U.S. Patent and Trademark Office: Observations on the Covered Business Method Patent Review Program

This testimony summarizes the information contained in GAO's March 2018 report, entitled U.S. Patent and Trademark Office: Assessment of the Covered Business Method Patent Review Program ( GAO-18-320 ).

From September 2012 through September 2017, entities facing patent infringement lawsuits filed 524 petitions challenging the validity of 359 patents under the U.S. Patent and Trademark Office's (USPTO) covered business method (CBM) program, resulting in decisions against about one-third of these patents. The CBM program provides entities facing infringement lawsuits an opportunity to challenge the validity of a business method patent by demonstrating that it did not meet requirements for patentability. Business method patents focus on ways of doing business in areas such as banking or e-commerce. The rate of filing petitions over this period has fluctuated but has generally declined since 2015, and none were filed in August or September 2017.

USPTO has taken several steps to ensure the timeliness of trial decisions, review past decisions, and engage with stakeholders to improve proceedings under the program:

Timeliness: USPTO regularly informs relevant parties about paperwork requirements and due dates throughout trials. According to program data, as of September 2017, all 181 completed trials were completed within statutorily required time frames.

Decision review: USPTO has taken several steps to review its decisions and has monitored the rate at which the Court of Appeals for the Federal Circuit affirms or reverses them. However, USPTO does not have guidance, such as documented procedures, for reviewing trial decisions, or the processes leading to decisions, for consistency. Without guidance, such as documented procedures, USPTO cannot fully ensure that it is meeting its objective of ensuring consistency of decisions.

Stakeholder engagement: USPTO judges have engaged with stakeholders by participating in public roundtables and webinars, and attending judicial conferences, among other things.

Stakeholders GAO interviewed generally agreed that the CBM program has reduced lawsuits involving business method patents in the federal courts. While many stakeholders favored maintaining aspects of the program, there was not strong consensus among stakeholders for how future trials should be designed.

I am pleased to be here today to discuss our recent report on the Patent  Trial and Appeal Board’s Transitional Program for Covered Business  Method Patents (CBM program).

As you know, to promote the progress of science and the useful arts,  inventors are granted exclusive rights to their inventions—in the form of  patents—for a limited time. Patent owners can bring infringement lawsuits  against anyone who uses, makes, sells, offers to sell, or imports a  patented invention without authorization. By restricting competition,  patents allow their owners to earn greater profits on inventions than if the  inventions could be freely imitated. In the late 2000s, however, legal  commentators, technology companies, and others began raising  questions about whether the patent system was working well to promote  innovation. By law, before granting a patent, the U.S. Patent and  Trademark Office (USPTO) must determine whether a patent application  meets patentability requirements for subject matter, novelty, non- obviousness, and clarity and specificity. Questions were raised about an  increase in the number of patents granted that did not meet these  requirements and about the increase in patent infringement litigation,  especially in the software and technology sectors. As we have previously  reported, patent infringement lawsuits can take years and cost several  million dollars.

In 2011, Congress passed the Leahy-Smith America Invents Act (AIA),  which authorized three administrative proceedings for challenging a  patent’s validity, including the CBM program. A “covered” business  method patent is a patent that claims a method or corresponding  apparatus for performing data processing or other operations used in the  practice, administration, or management of a financial product or service.  The CBM program provides entities facing infringement lawsuits an  opportunity to challenge a patent’s validity before administrative patent  judges at USPTO’s board. As reported by the House of Representatives  Committee on the Judiciary, the program is intended to provide a more  efficient and less costly alternative to district court for deciding patent  validity. The CBM program began in September 2012 and is slated to  sunset in September 2020.

My testimony today summarizes the findings and recommendation from  our report. Accordingly, this testimony addresses  1.  the extent to which the CBM program has been used to challenge  patents and the results of those challenges,  2.  the extent to which USPTO ensures timeliness of trial decisions,  reviews decisions for consistency, and engages with stakeholders to  improve its administrative proceedings for the program, and  3.  stakeholder views on the effects of the CBM program and whether it  should be extended past its scheduled September 2020 sunset date.

To conduct this work, we obtained and analyzed data on board  proceedings from September 2012 through September 2017, reviewed  the AIA and USPTO documents, and interviewed USPTO officials. We  also assessed USPTO’s efforts to review decisions for consistency  against federal standards for internal control and USPTO’s current  strategic plan, and we interviewed a nongeneralizable sample of 38  stakeholders knowledgeable about the CBM program, who provided a  broad spectrum of opinions on the CBM program. Additional information on our scope and methodology is available in our report. The work on  which this testimony is based was conducted in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.

More Than 350 Patents Have Been Challenged under the CBM Program, and About One-Third of These Patents Were Ruled Unpatentable

We found in our March 2018 report that, from September 2012 through  September 2017, parties accused of patent infringement filed 524  petitions with the Patent Trial and Appeal Board challenging the validity of  359 distinct patents under the CBM program, resulting in rulings against  about one-third of these patents. The average monthly number of CBM  petitions fluctuated during this period and tapered off over time (see fig.  1). Specifically, during this 5-year period, an average of more than 9  petitions per month were filed under the CBM program, but this average  rate declined to fewer than 5 per month in the last fiscal year, with no  petitions filed in August or September 2017.

Stakeholders we interviewed suggested several possible reasons for the  decline in CBM petitions, including recent decisions from the U.S. Court  of Appeals for the Federal Circuit and U.S. Supreme Court that clarified  which patents are eligible for CBM review;  that CBM petitioners  successfully targeted the lowest-quality business method patents— patents that should not have been issued because they did not meet the  patentability requirements—in the early years of the program, and now  those patents have been eliminated; and that owners of business method  patents are more wary of asserting their intellectual property through  infringement lawsuits and risking its invalidation.

Some stakeholders expressed concern about multiple petitions being filed  against the same patent. Specifically, stakeholders have suggested that  petitioners are, in some cases, using the CBM program and the inter  partes review program as tools to increase costs borne by patent  owners, and in the case of the CBM program, as a tool to delay district  court proceedings. In addition, some stakeholders asserted that this  manner of use of the administrative proceedings authorized by the AIA  amounts to harassment. However, our analysis of petition data showed  that the vast majority of patents challenged under the CBM program were  challenged once or twice. Stakeholders we interviewed outlined several  reasons why petitioners may file more than one petition against a single  patent. For example, the board limits the number of pages that a  petitioner may use to submit prior art and arguments for invalidity and  therefore some petitioners might file more than one petition so they can  present all of their art and arguments at once.

Overall, through September 2017, the Patent Trial and Appeal Board had  completed reviews of 329 of the 359 patents challenged under the  program, and for about one-third of these patents the board ruled at least  some challenged patent claims unpatentable. Data on petition outcomes  are open to different interpretations depending on how they are  presented. For example, under the CBM program, board judges ruled  some or all of the patent claims considered at trial unpatentable in 96.7  percent of the petitions for which they issued a final written decision from  September 2012 through September 2017. On the basis of this statistic,  the board could seem to invalidate the majority of the patents it reviews,  as noted by some stakeholders. However, this outcome is predictable  given the criteria for accepting, or instituting, a CBM trial—a judge panel  will institute a petition to the trial phase if it is “more likely than not” that at  least one of the claims challenged in a petition is unpatentable—which  tips outcomes for instituted petitions toward rulings of unpatentability. In  addition, board judges do not issue final written decisions for all petitions  that enter the trial phase because the parties often reach a settlement  before the final written decision. When taking into account all of the CBM  petitions that had an outcome as of September 30, 2017, board judges  ruled some or all of the claims considered at trial unpatentable in 35.6  percent of the cases.

The Board Met Timeliness Requirements and Took Steps to Analyze Decisions and Improve Proceedings but Does Not Have Guidance to Ensure Decision Consistency

We found in our March 2018 report that the Patent Trial and Appeal  Board has completed all trials under AIA-authorized proceedings within  statutorily directed time frames, according to board data, and the board  has taken steps to review issues that could affect the consistency of its  trial proceedings and decisions and to engage with stakeholders to  improve its proceedings. Board officials we interviewed told us the  timeliness of decisions to institute a trial and of final written decisions has  not been a concern in the 5 years that the board has operated. According  to board officials, as of November 2017, two AIA trials—one under the  inter partes review program and one under the CBM program—have  been extended, for good cause, past the typical 1-year time limit between  the institution decision and the final written decision, as allowed by  statute.

The Patent Trial and Appeal Board has decision review processes that  help ensure trial decisions are reviewed as appropriate, but the board  cannot ensure the consistency of its trial decisions because it does not  have guidance for reviewing the decisions or the processes that lead to  them. For trials still in progress, board officials told us there are several  ways management gets involved in reviews—including reviews of  ongoing trials if and when a paneled judge raises any issue deserving of  management attention. Such issues are brought to the attention of the  chief judge or other members of the board’s management team and are  acted upon at their discretion. Board officials also told us that a separate  internal review process has evolved over time, whereby a small group of  board judges, in consultation with board management, seeks to ensure  decision quality and consistency by reading a large number of draft AIA  trial decisions and giving feedback or suggestions to authoring judges  prior to issuance. In addition, the board reviews any AIA trial decisions  that are appealed to the U.S. Court of Appeals for the Federal Circuit and  the appeals court subsequently reverses or remands. Finally, board  officials told us that the board has begun to increase the number of trial  decisions considered for precedential and informative designations as  part of its efforts to ensure the consistency of trial decisions.

Taken together, the board’s review processes help ensure that board trial  decisions are reviewed in some manner. However, because the board  does not have documented procedures for how to review decisions for  consistency, the board cannot fully ensure the consistency of the  decisions or the processes that lead to them. Under federal standards for  internal control, management should design control activities to achieve  objectives and respond to risks. Such control activities include clearly  documenting internal control in a manner that allows the documentation  to be readily available for examination. The documentation may appear in  management directives, administrative policies, or operating manuals. We  recommended that the Director of USPTO develop guidance, such as  documented procedures, for judges reviewing the Patent Trial and Appeal  Board’s decisions and the processes that lead to the decisions. USPTO  agreed with our recommendation and stated that it has begun taking  actions to address it.

In addition, to improve various aspects of its trial proceedings, the board  has taken several steps to engage with stakeholders. USPTO’s strategic  plan states that the board should expand outreach to stakeholders by  providing opportunities for interaction and updates on board operations  and other important issues. The board has done so through several types  of public outreach efforts, including participating in roundtables, webinars, and judicial conferences, among other activities. The board has made  several changes to policies and procedures based on stakeholder  feedback gathered through these mechanisms.

Stakeholders Agree the CBM Program Has Reduced Litigation, and Many See Value in Maintaining Aspects of the Program

Stakeholders we interviewed for our March 2018 report generally agreed  the CBM program has reduced litigation involving business method  patents because the CBM program allows these patents to be more  easily challenged than in district courts, and many stakeholders said there  is value in maintaining some aspects of the program. Stakeholders told us  that fewer business method patent lawsuits are filed and that existing  lawsuits are often dropped after patents have been through the CBM  program. However, stakeholders also noted that the Supreme Court’s  2014 decision in Alice Corp. Pty. Ltd. v. CLS Bank Int’l has contributed to  the reduced number of business method patent lawsuits. Stakeholders  told us that the CBM program has made it riskier to assert business  method patents because, compared with district court, the program offers  a cheaper and more efficient way for alleged infringers to challenge a  patent’s validity. In addition, according to stakeholders, patent owners are  more focused on asserting business method patents that are higher  quality and less vulnerable to challenge either under the CBM program or  based on the Supreme Court’s decision in Alice; these are patents that  describe a technological invention that is not abstract and implemented  on a generic computer.

Stakeholders we interviewed generally agreed the effects of the CBM  program on innovation and investment have been minimal or mostly  positive. More specifically, stakeholders told us that the CBM program is  good for overall innovation and investment in financial technologies in that  the program eliminates overly broad (non-specific), low-quality patents.  Stakeholders told us they believe the existence and assertion of overly  broad patents is bad for innovation, in part because defending against  alleged infringement is expensive and time-consuming, even under the  CBM program. Assertion of overly broad, unclear, or otherwise low-quality  patents acts much like a tax on investment, according to stakeholders.

Stakeholders also told us that removing such patents from the  marketplace promotes innovation because it prevents these patents from  blocking new innovation. According to stakeholders, innovation is  represented by the quality of the patents issued rather than the quantity.  A large number of patents in a technology space, according to  stakeholders, can make it difficult to innovate within that crowded space.

Most stakeholders told us there was value in maintaining aspects of the  CBM program, including the ability to challenge patents at the Patent Trial  and Appeal Board on all four patentability requirements—subject matter;  novelty; non-obviousness; and clarity and specificity. Stakeholders we  interviewed pointed to inconsistencies in how federal courts interpret  subject matter eligibility and clarity requirements, in particular.  Stakeholders said that the federal courts and jurors do not necessarily  have the expertise to interpret requirements for subject matter eligibility  and clarity, and that the technically trained Patent Trial and Appeal Board  judges were better suited to make patentability determinations on these  grounds.

Stakeholders generally agreed that the ability to challenge a patent’s  validity on subject matter eligibility grounds remains important, although  there was not broad agreement among stakeholders regarding how far  that ability should extend beyond business method patents. Some  stakeholders said subject matter eligibility challenges were important for a  wider scope of patents than just business methods because concerns  about subject matter eligibility that apply to business method patents  extend to software-related patents in general. Similarly, stakeholders told  us that patent clarity problems exist beyond business method patents.

Chairman Issa, Ranking Member Johnson, and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.

If you or your staff have any questions about this statement, please  contact John Neumann, Director, Natural Resources and Environment at  (202) 512-3841 or neumannj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. GAO staff who made key contributions to this testimony  are Rob Marek (Assistant Director), Michael Krafve, and Cynthia Norris.  Additional staff who made key contributions to the report cited in this  testimony are identified in the source product.

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Entities facing lawsuits for infringing on a certain type of patent can challenge the validity of the patent through a U.S. Patent and Trademark Office program. This can be done for a fraction of the time and money that would be spent in court.

Under the program, the Patent Trial and Appeal Board decides whether patents are valid. In the report on which this testimony is based, we recommended that the Patent Office develop guidance for reviewing its decisions.

The program is set to expire in September 2020, but stakeholders say it has reduced lawsuits and that aspects of the program should be included in other Patent Office programs.