On July 25, 2016, the U.S. Court of Appeals for the Federal Circuit issued a decision in In re Magnum Oil Tools International, Ltd., reversing the U.S. Patent Trial and Appeal Board’s (“PTAB”) decision in an inter partes review and holding that the PTAB improperly shifted the burden of proof onto the patent owner to prove nonobviousness. The Federal Circuit confirmed that in IPRs, there is no burden-shifting framework and that the burden of persuasion to prove unpatentability always lies with the patent challenger.

Magnum Oil Tools International, Ltd. (“Magnum”) owns U.S. Patent No. 8,079,413 (“the ’413 patent”), which is directed to a technique in the field of oil drilling called hydraulic fracturing. A competitor, McClinton Energy Group, LLC (“McClinton”), filed a petition for inter partes review (“IPR”) of the ’413 patent. The PTAB instituted an IPR based on three primary prior art references. After trial and briefing, the PTAB issued a final decision holding that all challenged claims of the ’413 patent were unpatentable as obvious under 35 U.S.C. § 103. Soon after, McClinton and Magnum entered into a settlement agreement, whereby McClinton agreed not to participate in any appeal of the PTAB’s decision. After Magnum appealed to the Federal Circuit, McClinton withdrew, and the Director of the Patent and Trademark Office (“PTO”) intervened.

Before the Federal Circuit, Magnum argued that the PTAB erred in cancelling the claims of the ’413 patent because neither McClinton nor the PTAB established a prima facie case of obviousness. That is, Magnum contended that McClinton failed to raise the obviousness combinations relied on by the PTAB or specifically argue why a skilled artisan would have been motivated to combine the prior art references in the manner relied on by the PTAB. In response, the PTO disagreed that the PTAB needed to establish a prima facie case of obviousness. In the PTO’s view, a decision by the PTAB to institute IPR necessarily finds that a patent challenger has demonstrated a reasonable likelihood of success, and this finding should operate to shift the burden of producing evidence of nonobviousness to the patentee. In other words, according to the PTO, once the PTAB “found a reasonable likelihood that McClinton would ultimately carry its burden of persuasion, the burden of production shifted to Magnum to argue or produce evidence in its patent-owner response that Lehr, Cockrell, and Kristiansen do not render [the claims] obvious.”

The Federal Circuit rejected the PTO’s argument. It began by clarifying the difference between two distinct burdens of proof: the burden of persuasion and the burden of production. The Federal Circuit explained that the burden of persuasion “is the ultimate burden assigned to a party who must prove something to a specified degree of certainty, such as by a preponderance of the evidence or by clear and convincing evidence.” The burden of production on the other hand is the burden of “producing additional evidence and presenting persuasive argument based on new evidence or evidence already of record.” The Federal Circuit noted that in the IPR context, the burden of persuasion to prove unpatentability is always on the petitioner and never shifts to the patent holder. The Federal Circuit then held that neither should the burden of production shift merely because the Board instituted an IPR. The Federal Circuit reasoned that “the shifting of the burden of production is warranted [where] the patentee affirmatively seeks to establish a proposition not relied on by the patent challenger and not a necessary predicate for the unpatentability claim asserted—effectively an affirmative defense.” Here, Magnum’s position was always that the patent challenger, McClinton, failed to meets its burden of proving obviousness, and Magnum was not seeking to establish a proposition not relied on by McClinton. Thus, according to the Federal Circuit, burden-shifting would be “inapposite” and “would introduce unnecessary confusion because the ultimate burden of persuasion of obviousness must remain on the patent challenger and a fact finder must consider all evidence of obviousness and nonobviousness before reaching a determination.”

After rejecting the PTO’s proposed burden-shifting framework, the Federal Circuit held that the Board’s improper burden-shifting resulted in reversible error. The Federal Circuit emphasized that the PTAB’s “final written decision is replete with examples where, rather than require McClinton to prove its assertion of obviousness, the Board improperly shifted the burden to Magnum to disprove obviousness.” For example, the Federal Circuit determined that McClinton either failed to raise the obviousness combinations and motivations to combine relied on by the PTAB, or supported those arguments with only “mere conclusory statements,” yet the PTAB faulted Magnum for not rebutting those arguments. In conclusion, the Federal Circuit stated that because the PTAB’s decision “was premised on a legally incorrect standard for assessing obviousness” and because the PTAB’s “factual findings regarding the alleged motivation to combine lacked substantial evidence,” the PTAB’s decision should be reversed.

Moving forward, patent challengers should ensure to introduce sufficient evidence and argument in an IPR to meet its burden of persuasion on unpatentability and not rely on the mere fact that the PTAB instituted the IPR and found a reasonable likelihood that the challenged claims were unpatentable.