New Discretionary Institution Factors Target Offshoring Trends

Key Implications

The Director’s memo signals a significant policy shift, tying the PTAB’s institution decisions to considerations of domestic economic impact. Petitioners with a substantial U.S. manufacturing footprint or who qualify as small businesses may find it easier to secure institution, while entities with little or no domestic manufacturing presence may face heightened scrutiny. Patent owners and petitioners alike should promptly evaluate how these new factors affect their PTAB strategies.

Action Items

Parties to current and future IPR and PGR proceedings should be prepared to address their U.S. manufacturing activities and investments in discretionary briefing before the PTAB. The memo applies to all IPRs and PGRs in which the due date for a patent owner discretionary brief has not yet elapsed, meaning its impact will be felt immediately across a wide range of pending proceedings.

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Background: IPR and PGR Proceedings

Inter partes review and post-grant review are administrative proceedings conducted before the PTAB that allow third parties to challenge the validity of issued patents. IPR permits challenges based on prior art consisting of patents and printed publications, while PGR offers a broader set of grounds for invalidity and is available within nine months of patent issuance. Both proceedings were created by the Leahy-Smith America Invents Act (AIA) and were intended to provide a faster, less expensive alternative to district court patent litigation.

Critically, institution of an IPR or PGR is not automatic. The AIA grants the Director of the USPTO discretion over whether to institute these proceedings. Under 35 U.S.C. §§ 314 and 324, the Director may authorize an IPR or PGR only upon a threshold showing by the petitioner, and the statute further requires the Director to consider the effect of institution standards on “the economy, the integrity of the patent system, the efficient administration of the Office, and the ability of the Office to timely complete proceedings.” It is this broad statutory mandate, codified at 35 U.S.C. §§ 316(b) and 326(b), that provides the legal basis for the new discretionary factors announced in the March 11 memorandum.

The Director’s Rationale

Director Squires’ memorandum grounds the new institution factors in observable economic trends. The memo notes that over the past several decades, substantial segments of the United States’ manufacturing base, particularly in the electronics and computer industries, have moved overseas. The Director cites studies by the Departments of Commerce and Homeland Security highlighting the significant economic and national security damage caused by this offshoring trend, including threats to America’s innovation leadership.

The memo further observes that, while some stakeholders have argued IPRs and PGRs are important tools for protecting American manufacturers and small businesses, offshoring trends have continued unabated during the 15 years these proceedings have been available. Moreover, the Director notes that many of the most frequent users of IPR and PGR proceedings are large companies that have publicly disclosed that they do not have a significant manufacturing presence in the United States and are not taking concrete steps to invest in American manufacturing. The memo cites a recent USPTO study of high-volume PTAB filers and domestic university-related patentees in district court litigation to support this observation. These facts, the Director concludes, raise a legitimate question about whether the current institution framework appropriately weighs the interests of entities that invest in domestic production.

The New Discretionary Factors

Under the memorandum, when determining whether to institute IPR and PGR proceedings, the Director will consider three factors.

First, the Director will consider the extent to which any products accused of infringement in a parallel proceeding are manufactured in the United States or are related to investments in American manufacturing operations.

Second, the Director will consider the extent to which any products made, sold, or licensed by the patent owner that compete with the accused products are manufactured in the United States.

Third, the Director will consider whether the petitioner is a small business that has been sued for infringement of the patent at issue.

The memo provides additional guidance on how these factors will be applied. In evaluating the extent of domestic manufacturing or manufacturing investments, the Director will consider not only assembly of the final product in the United States, but also the extent to which components of a product are made domestically and the extent to which domestically produced products are sent for further processing outside the United States. For method claims, the relevant products are the devices used to carry out the method, for example, for claims directed to a method of operating a computer, the relevant product would be the computer itself.

In determining whether a petitioner qualifies as a small business, the Director will consider all relevant facts raised by the parties, including the Small Business Administration’s size standards set forth in 13 C.F.R. §§ 121.801 through 121.805 and 37 C.F.R. § 1.27(a) that would render a person, business, or nonprofit organization eligible for reduced patent fees.

Applicability

The memorandum applies to all IPRs and PGRs in which the due date for a patent owner discretionary brief has not yet elapsed. The Office encourages parties to identify relevant facts regarding manufacturing presence and small business status in their discretionary briefing. The Office also encourages petitioners who are small businesses that have been sued for infringement to identify themselves, to assist the Office in understanding how frequently small businesses use IPRs and PGRs to defend against claims of infringement.

Practical Implications

Entities that frequently petition for IPR or PGR proceedings should assess the extent to which they can demonstrate a meaningful connection to U.S. manufacturing. Companies that manufacture domestically, source components from U.S. suppliers, or make concrete investments in American manufacturing capacity may be well-positioned under the new framework. Conversely, petitioners whose operations are primarily offshore may face greater difficulty securing institution, particularly if the patent owner can demonstrate competing domestic manufacturing activity.

Patent owners, for their part, should be prepared to present evidence of their own domestic manufacturing activities or investments in discretionary briefing, as the second factor expressly considers the patent owner's competing products and their domestic manufacturing ties.

Small businesses that have been sued for infringement should carefully document their eligibility under the applicable SBA size standards and reduced patent fee regulations, as small business status is a distinct and independent factor favoring institution.

Given the memo’s immediate applicability to pending proceedings, all parties with active or anticipated IPR and PGR matters should promptly evaluate their positions under the new discretionary framework and consider how to address these factors in their PTAB filings.

Ballard Spahr’s Post-Grant Proceedings Team represents patent owners and petitioners in inter partes review, post-grant review, and other PTAB proceedings, offering strategic counsel on institution, trial, and appeal. The Team works closely with the firm’s Patents Group, internationally recognized for patent prosecution, portfolio development, and strategic counseling for innovative businesses across technology, life sciences, manufacturing, and other industries.

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