How PTAB Privity Ruling Constrains Federal Contractors

The ongoing process of reconciling how the Patent Trial and Appeal Board fits within the broader patent regime continues almost nine years after Congress' passage of the Leahy-Smith America Invents Act.

The PTAB, U.S. Court of Appeals for the Federal Circuit and U.S. Supreme Court have all recently weighed in on how the PTAB interacts with the U.S. Court of Federal Claims, the exclusive forum for patent infringement claims against the federal government.

In Microsoft Corp. v. Science Applications International Corp.,¹ the PTAB denied institution of a federal contractor's related inter partes review petitions, holding them time-barred under Title 35 of U.S. Code Section 315(b).

In June 2017, patent owner Science Application International Corp. sued the government for infringing its patents directed to rapid target acquisition, a feature that petitioner Microsoft Corp. allegedly implemented in a product it provided the government under a November 2018 contract.

The institution decision held that Section 315(b) barred Microsoft's IPR petitions against SAIC's asserted patents because (1) Microsoft and the government were in privity and (2) Microsoft filed the petitions more than a year after June 2017. The board also indicated that it would, as an alternative, exercise its discretion to deny institution as a means of comporting with the holding in Return Mail Inc. v. United Postal Service.²

This article discusses the legal and factual background of the PTAB's Microsoft decision, how it applied the privity standard, the decision's impact on federal contractors, and how to square it with a similar PTAB decision from 2016.

Background

Third-Party Practice at the COFC

Suing the federal government for patent infringement³ is specialized work governed by Title 28 of U.S. Code Section 1498(a).⁴ Patent owners can sue in only one forum, the jury-less COFC, and only for "reasonable and entire compensation"⁵ — not injunctive relief.⁶ Patent owners cannot sue federal contractors for infringing activity performed for the government.⁷

Federal contractors may nevertheless find themselves in these specialized proceedings in the role of government indemnitor. Federal contracting regulations typically require suppliers to indemnify the government from patent infringement liability.⁸ If a contractor-indemnitor's activity or related activities of federal government are found to infringe, its continued performance under the contract exposes it to mounting indemnification liability.

Compounding a contractor's predicament is the government's inability to cede control of its litigation defense to a third party.⁹ The contractor-indemnitor, bereft of control of its indemnitee's defense but exposed to indemnification liability, may join a Section 1498(a) action as a third party.¹⁰ In that capacity, it may present defenses against any alleged infringement, including defenses distinct from the government's.

The IPR Section 315(b) Time Bar

Given the much-discussed benefits of PTAB proceedings,¹¹ federal contractors may prefer to invalidate a patent before administrative patent judges as opposed to a COFC judge. Access to the PTAB is, however, time-sensitive. For example, Section 315(b) provides that:

An inter partes review may not be instituted if the petition requesting the proceeding is filed more than 1 year after the date on which the petitioner, real party in interest, or privy of the petitioner is served with a complaint alleging infringement of the patent.

This provision is particularly salient for contractor-indemnitors because they are (i) at risk of being deemed in privity with their customers and (ii) often only notified that products or services they supply are the subject of a complaint long after service.

As discussed below, the PTAB recently denied a series of IPR petitions by applying Section 315(b) to Microsoft in its capacity as a federal contractor.

Microsoft v. SAIC

On June 19, 2017, SAIC sued the government under Section 1498(a), accusing certain night-vision goggles of implementing its patented rapid target acquisition technology. RTA provides visual indication in a soldier's heads-up display where the soldier's gun is aimed.

On Nov. 20, 2018, in the middle of the Section 1498(a) litigation, Microsoft contracted with the U.S. to develop systems implementing RTA. In the spring of 2019, Microsoft successfully intervened in the Section 1498(a) action.¹² Then, in July, Microsoft filed five IPR petitions against each of SAIC's asserted patents, almost two years after SAIC filed its complaint.

On Jan. 27, in Microsoft. v. SAIC, the PTAB denied institution of Microsoft's IPR petitions, determining that Microsoft was in privity with the government. The board applied the Supreme Court's Taylor v. Sturgell factors in its privity analysis. Taylor provides six nonexhaustive factors to consider when determining privity:

An agreement between the parties to be bound;
Preexisting substantive legal relationships between the parties;
Adequate representation by the named party;
The nonparty's control of the prior litigation;
Where the nonparty acts as a proxy for the named party to re-litigate the same issues; and where special statutory schemes foreclose successive litigation by the nonparty (e.g., bankruptcy or probate).¹³

The board here found privity based on three of those factors.¹⁴

The decision relied principally on the second factor: preexisting substantive legal relationships between the parties. The board's foundational premise was that such relationships are marked by sharing a high degree of commonality of proprietary or financial interest.¹⁵

One shared interest here was the common desire to invalidate the asserted patents. And though the board recognized that that interest alone cannot establish privity, it emphasized that Microsoft would have no such interest but for its government contract.¹⁶

Also relevant to the second factor was sealed evidence showing that Microsoft's relationship with the government was more than the kind of fairly standard customer-manufacturer relationship incapable of establishing privity.¹⁷

The Federal Circuit has categorized the relationship between an indemnitor and indemnitee as standard where (1) the parties' correspondence showed an arm's-length relationship, and (2) the relevant indemnification clause did not specify the scope of indemnity by, for example, providing for control of defense or reimbursement of legal expenses and infringement liability.¹⁸

Based on the sealed evidence, Microsoft's intervention in the infringement case at the COFC, and Microsoft's failure to provide sufficient evidence rebutting such a legal relationship, the board found that the relationship between the petitioner and the government was more than a standard customer-manufacturer arrangement.

The board also held that Taylor's fourth factor — the nonparty's control of the prior litigation — weighed in favor of privity because of certain prefiling communications. For example, the government's counsel had asked petitioner's counsel whether Microsoft had decided to file IPRs.¹⁹

Factor six — special statutory schemes foreclosing successive litigation by the nonparty — also favored privity given Section 315(b).²⁰ Moreover, the board noted that "Petitioner's filings are the only filed Petitions from which the government could benefit, because the government could not file its own petition in light of the June 10, 2019, Return Mail decision."²¹

In Return Mail Inc. v. United Postal Service, the Supreme Court held that the AIA prohibited the federal government from petitioning the PTAB for post-issuance review.²² Microsoft filed its petitions only a month after the court issued Return Mail, and while that decision's effect on the board's ultimate finding of privity is hard to quantity, its impression on the board's privity decision is evident.

As an epilogue to its Section 315(b) decision, the board stated that regardless of the outcome of its privity analysis, it would have denied institution using its discretion under Title 35 of U.S. Code Section 314(a) so as "to avoid any concerns that the government is obtaining a benefit to which it is not permitted under Return Mail."²³

Takeaways

The impact of Microsoft v. SAIC can be qualified by comparison with AM General LLCv. UUSI LLC, a 2016 decision in which the PTAB found no privity between a similarly situated federal contractor and the government.²⁴ The AM General decision signaled that federal contractors were impervious to Section 315(b)'s time-bar by nature of their third-party status, free to challenge patents asserted against the government even years after the patentee initiated the Section 1498(a) action.²⁵

The Microsoft decision, however, seems not only to wrest that tremendous advantage from federal contractors, but, in view of Return Mail, to potentially foreclose federal contractors from seeking post-issuance review of patents asserted against the government.

The Microsoft privity analysis may therefore counsel contractors with solid IPR invalidity positions against appearing at the COFC after the Section 315(b) one-year bar lapses lest the board deny institution by establishing privity based on statements made in the contractor's COFC motions and pleadings. Yet by foregoing participation at the COFC in this instance, a contractor risks the board's denying institution on Return Mail grounds, at which point the contractor's time to appear in the COFC would have also lapsed.²⁶

There are, nevertheless, a few distinctions between Microsoft and AM General meriting the attention of federal contractors.²⁷

First: the nature of the government relationship. The Microsoft decision hinged on redacted confidential evidence potentially illustrating a less-than-arm's-length relationship between the government and its contractor. To the board, this showed a unity of interests. Contractors seeking to avoid privity would do well to highlight any of its divergent interests, such as supplying the accused technology to customers other than the federal government.

And though the Federal Acquisition Regulation constrains government contracts, contract clauses should be reviewed carefully as they have the potential to demonstrate an arrangement with the government that is more extensive than a fairly standard customer-manufacturer relationship.

Further, the PTAB in Microsoft seized upon the government asking Microsoft whether it had decided to file IPRs as evidence of privity. Contractors should, to the extent feasible, seek to minimize similar communication from and with the government that could be construed as instruction or control.

Second: Avoiding privity may depend on the contractor's portrayal of the relationship between the parallel proceedings. AM General avoided a privity determination by emphasizing the absence of preclusion between parallel proceedings.²⁸

Comparatively, Microsoft, unlike AM General, moved to stay the Section 1498(a) action in favor of IPR proceedings, supporting its motion by arguing that the COFC would need to consider the IPR record when construing the asserted claims.²⁹ The board read Microsoft's suggestion as an indication that the petition and the infringement claims against the government were intertwined, evidencing a substantive legal relationship between the government and the petitioner.

So painting the IPR and COFC proceedings as isolated may prevent a finding of privity. The Microsoft decision may, therefore, warn contractors against moving to stay COFC proceedings pending resolution of a preinstitution petition filed after the Section 315(b) time bar lapses.

Microsoft's departure from AM General may, however, merely represent a shift in the privity analysis at the PTAB, attributable to the intervening Return Mail decision and the sentiment that the government—and even those contractors Section 1498(a) shields with immunity — cannot benefit from post-issuance review before the PTAB.

Neither AM General nor Microsoft are precedential, so their impact is limited to their persuasiveness. Yet no controlling clarification on these issues is forthcoming from the Federal Circuit for two reasons. First, Microsoft's appeal of the adverse institution decision was dismissed by the Federal Circuit on April 17 because a decision to deny a petition is a matter committed to the U.S. Patent and Trademark Office's discretion.³⁰

Second, on April 20, the U.S. Supreme Court, in Thryv Inc. v. Click-to-Call Technologies LP, overruled Federal Circuit precedent that had treated Section 315(b) time-bar determinations as reviewable after a final written decision.³¹

Now that these determinations are unappealable, the AM General and Microsoft decisions may represent federal contractors' best guidance on Section 315(b)'s privity standard and related Return Mail considerations until the PTAB next takes up these issues. Federal contractors should therefore remain mindful of Section 315(b)'s one-year window when filing IPR petitions related to Section 1498(a) actions and cognizant of how Return Mail may affect such petitions.

Footnotes

¹ No. IPR2019-01311, Paper No. 35 (P.T.A.B. Jan. 27, 2020).

² 139 S. Ct. 1853, 1872 (2019).

³ Of note, §1498(a) is a suit for "unauthorized use," not "infringement," which is a material distinction. See, e.g., Return Mail, Inc. v. U.S. Postal Serv. , 868 F.3d 1350, 1360-64 (Fed. Cir. 2017), rev'd on other grounds, 139 S. Ct. 1853 (2019). This article will use "infringement" as a shorthand for "unauthorized use."

⁴ For a comprehensive review of §1498,see Lionel M. Lavenue, Patent Infringement Against the United States and Government Contractors Under 28 U.S.C. § 1498 in the United States Court of Federal Claims, 2 J. Intell. Prop. L. 389 (1995); see also Mary Ellen Coster Williams & Diane E. Ghrist, Intellectual Property Suits in the United States Court of Federal Claims, 10 Landslide (2017), https://www.uscfc.uscourts.gov/node/2927.

⁵ 28 U.S.C. § 1498 (2018).

⁶ See, e.g., Trojan, Inc. v. Shat-R-Shield, Inc. , 885 F.2d 854, 856-57 (Fed. Cir. 1989).

⁷ § 1498(a).

⁸ See 48 CFR 52.227-3 (2020).

⁹ See 28 U.S.C. §516 (2018).

¹⁰ The Rules of the COFC ("RCFC") provide contractors at least two avenues for being heard at court. First, RCFC 14(b) allows parties to formally notify any interested third-party, such as an indemnitor, of the § 1498(a) complaint. A noticed party "may file an appropriate pleading setting forth the person's interest in the subject matter of the litigation." RCFC 14(c)(1)(a). Second, RCFC 24 allows interested parties to proactively intervene, permissively or by right.

¹¹ See, e.g., Dan Cooley et al., PTAB Basics: Key Features of Trials Before the USPTO, Finnegan (Jan. 2020), https://www.finnegan.com/en/insights/ptab-basics-key-features-of-trials-before-the-uspto.html .

¹² Microsoft Corp. v. Science Applications Int'l Corp., No. IPR2019-01311, Paper No. 35 (P.T.A.B. Jan. 27, 2020).

¹³ WesternGeco LLC v. ION Geophysical Corp. , 889 F.3d 1308, 1319−20 (Fed. Cir. 2018) (citing Taylor v. Sturgell , 553 U.S. 880, 894-95 (2008)).

¹⁴ Id. at 6-7 (citing Taylor v. Sturgell, 553 U.S. 880 (2008)).

¹⁵ Id. at 7 (citing Applications in Internet Time, LLC v. RPX Corp. , 897 F.3d 1336, 1352 (Fed. Cir. 2018) (Reyna, J., concurring)).

¹⁶ Id. at 9 (citing WesternGeco LLC v. ION Geophysical Corp. , 889 F.3d 1308, 131 (Fed. Cir. 2018)).

¹⁷ Id. at 11 (citing WesternGeco, 889 F.3d at 1321).

¹⁸ WesternGeco, 889 F.3d at 1320-22.

¹⁹ Microsoft, No. IPR2019-01311, Paper No. 35, at 12.

²⁰ Id. at 11.

²¹ Id. at 12.

²² Return Mail, Inc. v. United States Postal Serv. , 139 S. Ct. 1853, 1872 (2019).

²³ Microsoft, No. IPR2019-01311, Paper No. 35, at 13-14.

²⁴ No. IPR2016-01049, Paper No. 14 (P.T.A.B. Nov. 7, 2016).

²⁵ For additional analysis of this opinion, see Lionel M. Lavenue & David C. Seastrunk, Gov't Contractors and the Inter Partes Review Time-Bar, Law360 (Jan. 5, 2017), https://www.law360.com/articles/875546/gov-t-contractors-and-the-inter-partes-review-time-bar .

²⁶ See RCFC 14(c)(2) (providing only 42 days after a contractor is noticed for it to plead); RCFC 24 (requiring "timely" motions to intervene).

²⁷ Most glaringly, AM General put more emphasis on other Taylor factors.

²⁸ The AM General decision relied heavily on the Federal Circuit's Penda decision; any discussion of Penda and its holdings on preclusion are conspicuously absent from Microsoft, despite Microsoft citing it for the Board.

²⁹ See Microsoft, No. IPR2019-01311, Paper No. 35, at 9.

³⁰ Microsoft Corp. v. Sci. Applications Int'l Corp., No. 20-1464 (Fed. Cir. Apr. 16, 2020) (citing Cuozzo Speed Techs. LLC v. Lee , 136 S. Ct. 2131, 2140 (2016)).

³¹ No. 18-916 (Apr. 20, 2020) (holding that the PTAB's time-bar decisions are unappealable, even after final written decision).

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