Q2 in Review: NPE Litigation Rebounds as Vidal Kicks Off PTAB Reform Efforts

NPE litigation in the first half of 2022 came in slightly ahead of the same period in 2021, with the second quarter making up the difference from a relatively slower Q1—yielding the busiest first half of the year for NPE litigation since 2016. Conversely, patent litigation filed by operating companies fell significantly in the second quarter. Overall patent litigation (including all plaintiff types) essentially matched the first half of last year as a result of the upswing in NPE activity.

USPTO Director Kathi Vidal, meanwhile, has begun to put her stamp on the Patent Trial and Appeal Board (PTAB). In June, Vidal issued the first of a series of promised reforms addressing criticisms over the PTAB’s practice of denying institution in America Invents Act (AIA) reviews based on the status of parallel litigation. That new guidance follows other changes under Vidal that have refined the post-Arthrex director review process, as well as the creation of new procedures to insulate the Board’s Administrative Patent Judges from political influence. On the other hand, another announced policy shift in the arena of standard essential patent (SEP) licensing went in an unexpected direction with the Biden administration’s announcement that it would withdraw a 2019 policy endorsing SEP injunctions without adopting a replacement proposed in late 2021—creating uncertainty for licensors and licensees alike.

The second quarter also saw a number of notable patent transactions, including among NPEs, with some involving assets developed by global technology companies. In related news, BlackBerry’s $600M patent sale to Catapult IP Innovations Inc. stalled when the potential buyer failed to meet its financing requirements within a specified time frame—leading BlackBerry to explore “alternative options” for divesting “substantially all of its non-core patent assets”. Also newsworthy during Q2—and potentially game changing—were two new standing orders posted by Chief Judge Colm F. Connolly of the District of Delaware, which deal a one-two blow to litigants that wish to keep their funding arrangements and corporate control under wraps.

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RPX members also have exclusive access to an on-demand RPX Community webinar covering highlights from this post; CLE credit may be available. Members can view the webinar on RPX Insight.

NPEs added 676 defendants to litigation campaigns in Q2 2022—up 13% from the same quarter last year (as noted above) and up 28% from Q1, beating the trailing second-quarter 2019-2021 average by 17%. In the second quarter of 2022, NPEs were responsible for 73% of all patent litigation.

Meanwhile, operating companies added 254 defendants in the fourth quarter, which was 21% below the year-ago quarter, 5% lower than Q1, and 24% lower than the trailing average. Operating companies accounted for 27% of all patent litigation in 1H 2022.

Overall, with no filter for plaintiff type, 930 defendants were added to patent suits in Q2, roughly equal to the amount of litigation filed in the second quarter of 2021, 17% more than the prior quarter, and about 2% more than the trailing average.

As noted in prior reports, the operating company data above exclude another distinct category of litigation filed by a small group of design and utility patent owners targeting copycats and counterfeiters selling products online. RPX excludes such “e-seller” cases from analyses of district court litigation because they tend to follow a different dynamic compared to a typical patent suit: These e-seller cases sometimes name hundreds of defendant entities, many of which may be merely online storefronts for the same ultimate parent. Additionally, plaintiffs mainly seek injunctive relief instead of damages, and their cases often end with the e-seller defendant’s failure to answer, followed by a default judgment.

This category of litigation, which began to spike in Q3 2020, is shown in grey below to illustrate its magnitude. As evident from the rightmost bar, e-seller litigation in Q2 2022 was nearly as high as it was in Q3 2020, at 1,562 defendants added—accounting for 63% of all litigation during the quarter (subject to the caveat about defendants with multiple online storefronts noted above).

Please note that apart from the graph below, the remaining analyses in this report exclude pure design patent and e-seller litigation.

At present, the District of Delaware has three active district judges—Chief Judge Colm F. Connolly and District Judges Richard G. Andrews and Maryellen Noreika—following the recent confirmation of former District Judge Leonard P. Stark to join the Federal Circuit. On April 13, President Biden nominated Fox Rothschild partner Gregory B. Williams—an experienced patent litigator—to fill the vacancy left by Judge Stark. The state’s two US senators, Tom Carper and Chris Coons (both D-DE), issued an endorsement that same day touting his “broad federal court experience, including with intellectual property and corporate law”. Williams, who has served as a special master for the District of Delaware since 2020, is also a former president of the Delaware State Bar association.

The Senate Judiciary Committee held a hearing on Williams’s nomination on May 11. Written questions posed to the nominee by committee members largely focused on topics not related to patent litigation, though Williams did state that he does “not believe it is appropriate for judges to take any steps with the intention of attracting a particular type of case or litigant” in response to a question about “forum selling” from Senator Thom Tillis (R-NC)—in context, a reference to Senator Tillis’s criticisms of the practices of District Judge Alan D. Albright of West Texas (who is discussed further below). Williams cited the need to avoid commenting on hypotheticals in declining to answer questions on the Federal Circuit’s mandamus jurisprudence (also a reference to Judge Albright) and on the state of the law on patent eligibility.

On June 9, the Judiciary Committee voted favorably on Williams’s nomination, with Senator Richard Durbin (D-IL) adding the nomination to the Senate’s Executive Calendar—likely teeing the nomination up for a full Senate vote in the near future.

Judge Albright, Again the Nation’s Top Patent Judge, Gets Further Pushback from Federal Circuit

The top judge in Q2 2022 was Judge Albright, with 25% of new litigation filed in his courtroom. Judge Albright—who has gone to great lengths to attract patent litigation, drawing the ire of Congress in the process—has shown a restrictive approach to various defensive motions. Among other such tendencies, Judge Albright has expressed an aversion to granting motions to stay pending the outcome of PTAB trials and an inclination against granting patent eligibility challenges early in the course of litigation.

Perhaps the most ink, however, has been spilled over his handling of requests to transfer litigation to other districts—especially on convenience grounds, under 28 USC Section 1404. Judge Albright has largely tended to deny convenience transfer motions, applying the substantive factors underpinning the required analysis in a manner that has frequently led to objections from the Federal Circuit. As detailed in RPX’s first-quarter report, the appellate court has repeatedly reversed Judge Albright’s transfer decisions on mandamus, doing so 18 times last year—often flagging a series of repeated legal errors that he has made despite the court’s ongoing criticism.

While that wave has slowed to a steady trickle, one recent opinion—the second such reversal by the Federal Circuit this year—suggests that Judge Albright’s approach is still not to the court’s liking. On May 26, the Federal Circuit held that Judge Albright erred by denying Apple’s motion to transfer a case filed against it by BillJCo LLC, despite his use of revised arguments that cited the appellate court’s prior mandamus rulings against him, concluding that he had made a similar set of legal errors in his application of the relevant factors. Among those repeated errors were his characteristic emphasis on his district’s quick time to trial for the “court congestion” factor, notwithstanding his newfound reliance on actual trial timing statistics versus speculative, scheduled dates; and his overemphasis on a defendant’s general presence in a district for the “local interest” factor, rather than focusing on acts related to the “events that gave rise to a suit”. More details can be found on RPX Insight.

NPE activity hitting the E-Commerce and Software sector in Q2 included litigation from several well-known plaintiffs as well as smaller entities and individual inventors.

Among those campaigns were several hitting web content and analytics technologies. In April, R2 Solutions LLC, a subsidiary of publicly traded Acacia Research Corporation, filed a new round of suits over patents from the large former Yahoo portfolio that Acacia acquired in 2019 through Excalibur IP, LLC, targeting search query processing and analytics features from web platforms and mobile apps offered by American Airlines, Citigroup, CVS, and Hilton. Another familiar player targeting website search functionality was monetization firm IP Edge LLC, via controlled plaintiff Ridgeview IP LLC, which in late April kicked off a campaign against the purveyors of several online learning and research websites offering such features.

Additional web-related campaigns that saw new litigation in Q2 included two related to user interface features. In late May, Lexos Media IP, LLC revived its campaign against e-commerce retailers, filing a new wave of complaints targeting features for displaying a zoomed section of a product image in place of the user’s cursor when it rolls over the image. Meanwhile, websites with hierarchical/nested menus are at issue in the latest batch of litigation filed in May by coplaintiffs Caddo Systems, Inc. (the inventor-controlled owner of the asserted patents) and 511 Technologies, Inc. (their exclusive licensee), followed weeks later by the issuance of an infringement verdict in an earlier West Texas lawsuit from that same campaign.

Other NPEs hitting this sector in Q2 focused on location-based technologies and related products. Those plaintiffs included monetization firm Equitable IP Corporation, which through subsidiary Route Guidance Systems LLC has targeted a range of products with GPS navigation features—including vehicle infotainment systems, telematics systems, and mobile apps—in a three-year-old campaign that saw new suits in early May. Another familiar plaintiff, inventor-controlled Traxcell Technologies, LLC, focused more on the use of location services in delivery and rental services in a set of late-June complaints, hitting apps with features related to tracking arrival times and locations of ridesharing drivers and delivery orders as well as locating available scooters for rental. Additionally, new plaintiff SurgeTech, LLC launched a campaign hitting one of those same ridesharing defendants over features allowing surge pricing, with public records suggesting that the plaintiff has the backing of a “boutique litigation funder”.

Products related to online communications and social media were also at issue in other NPE litigation hitting the E-Commerce and Software sector this past quarter—including the campaign waged by Peter Henrik Pedersen, which in April saw the inventor add a new set of cases to the email management campaign he launched in November 2021. Earlier that month, inventor-controlled plaintiff Wireless Discovery LLC sued several providers of dating apps and services in Delaware, switching to a second asserted claim after Judge Albright invalidated the claim at issue in a first round of West Texas cases against those same defendants. That same day, another inventor-controlled NPE, FacetoFace Biometrics, Inc., sued Apple over the provision of various iPhones and iPads that support sending “Memoji”—emoticons with animations based on the user’s facial expressions—over the iMessage messaging service.

Additionally, the PTAB instituted trial in 66% of the AIA review petitions addressed in the first half of 2022, up from 59.8% in the same period last year and 59% for all of 2021. The institution rate in the second quarter of 2022 alone was 71%.

One of the most hotly debated issues related to the PTAB in the past few years has been the Board’s practice of discretionarily denying institution for reasons other than the merits, based on a series of factors—collectively known as the NHK-Fintiv rule—that allow the Board to consider the status of parallel district court litigation. Ever since USPTO Director Kathi Vidal’s April confirmation, stakeholders have watched closely for signs of how she would address concerns over NHK-Fintiv, and she has now taken some initial steps to limit the rule’s application.

On June 21, Vidal issued an interim guidance that in part seeks to mitigate the impact of one of the NHK-Fintiv rule’s most controversial factors, factor two, under which the PTAB may reject a petition if the district court’s scheduled trial date falls too close to the deadline for the Board’s final validity decision. This factor can be especially problematic from a strategic perspective because it forces petitioners to file as early as possible—effectively further compressing the one-year window defendants already have to file an IPR—based on an aspect of litigation, trial scheduling, that is inherently outside of a petitioner’s control. Moreover, critics of this factor (among them Senator Tillis, otherwise an NHK-Fintiv supporter) have faulted the Board for relying on the date when trials are scheduled as opposed to when they ultimately take place, since scheduled dates can often get pushed back due to a variety of factors—a particular problem during the early days of the COVID-19 pandemic.

Vidal’s new guidance acknowledges those concerns, agreeing with critics that because scheduled dates are “unreliable” and frequently change, such a date is “not by itself a good indicator of whether the district court trial will occur before the statutory deadline for a final written decision”. As a result, Vidal established that trial time alone cannot tip the scales toward denial under NHK-Fintiv: “when other relevant factors weigh against exercising discretion to deny institution or are neutral, the proximity to trial should not alone outweigh all of those other factors”. Moreover, Vidal declared that trial dates must instead be considered based on the district’s actual, median time to trial, alongside other factors including the caseload of the judge in the parallel litigation as well as the “speed and availability of other case dispositions”.

The guidance also establishes other limitations on NHK-Fintiv, chief among them a rule that essentially exempts AIA reviews that are especially likely to succeed from discretionary denials on that basis. While Vidal stated that while the PTAB will retain the discretion to deny institution under NHK-Fintiv factor six (considering the merits of the petition) where evidence of invalidity is “merely sufficient to meet the statutory institution threshold”, the Board “should not discretionarily deny institution” for petitions presenting “compelling, meritorious challenges”: “those in which the evidence, if unrebutted in trial, would plainly lead to a conclusion that one or more claims are unpatentable by a preponderance of the evidence”.

Additionally, Vidal’s guidance memorializes two other practices that have developed as a result of NHK-Fintiv. First, Vidal established that only district court litigation may be considered under NHK-Fintiv, not investigations before the International Trade Commission (ITC), confirming that the current practice of doing so is consistent with the text and intent behind the rule.

Second, Vidal gave her seal of approval to the PTAB’s practice of allowing parties to stipulate around NHK-Fintiv factor four, under which the Board may deny a petition if it contains the “same or substantially the same claims, grounds, arguments, and evidence” as a district court invalidity challenge. That practice has arisen as a result of two key PTAB decisions, as noted in RPX’s last quarterly report. In Sand Revolution II v. Continental Intermodal Group – Trucking (issued May 2020; designated as informative that July), the PTAB granted institution after the petitioner agreed not to assert the same invalidity grounds in district court that it did in its IPR petition. That same December, the Board accepted an even broader type of stipulation in its Sotera Wireless v. Masimo decision (designated as precedential two weeks later), after the petitioner informed the district court that it would not pursue “any ground raised or that could have been reasonably raised in an IPR” after institution. Vidal endorsed the latter category (calling them “Sotera [s]tipulations”, described in related materials as “Sand/Sotera stipulations”), explaining that these “mitigate[] concerns of potentially conflicting decisions and duplicative efforts between the district court and the PTAB”. As a result, Vidal stated that “the PTAB will not discretionarily deny institution of an IPR or PGR in view of parallel district court litigation where a petitioner stipulates not to pursue in a parallel district court proceeding the same grounds as in the petition or any grounds that could have reasonably been raised in the petition”.

Companion Study Illustrates NHK-Fintiv’s Impact

Also released alongside Vidal’s guidance was a USPTO study on parallel litigation that provided data on how the NHK-Fintiv rule has played out in practice (with an accompanying executive summary as well an appendix providing tabular data and methodology). The study revealed that after the Fintiv decision was designated as precedential in May 2020 (with its companion NHK Spring decision having been so designated one year prior), parallel litigation was raised in 40% of all AIA review proceedings (meaning that either the institution decision analyzed NHK-Fintiv, or the patent owner argued for discretionary denial under NHK-Fintiv in its preliminary response, prior to the denial of institution on other, merits-related grounds). Additionally, the study found that NHK–Fintiv denials peaked in the first quarter of 2021 and “dropped significantly afterwards”.

Indeed, the data shown in the study indicate that the PTAB issued just six NHK-Fintiv denials in Q4 2021, compared to 85 decisions granting institution after analyzing NHK-Fintiv. (Note that the time periods discussed in the study refer to the USPTO’s fiscal year, which begins on October 1—so, e.g., the second quarter of fiscal year 2021 corresponds to Q1 2021 for the calendar year. This report, including the graphs below, adapts fiscal year dates to the calendar year.)

The USPTO also included a breakdown of NHK-Fintiv decisions by the venue of parallel district court cases, focusing on the three districts accounting for the bulk of such decisions: the Western and Eastern Districts of Texas and the District of Delaware. That breakdown revealed one rather surprising conclusion. While the Western District of Texas has been a focal point in the NHK-Fintiv debate due to Judge Albright’s focus on scheduling early trial dates—and, indeed, his venue was the one most discussed in NHK-Fintiv decisions—it had not seen an NHK-Fintiv denial based on parallel litigation since August 2021. West Texas was also the district with the lowest rate of NHK-Fintiv denials among the top three, at 16.1% (or 29 denials out of the 180 total institution decisions counted). The Eastern District of Texas had a much higher denial rate at 55.7% (or 83 of 149 total decisions), with Delaware the lowest at 11.2% (13 of 116 decisions total).

The study further quantified the impact of the Sand/Sotera stipulations endorsed in Vidal’s guidance, showing that challengers agreeing to such estoppel in district court are now much more likely to have their petitions instituted. In particular, the data show that for institution decisions that noted such stipulations, the grant rate has increased significantly—going from 61.3% in Q1 2021 (the first full quarter since the Sotera decision was designated as precedential) to 97.1% in Q4. The statistics also reflect a corresponding increase in the number of institution decisions noting such stipulations.

Defendants Still Filing More Reexam Requests Despite Dip in NHK-Fintiv Denials

While the USPTO’s study confirms that NHK-Fintiv denials have decreased, and that defendants have avoided some aspects of NHK-Fintiv via stipulations, it also shows that patent owners are still raising the rule in a rising number of AIA reviews despite the lower chance of success—doing so in 50.6% of AIA reviews that saw institution decisions in Q4 2021.

Given that remaining uncertainty, it is perhaps not surprising that some would-be petitioners have instead been filing increasingly more ex parte reexaminations instead of AIA reviews. Reexams are not subject to the same level of discretionary denials and offer a variety of other advantages compared to AIA reviews, such as lower cost and the lack of estoppel altogether—no stipulations required.

As shown below, parties filed 331 reexam requests in 2021, 53.2% more than they did the year prior—and that trend appears to be continuing in 2022. The second quarter saw 93 new requests for reexam, a 27.4% jump from Q2 2021. With that upswing in second-quarter filings, the first half of the year is 13.1% ahead of that same period in 2021. A rising share of the patents subject to reexam requests were also previously challenged through AIA reviews, reaching 38% in the first half of 2022, up from 36% in 2021, 33% in 2020, and 25% in 2019. Additionally, the share of patents with reexam requests that have also been asserted in parallel district court litigation also remains high, at 62% in the first half of the year—a slight dip from 2021’s 64%, but still higher than 2020’s 60% and 2019’s 52%.

This high degree of overlap with AIA reviews and district court litigation strongly suggests that the uptick in reexam requests is the result of the NHK-Fintiv rule discouraging defendants from filing AIA reviews.

Congress Weighs Legislative Reform

Vidal’s new guidance comes as Congress considers legislative proposals to reform the PTAB—including a new Senate bill that would eliminate the NHK-Fintiv rule. That bill, the Patent Trial and Appeal Board Reform Act of 2022, was introduced on June 16 by Senators Patrick Leahy (D-VT), John Cornyn (R-TX), and Tillis. The proposed law also includes provisions designed to counter alleged gamesmanship at the PTAB and would pay the expert witness fees and attorney fees for certain “small” and “micro” entities that have not asserted their challenged patents in litigation. In announcing the bill, Senator Tillis described it as a “carefully crafted compromise requiring sacrifices from both sides of the issues”, adding at a June 22 hearing on PTAB reform, “[i]f you don’t like the compromise we’ve come up with, tell us. But don’t just tell us you hate it. Give us ideas on how to write a better bill that will, in your opinion, be a better compromise”.

Alleged abuses of the patent system, the need to encourage innovation, and a variety of specific PTAB issues were at the forefront in Kathi Vidal’s confirmation process, during which Senator Tillis and other members of the Senate Judiciary Committee questioned her about NHK-Fintiv, patent eligibility, “judge shopping”, SEP licensing, and a variety of other patent issues. For details on Vidal’s responses in her capacity as a then-nominee, see RPX Insight.

Vidal Clarifies Post-Arthrex Director Review Process

Vidal has also taken steps to further clarify the metes and bounds of the director review program created as a result of the Supreme Court’s June 2021 decision in Arthrex. That opinion, considering whether the PTAB’s appointment of Administrative Patent Judges was unconstitutional, left the Board largely intact but gave the USPTO director the authority to rehear final validity decisions in AIA reviews. The Patent Office implemented that holding through an interim director review program created shortly after the decision’s issuance, laying down certain procedural and substantive requirements the following month.

In April 2022, soon after her confirmation as USPTO director, Vidal announced that the USPTO would be seeking to formalize the director review program after stakeholder input through an official Request for Comment filed in the Federal Register. Alongside Vidal’s announcement, the USPTO also further detailed what issues can form the basis of a director review request, including intervening changes in law, USPTO procedures, or guidance; “material errors of fact or law” in PTAB decisions; “novel issues of law or policy”; “issues on which PTAB panel decisions are split”; “issues of particular importance to the Office or patent community”; or “inconsistencies with USPTO procedures, guidance, or decisions”. On June 22, the USPTO updated that guidance to indicate that parties should highlight issues of first impression when seeking director review.

Relatedly, the USPTO has also begun providing official statistics on director review to promote transparency, indicating that it has rarely granted such review—doing so for just seven of the 186 requests decided thus far. The USPTO plans to update this data each month.

Director Review and Allegations of Gamesmanship

In addition, Vidal has also begun to address criticisms from members of Congress and other stakeholders regarding allegations of abuse or gamesmanship in the IPR process.

Those criticisms have focused lately on IPRs filed by OpenSky Industries and Patent Quality Assurance (PQA) against VLSI Technology LLC, which Senators Mazie Hirono (D-HI) and Thom Tillis (R-NC) characterized as using the IPR system for financial gain. In an April letter to Vidal asking her to take action against such practices, the senators deemed the motives of OpenSky, in particular, as “suspect” based on an email regarding settlement discussions that VLSI filed with the USPTO. They characterized that email as proposing that OpenSky “would actively work to undermine the IPR it brought—thereby protecting VLSI’s patents from other challenges—in exchange for monetary payment”. The senators flagged this email and other allegedly problematic aspects of the IPRs, including the fact that the PTAB proceeded to institute two of them.

Vidal responded to the senators on May 27, saying that she had begun working on this “important” issue shortly after her confirmation and informing them that the “USPTO is revisiting its related practices and procedures to make clear that abuses of the IPR process will not be tolerated”, though she did not detail the initiatives under consideration.

In the meantime, Vidal has initiated director review in IPRs from OpenSky and PQA, doing so sua sponte (i.e., at her own initiative, without the request of a party) for the first time since the interim director review program was established under her predecessor. While the filings announcing those decisions did not provide many specifics, Vidal did argue in both that director review was “appropriate because this case raises novel issues of law and policy, as well as issues of particular importance to the Office and the patent community”.

New Process Insulates PTAB Panels from Perceived Director Influence

Another issue that has faced the PTAB is the perception that the USPTO director may wield her authority to influence the outcomes of AIA review decisions. In May, Vidal took steps to address this concern by announcing a new interim process for reviewing the decisions of PTAB panels in AIA reviews prior to issuance. Under that new process, a Circulation Judge Pool (formerly known as the AIA Review Committee) comprised of at least eight non-management peer judges review and provide feedback on pending decisions. The process is modeled in part after the Federal Circuit’s ten-day circulation process but differs in one key respect: while Federal Circuit review can result in a decision being blocked, here it is the original PTAB panel that has the authority to makes the final decision. More importantly, the “interim process makes clear that the Director is not involved, pre-issuance, in directing or otherwise influencing panel decisions”.