Federal Circuit Rejects PTAB Burden Shifting Scheme in IPR and Confirms Burden Lies With the Petitioner Throughout Trial

On July 25, 2016, the United States Court of Appeals for the Federal Circuit issued a decision in In re: Magnum Tools Int’l, Ltd., No. 2015-1300 (Fed. Cir. Jul. 25, 2016) confirming that the burden of proving invalidity lies with the petitioner throughout the entire IPR proceeding and never shifts to the patent owner.  In Magnum Tools, the court disagreed with the PTAB’s view that institution of an IPR upon a finding of a reasonable likelihood of success operates to shift the burden of producing evidence of non-obviousness to the patent owner.

Under 35 U.S.C. § 316(e), the petitioner bears “the burden of proving a proposition of unpatentability by a preponderance of the evidence.”  While the court has at times noted the usefulness of the burden shifting framework as a procedural tool of patent examination in order to allocate the burdens between an examiner and an applicant, in Magnum Tools the Federal Circuit reaffirmed that this framework does not apply in an adjudicatory context such as an IPR or litigation in federal court.

In Magnum Tools, McClinton Energy Group, LLC (“petitioner”) petitioned for IPR based on two primary references, Lehr and Alpha, each separately in view of two additional references.  In its petition, petitioner explicitly argued that the combination of Alpha and the additional references (the “Alpha combination”) rendered the challenged claims obvious.  With regard to the Lehr reference, the petition incorporated the bulk of its argument by reference stating “as discussed above with respect to Alpha” the “same analysis applies to combinations using Lehr as a base reference,” (the “Lehr combination”).  In its Preliminary Response, the patent owner took the position that (1) petitioner’s arguments based on Lehr were insufficient for failing to “specify where each element of the claim is found” as required by 37 C.F.R. § 104(b)(4); and (2) that petitioner failed to present evidence of how a skilled artisan would modify Lehr in view of the additional references where the petitioner’s expert focused on the Alpha combination but failed to similarly address the Lehr combination.

The PTAB instituted trial based on the Lehr combination, but declined to institute based on the Alpha combination. Despite the patent owner’s arguments, which were maintained throughout briefing and at trial, the PTAB issued a final written decision holding all challenged claims unpatentable as obvious in light of the Lehr combination.  On appeal, the patent owner continued to argue that petitioner failed to establish a prima facie basis for the rejection, that Lehr could not be the basis for a finding of obviousness for failing to disclose key limitations, and because a skilled artisan would not have sought to combine Lehr with the additional references.  Intervening in the appeal, the PTAB argued (1) that as soon as IPR is instituted by petitioner establishing a reasonable likelihood of success, the burden of production shifts to the patent owner to present evidence of non-obviousness, and (2) that the PTAB may make an obviousness argument on behalf of a petitioner where the argument “could have been included in a properly-drafted petition.”

The Federal Circuit noted that the PTAB’s proposed burden shifting necessarily implies that “a finding of obviousness in an IPR can be based on less than a preponderance of the evidence” where the patent owner does not affirmatively disprove the grounds on which the IPR was instituted.  This burden shifting after institution is “inapposite because the patentee’s position is that the patent challenger failed to meet its burden of proving obviousness,” and would introduce unnecessary confusion.  This is 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.”  The court further notes that this burden shifting scheme is directly contrary to previous Federal Circuit rulings that a decision to institute and a final written decision are “two very different analyses,” because “each applies a qualitatively different standard.”

Having determined that the burden remains with the petitioner throughout the course of an IPR, the court reversed the PTAB decision, finding that the PTAB’s final written decision inappropriately relies on the patent owner’s failure to explain why the petitioners’ arguments with respect to the Alpha combination are not applicable to the Lehr combination.  Instead, the court found that by relying on arguments made in the Petition in reference to different prior art – the Alpha combination – the PTAB’s determination was not substantiated by evidence that those arguments also applied to the Lehr combination.  The court also rejected the PTAB’s argument that it did not err by making an obviousness argument on behalf of the petitioner, reiterating that the statutory scheme requires that “the petitioner that bears the burden of proof in IPRs” and that the PTAB cannot “raise, address, and decide unpatentability theories never presented by the petition and not supported by the record.”

Magnum Tools teaches that petitioners should take care to carefully craft their petitions because the PTAB’s duties are adjudicatory in nature, and it is improper for the Board to fix shortcomings in the petition.