New Federal Circuit Appeal Claims PTAB Unconstitutional Because Of Fee Funding—But Ignores The Patent Examination Process

In a recently filed brief in the Federal Circuit case New Vision Gaming v. SG Gaming, the appellant argues that the PTAB is unconstitutional because the fees charged for the proceeding create a bias towards institution.  Specifically, New Vision Gaming claims that PTAB judges stand to benefit from institution and therefore it’s a violation of due process for the judges to make an institution decision.

That claim fails to hold up, because the financial bias argument is baseless, but if it were to be upheld, it would throw into question every single patent currently in force.  The financial incentive to grant a patent created by the USPTO fee structure is more clearly apparent and far greater, in monetary terms, than any potential incentive for financial enrichment by the agency or by a PTAB judge deciding whether to institute or deny an IPR.

Financial Bias Is, If Anything, Against Institution

New Vision argues that, because a portion of the PTAB’s budget depends on post-institution fees that are only collected if the proceeding is instituted, the judges are biased towards institution.  But this argument ignores the cost of the work performed by PTAB judges after institution.  As a fee-funded agency, the USPTO is supposed to recover the entirety of its costs through the fees it charges, with the fees being commensurate with the costs.  Fortunately, the USPTO publishes a unit-cost breakdown of major aspects of everything it does—including IPRs and other AIA trial proceedings.  

The USPTO receives $15,500 pre-institution when an IPR request is filed, but it costs the agency $15,922 to complete all of the work through the institution decision.  If instituted, the IPR costs the agency $16,206 to complete the work, but the USPTO only collects $15,000.  In other words, if PTAB judges were driven by financial considerations of the agency, the financial incentive would actually be to deny institution, because every grant of institution actually represents a net loss to the agency and there’s no possibility of appeal of a denied institution.  

If PTAB judges are responding to financial incentives, we would expect the institution rate to be artificially low, not high, meaning that a petitioner might have a viable challenge, but New Vision does not.

PTAB Judges Don’t Have A Personal Incentive To Institute

New Vision also makes unsubstantiated claims that PTAB judges might institute in order to obtain bonuses or ensure a steady flow of work.  Setting aside that much of the PTAB’s work is actually in appeals from examination, not IPR trials, a judge who wished to game the system to obtain a bonus would again be incentivized to deny institution.  They’d simply review and deny more petitions in order to maintain the same workload.  And because denial of institution is completely unappealable, they would never be overturned on appeal.  

In contrast, a PTAB judge who over-instituted would face the prospect of review of their presumably biased decisions by the Director of the USPTO and the Federal Circuit.  While the USPTO doesn’t disclose details of its bonus program for PTAB judges, if any exists, having your decisions overturned seems like it would drive down your bonus, not improve it.

So the personal bonus incentive argument doesn’t seem to fly either.

Empirical Evidence Doesn’t Support The Claim

New Vision’s theory also fails empirically.  Its appeal presents a theory that would, if accurate, incentivize institution—but not one that creates a financial incentive to find invalidity at the end of the IPR.  The hypothetical advantage to the agency and judge has already been obtained once the institution occurs, so there’s no incentive not to find validity.  If New Vision’s theory was accurate, we’d expect to see high rates of validity findings at the end of the chain as PTAB judges who instituted cases on meritless petitions make the correct decision, since the financial benefit was already received.  Instead we see low rates of validity in final decisions.

But, counter to the New Vision theory, one of the most frequent criticisms of the PTAB is that once a patent is instituted the patent is usually at least partially invalidated.  And that’s actually a signal that decisions to institute are mostly correct on the merits—they’re not instituting IPRs on arguments that have little chance of success.  If anything, the high invalidation rate in final decisions is actually a signal that the PTAB is under-instituting, denying potentially valid petitions that wind up not working out once all the evidence is in.

New Vision’s theory thus fails on both theoretical and empirical grounds.

But the idea that a financial incentive for an agency to act in a particular way might lead to a due process violation isn’t crazy.  I don’t think the Federal Circuit will agree that this particular case presents such a problem, but if they do, let’s talk about the elephant in the room—examination.

The Huge Financial Incentive To Grant A Patent

As I noted above, the USPTO publishes its unit-cost data for AIA trials like IPR.  But it also publishes its unit-cost data for examination.  And that data shows that the USPTO incurs a massive financial loss with every patent it examines—one that it only makes up through issue fees and especially through maintenance fees.  In fact, based on USPTO unit-fee data and other data they’ve published about the characteristics of patent applications, the average cost to the USPTO of taking a patent application from filing through to allowance is $6,000.

But the USPTO only collects around $2,200 on average during this phase, meaning it loses $3,800 on each patent it examines but doesn’t grant.  If it issued no patents, there would be a huge revenue shortfall for the agency.

And even if the USPTO issues a patent, it still loses money.  It costs the USPTO $325 to issue a patent, but it collects $1,000 in issue fees.  So the USPTO is still in the hole by $2,800 after issuance.  Even after the 4-year maintenance fee ($1,600) is paid, the agency is still losing money.  It’s only if a patent is maintained for 8 years that the PTO finally covers its costs of examination.

And empirically, the evidence suggests [1][2] that this fee structure does in fact lead to patents being granted that shouldn’t have been.

So if structural financial incentives create due process violations, as New Vision alleges in their appeal, then the entire patent granting process is suspect.  

Every patent in force is a potential due process violation.  

And every patent defendant in existence would bring a due process defense, claiming that the patent granting process deprived them of their liberty to create without receiving due process of law because of the financial incentives of examiners and the USPTO to grant patents.

Joshua Landau

Joshua Landau is the Patent Counsel at the Computer & Communications Industry Association (CCIA), where he represents and advises the association regarding patent issues.  Mr. Landau joined CCIA from WilmerHale in 2017, where he represented clients in patent litigation, counseling, and prosecution, including trials in both district courts and before the PTAB.

Prior to his time at WilmerHale, Mr. Landau was a Legal Fellow on Senator Al Franken’s Judiciary staff, focusing on privacy and technology issues.  Mr. Landau received his J.D. from Georgetown University Law Center and his B.S.E.E. from the University of Michigan.  Before law school, he spent several years as an automotive engineer, during which time he co-invented technology leading to U.S. Patent No. 6,934,140.

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