By Peter Reap, J.D., LL.M.
In a lengthy opinion, a divided en banc U.S. Court of Appeals for the Federal Circuit has ruled in that in this case—involving a dispute over a patent for swimming pool cleaning devices—and going forward in all other inter partes review proceedings ("IPRs") under the Leahy-Smith America Invents Act ("AIA"), the Patent Trial and Appeal Board (PTAB) must assess the burden of persuasion of proposed substituted claims without placing the burden of persuasion on the patent owner. In so finding its way to that very narrow legal conclusion that defined its judgment, the court held that § 316(e) unambiguously requires the petitioner to prove all propositions of unpatentability, including for amended claims, and that there was no interpretation of the statute by the USPTO to which the court was required to defer under Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Finally, the Board must consider the entirety of the record before it when assessing the patentability of amended claims under § 318(a) and must justify any conclusions of unpatentability with respect to amended claims based on that record (Aqua Products, Inc. v. Matal, October 4, 2017, O’Malley, K.).
The majority opinion was authored by Circuit Judge Kathleen O’Malley, joined by Circuit Judges Newman, Lourie, Moore, and Wallach. Circuit Judges Dyk and Reyna concurred in the result. Separate concurring opinions were filed by Circuit Judges Moore, Reyna, and Taranto. Circuit Judge Hughes, joined by Circuit Judge Chen, filed a dissenting opinion.
The en banc court vacated a final written decision by the PTAB in the underlying dispute between patent owner Aqua Products and petitioner Zodiac Pool Systems insofar as it denied the patent owner’s motion to amend the patent. The matter was remanded for the Board to issue a final decision under § 318(a) assessing the patentability of the proposed substitute claims without placing the burden of persuasion on the patent owner.
The dispute. With litigation pending between the parties, Zodiac petitioned the Board for IPR on claims 1–14, 16, and 19–21 of the ’183 patent, asserting invalidity under 35 U.S.C. § 102 and § 103 in light of several prior art references. The Board instituted an IPR on claims 1–9, 13, 14, 16, and 19–21 of the ’183 patent. Aqua then moved to substitute claims 1, 8, and 20 of the ’183 patent with proposed claims 22, 23, and 24, respectively.
The Board denied Aqua’s motion to amend. Although the Board expressly found that Aqua’s amendments complied with the requirements of § 316(d) and 37 C.F.R. § 42.121(a)(2)(i)–(ii) (2015), the Board concluded Aqua had failed to prove the substitute claims were patentable. Aqua appealed.
On appeal, Aqua argued that it did not bear the burden of proving the patentability of its proposed substitute claims. A panel of the Federal Circuit rejected Aqua’s argument based on Federal Circuit precedent, which "has upheld the Board’s approach of allocating to the patentee the burden of showing that its proposed amendments would overcome the art of record." Aqua sought and was granted rehearing en banc of that panel decision.
IPR proceedings. In an IPR, a third party may petition the Director to review previously-issued patent claims in an adjudicatory setting. To initiate an IPR, a petitioner must show a reasonable likelihood that it would prevail with respect to at least one of the claims challenged. The Board reaches its conclusions based on a preponderance of the evidence and, in doing so, employs the broadest reasonable interpretation of the challenged claims for unexpired patents. Supreme Court precedent emphasized that the patent owner’s opportunity to amend its patent in IPRs is what justifies the Board’s use of the broadest reasonable interpretation standard in IPRs. Indeed, the USPTO has more than once acknowledged that use of the broadest reasonable interpretation standard is only appropriate when patent owners have the opportunity to amend, Judge O’Malley noted.
Despite repeated recognition of the importance of the patent owner’s right to amend during IPR proceedings—by Congress, courts, and the USPTO alike—patent owners largely have been prevented from amending claims in the context of IPRs. A February 2017 study noted that the Board has only granted eight motions to amend in post-issuance review proceedings (six in IPRs and two in CBM proceedings). Aqua and its amici contended that these statistics are a direct result of the Board’s placement of the burden of proving the patentability of amended claims on the patent owner, its requirement that the patent owner satisfy that burden on the face of a 25-page motion to amend—without regard to the remainder of the record—and its requirement that the patent owner prove patentability, not just in response to the grounds of unpatentability asserted by the petitioner, but on all possible grounds and in light of all prior art known to the patent owner.
Thus, the main question at issue was whether the Board’s current practice of placing the substantive burden of proving patentability on the patent owner with regard to claim amendments proffered in IPRs may be employed in pending IPRs. It may not, the majority decided.
Statutory and regulatory scheme. The AIA provides that a patent holder in an IPR "may file 1 motion to amend the patent," either by cancelling any challenged patent claim or by "propos[ing] a reasonable number of substitute claims." 35 U.S.C. § 316(d)(1). In the same statutory section that discusses motions to amend, the following subsection appears: "(e) Evidentiary Standards.—In an inter partes review instituted under this chapter, the petitioner shall have the burden of proving a proposition of unpatentability by a preponderance of the evidence." Id. § 316(e).
The Director promulgated 37 C.F.R. § 42.20 to govern all motion practice before the Board. In relevant part, Rule 42.20(a) requires that any "[r]elief, other than a petition requesting the institution of a trial, must be requested in the form of a motion." Rule 42.20(c) states additionally that "[t]he moving party has the burden of proof to establish that it is entitled to the requested relief." While these rules do not say so expressly, the USPTO claimed in this appeal that the Board has interpreted Rules 42.20 and 42.121 to place the burden of persuasion on a patent owner to demonstrate, by a preponderance of the evidence, that any proposed amended claims are patentable, that it must do so in light of prior art not already part of the IPR, and that the Director has endorsed that interpretation, the court noted.
Chevron. Chevron requires a court reviewing an agency’s construction of a statute it administers to determine first "whether Congress has directly spoken to the precise question at issue." 467 U.S. at 842. If the answer is yes, the inquiry ends, requiring effect to be given to Congress’s unambiguous intent. Id. at 842–43. If the answer is no, the court must consider "whether the agency’s answer [to the precise question at issue] is based on a permissible construction of the statute."
Chevron step one. Congress explicitly placed the burden of persuasion to prove propositions of unpatentability on the petitioner for all claims, including amended claims, according Judge O’Malley. This interpretation was compelled by the literal text of § 316(e), the overall statutory scheme for IPRs set forth in the AIA, and its legislative history. Moreover, this interpretation is consistent with the language and purpose of § 316(d).
The USPTO claimed that § 316(d)(1) unambiguously places the burden on the patent owner to prove the patentability of any proposed amended claim. The USPTO’s reading of § 316(d)(1) was contravened by the plain language of the statute: § 316(d)(1) says "the patent owner may" move to amend, not that the Board may or may not allow such a motion regardless of its content. It was also inconsistent with the purpose of § 316(d) to provide a patent owner with the ability to amend a challenged claim at least once as a matter of right, so long as the proposed amended claim conforms to the statutory requirements and any reasonable procedural rules. Indeed, the USPTO’s reasoning would render the amendment process virtually meaningless.
The USPTO contended that, because § 316(d)(1) says the patent owner may seek to amend by "motion," the amendment process unequivocally puts the burden of persuasion regarding the patentability of the amendment on the patent owner because movants bear the burden of proof on motions. Judge O’Malley rejected that contention.
The USPTO’s argument begged the question: what is the relief sought by the "motion" authorized in § 316(d)(1)? The "request" made by a motion to amend is—in the USPTO’s own words—for "entry" into the IPR, not for entry of an amended claim into the patent. Once entered into the proceeding, the amended claims are to be assessed for patentability alongside the original instituted claims. To conclude otherwise would conflate two concepts that are traditionally treated as distinct: the use of motions to raise evidentiary issues in adversarial proceedings versus the overall allocation of evidentiary burdens to the respective parties when rendering decisions on such motions.
For these reasons, the only reasonable reading of the burden imposed on the movant in § 316(d) was that the patent owner must satisfy the Board that the statutory criteria in § 316(d)(1)(a)–(b) and § 316(d)(3) are met and that any reasonable procedural obligations imposed by the Director are satisfied before the amendment is entered into the IPR. Only once the proposed amended claims are entered into the IPR does the question of burdens of proof or persuasion on propositions of unpatentability come into play. It is at that point, accordingly, that § 316(e) governs, placing that burden onto the petitioner, according to Judge O’Malley.
Chevron step two. Judge O’Malley’s majority opinion was joined only by Judges Newman, Lourie, Moore, and Wallach, with Judges Dyk and Reyna concurring only in the result. The majority believed there was no need to consider whether deference to any interpretation of § 316(d) and § 316(e) that was contrary was appropriate, However, majority found that it was required to reach Chevron step two because, of the eleven judges participating in this en banc rehearing, six believed the relevant statutory scheme is ambiguous.
Thus, the court next considered: (1) whether the USPTO has adopted a rule or regulation through APA compliant procedures that have the force and effect of law; (2) if so, whether that rule is within the scope of the USPTO’s rulemaking authority; and (3) if so, whether that rule is based on "a permissible construction of the statute." Chevron, 467 U.S. at 843. Because the majority concluded that the answer to at least the first question was no, it proceeded to analyze the relevant statutory provisions in the first instance.
The USPTO has not adopted a rule or regulation governing the burden of persuasion on the patentability of proposed amended claims. Neither Rule 42.20 nor Rule 42.121 addresses the burdens of proof or persuasion with respect to propositions of unpatentability once an amended claim has been entered into the IPR.
In connection with the adoption of its rules governing IPRs, including Rule 42.20, the USPTO defended its choice not to employ all of the rulemaking procedures under the APA by explaining, repeatedly, that nothing it was doing in its rules was substantive and nothing in its rules would impact final decisions on patentability. However, the USPTO was not entitled to say that its rules do not relate to issues of patentability and then later apply those very rules to impose substantive burdens of persuasion with respect to patentability on the patent owner.
In sum, the USPTO failed to make any determination on the ambiguity of either § 316(d)(1) or § 316(e) at any point before the briefing on appeal. The court found that the Board’s decisions do not reflect "a reasonable accommodation of manifestly competing interests . . . [where] the agency considered the matter in a detailed and reasoned fashion, and the decision involves reconciling conflicting policies," Chevron, 467 U.S. at 865, and, thus, concluded that there was no basis for deference.
With nothing to defer to for their interpretation of § 316(d) and § 316(e), the court was required to determine the most reasonable reading of those provisions. Specifically, whether the AIA either requires or authorizes placing the burden of proving the patentability of amended claims on the patent owner rather than the petitioner. For all the reasons discussed above, the most natural reading of the statute was that it does not, the court opined. Thus, the manority concluded that the Board erred when it imposed the burden of proving the patentability of its proposed substitute claims on Aqua.
Patentability decisions must be based on entirety of record. The court’s en banc order also asked whether the Board may sua sponte raise patentability challenges to a proposed amended claim. Having fully considered the record, however, the majority concluded that the record does not present this precise question. It should therefore be reserved for another day, as, apparently, other members of the court agreed. The record and the panel decision in this case, however, directly posed a different question: whether the Board may base its patentability determinations with respect to amended claims solely on the face of the motion to amend, without regard to the remainder of the IPR record. The panel decision in this case answered that question in the affirmative. The en banc majority did not.
Section 318(a) provides that, where it proceeds to a final written decision, the Board is to issue a decision on the patentability of both originally issued, challenged claims and any amended claims. That final substantive decision must be based on the entirety of the record. Basic principles of administrative law compel this conclusion. First, an agency must explain why it decides any question the way it does. Second, an agency’s refusal to consider evidence bearing on the issue before it is, by definition, arbitrary and capricious.
In the context of this case, accordingly, the majority believed that the Board’s decision to reject Aqua’s proposed amended claims without consideration of the entirety of the IPR record was an abuse of discretion which provided an independent basis for judgment vacating and remanding this matter to the Board.
Conclusion. In sum, Judge O’Malley clarified that the only legal conclusions of the divided en banc court that supported and defined the judgment of the court were: (1) the USPTO has not adopted a rule placing the burden of persuasion with respect to the patentability of amended claims on the patent owner that is entitled to deference; and (2) in the absence of anything that might be entitled deference, the USPTO may not place that burden on the patentee.
The case is No. 2015-1177.
Attorneys: James R. Barney (Finnegan, Henderson, Farabow, Garrett & Dunner, LLP) for Aqua Products, Inc. Nathan K. Kelley, USPTO, for Joseph Matal.
Companies: Aqua Products, Inc.
MainStory: TopStory Patent FedCirNews
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