Patent Owners gained a bit of a reprieve in the Federal Circuit’s recent decision in In Re Magnum Oil Tool Int’l, Ltd., decided on July 25, 2016.  In several key respects, Patent Owners regained some footing in the otherwise daunting IPR process.

As an initial matter, in one of its first post-Cuozzo (Supreme Court edition) decisions, the Federal Circuit determined that, for issues that are central to the Board’s Final Written Decision, the Court is not prohibited by § 314(d) from reviewing those decisions just because they were also addressed in the Decision to Institute.  The merits of a final written decision is reviewable, even though the issue was initially decided by the Board at the decision to institute stage.  Id. at 12.  In the context of the Magnum decision, this meant that the Court had jurisdiction to review all of Patent Owner’s arguments regarding the basis for the Board’s ultimate judgment of unpatentability, including rationale to combine references, even though the Board addressed those arguments in the decision to institute.

The key substantive issue in the case was whether the Board’s decision adequately established a prima facie basis of obviousness.  Specifically, Patent Owner argued that no adequate motivation to combine the subject references was articulated.  The issue stemmed from the fact that, in the petition, Petitioner put forth a detailed obviousness argument on one set of references (“Ground 1”), but took a more abbreviated approach with a second set of references (“Ground 2”), that “incorporated by reference” the motivation to combine from Ground 1.

In response, the PTO argued that when the Board institutes a ground, it necessarily finds that Petitioner has demonstrated a reasonable likelihood of success and that this finding operates to shift the burden of producing evidence of nonobviousness to Patent Owner.  But, the Court rejected the PTO’s contention and clarified that the burden of persuasion is always on the Petitioner to prove unpatentability by preponderance and that burden never shifts to the patentee.  The court reasoned that, due to the significant difference between the standards of proof at institution (likelihood of success) and at trial (preponderance), it is inappropriate to shift the burden to the patentee after institution to prove that the claims are patentable.

As to the ultimate conclusion of obviousness, the court concluded that, in light of Petitioner’s failure to explain why a skilled artisan would combine the Ground 2 references, the Board had no basis for its conclusion that Petitioner had met its burden of proving obviousness by preponderance under KSR.  The court emphasized that to satisfy its burden of proving obviousness, Petitioner cannot employ mere conclusory statements because such statements cannot satisfy Petitioner’s burden.  Nonetheless, the PTO argued that the Board did not err in making an obviousness argument on behalf of Petitioner based on the Ground 2 references because this argument “could have been included in a properly drafted petition.”  The court flatly rejected the PTO’s contention that the Board is free to adopt arguments on behalf of Petitioners that could have been but were not raised by the Petitioner during an IPR, noting again that Petitioner bears the burden of proof.  The court acknowledged that the PTO has broad authority to establish procedures in IPR’s but clarified that the authority is not so broad to allow the PTO to raise, address, and decide patentability theories never presented by the Petitioner and not supported by record evidence.  Instead, the court emphasized that the Board must base its decisions on arguments advanced by a party and to which the opposing party was given a chance to respond.  Accordingly, the court held that the Board’s obviousness conclusion was not based on sufficient evidence since the Board relied on Petitioner’s conclusory statements and improperly argued on behalf of Petitioner why the Ground 2 references could be combined.

Lastly, the Court addressed the PTO’s argument that Patent Owner should have challenged the Board’s actions in the rehearing request.  The court quickly disposed the PTO’s argument, stating that the plain language of 35 USC § 141(c) does not require a party dissatisfied with the Board’s final written decision to first raise the issue in a rehearing request before appealing the issue to the court.

In sum, Magnum is a ray of hope for Patent Owners that have become accustomed to most aspects of IPR practice being construed against them.  The Court’s docket contains many upcoming cases that will allow us to learn whether this is an aberration, or a trend.