Federal Circuit Affirms First Patent Trial and Appeal Board (PTAB) Decision in a Covered Business Method Review

July.15.2015

​On July 9, 2015, a divided panel of the Court of Appeals for the Federal Circuit ("CAFC") affirmed the first Patent Trial and Appeals Board (“PTAB”) decision concerning Covered Business Method (“CBM”) reviews, which were created by Section 18 of the Leahy-Smith America Invents Act (“AIA”). Versata Development Group, Inc. v. SAP America, Inc., Case No. 2014-1194. The PTAB had ruled two years earlier that claims 17 and 26-29 of U.S. Patent No. 6,553,350, assigned to Versata Development Group, Inc., were unpatentable as abstract ideas under 35 U.S.C. § 101. Versata appealed.

The Federal Circuit decision resolves several important issues related to CBM reviews. Among other things, the court decided that (1) broadest reasonable interpretation is the proper standard for claim construction in a CBM review; (2) the PTAB may consider § 101 patentability challenges in a CBM review; (3) the CAFC may decide, on appeal from a CBM review, whether the challenged patent is eligible for CBM review; and (4) the CAFC may consider, on appeal from a CBM review, whether the PTAB correctly decided certain other issues implicating the scope of the PTAB’s decision-making authority.

Based on these rulings, the CAFC proceeded to consider the merits of the PTAB’s determination that the challenged claims of the ʼ350 patent were invalid under § 101, and it affirmed. Judge Hughes dissented in part, arguing that the CAFC was exceeding its jurisdiction by reviewing whether the challenged patent was eligible for CBM review.

Some Decisions of the PTAB in Instituting a CBM Review Are Reviewable in an Appeal From a Final Written Decision

The panel majority held that the CAFC, when deciding an appeal from a final written decision of the PTAB in a CBM review, has jurisdiction to review issues decided by the PTAB that implicate the scope of the PTAB’s authority—even if those issues were only expressly addressed by the PTAB in the context of deciding to institute review. SAP America and the USPTO, as intervenor, argued that 35 U.S.C. § 324(e) precludes such review because it states that “the determination by the PTAB whether to institute a post-grant review under this section shall be final and nonappealable.” The panel majority disagreed, holding that the statute does not preclude appellate review of limits on the PTAB’s authority to enter a “‘final written decision invalidating a patent.” The majority explained that “institution and invalidation are two distinct actions by the PTAB.” In an appeal from a final written decision, review of an issue affecting the PTAB’s authority to invalidate a patent is not precluded “just because the agency chooses, or even follows a congressional directive, to decide an issue determining final-action authority at the initiation stage and then does not revisit the issue later.” Foreclosing review of such PTAB decisions would “run counter to our long tradition of judicial review of government actions that alter the legal rights of an affected person, a hallmark of the distinction between (generally reviewable) final agency action and (generally unreviewable) agency action that merely initiates a process to consider such an alteration.”

Judge Hughes disagreed, arguing that the plain language of § 324(e) unambiguously bars judicial review of the PTAB’s decision to institute review at any time. Judge Hughes stated that nothing in that section’s language suggests that the judicial review bar is limited, as the majority held, to interlocutory appeals of the PTAB’s decision to institute. He also contended that the majority’s interpretation “directly conflicts” with the CAFC’s recent decision in In re Cuozzo Speed Technologies, LLC, No. 14-1301 (Fed. Cir. July 8, 2015).

The “Broadest Reasonable Interpretation” Claim Construction Standard Applies

On another matter of procedure, Versata challenged the PTAB’s decision to apply the “broadest reasonable interpretation” ("BRI") claim construction standard in a CBM review. This standard is generally used in USPTO office actions, and the PTAB adopted it for all AIA post-grant proceedings. Siding with the PTAB, the CAFC deferred to its previous decision in Cuozzo, in which the court approved the PTAB’s use of the BRI standard in inter partes reviews (“IPRs”).  The CAFC acknowledged that although the rules applicable to IPRs will not necessarily always govern in CBM or other post-grant reviews, the CAFC saw no basis to distinguish between the two proceedings for purposes of the applicable claim construction standard.

The PTAB May Consider § 101 Subject Matter Eligibility Challenges in CBM Reviews

Versata argued that Section 101 of the Patent Act may not be considered as a basis for unpatentability in CBM reviews. Under Chapter 32 of the Act, governing post-grant review and § 18 cases, the PTAB “shall issue a final written decision with respect to the patentability of any patent claim challenged”  35 U.S.C. § 328(a). This language seemingly gives the PTAB broad authority to consider patentability challenges. However, Versata pointed out that 35 U.S.C. § 321(b), entitled “Scope,” states that a petitioner “may request to cancel as unpatentable 1 or more claims of a patent on any ground that could be raised under paragraph (2) or (3) of section 282(b) (relating to invalidity of the patent or any claim).” Versata argued that § 101 challenges do not fall within the scope of paragraph (2) or (3) of Section 282(b), which specifies the defenses that may be raised in a lawsuit involving the validity or infringement of a patent. The headings in the compiled statutes concerning conditions for patentability only list § 102 (anticipation) and § 103 (obviousness), not § 101 (subject matter eligibility). Versata accordingly argued that § 321(b) precludes § 101 review. SAP and USPTO countered that it is generally understood that § 101 is an invalidity defense under § 282, and that Versata’s reliance on the headings was improper.

The CAFC rejected Versata’s argument. It noted that both CAFC and Supreme Court opinions over the years have established that § 101 challenges constitute validity and patentability challenges. Adopting Versata’s position would require a hyper-technical adherence to form over substance. Consequently, the CAFC concluded that the PTAB had acted within the scope of its authority delineated by Congress in permitting a § 101 challenge in a CBM review.

Merits

Finally addressing the merits after resolving the numerous procedural and jurisdictional predicate issues summarized above, the CAFC affirmed the PTAB’s decisions that: (1) the ’350 patent is a covered business method patent subject to CBM review; (2) the invention claimed in the ʼ350 patent is not a “technological invention” for which CBM review is not available; and (3) the PTAB properly construed the challenged claims of the ’350 patent and held those claims invalid under § 101.

Conclusion

The CAFC’s Versata decision resolved several important issues related to CBM review. It authorizes § 101 patentability challenges in such proceedings. It confirms that the BRI claim construction standard applies—a ruling that is likely to stand for some time given the court’s recent denial of a request for en banc review in Cuozzo, in which the BRI standard was found applicable in the IPR context. And it allows judicial review of PTAB decisions that challenged patents are eligible for CBM review, although only in the context of appeals from final written decisions. However, the CAFC did not provide any further guidance for determining when a patent is “a covered business method patent” eligible for CBM review, or what defines a “technological invention” that may not be challenged in such a proceeding. Thus, the opinion is not as helpful as it could have been.

It should be noted that whether Versata’s influence is to be long-lived may depend on Congress, which is considering several patent reform bills. The PATENT Act (S 1137), the Innovation Act (H.R. 9), and the STRONG Patents Act  (S 632) all contain provisions that would require that claims in USPTO trial proceedings be construed in the same manner as a court would construe such claims in a civil action, thus scrapping the BRI standard endorsed by Cuozzo and Versata. The Senate Judiciary Committee approved the PATENT Act by a vote of 16-4 on June 4, 2015. The House Judiciary Committee approved the Innovation Act by a vote of 24-8 on June 11, 2015. The STRONG Patents act is currently pending in the Committee on Small Business and Entrepreneurship.