IP Law Daily, PATENT—N.D. Cal.: Controversial ‘NHK-Fintiv’ standard did not require notice-and-comment rulemaking, (Apr 1, 2024)

By Thomas Long, J.D.

USPTO’s multi-factor test used in decisions to grant or deny institution of patent reviews was a general policy statement and not a substantive rule subject to APA requirements for adoption.

The so-called NHK-Fintiv standard—a rule adopted by the USPTO concerning when to grant or deny petitions to institute inter partes (IPR) review when related civil lawsuits were pending—was not a substantive rule requiring notice-and-comment rulemaking, according to the federal district court in San Jose, California. Major tech companies—including Apple, Google, and Intel—accordingly cannot go forward with a lawsuit in which they have asserted that the NHK-Fintiv rule was invalid under the Administrative Procedure Act (APA). In the district court’s view, USPTO Director Kathi Vidal was entitled to summary judgment in her favor because the NHK-Fintiv standard was a general statement of policy that expressly left the Board with genuine discretion to evaluate all facts and circumstances relevant to the institution or denial of IPR. The NHK-Fintiv standard was not binding and did not effect a substantive change in the rights of patent owners, so its adoption did not rise to the level of a rulemaking that needed a notice-and-comment period under the APA (Apple Inc. v. Vidal, March 31, 2024, Davila, E.).

APA claims. Five companies that frequently find themselves defending against patent infringement lawsuits—Apple Inc.; Cisco Systems, Inc.; Google LLC; Intel Corp.; Edwards Lifesciences Corp. and Edwards Lifesciences LLC—brought a multi-pronged challenge under the APA of instructions issued by the Director of the USPTO to the Patent Trial and Appeal Board to inform it how to exercise, under delegation by the Director, the Director’s discretion whether to institute a requested IPR (known as the NHK-Fintiv instructions). In general, the companies contended that the instructions were likely to produce too many denials of institution requests, making them contrary to the aims of the Patent Act, as well as arbitrary and capricious.

Delegation of IPR institution authority. The America Invents Act gives the Director the authority to decide whether to institute IPR or not (that is, whether to grant or deny petitions to institute IPR). From the beginning of the IPR program, the Director has delegated the institution authority to the Board. The Federal Circuit has upheld that delegation, largely because it would be impractical to require the Director to personally review every petition.

NHK-Fintiv rule. In NHK Spring Co., Ltd. v. Intri-Plex Techs., Inc. , No. IPR2018-00752, September 12, 2018, the PTAB determined that it would defer to court proceedings that were in an “advanced state.” Two years later, in Apple Inc. v. Fintiv, Inc. , No. IPR2020-00019, March 20, 2020), the PTAB clarified its earlier decision by setting out six factors it would consider in determining whether to defer to ongoing court proceedings. Those factors are:

1. whether the court granted a stay or evidence exists that one may be granted if a proceeding is instituted;

2. proximity of the court’s trial date to the Board’s projected statutory deadline for a final written decision;

3. investment in the parallel proceeding by the court and the parties;

4. overlap between issues raised in the petition and in the parallel proceeding;

5. whether the petitioner and the defendant in the parallel proceeding are the same party;

6. other circumstances that impact the Board’s exercise of discretion, including the merits.

In June 2022, the Director issued a memorandum updating the instructions. Among other adjustments, the Director instructed the Board that it should not “rely on the NHK-Fintiv factors to discretionarily deny institution in view of parallel district court litigation where a petition presents compelling evidence of unpatentability.”

Challenges to NHK-Fintiv instructions. The companies filed suit in the Northern District of California, challenging the instructions. They asserted (1) that the Director acted contrary to the IPR provisions of the patent statute; (2) that the NHK-Fintiv instructions are arbitrary and capricious; and (3) that the NHK-Fintiv instructions were issued without compliance with the notice-and-comment rulemaking requirements of Section 553 of the Administrative Procedure Act (APA), 5 U.S.C. § 553. The district court determined that the companies had standing to press the APA claims, but then it concluded that their challenges were to Director actions that were not reviewable. The district court dismissed the case, and the companies appealed. In March 2023, the U.S. Court of Appeals for the Federal Circuit held that at least Apple had standing to pursue their APA challenge based on the USPTO’s failure to comply with the notice-and-comment rulemaking requirements of APA Section 553. Back at the district court, both sides filed competing motions for summary judgment. The key issue was whether the NHK-Fintiv standard constituted a substantive rule that was subject to the APA’s notice-and-comment rulemaking requirements.

Substantive rule or general policy statement? To address the question of whether the USPTO’s adoption of the NHK-Fintiv instructions was the implementation of a substantive rule or the issuance of a general statement of policy, the court first examined what was actually required by the rule. The plaintiffs did not challenge the Director’s designation of the NHK and Fintiv cases as precedential, but they argued that this designation had the effect of creating a substantive rule, which should have been subject to notice-and-comment rulemaking. Looking to Federal Circuit law for guidance, while noting considerable overlap with Ninth Circuit law, the district court stated that the general principle is that substantive rules “alter the landscape of individual rights and obligations,” whereas general statements of policy are statements “issued by an agency to advise the public prospectively of the manner in which the agency proposes to exercise a discretionary power.” The most important factor in distinguishing between the two is actual legal effect (or lack thereof) of the agency action on regulated entities.

The court concluded that “the NHK-Fintiv standard is a general statement of policy that guides the Board to consider certain enumerated factors related to parallel district court litigation with an eye toward overall system efficiency, but expressly leaves the Board with genuine discretion to evaluate all facts and circumstances relevant to the institution or denial of IPR.” Application of the standards does not alter the landscape of individual rights and obligations, create rights, impose obligations, or effect a change in existing law, the court said. Moreover, explained the court, “nothing in the NHK-Fintiv standard requires any action on the part of a petitioner or patent owner; rather, the Director’s designation of the NHK and Fintiv decisions as precedential has required action only of the PTAB.” In addition, there was no dispute that the standard applied only prospectively, which was a necessary criterion for a general statement of policy.

With respect to the Board’s discretion to grant or deny IPR institutions regardless of what the NHK-Fintiv standards counsel, the court agreed with the USPTO Director that the Fintiv factors—which were articulated as a nonexclusive set of factors—were not outcome-determinative. “Nothing in Fintiv would prevent a Board from considering all of the enumerated factors and any others the Board deemed appropriate, finding that the factors related to a parallel proceeding all weighed in favor of denial, but that the merits of the petition were so strong that institution was the preferred disposition,” the court explained.

While expressing some sympathy to the plaintiffs’ disappointment when their IPR institution petitions were denied for the sake of agency efficiency, the court disagreed that the policy ran afoul of the APA. “The Director’s guidance to the Board regarding her policy priorities of ‘system efficiency, fairness, and patent quality’ … does not mean that the NHK-Fintiv standard creates a ‘binding norm’ or is otherwise outcome determinative,” the court said.

Therefore, the court denied the complaining tech companies’ motion for summary judgment, and granted the motion of Director Vidal, indicating that it would enter judgment in favor of the Director.

The case is No. 5:20-cv-06128-EJD.

Attorneys: Alyson M. Zureick (Wilmer Cutler Pickering Hale and Dorr LLP) for Apple Inc. and Cisco Systems, Inc. Gary D. Feldon, U.S. Department of Justice, for USPTO Director Kathi Vidal.

Companies: Apple Inc.; Cisco Systems, Inc.

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