IP News

Federal Circuit Remands PTAB Decision Due to Claim Construction Change

On June 10, 2016, a Federal Circuit panel of Judges Newman, Chen and Stoll issued a majority opinion, authored by Judge Stoll, in SAS Institute, Inc. v. Complementsoft, LLC, Case Nos. 2015-1346 and 2015-1347. The panel vacated-in-part the PTAB's decision on patentability in an inter partes review (IPR) proceeding and remanded due to the PTAB's adoption of a new claim construction in its final written decision that differed significantly from that offered in its institution decision.

SAS filed its petition to review the patentability of ComplementSoft's U.S. Patent No. 7,110,936 (“the '936 patent”). SAS's petition challenged all 16 claims of the '936 patent as being unpatentable. The PTAB instituted IPR for claims 1 and 3-10. In its institution decision, the PTAB construed certain terms of the '936 patent. In particular, the term “graphical representations of data flows” was construed to mean “a depiction of a map of the path of data through the executing source code.”

ComplementSoft did not challenge this construction in its patent owner's response. In its reply, SAS took issue with the construction's inclusion of the term “executing,” but suggested no modifications other than to remove this term from the PTAB's initial construction. The parties did not ask for a revised construction of “graphical representations of data flows” at the oral hearing, and the PTAB acknowledged that the parties did not dispute its initial construction of this term. Slip. Op. 16.

In its final written decision, the PTAB ultimately concluded that claims 1, 3, and 5-10 of the '936 patent were unpatentable as obvious, but found claim 4 to be patentable. With respect to claim 4, the PTAB found that the prior art did not disclose its “graphical representations of data flows” limitation, which the PTAB newly construed to mean “a graphical representation comprised of icons depicting data processing steps and arrows to depict the movement of data through source code.” The final written decision did not review patentability of claims 2 and 11'16 for which the PTAB did not institute IPR. In denying SAS's subsequent request for rehearing, the PTAB concluded that the new construction did not prejudice SAS because SAS could have made construction arguments for the term in its IPR petition.

On appeal, SAS argued, inter alia, that it was improper for the PTAB to change its interpretation of the term “graphical representations of data flows” in its final written decision without affording the parties an opportunity to respond. SAS also argued that the PTAB's final written decision was deficient for failing to address the patentability of all claims SAS included in its IPR petition, including those for which the PTAB did not institute IPR.

In its decision, the Federal Circuit panel agreed with the PTAB's claim constructions and also determined that the PTAB did not need to address, in its final written decision, challenges to claims upon which IPR was not instituted, citing its decision in Synopsys, Inc. v. Mentor Graphics Corp., 814 F.3d 1309 (Fed. Cir. 2016). The Federal Circuit, however, disagreed with the PTAB regarding the propriety of basing its final written decision on a new claim construction neither requested, nor reasonably anticipated by the parties. Id. at 17-18.

In reaching this conclusion, The Federal Circuit reiterated that “IPR proceedings are formal administrative adjudications subject to the procedural requirements of the Administrative Procedure Act ('APA').” Id. at 16. The panel then noted that “[o]ne such APA provision is that '[p]ersons entitled to notice of an agency hearing shall be timely informed of ' the matters of fact and law asserted.'” Id., quoting 5 U.S.C. '554(b)(3). The panel concluded that Petitioner SAS was entitled to this procedural protection because, per statute, IPR petitioners are entitled to notice of any oral hearing, and because petitioners, rather than being disinterested parties, “stand to lose significant rights in an instituted IPR proceeding because of the estoppel effects that trigger upon final written decision.” Id. at 16-17.

The panel clarified that “[w]hat concerns us is not that the Board adopted a construction in its final written decision, as the Board is free to do, but that the Board 'change[d] theories in midstream.'” Id. at 17, citing Belden Inc. v. Berk-Tek LLC, 805 F.3d 1064, 1080 (Fed. Cir. 2015). Thus, the Federal Circuit vacated the PTAB's patentability determination of claim 4 and remanded so that the parties could address the PTAB's new construction of “graphical representations of data flows.” Id. at 20.

Judge Newman, in an opinion concurring-in-part and dissenting-in-part, agreed that “that principles of due process, as well as the strictures of the Administrative Procedure Act ' require that the parties have the opportunity to adjust their arguments and evidence to the Patent Trial and Appeal Board's (PTAB's) change in claim construction,” Slip Op. at 1, but dissented from the panel's ratification of the PTAB's practice of addressing only some of the challenged claims in an instituted IPR, as she did in Synopsys, Inc., v. Mentor Graphics Corp.

Supreme Court Restricts Challenges to PTAB's Institution Decisions and Upholds Broadest Reasonable Interpretation Standard in IPR Proceedings

On June 20, 2016, the Supreme Court issued an opinion, authored by Justice Breyer, in Cuozzo Speed Techs., LLC v. Lee, holding that: 1) 35 U.S.C. '314(d) substantially restricts challenges to a PTO's decision to institute inter partes review (IPR); and 2) the PTO regulation imposing a broadest reasonable construction standard on IPR proceedings constitutes a reasonable exercise of its rulemaking authority.

In 2012, Garmin International, Inc., and Garmin USA, Inc., filed a petition for inter partes review of all claims of U.S. Patent 6,778,074 held by Cuozzo Speed Technologies, LLC. The PTAB instituted review of claim 17 on an obviousness ground proposed in Garmin's petition. The PTAB also instituted review of claims 10 and 14 based on the same obviousness ground, though Garmin's petition did not explicitly assert this ground of obviousness against these claims. The PTAB reasoned that Garmin implicitly challenged claims 10 and 14 by challenging claim 17 which depends from claims 10 and 14. The PTAB ultimately held claims 10, 14 and 17 unpatentable and concluded that amended claims proposed by Cuozzo were likewise unpatentable. Slip Op. at 6.

Cuozzo appealed to the Federal Circuit, arguing that the PTAB improperly instituted review of claims 10 and 14 based on an implicit challenge, in contravention of 35 U.S.C. '312(a)(3) requiring petitions to set forth the grounds for challenge “with particularity.” Id. at 6. Cuozzo also challenged the PTAB's use of the “broadest reasonable construction,” standard for claim construction set forth in 37 CFR '42.100(b). Id. A divided panel of the Federal Circuit rejected both of Cuozzo's arguments. The U.S. Supreme Court granted Cuozzo's petition for certiorari to review these two questions.

In its decision, the Supreme Court agreed with the Federal Circuit's conclusion that Cuozzo was barred from appealing the PTAB's institution decision. In reaching this conclusion, the Court relied on 35 U.S.C. '314(d), which states that the “determination by the [Patent Office] whether to institute an inter partes review under this section shall be final and nonappealable.” Id. at 7. The Court further concluded that the strong presumption in favor of judicial review was “overcome by clear and convincing indications, drawn from specific language, specific legislative history, and inferences of intent drawn from the statutory scheme as a whole that Congress intended to bar review.” Id. at 9-10 (internal quotations omitted).

The Court noted, however, that it expressed no opinion as to the precise effect of '314(d) on appeals that “implicate constitutional questions, that depend on other less closely related statutes, or that present other questions of interpretation that reach, in terms of scope and impact, well beyond [statutes related to inter partes review],” such as, for example a review based on a due process violation or of an institution decision that exceeds its statutory limits. Id. at 11.

According to the Court, Cuozzo's claim that Garmin's petition was not pleaded “with particularity” under '312 was little more than a challenge to the PTO's conclusion, under '314(a). Accordingly, the Court held that the institution decision was non-appealable.

The Court also agreed with the Federal Circuit's conclusion that a PTO regulation requiring the PTAB to apply the broadest reasonable construction standard reflects a reasonable exercise of its rulemaking authority. In reaching this decision, the Court analyzed Congress' grant of rulemaking authority to the PTO in light of its decision in Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984), which provides that “[w]here a statute is clear, the agency must follow the statute. But where a statute leaves a 'gap' or is 'ambigu[ous],' we typically interpret it as granting the agency leeway to enact rules that are reasonable in light of the text, nature, and purpose of the statute.” Id. at 13 (internal citation to Chevron omitted). The Court concluded that a statutory gap existed in this instance, but that the '316(a)(4) expressly authorizes the PTO to issue rules governing inter partes review, and that the broadest reasonable construction regulation is such a rule. Id. The Court further concluded that the claim construction regulation protects the public, is consistent with past practices of the PTO, and is therefore reasonable. Id. at 17-18.

In an opinion concurring in part and dissenting in part, joined by Justice Sotomayor, Justice Alito agreed with the Court's decision regarding adoption of a “broadest reasonable interpretation” standard, but dissented from the Court's decision regarding judicial review. Justice Alito concluded that, “consistent with the strong presumption favoring judicial review, Congress required only that judicial review, including of issues bearing on the institution of patent review proceedings, be channeled through an appeal from the agency's final decision.” Slip Op. at 1.

Watch for an expanded article on this case in the August issue of IP Strategist .

Jeff Ginsberg is a Partner, and David Cooperberg is an Associate, of Patterson Belknap Webb & Tyler LLP.