In a pair of decisions, the U.S. Supreme Court upheld the constitutionality of the inter partes review (IPR) process created by the America Invents Act but required the U.S. Patent & Trademark Office (USPTO) to make a significant change to its implementation of the process to comply with that statute. In rejecting the constitutional challenge to IPRs raised by the patent owner in Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, No. 16-712, slip op. (Apr. 24, 2018), the Supreme Court concluded that Congress had the power to create administrative mechanisms for canceling issued patents. In SAS Institute Inc. v. Iancu, No. 16-969, slip op. (Apr. 24, 2018), decided the same day, the Court held that the USPTO’s Patent Trial and Appeal Board (PTAB) cannot, as it had been, institute IPR proceedings on only some claims challenged in a petition without addressing all challenged claims in its final written decision. Taken together, the result of these two decisions is that IPRs will survive, but the USPTO will need to adapt to comply with the enabling legislation.
In response, on April 26, 2018, the USPTO issued its initial guidance with respect to SAS. The Guidance provides that “the PTAB will institute as to all claims or none.” How this is implemented for pending cases may be complicated, and parties involved in such cases should monitor the PTAB’s orders and guidance. The Supreme Court’s decision found that at least one regulation, 37 C.F.R. § 42.108(a), exceeds the USPTO’s statutory authority, which suggests the USPTO will eventually issue a proposed rule-making to replace any affected regulations. In addition, SAS Institute will likely impact patent challenges and practices for petitioners and patent owners before the PTAB and for litigants before district courts, opening the door for more wide-reaching application of estoppel and for more common issuance of stays.
Oil States: IPRs Are Constitutional Under Article III and the Seventh Amendment
In Oil States, the patent owner challenged the constitutionality of IPR proceedings on appeal from a final written decision of the PTAB. In particular, the patent owner argued that patents, once granted, become private property that can only be revoked by an Article III court and with the protections afforded by the Seventh Amendment right to a jury. The U.S. Court of Appeals for the Federal Circuit summarily affirmed the PTAB’s decision without opinion, having rejected similar arguments regarding IPRs in other cases, e.g., MCM Portfolio LLC v. Hewlett-Packard Co., 812 F.3d 1284 (Fed. Cir. 2015).
The Supreme Court affirmed the Federal Circuit, finding that IPRs do not violate Article III’s allocation of the “judicial power” to the courts because patents belong to the class of “public rights” and Congress permissibly provided the USPTO authority to grant and to reconsider those rights. As explained by the Court, the “public-rights doctrine” applies to patents because granting exclusive rights to the patentee effectively takes those rights from the public. Despite occurring after a patent issues, an IPR “involves the same basic matter as the grant of a patent,” so administrative reconsideration of the grant remains “on the public-rights side of the line.” According to the Court, “[a]s a public franchise, a patent can confer only the rights that ‘the statute prescribes,’” meaning that Congress could lawfully make patent rights granted by statute subject to subsequent IPR proceedings.
Two dissenting justices would have held IPRs unconstitutional because patent invalidation historically occurred in court proceedings. But the majority of the Court concluded that the Constitution permitted Congress to give the USPTO cancellation authority, even if Congress had historically decided not to do so.
Having concluded that Congress did not violate Article III by creating the IPR process, the Court summarily dispensed with the Seventh Amendment challenge to the proceedings because “when Congress properly assigns a matter to adjudication in a non-Article III tribunal, “the Seventh Amendment poses no independent bar to the adjudication of that action by a nonjury factfinder.”
While this decision is significant, the Court was careful to “emphasize the narrowness of [its] holding,” listing issues that were expressly not resolved by its decision, including the retroactive application of IPR to pre-AIA patents and due process challenges.
USPTO’s “Partial Institution” Practice Exceeds Its Statutory Authority
In contrast to the fundamental constitutional holding in Oil States, the decision in SAS Institute focused on the construction of the statute enabling IPRs and its implementation by the USPTO. 35 U.S.C. § 318(a) requires (in relevant part) that the PTAB “issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner” in an IPR not otherwise dismissed. The petitioner in the case, both at the PTAB and before the Court, argued that this provision requires the PTAB’s final written decision to address the patentability of every claim challenged in the petition. The USPTO disagreed with this interpretation, arguing that the final written decision need only address claims on which trial had been instituted under 35 U.S.C. § 314, i.e., claims challenged during the proceeding. The USPTO’s assertion was consistent with its “partial institution” practice (pursuant to 37 C.F.R. § 42.108(a)), limiting its final written decision to the challenged claims on which institution was granted. The Supreme Court, in a 5-4 decision, held that the “partial institution” practice exceeded the USPTO’s statutory authority and remanded the case for further proceedings.
The Supreme Court explained that the structure of the IPR process envisioned by the AIA is one “in which it’s the petitioner, not the Director, who gets to define the contours of the proceeding.” The Court observed that, under 35 U.S.C. §§ 311 and 312, the process begins with a petition that describes the challenges to patentability and identifies the claims challenged. The institution decision given to the Director under § 314—“whether to institute an [IPR] . . . pursuant to a petition”—was, in the Court’s view, a “binary choice” to institute a proceeding on an entire petition or not at all. The Court found further support for this interpretation in the AIA’s reference to the patent owner’s “response to the petition,” which it found inconsistent with the idea that the Director would define the scope of review in the institution decision, and in § 318(a), the statute requiring the final written decision to address all claims “challenged by the petitioner.” The common thread in all these provisions was that the scope of the proceedings was determined by the petitioner’s contentions and not by any action of the USPTO.
The Court also rejected the argument that the statutory bar on appeals from institution decisions (35 U.S.C. § 314(d)) barred review of the “partial institution” in the case. Citing its decision in Cuozzo Speed Technologies, LLC v. Lee, the Court explained that § 314(d) only barred review of the Director’s “initial determination” under § 314(a). It did not apply to judicial review under the Administrative Procedure Act in cases where the USPTO “has engaged in shenanigans by exceeding its statutory bounds” (internal quotation marks omitted). According to the Court, the PTAB’s practice of instituting on less than all claims was an example of this.
The Court also acknowledged the petitioner’s argument that it should abandon the Chevron doctrine but declined to do so because the statute, in the Court’s view, was clear and unambiguous. Chevron therefore did not apply. The four dissenting justices, however, would have applied the doctrine and deferred to the USPTO’s interpretation of the statute. “Why should the statute be read to preclude the Board’s more rational way to weed out insubstantial challenges?” they asked, particularly when the alternative would seem to require the PTAB to review several “near frivolous” challenges in order to finally decide one substantial challenge on its merits. The majority dismissed most of the arguments of the dissents as policy arguments to be addressed by Congress, not the Court.
