McClinton Energy Group filed an inter partes review (IPR) petition against all claims of U.S. Patent No. 8,079,413, owned by Magnum Oil Tools International, Ltd.  The USPTO's Patent Trial and Appeal Board (PTAB) instituted the IPR, and eventually rendered a final decision finding that all challenged claims of the '413 patent were obvious.  Magnum appealed to the Federal Circuit and the USPTO intervened in the proceeding.

The '413 patent is directed to downhole wellbore plugs that can be used to facilitate hydraulic fracturing ("fracking").  Since our interest in the case is focused on its procedural aspects, we will ignore the technology, including what the challenged claims of the '413 patent actually recite, as well as the teachings of the prior art.

In its petition for review, McClinton argued in detail that all claims were obvious over three references, which we will call "A", "C", and "K".  McClinton had also contended that another reference, which we will call "L", disclosed the same relevant features as the primary reference, A.  Accordingly, McClinton also asserted that the claims were obvious over L, C, and K, but in doing so largely incorporated by reference its earlier arguments for A, C, and K, but with L replacing A.

An IPR proceeding has two distinct phases.  First, the PTAB reviews the challenger's petition for review, and determines whether, and on what grounds, review should be instituted.  If the petitioner offers multiple grounds for review, the PTAB is permitted to institute on some, all, or none of these grounds.  If the review is instituted, an abbreviated trial is then held before the PTAB, and that body ultimately decided whether to cancel any of the claims under review.

In this case, the PTAB instituted the IPR based on references L, C, and K, and eventually found the challenged claims obvious over this combination of references.  Magnum requested a rehearing on the basis that the PTAB had improperly relied on a new ground of rejection in its obviousness determination.  Magnum also argued that "there was no evidence supporting the [PTAB's] finding that a skilled artisan would have had a reasonable expectation of success" in combining the L and C references.  The PTAB denied the request, holding that "McClinton had explained adequately why a skilled artisan would have had a reasonable expectation of success and a motivation" to make this combination.

Before the Federal Circuit, Magnum's main line of reasoning was that McClinton never established a prima facie case that the claims were obvious over L, C, and K.  Specifically, Magnum took the position that the PTAB erred because McClinton has not explained why one of ordinary skill in the art would have been motivated to combine L with C and K.

At this point in the case, McClinton had dropped out due to a settlement with Magnum, and the USPTO intervened.  The USPTO countered, stating that since the IPR was instituted, the PTAB had concluded that McClinton's petition demonstrated the requisite reasonable likelihood of success.  The USPTO further argued that this finding (i.e., the decision to institute) shifted the burden to Magnum, and that Magnum had to produce evidence of non-obviousness as a result.  Essentially, the USPTO was arguing that the Board's institution decision (finding a reasonable likelihood of success that at least one challenged claim is invalid) is equivalent to establishment of a prima facie case of obviousness for all challenged claims.

The Court disagreed.  As an initial step, the Court pointed out that:

[T]here are two distinct burdens of proof: a burden of persuasion and a burden of production.  The burden of persuasion is the ultimate burden assigned to a party who must prove something to a specified degree of certainty, such as by a preponderance of the evidence or by clear and convincing evidence . . . .  A distinct burden, the burden of production may entail producing additional evidence and presenting persuasive argument based on new evidence or evidence already of record.

Referring to 35 U.S.C. § 316(e), the Court observed that "[i]n an inter partes review, the burden of persuasion is on the petitioner to prove unpatentability by a preponderance of the evidence," and that this burden never shifts to the patent owner.  In contrast, patent application prosecution before the USPTO involves a burden-shifting framework in which the burden of proving claims non-obvious shifts to the applicant once the USPTO makes its prima facie case.  But, in the Court's view, such a framework does not apply in IPR proceedings.

The burden of production, on the other hand, shifts between the petitioner and patent owner when the PTAB institutes an IPR.  For instance, if the patent owner is attempting to disqualify prior art by establishing an earlier conception and reduction to practice than the patent's filing date, the burden of production naturally falls on the patent owner.  The Court noted that "the shifting of the burden of production is warranted because the patentee affirmatively seeks to establish a proposition not relied on by the patent challenger and not a necessary predicate for the unpatentability claim asserted—effectively an affirmative defense."

The Court stated that "the ultimate burden of persuasion of obviousness must remain on the patent challenger and a fact finder must consider all evidence of obviousness and non-obviousness before reaching a determination."  Further, the Court observed that "[t]he PTO's proposed burden shifting framework is also directly at odds with our precedent holding that the decision to institute and the final written decision are two very different analyses, and each applies a qualitatively different standard."  Particularly, a decision to institute is a preliminary, non-binding determination made without the PTAB considering the full record.  It is also non-appealable.  But, after an IPR is instituted, the PTAB is free to change its mind in view of the full record.

Looking to the facts of the present case, Magnum's position was that the PTAB instituted the IPR based on the combination of references L, C, and K, but McClinton had only presented a prima facie case of obviousness for the combination of A, C, and K.  This, according to Magnum, amounted to the PTAB improperly incorporating by reference McClinton's arguments based on A into the conclusion that L, C, and K rendered the claims obvious.  The USPTO argued that the differences between A and L were irrelevant, and that "it is not error for the Board to rely on an unpatentability theory that could have been included in a properly-drafted petition, but was not."

The Court concluded that the PTAB improperly shifted the burden to Magnum to disprove obviousness, essentially because the PTAB assumed without deciding that McClinton proved that L, C, and K rendered the claims obvious.  As a result, the PTAB did not require McClinton to support its claim of obviousness by a preponderance of the evidence.

Further, the Court rejected the USPTO's position 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."  Instead, the PTAB "must base its decision on arguments that were advanced by a party, and to which the opposing party was given a chance to respond."

When drafting an IPR petition, which has a 14,000-word limit, it can be tempting to incorporate earlier arguments by reference in later grounds for institution.  This case instructs us that doing so can be fraught with danger for the petitioner.  Instead, the petitioner should attempt to make out a full prima facie case of invalidity for each of its asserted grounds.

Additionally, the patent owner should be on the lookout for improper burden shifting and the PTAB adopting grounds of invalidity not set forth by the petitioner.  The patent owner should also take every opportunity to remind the PTAB that the burden of persuasion always remains with the petitioner.

In re Magnum Oil Tools Int'l, Ltd. (Fed. Cir. 2016)
Panel: Circuit Judges Newman, O'Malley, and Chen
Opinion by Circuit Judge O'Malley