In United States v. Arthrex, the Supreme Court Delivers A Seemingly Simple Solution That May Prove More Complicated in Practice

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This week, in United States v. Arthrex, Inc., the Supreme Court vacated and remanded a decision by the Court of Appeals for the Federal Circuit (“the CAFC”), holding that the administrative patent judges (“APJs”) at the Patent Trial and Appeal Board (“the Board”) are unconstitutionally appointed. While the CAFC came to the same conclusion as the Supreme Court, the CAFC’s response was to make APJs removable at will by the Secretary of Commerce. In the Supreme Court’s words, the CAFC’s solution “satisfied no one.” The Court, in a plurality decision, formulated its own solution: grant the Director of the United States Patent and Trademark Office (“the Director”) the power to review the decisions of the APJs.

Background

Arthrex, Inc., a medical device company headquartered in the United States, is the assignee of a large patent portfolio, including U.S. Patent No. 9,179,907 (“the ’907 patent”). In 2015, Arthrex filed suit in the Eastern District of Texas (“the District Court”), alleging numerous claims of patent infringement by the British multinational Smith & Nephew plc and its U.S. subsidiary ArthroCare Corporation (collectively, “Smith & Nephew”). One of the many patents Arthrex accused Smith & Nephew of infringing was the ’907 patent.

A little over a year after the filing of Arthrex’s complaint, Smith & Nephew petitioned for inter partes review (“the IPR”) of multiple claims of the ’907 patent, including claims 4, 8, 16, and 27. Meanwhile, just a few weeks after Smith & Nephew’s petition, a jury in the District Court found that Arthrex had proved by a preponderance of the evidence that Smith & Nephew infringed claims 4, 8, 16, and 27 of the ’907 patent. Shortly thereafter, Arthrex and Smith & Nephew settled and filed a Joint Stipulated Motion for Dismissal with Prejudice, which the District Court granted. However, the parties agreed that their settlement did not preclude the IPR, and, in 2018, the Board found the challenged claims of the ’907 patent had been shown to be unpatentable.

Arthrex appealed the Board’s decision to the CAFC. In its appeal, Arthrex argued that, under the Appointments Clause of the Constitution, the APJs were unconstitutionally appointed. For context, the Appointments Clause distinguishes between two types of officers. First, are so-called “principal officers,” such as ambassadors and Supreme Court Justices, who must be appointed with the advice and consent of the Senate. Second, are the unfortunately titled “inferior officers,” officers specified by acts of Congress, and whose appointment Congress may place in the President, in the head of an executive department, or in a court. Essentially, Arthrex’s argument was that the APJs are “principal officers” – therefore, an APJ’s appointment by the Secretary of Commerce is unconstitutional.

The CAFC agreed with Arthrex that APJs are “principal officers” because neither the Secretary of Commerce (“the Secretary”) nor the Director had the authority to review APJ decisions or remove an APJ at will. The CAFC “solved” this constitutional violation by making APJs removable at will by the Secretary, rending them “inferior rather than principal officers.” Then, the CAFC vacated and remanded the Board’s decision. Both Arthrex and Smith & Nephew, as well as the United States government (“the Government”), requested a rehearing en banc, which the CAFC denied. Subsequently, each of these parties requested review of the panel’s decisions in three petitions for certiorari, all of which the Supreme Court granted.

The Supreme Court’s Opinion, Parts I and II

Chief Justice Roberts delivered Parts I and II of the Court’s opinion, which was joined by Justices Alito, Gorsuch, Kavanaugh, and Barrett.

The Court’s opinion begins with a brief history of the Appointments Clause before citing to Edmond v. United States, 520 U.S. 651 (1997), wherein the Court held that an “inferior officer” must be “directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.” (Emphasis added). In the context of the Board, the Court writes that APJs, while designated by Congress as “inferior officers,” in fact exercise “significant authority” when they issue decisions on patentability. However, the APJ’s decisions may be reviewed only by a petition for rehearing, and that Congress unambiguously stated that such review is a power designated to the Board. Hence, the Director does not “direct” or “supervise” decisions by the APJs on issues of patentability, and APJs are effectively more akin to “principal” rather than “inferior” officers.

Smith & Nephew, along with the Government, countered by positing that the Director may still affect the Board’s decision process by, for example, deciding whether to initiate an IPR, designating the APJs who will decide a particular case, and potentially vacating his or her earlier decision to institute an IPR.  The Supreme Court rejected these arguments, finding that Smith & Nephew and the Government pointed to the problem, not the solution. By outlining a roadmap for the Director to “evade a statutory prohibition on review without having him take responsibility for the ultimate decision,” the parties highlighted the hazards of the current system.

Next, the Court’s opinion turns to arguments by Smith & Nephew and the Government that there are other contemporary officers in the modern administrative state that are appointed by heads of departments but still exercise final authority. However, the Court rejected the other officers as incomparable. For example, while Smith & Nephew and the Government point to the Board of Veteran Affairs, which may make final decisions but whose decisions are reviewed by the Court of Appeals for Veteran Claims, the Court notes in its opinion that the Court of Appeals for Veteran Claims is an Executive Branch entity.

The Court’s opinion concludes by holding that the APJ’s wield unreviewable authority that is “incompatible with their appointment by the Secretary to an inferior office.” It goes on to state explicitly that “[o]nly an officer properly appointed to a principal office may issue a final decision binding the Executive Branch in the proceeding before us.” Having found the exercising of “significant authority” by the APJs in adjudicating the rights of private parties to be unconstitutional, the opinion then turns to the appropriate way to resolve the constitutional violation.

The Supreme Court’s Opinion, Part III

 Chief Justice Roberts delivered the opinion of the Court with respect to Part III, which was joined by Justices Alito, Kavanaugh, and Barrett.

In fashioning its solution, the Court declined to adopt Arthrex’s proposal to hold the “entire regime” of IPRs unconstitutional. The Court looked to the structure of the Patent and Trademark Office and spotted a “clear course,” wherein APJs would be subject to the Director’s review. By the Court’s reasoning, the Director already had authority from Congress to oversee APJs in all areas except review of the Board’s decisions on patentability. While the current patent statute prevents the Director from rehearing and reversing a final decision by the APJs, the Court’s opinion states that giving the Director “authority to take control” of a Board proceeding would cause the APJs to “properly function as inferior officers.”

The plurality emphasizes that its decision does not render the current patent statute incomplete or unworkable. Essentially, the Court did not alter the patent statute, except to the extent that the Director may supervise APJs in “adjudicating petitions for inter partes review.”

To remedy the present dispute between Arthrex and Smith & Nephew, the Court remanded to the Acting Director of the Patent and Trademark Office for him to decide whether to rehear the original petition.

Concurrences and Dissents

Justice Gorsuch

Justice Gorsuch filed an opinion concurring in part and dissenting in part. His dissent begins by discussing the history of patent rights in the United States. He considers the decision to allow Executive Branch officials to “cancel” issued patents to be a departure from the Constitution’s separation of powers. Hence, allowing those officials to “cancel” issued patents without being accountable to anyone else in the Executive Branch would be an even greater departure, and he joined with the Court’s opinion as to Parts I and II. However, with respect to Part III, Justice Gorsuch declined to join.

In his dissent from the Court’s crafted solution in Part III, Justice Gorsuch points out that Congress did not put any “fallback” provisions in the statute to suggest a solution, and that the present violation is a “combination of separate statutory provisions that conspire to create a constitutional violation.” He goes on to recognize that there are multiple possible solutions, not just the one the Court chose. “In circumstances like these, I believe traditional remedial principles should be our guide.” (Emphasis added). In effect, he would rather “set aside” the Board’s decision in the present case, not “sever” a portion of the statute entirely, as the plurality does.

One key argument Justice Gorsuch makes is that the Court’s decision in Part III to give the Director the authority to review is based on the “standard federal model” for agency adjudication, but he critically notes that Congress specifically drafted the current patent statute to reject this model. “Multiple amici contend that Congress did so specifically to ensure APJs enjoy ‘independence’ from superior executive officers and thus possess more ‘impartiality.’”

The dissent concludes by noting that each decision by the Supreme Court seems to highlight more and more problems that exist within the present statutory scheme, particularly since the Court’s decision in Oil States a few years ago.

Justice Breyer

Justice Breyer filed an opinion, joined by Justices Sotomayor and Kagan, concurring in the judgment in part and dissenting in part.

First, Justice Breyer argues that the Appointments Clause issue is not as fraught as the Court seems to believe. In his view, the Court should interpret the Appointments Clause as giving Congress “a degree of leeway” in establishing and empowering offices. He cites to the Court’s decision in Buckley v. Valeo, noting that “[n]othing in [the provisions at issue] represents an effort by the ‘Legislative Branch [to] aggrandize itself at the expense of the other two branches.’”

Second, Justice Breyer considers the Court’s decision “formalist” and a “judicial-rules-based approach,” and that instead the Court should embark on a “functional examination of the offices and duties in question.” He cites to the case of Wiener v. United States, 357 U.S. 349 (1958) as a good example of how the Court can consider “the practical consequences that are likely to follow from Congress’ chosen scheme.” Under this reasoning, Justice Breyer states, the Court’s result would be undermined because the need for expertise and the importance of avoiding political interference led Congress to grant the APJs a “degree of independence.” He goes on to contend that the Court’s ruling does not have the precedential foundation that the Court claims.

Justice Breyer concludes by lamenting the shift to a more formalist separation of powers doctrine, rather than a functional one, but he agrees with the Court’s chosen remedy because it does address the specific problem of the reviewability of APJ decisions.

Justice Thomas

Finally, Justice Thomas filed a dissenting opinion, which Justices Breyer, Sotomayor, and Kagan joined with respect to Parts I and II.

In Part I, Justice Thomas lays out the hierarchical structure of the Executive Branch, and points out that the APJs are on a relatively low rung. He proposes leaving the system intact, arguing that because “both the Federal Circuit and this Court would take so much care to ensure that administrative patent judges, appointed as inferior officers, would remain inferior officers at the end of the day suggests that perhaps they were inferior officers to begin with.”

In Part II, he cites Supreme Court precedent on the Appointments Clause to the extent that the Court has never developed a “rigid test” for dividing “principal officers” from “inferior ones.” However, he states “[t]here can be no dispute that administrative patent judges are, in fact, inferior,” noting their lower rank to at least two different officers, that they serve in the Patent and Trademark Office run by the Director, and that they are appointed by the Secretary of Commerce. He goes on to critique the majority’s opinion almost point-by-point, concluding with a theory that the “Court appears to suggest that the real issue is that this scheme violates the Vesting Clause.”

In Part III, Justice Thomas dissents from the Court’s remedy. The Court’s remedy, he contends, “makes extra clear what should already be obvious: Administrative patent judges are inferior officers.” At any rate, whether they are or are not principal officers does not support the Court’s proposed remedy, Justice Thomas argues. If the APJs are “principal officers,” then Arthrex would be entitled to a new hearing before officers “untainted by an appointments violation.” If APJs are “inferior officers,” then no constitutional violation has occurred because the Board did not misinterpret its statutory authority or try to prevent Director review.

Lastly, in Part IV, Justice Thomas engages in a lengthy (and in his words “unnecessary to resolve this suit”) analysis of the Court’s Edmond decision, or at least the part cited by the majority, and considers how it “aligns with the text, history, and structure of the Constitution.”

Conclusion

In an immediate sense, the Supreme Court’s decision in Arthrex returns the present case to the Acting Director of the Patent and Trademark Office to decide whether or not to rehear the original IPR petition. The plurality’s decision in Part III seems fairly straightforward: the Director may review the decisions of the Board. However, complicated broader issues remain unaddressed, such as the practicality of the Director reviewing what could be hundreds or thousands of Board decisions, as well as ethical concerns of granting the Director (a political appointee) review authority. Finally, the several dissents and concurrences in this case indicate separation of powers questions that the Court has yet to resolve.

Further Reading:
1) https://www.ptablaw.com/2020/06/29/federal-circuit-grants-remand-in-ex-parte-reexam-while-world-waits-for-supreme-court-to-weigh-in-on-arthrex/
2) https://www.ptablaw.com/2019/11/21/the-federal-circuits-determination-that-administrative-patent-judges-are-unconstitutionally-appointed/

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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