On October 4, 2017, the U.S. Court of Appeals for the Federal Circuit issued a divided en banc decision in Aqua Products, Inc. v. Matal, vacating the Patent Trial and Appeal Board’s (PTAB) final written decision insofar as it denied the patent owner’s motion to amend, and remanding to the PTAB to issue a final decision assessing the patentability of the proposed substitute claims without placing the burden of persuasion on the patent owner. The majority did not come to any agreement as to whether the burden of persuasion should lie with the petitioner or the office.   A total of five separate opinions were filed in this precedential decision, leading to an extremely narrow judgment of the court. The Court described the only supported legal conclusions as: “(1) the PTO 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 PTO may not place that burden on the patentee.”(O’Malley Opinion at pg. 66).

In arriving at these legal conclusions, a majority of the Court also agreed that 35 U.S.C. § 316(d) and 37 C.F.R. § 42.121 place a default burden of production on the patentee, but that the statute is ambiguous as to the burden of persuasion on the patentee. A majority of the Court further agreed that “where a statute delegates to the Director the authority to prescribe regulations adopting standards, only notice and comment rulemaking by regulation will be given Chevrondeference.”(Moore Opinion at pg. 10).

However, in removing the burden of persuasion from the patentee, the Court’s order merely states that the PTO “must follow this same practice in all pending IPRs unless and until the Director engages in notice and comment rule-making. At that point, the court will be tasked with determining whether any practice so adopted is valid.”(O’Malley Opinion at pg. 66 (emphasis added)).Accordingly, it is likely that, if the burden of persuasion were placed on the patentee through notice and comment rule-making, this rule would be upheld by the Federal Circuit.

Background

Aqua Products, Inc., the owner of U.S. Patent No. 8,273,183 directed to an automated swimming pool cleaner, filed an infringement suit against Zodiac Pool Systems, Inc. in 2012.Zodiac responded by challenging the validity of the patent and petitioned the PTAB for inter partes review (IPR).

The PTAB instituted the IPR and denied Aqua Products’ motion to amend the claims. In its Final Written Decision, the PTAB concluded that Aqua Products failed to carry its burden of persuasion because its arguments to amend the claims were unpersuasive—i.e., the patent owner failed to demonstrate that the new limitations would render the substitute claims patentable over the prior art. Aqua Products appealed to the Federal Circuit, challenging the PTAB’s amendment procedures that “require the patentee to demonstrate that the amended claims would be patentable over the art of record.”(In re: Aqua Products, Inc., No. 15-1177 (Fed. Cir. May 25, 2016)).

In its previous panel decision, the Federal Circuit made clear that, for a denial of a motion to amend claims to be in compliance with the Administrative Procedure Act, the PTAB must show only that: (1) “it fully considered the particular arguments that were raised by the patentee” and (2) “it provided a reasoned explanation for why those arguments were unpersuasive.”(Id. at pg. 7).The Federal Circuit panel found that both of these requirements were satisfied, and accordingly, the PTAB did not abuse its discretion by denying Aqua Products’ proposed amendments.(See id.).

The Court noted that its precedents have upheld the PTAB’s “approach of allocating to the patentee the burden of showing that its proposed amendments would overcome the art of record.”(Id. at pg. 6 (citing Microsoft Corp. v. Proxyconn, Inc., 789 F.3d 1292 (Fed. Cir 2015))).The Court further noted that its precedents have also held that the PTAB’s “regulations concerning motions to amend and its interpretation thereof are consistent with the [America Invents Act’s (“AIA”)] statutory framework, even though the framework generally places the burden of proving unpatentability on the IPR petitioner.”(Aqua Products I at pg. 6 (citing Nike, Inc. v. Adidas AG, 812 F.3d 1326 (Fed. Cir. 2016))).

Following the panel decision, Aqua Products petitioned for rehearing en banc. The petition was granted, proposing two questions: (1) whether the PTO could require the patent owner to bear the burden of persuasion or production under 35 U.S.C. § 316, and (2) whether the Board could raise patentability challenge to proposed amended claims sua sponte, and where the burden of persuasion or production would lie in such a situation.

A Fractured En Banc Decision

Burdens of Persuasion and Production in Motions to Amend

The judgment of the majority agreed only as to the first question—that, because the PTO has not to date 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, the PTO may not place this burden on the patentee. The rationale for this narrow holding varied widely across five separate opinions, with a majority of the Court agreeing on only a subset of points.

Further, in removing the burden of persuasion from the patentee in motions to amend, the Court’s order merely states that the PTO “must follow this same practice in all pending IPRs unless and until the Director engages in notice and comment rule-making. At that point, the court will be tasked with determining whether any practice so adopted is valid.”(O’Malley Opinion at pg. 66 (emphasis added)).In other words, the fractured opinion of the Federal Circuit explicitly leaves open the possibility that, with simple notice and comment rulemaking, the PTO could properly levy the burden of persuasion regarding motions to amend on patentees.

The Court was split on the effect of the statutory framework on burdens of production and persuasion in motions to amend. A majority of the court—Judges Reyna, Dyk, Prost, Taranto, Chen, and Hughes—agreed that 35 U.S.C. § 316(d) and 37 C.F.R. § 42.121 place a default burden of production on the patentee.(Reyna Opinion at pg. 2).However, a plurality of the court—Judges O’Malley, Newman, Lourie, Moore, and Wallach—agreed that 35 U.S.C. § 316(a)(9) does not give PTO the express authority to regulate burdens of proof or persuasion with respect to amendments authorized under § 316(d).(O’Malley Opinion at pgs. 57, 58).

Analysis under Chevron Steps One and Two—Concurring Opinions

Judges O’Malley, Newman, Lourie, Moore, and Wallach would have held that 35 U.S.C. § 316(e) unambiguously requires the petitioner to carry the burden of persuasion on all propositions of unpatentability, and would have concluded that the Board’s decision to reject Aqua Products’ amended claims without considering the entirety of the IPR record was an abuse of discretion.(O’Malley Opinion at pg. 62).

However, by a 6-5 vote, the Court held that 35 U.S.C. § 316(e) is ambiguous as to who bears the burden of persuasion for proposed substitute claims. Because the majority held that the statute is ambiguous, each concurring and dissenting opinion addresses the Administrative Procedure Act (“APA”) and deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) at length.

Judge O’Malley’s opinion repeatedly emphasizes the importance of patentees’ ability to amend their claims in the legislative history and in justifying the PTAB’s use of the broadest reasonable construction in IPRs, and concludes that the PTAB’s Idle Free and MasterImage 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,” under Chevron step two.(O’Malley Opinion at pg. 55 (citing Chevron, 467 U.S. at 865 (internal quotation omitted))).Accordingly, a majority of the court—Judges O’Malley, Newman, Lourie, Moore, Wallach, Dyk, and Reyna—found there was no interpretation of either 35 U.S.C. § 316(d) or § 316(e) to which courts must defer.(O’Malley Opinion at pg. 56).

Judge Moore, joined by Judges Newman and O’Malley, further explained their view that the PTAB’s Idle Free and MasterImage decisions allocating the burden of persuasion to patent owners are not entitled to Chevron deference because the PTO only has statutory authority under 35 U.S.C. § 316(b) to prescribe regulationsregarding § 316(d), and these adjudicatory decisions are not regulations.(See Moore Opinion at pgs. 4, 5).As Judge Moore explained, a majority of the Court agreed that “where a statute delegates to the Director the authority to prescribe regulations adopting standards, only notice and comment rulemaking by regulation will be given Chevron deference.”(Moore Opinion at pg. 10).

Judge Reyna, joined by Judges Dyk and Prost, take still another approach, finding that 35 U.S.C. § 316(e) is ambiguous, and that the PTAB’s Idle Free andMasterImage decisions attempting to assign a burden of persuasion to the patent owner in motions to amend, which did not explicitly discuss or interpret the statutory framework, were procedurally flawed such that, under Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2125 (2016), Chevron deference was not warranted.(Reyna Opinion at pg. 3).

Analysis under Chevron Steps One and Two—Dissenting Opinions

Judge Taranto, writing separately, joined by Judges Prost, Chen, and Hughes, dissented from the judgment of vacatur, based on the view that a PTO regulation, 37 C.F.R. § 42.20(c), assigns the burden of persuasion to the patent owner, and Aqua Products did not present any sound argument against giving Chevron deference to that regulation.

Finally, Judge Hughes, writing separately, joined by Judge Chen, dissented from the judgment. Judge Hughes argued that, even if the scope of the PTO’s regulation on the burden of proof for motions to amend is ambiguous, the PTO is still entitled to Auer deference for its own interpretation of its own regulation. Judge Hughes also wrote to disagree with Judge Moore’s argument that Congress’s use of the word “regulation” limits an agency’s authority to promulgating regulations codified in the Code of Federal Regulations (CFR).(Hughes Opinion at pg. 3).

Potential Impact

The Court’s holding that the PTO may not place the burden of proving patentability of proposed amended claims on patentees in future IPRs should make it easier for patentees to amend claims in future post grant proceedings. However, because a majority of the Court agreed that the statutory framework was ambiguous as to this question, the PTO could simply choose to promulgate a formal rule through the notice and comment process which explicitly places the burden of proving patentability of proposed amended claims on the patentee. Based on the opinions of the Judges in this case, such a rule would likely be entitled to Chevrondeference.

While patentees may be eager to file motions to amend in view of this ruling, they should still exercise caution before filing a motion to amend in an IPR. While patentees may not have the burden of proof, filing a motion to amend may be viewed as a concession of unpatentability of the original challenged claims, and the Court’s opinion has left the PTO with the clear option to promulgate a regulation re-assigning the burden of proof to patentees.

Further, as emphasized in Judge Hughes’s dissenting opinion, the Federal Circuit’s decision reaches far beyond patent law, and impacts the entirety of administrative law by potentially transforming Chevron analysis into a de novo review of an agency’s choices. In particular, the Court’s interpretation that the use of the word “regulation” in a statute limits an agency’s statutory authority to notice and comment rulemaking could have wide-reaching effects. As Judge Hughes warned in his dissenting opinion, this interpretation may mean that “agencies can no longer be sure that any promulgated rule will withstand judicial review and the sua sponteideas of courts.”(Hughes Opinion at pg. 7).