Burden of Proof does not shift to Patent Owner upon institution of an Inter Partes Review

Andrew Melick | August 1, 2016

In Re: Magnum Oil Tools International, LTD.

July 25, 2016

Before Newman, O’Malley, and Chen. Opinion by O’Malley

Summary:

McClinton Energy Group, LLC (“McClinton”) filed a petition for inter partes review (“IPR”) of U.S. Patent No. 8,079,413 (“the ‘413 patent”) owned by Magnum Oil Tools International, Ltd. (“Magnum”). McClinton based the petition on two combinations of prior art references: (1) Alpha in view of Cockrell and Kristiansen, and (2) Lehr in view of Cockrell and Kristiansen. The petition primarily focused on the combination of Alpha, Cockrell and Kristiansen, and merely “incorporated by reference” the arguments based on Alpha for the arguments based on Lehr. The IPR was instituted based only on Lehr in view of Cockrell and Kristiansen, and in a final decision, the claims were found unpatentable. The CAFC reversed the PTAB decision stating that the arguments “incorporated by reference” are not sufficient for meeting the burden of proving obviousness by a preponderance of the evidence. Conclusory statements cannot satisfy the petitioner’s burden of demonstrating obviousness, and thus the PTAB did not have sufficient evidence on which to base its legal conclusion of obviousness. The PTAB improperly shifted the burden to Magnum to disprove obviousness without requiring McClinton to prove its assertion of obviousness. The CAFC also stated that it was improper for the PTAB to rely on an unpatentability theory that was not included in the petition.

Details:

The ‘413 patent is to technology in the field of oil drilling through the use of “fracking” (hydraulic fracturing). Specifically, the patent is to a release mechanism for a setting tool of a downhole plug.

McClinton’s petition was based on two combinations of prior art references: (1) Alpha in view of Cockrell and Kristiansen, and (2) Lehr in view of Cockrell and Kristiansen. The petition primarily focused on the combination of Alpha, Cockrell and Kristiansen, and merely “incorporated by reference” the arguments based on Alpha for the arguments based on Lehr.

The PTAB instituted the IPR based on Lehr in view of Cockrell and Kristiansen finding that the petitioner established a reasonable likelihood of success. In the final decision, the PTAB held all challenged claims unpatentable. Magnum appealed the decision. McClinton and Magnum subsequently settled and as part of the settlement, McClinton agreed not to participate in the appeal. The PTO intervened for McClinton.

Magnum argued that neither McClinton nor the PTAB established a prima facie case for rejection. McClinton merely tried to incorporate by reference arguments of obviousness based on Alpha in view of Cockrell and Kristiansen for obviousness based on Lehr in view of Cockrell and Kristiansen. Thus, McClinton failed to specifically argue why it would have been obvious to combine Lehr with Cockrell and Kristiansen.

The PTO argued that upon institution of an IPR, the burden of producing evidence of nonobviousness shifts to the patentee. The PTO’s position is that the PTAB found a reasonable likelihood that McClinton would ultimately carry its burden of persuasion, and thus, the burden of production shifted to Magnum to argue or produce evidence that Lehr in view of Cockrell and Kristiansen does not render claim 1 obvious. According to the CAFC, the PTAB relied primarily on Magnum’s failure to prove non-obviousness in its decision that the claims are obvious.

Burden of Proof in an IPR

There are two distinct burdens of proof: a burden of persuasion and a burden of production. “The burden of persuasion is the ultimate burden assigned to a party who must prove something to a specified degree of certainty.” “The burden of production may entail producing additional evidence and presenting persuasive argument based on new evidence or evidence already of record.”

In an IPR, “the burden of persuasion is on the petitioner to prove unpatentability by a preponderance of the evidence.” CAFC citing 35 U.S.C. § 316(e). The burden of persuasion never shifts to the patentee. The CAFC noted that a burden shifting framework makes sense in the prosecution context “where the prima facie case furnishes a procedural tool of patent examination, allocating the burdens of going forward as between examiner and applicant.” But the burden shifting framework does not apply in the adjudicatory context of an IPR.

The PTO argued that the burden of production shifts between the petitioner and the patent owner once the PTAB institutes an IPR. The CAFC stated that in the context of establishing a priority date, shifting the burden of production is warranted. The patent challenger has the burden of producing evidence to support a conclusion of unpatentability under § 102 or § 103, but the patentee bears the burden of establishing an earlier priority date effectively as an affirmative defense. But in this case, the burden shift is not warranted because the patentee’s position is that the petitioner failed to meet its burden of proving obviousness.

Where, as here, the only question presented is whether due consideration of the four Graham factors renders a claim or claims obvious, no burden shifts from the patent challenger to the patentee.

The CAFC also stated that the PTO’s proposed burden shifting is not consistent with precedent holding that the decision to institute and the final written decision are two different analyses applying different qualitative standards. Due to the different standards, it is not appropriate to shift the burden to the patentee after institution to prove that the patent is patentable. The petitioner continues to bear the burden of proving unpatentability after institution, and “the Board has an obligation to assess the question anew after trial based on the totality of the record.”

Obviousness

Magnum argued that McClinton did not explain why one of ordinary skill in the art would have combined Lehr with Cockrell and Kristensen, and that the PTAB improperly incorporated by reference McClinton’s arguments based on Alpha into the conclusion that the claims would have been obvious based on Lehr. Magnum also argued that the PTAB improperly shifted the burden to Magnum to prove nonobviousness.

The CAFC pointed out several examples where the PTAB improperly shifted the burden to Magnum to disprove obviousness without requiring McClinton to prove its assertion of obviousness. In one example, no explanation was provided by McClinton or the PTAB for applying statements from the Alpha arguments to the Lehr arguments, but the PTAB expected Magnum to explain why an obviousness argument based on Alpha in view Cockrell and Kristensen would not be applicable to Lehr in view of Cockrell and Kristensen. The CAFC noted that an explanation by McClinton was particularly necessary since Alpha and Lehr operate differently.

Since McClinton attempted to merely “incorporate by reference” the argument based on Alpha to the argument based on Lehr, and the teachings of Alpha and Lehr are significantly different, McClinton failed to provide an explanation regarding why a skilled artisan would combine the prior art references to achieve the claimed invention. The PTAB had no basis for its conclusion that McClinton had met its burden of proving by a preponderance of the evidence that the claimed invention would have been obvious. Conclusory statements cannot satisfy the petitioner’s burden of demonstrating obviousness, and thus the PTAB did not have sufficient evidence on which to base its legal conclusion of obviousness.

The PTO argued that it is not error for the PTAB to rely on an unpatentability theory that could have been included in a properly-drafted petition, but was not. However, the CAFC stated that the PTAB must base its decision on arguments that were advanced by a party, and to which the opposing party was given a chance to respond. “While the PTO has broad authority to establish procedures for revisiting earlier-granted patents in IPRs, that authority is not so broad that it allows the PTO to raise, address, and decide unpatentability theories never presented by the petitioner and not supported by the record evidence.”

Other PTO Arguments

The PTO had a couple of additional arguments that the CAFC readily dismissed. The PTO attempted to frame Magnum’s arguments as an improper appeal to the institution decision since the statements that Magnum took issue with are from the institution decision. The CAFC said that the statements were also in the final decision and so the appeal is from the final decision regardless of whether the statements were also in the institution decision.

The PTO also argued that Magnum waived its arguments since they were required to first make the arguments in a request for rehearing of the institution decision. The CAFC said that an appeal can be taken from the final decision based on arguments that were previously presented to the Board, and that a request for rehearing is not required to preserve the right to appeal.

Comments

Based on this case, I would expect that the PTAB will be more careful about the grounds of unpatentability that it relies on for instituting an IPR.

As a petitioner for an IPR, you should make sure that arguments are fully developed. Arguments that are “incorporated by reference” based on another argument may not satisfy the requirements for proving obviousness.

As a patent owner in an IPR, watch out for petitioners using shortcuts for adding grounds of unpatentability such as arguments that are “incorporated by reference” for one primary reference to another primary reference, especially if there are significant differences between the references. Also as a patent owner, watch out for statements by the PTAB indicating a requirement to prove non-obviousness. The burden is on the petitioner to prove obviousness. In addition, a patentee should watch out for the PTAB using theories of obviousness that were not presented by the petitioner. It is improper for the PTAB to use new grounds of unpatentability in its decision.

Full Opinion

 

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