As discussed previously on this blog (see "USPTO Proposed Rule Change to Terminal Disclaimer Practice" and "The USPTO's Proposed Terminal Disclaimer Rule: A Litigator's Perspective") and elsewhere, the U.S. Patent and Trademark Office has announced a proposed rule change to the required form for terminal disclaimers in an attempt to rein in abusive serial litigation practices.[1] Since the proposal was announced, the public commentary about the proposed change has been overwhelmingly negative.[2] Recently, several former high-ranking USPTO officials (including former directors) joined that chorus in a letter to Director Vidal.[3] In their words, just the Notice of Proposed Rulemaking (NPRM) alone -- let alone adoption of the proposed rule -- "destabilizes the patent system and advances anti-innovation policies."
The letter attacks both the proposed rule on numerous grounds, both substantive and procedural. At the most fundamental level, the former officials echoed our previous doubts that the proposed rule is proper exercise of agency discretion in rulemaking, albeit from a slightly different angle. Their letter argues that the proposed rule would constitute a "substantive" rule and that implementing such a rule is beyond the USPTO's statutory authority (i.e., illegal). Under 35 U.S.C. § 2(b)(2)(A), the USPTO "may establish regulations, not inconsistent with law, which . . . shall govern the conduct of proceedings in the Office."[4] This is frequently interpreted as giving the USPTO the authority to make procedural rules but not substantive rules.[5]
According to the letter, because the proposed rule "impacts the scope of patent rights in one application based on validity determinations in another," it should be considered a "substantive," rather than a "procedural," rule. In other words, because the proposed rule telescopes validity between patents after examination, it is beyond the USPTO's proper purview.
The USPTO has, unsurprisingly, preemptively disagreed with this contention. For example, in the Federal Register Notice regarding the proposed change, the USPTO cited to In re Van Ornum, 686 F.2d 937 (CCPA 1982), as authority for the assertion that a rule regarding enforcement conditions resulting from terminal disclaimers filed to obviate nonstatutory double patenting rejections is within the USPTO's rulemaking authority.[6] In addition, some Federal Circuit cases have suggested that the USPTO's interpretation of what the phrase "in the Office" means in the context of rulemaking authority should be entitled to Chevron deference, which (if it still exists) would suggest deference to the USPTO's determination of the proper scope of rulemaking.[7] Further, the USPTO might argue that even current nonstatutory double patenting practice inherently can affect validity after issuance (e.g., since terminal disclaimers filed to overcome nonstatutory double patenting rejections include a "common ownership" requirement). If so, the change could be argued to be a practical distinction without a legality difference.
In addition to arguing that the adoption of the proposed rule would be illegal because it exceeds the USPTO's statutory authority, though, the letter also uses the term "illegal" when discussing the way in which the proposed rule would render entire families of patents invalid or unenforceable whenever a single claim in an entirely different patent tied to it by a terminal disclaimer was found invalid or unenforceable. That is, they are raising the same argument we did earlier (see "The USPTO's Proposed Terminal Disclaimer Rule: A Litigator's Perspective"). Using the term "illegal" here is not hyperbole, since the proposed rule likely runs afoul of the validity provisions of 35 U.S.C. § 282(a), which states:
A patent shall be presumed valid. Each claim of a patent (whether in independent, dependent, or multiple dependent form) shall be presumed valid independently of the validity of other claims; dependent or multiple dependent claims shall be presumed valid even though dependent upon an invalid claim. The burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity [emphasis added].
The proposed rule turns that calculus on its head and links the validity of all members of a terminal disclaimer family together. If one claim falls, it would pull all of the others down with it.
In addition to criticizing the legality of the proposed rule, the letter also discusses the alleged justification (or lack thereof) for the proposed change. In the authors' views, the USPTO did not conduct sufficient studies to justify this change. Without any such studies, there is simply insufficient data to lend credence to any suggestion that present terminal disclaimer/nonstatutory double patenting practice is detrimental to innovation (let alone that the proposed change would remedy the alleged detriment). In the authors' words, "[t]he proposal seeks to solve a problem that does not exist."
The USPTO did provide some "Rulemaking Considerations" under § IV of the Federal Register notice. However, most of these sections appear to be boilerplate language to satisfy bureaucratic requirements for rulemaking. For example, under § IV(K), the USPTO states, without citing any evidence, that "[t]he changes proposed in this rulemaking are not expected to result in . . . significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets." If this were indeed the case, I think many opponents of the proposed change would be put somewhat at ease. Yet, there is simply no evidence cited in support of this assertion.
Importantly, some of the only data the USPTO did provide in the NPRM seems to highlight the substantial magnitude of the issue. According to § IV(B) of the NPRM, roughly 14% of Office Actions include at least one nonstatutory double patenting rejection. This number was provided only in the context of small entity applicants. Thus, while 14% is not negligible in that context, the percentage would likely be even larger when considering all applicants (especially because non-discounted entities have larger patent budgets and may, on average, have larger patent portfolios with more overlapping patents, which are more susceptible to nonstatutory double patenting rejections).
While the evidence cited in the NPRM may not go far enough, the authors of the letter go too far. There are parties that have used extended families in combination with sequential litigation (or the threat thereof) to chill the entry of other parties into the market. This has been seen most clearly in the biosimilar and generic drug fields, where branded companies have kept patent families alive -- as is the best practice -- and rolled patents out one after another to be fought over by the non-branded companies. The result has been a war of attrition in which the branded company has more to lose than the non-branded has to gain, and the non-branded generally leave the field of battle or yield ground simply because of the cost of litigation. The result is a net loss to the public, even if the USPTO did not cite specific examples.
Lastly, the letter highlights some of the unintended consequences that could result from the adoption of the proposed rule. First, the letter asserts that the expected cost of obtaining and enforcing a patent will necessarily increase. This is because, for example, applicants will be forced to amend claims in response to or argue against nonstatutory double patenting rejections instead of simply filing terminal disclaimers, given the risks involved with terminal disclaimers under the proposed rule. According to the authors, this additional cost represents a greater burden to small companies and individual inventors (given their relative available resources). But that assumes that applicants will be seeking more than one patent per family, or patents from continuations instead of divisionals (or otherwise prosecuting overlapping subject matter across a portfolio).
Under the Regulatory Flexibility Act (RFA), the USPTO actually had to estimate the costs to small entities based on the proposed change in the NPRM. According to the USPTO in § IV(B) of the NPRM, the changes "will . . . not affect a substantial number (approximately 20%) of small entities" and that these 20% of small entities will be impacted by, at most, ~$26 Million a year, in total. There are numerous assumptions that go into the math of how the USPTO came up with that figure, but even if it is a reasonable estimate, whether or not it is acceptably de minimis is certainly not a given. Further, that figure only includes obtaining a patent for small entities (i.e., does not include enforcement for small entities or obtaining and enforcing patents for non-discounted entities), so it may not be representative of the total cost to all innovators.
As the former USPTO officials point out, one result related to enforcement may be a strong shift of the expense of enforcement from a relatively even split to strongly in favor of accused infringers. In particular, under the proposed regime, an infringer can take an invalidity shortcut by attacking a single claim in the weakest patent in a grouping in order to render the strongest patents obsolete. This means that, in order to assert one patent against an infringer, a patentee might need to successfully defend against two, three, five, ten, or more invalidity judgments depending on how many patents are tied together by terminal disclaimers. Clearly, this would be a pricey endeavor for the patentee.
In addition to all the substantive commentary provided by the five distinguished individuals, the letter asserts an underlying urgency for action. The authors assert that their plea represents an "unusual step" as a result of their being "deeply concerned." Further, the letter goes beyond merely arguing against the ultimate implementation of the rule change. It also calls on the USPTO to "withdraw [the proposal] immediately" because the NPRM "creates uncertainty every day that it remains under consideration." So they suggest the extremely unusual step of withdrawing the proposed rule before the comment period even closes to mitigate the harm -- essentially an admission that the USPTO was wrong to even propose the rule.
[1] Full text of the proposed rule change can be found at https://www.federalregister.gov/public-inspection/2024-10166/terminal-disclaimer-practice-to-obviate-nonstatutory-double-patenting.
[2] As of writing, 22 public comments have been submitted at https://www.regulations.gov/, most of which oppose the change.
[3] The letter was signed by former directors Andrei Iancu, David Kappos, and Drew Hirshfeld and former deputy directors Laura Peter and Russell Slifer. A copy of the full letter can be found here.
[4] https://www.law.cornell.edu/uscode/text/35/2.
[5] See also Merck & Co. v. Kessler, 80 F.3d 1543 (Fed. Cir. 1996); Animal Legal Def. Fund v. Quigg, 932 F.2d 920 (Fed. Cir. 1991).
[6] The USPTO also stated, in § IV(A) of the Federal Register Notice, that the proposed changes "involve rules of agency practice and procedure, and/or interpretative rules, and do not require notice-and-comment rulemaking" (citing to Perez v. Mortg. Bankers Ass'n, 575 U.S. 92 (2015); Cooper Techs. Co. v. Dudas, 536 F.3d 1330 (Fed. Cir. 2008)).
[7] Response to "Request for Comments on Eliciting More Complete Patent Assignment Information," Arti K. Rai (citing Bender v. Dudas, 490 F.3d 1361 (Fed. Cir. 2007)).
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