requiring only that IPRs be filed by a party who has been sued within one year after a court case commences and blocking a party bringing an IPR from raising in court any arguments it could have made in the IPR. The problem is not just the PTO’s policy itself, however, but also the way the PTO went about devising it. The PTO announced this new rule without following the Administrative Procedure Act, which provides the only opportunity for stakeholders to weigh in on agency actions that may have significant consequences. That’s why we, Intel, Google, and Apple filed suit in the Northern District of California challenging the new rule and the PTO’s failure to provide public notice and comment before implementing this change.
For these same reasons, we have also challenged in the Federal Circuit Court of Appeals the PTO’s decision to deny IPR institution on patents belonging to an Israeli company called Ramot. Ramot filed a case against Cisco last summer in the Eastern District of Texas, which is an attractive venue for patent plaintiffs in part because of its speed in resolving cases. Cisco filed compelling IPR petitions asking the PTO to invalidate Ramot’s patents well within the one-year deadline provided in the AIA; in fact we filed less than five months after we were sued. Still, the PTO denied our petitions without any consideration of the merits, because the trial in Texas would finish before our IPRs. The law doesn’t permit the PTO to deny IPRs for that reason. The PTO’s current practice is simply not consistent with the AIA.
The AIA was a careful compromise among multiple stakeholders that took many years to get through Congress. How an IPR would proceed in parallel with district court litigation on the same patent was a hotly discussed topic. The final legislation struck a balance between the interests of some stakeholders, like pharmaceutical companies, where huge sums are expended to develop vital new drugs and whose patents might be relatively easy to copy, and companies like ours and others in equally innovative industries that are susceptible to frivolous patent litigation because of the sheer quantity of vaguely worded patents that can be asserted against complex computer-based products. In the end, Congress created IPR to allow defendants in infringement actions to use a more efficient and effective process to challenge the validity of the patents asserted against them. The PTO’s new rule, however, turns all of that on its head: it uses the existence of a parallel district court action as a determinative reason to deny IPR, even when the IPR petition is filed within the one-year window. That is not what Congress wanted; Congress wanted timely IPRs to proceed, regardless of the pendency or pace of parallel district court litigation. The PTO’s new rule also flouts Congress’s directive that the PTO adopt any new standards that would guide its decisions on whether to allow an IPR by notice-and-comment rulemaking—a process that allows stakeholders to weigh in and requires the agency to take their concerns seriously. But the PTO didn’t do any of that.
Incentivizing American Innovation
The incentives created by the PTO’s new rule are all wrong. A patent holder who wants to block an IPR challenge will sue in a fast moving district court, hoping that between the presumption of patent validity, which applies in district courts, and the refusal of the PTO to review the patent, they can extract monopoly profits from US companies to the ultimate detriment of the US consumer. Together, the two leading so-called “rocket dockets” in Texas account for 40% of the patent infringement cases filed by NPEs in 2020, and the new rule will only increase this type of gamesmanship. When IPR is unavailable, monetization of weak patents thrives, and that means costs passed onto American consumers and a disincentive to innovate for American companies. Already in 2020, we have seen an increase in patent litigation brought by NPEs: compared to the first half of 2019, the first six months of 2020 have shown a 16% increase. This was precisely the problem Congress sought to tackle. Instead, the PTO’s emasculation of the IPR process will only encourage and strengthen the business model of asserting questionable patents.
Continued Improvements for the US Patent System
Although I strongly object to the PTO’s new rule on IPR and district court litigation, I continue to believe that the US patent system should be improved to benefit American innovation.
Director Iancu is right to emphasize the reliability and certainty of patent rights. Issuing only strong patents after a quality examination is the best way to reward innovation without leaving patent holders at risk of losing valuable assets. I also share his concern over the confused state of subject matter eligibility law in the United States. I would support sensible legislation that clarifies the eligibility of technologies such as medical diagnostic procedures for patent protection while assuring that abstract concepts that are implemented on computers remain ineligible for protection while empowering courts and the PTO to assure that patents are limited in scope to what was actually invented. The patent system can and should keep changing, but I’d like to make sure that each change makes it even better and more balanced. The recent changes to IPR institution criteria do neither.