On March 1, 2021, the Supreme Court heard the oral argument in Arthrex, Inc. v. Smith & Nephew, Inc., No. 19-1434. Two questions are before the Court. First, whether under the Appointments Clause, U.S. Const. Art. II, § 2, cl. 2, Administrative Patent Judges ("APJ"s) are "principal officers"—who must be appointed by the President—or "inferior officers"—who can be appointed by the USPTO Director. Second, if APJs are principal officers, whether the Court of Appeals for the Federal Circuit ("Federal Circuit") cured the constitutional defect by severing the application of 5 U.S.C. § 7514(a) — the statutory provision that restricted removal of the APJs.
History of Arthrex
On October 31, 2019, the Federal Circuit held that the appointment of the APJs to the Patent Trial and Appeal Board ("PTAB") violated the Appointments Clause of the United States Constitution. To cure the constitutional violation, the Federal Circuit severed the provision that restricts removal of the APJs. See Federal Circuit Rules the Appointment of PTAB Judges Unconstitutional – IPR Appellants May Get Another Shot with Remand to PTAB.
Following the Federal Circuit's decision, Arthrex, Smith & Nephew, and the United States as an intervener, filed petitions for panel rehearing and en banc. In March 2020, the Federal Circuit denied all petitions by an 8-4 vote accompanied by five opinions. See Federal Circuit Denies Rehearing of Decision Finding the Appointment of PTAB Judges Unconstitutional.
As a result of the Federal Circuit decision in November 2019, the Federal Circuit vacated and remanded more than 100 appeals back to the PTAB to be reheard by a different panel. The remanded cases were limited to those with PTAB decisions that predated Arthrex and where the Appointment Clause challenge was raised in appellant's opening brief or in a motion filed prior to the opening brief.
On May 1, 2020, the PTAB issued a general order holding in abeyance all cases remanded under the Arthrex decision. See General Order In Cases Remanded Under Arthrex, Inc. v. Smith & Newphew Inc., (May 1, 2020, PTAB). Those cases remain stayed until the Supreme Court issues its decision in Arthrex.
In July 2020, the government filed a consolidated petition asking the Court to vacate the Federal Circuit's remands under Arthrex in the event the Court reverses the Federal Circuit's decision.
In October 2020, the Supreme Court granted certiorari in Arthrex.
Oral Argument Summary
The government argued that APJs are inferior officers whose work is subject to substantial supervision and direction by the USPTO Director. In addition to setting procedures and reassigning APJs, the Director can promulgate binding guidances, designate opinions as precedential, decide which review will be instituted and which APJs will sit on a panel, and even de-institute a review after it has commenced. Thus, the Director's supervision over APJs exceeds the supervision over the inferior officers in Edmond v. United States, 520 U.S. 651 (1997).
- Chief Justice Roberts pointed out that the Director can "twist the arms of the APJs" but cannot change the APJs' executive decision. This is the opposite of the transparency required by the Appointment Clause. The government responded that the APJs' decision only becomes the final executive decision if it is not reheard, and the Director has substantial power over rehearings.
- Justice Thomas asked how the Court should decide on whether the Director's power is substantial. The government stated that there is no bright-line test, but the Court should focus primarily on the Director's authority to tell the subordinate APJs how to do their job; for example, by issuing binding guidances.
- Justice Sotomayor noted that Arthrex's position was straightforward: APJs are not inferior officers because they can make final decisions that are unreviewable by the Director. Justice Sotomayor asked the government what its test was to determine whether an officer is inferior. The government answered that the Court had decided in Edmond that there was no bright-line test. In view of the size of the Executive Branch, a bright-line test could lead to anomalous results
- Justice Kagan brought up the Precedential Opinion Panels and pointed out that the Director does not have full authority over the other panel members. The government conceded that the Director's authority is not plenary but argued that only the Director can convene such a panel and the Director sets out the rules of law that the other panel members must follow.
- Justice Gorsuch was concerned with the constitutional implications of the position that not even the President can reverse a decision of the APJs. The government argued that the President can terminate the Director who has supervision over the APJs. Justice Gorsuch distinguished between the President's power to remove the Director and the lack of remedy if the President or one of his designees disagrees with a particular APJ decision. The government pointed out that the President would not have greater control over the APJ decisions if the Court were to hold that APJs were principal officers.
- Justice Kavanaugh said that he found the structure of the PTAB concerning because it was a "real break from tradition." He also found it problematic that billion-dollar decisions were made "not by someone who's accountable in the usual way the Appointments Clause demands." The government argued that if there is a constitutional problem, the appropriate remedy was to give the Director plenary review over the APJs by severing the provision of the statute that says only the board can grant rehearings.
Smith and Nephew
Smith and Nephew argued that Arthrex's bright-line test relies on a misapplication of a single line form Edmond. The APJs are inferior officers because they cannot render decisions unless the Director permits them to do so.
- Chief Justice Roberts raised a potential due process issue because the Director could grant rehearing of an APJ decision and issue a new guidance resulting in a different outcome in the case. Smith and Nephew responded that due process is not an issue before the Court in this case.
- Justice Thomas asked what will be their "one test" for deciding if an officer is inferior. Smith and Nephew responded that the only principal officers the Court has recognized are ambassadors, cabinet officers and heads of agencies. These officers are one step removed from the President whereas the APJs come after the Secretary of Commerce and the Director in the chain of command. The ultimate test is whether the President and his direct reports remain accountable for the operations of the agency. Under the Edmonds totality of circumstances test, APJs are supervised and controlled by the Director and Secretary.
- Justice Breyer suggested that there are other officials in different areas of the Executive Branch with unreviewable authority. Smith and Nephew agreed and noted that the priority date decision at issue in the case was narrow and factual, and thus not the type of decision that must be made or even reviewed by a principal officer.
- Justice Alito wondered which of the Director's powers would have to be removed before the Director ceased to have sufficient control over APJs. Smith and Nephew argued that the relationship to the President is the "magic divider" and an officer three steps removed from the President is never or almost never a principal officer.
- Justice Kagan asked whether there was a story behind the lack of automatic review in the head of the Patent Office. Smith and Nephew pointed out the long history of interference examiners making decisions without director review.
- Justice Kavanaugh was concerned that the PTAB structure is unusual, "gives a model for Congress to eliminate agency review of ALJ decisions," and gives enormous power to inferior officers. There are two fixes possible: the executive model, in which there is agency review of APJ decisions; or the judicial model, in which APJs are principal officers with presidential appointment. Smith and Nephew responded that the Director maintains the final authority to cancel or confirm any patent.
- Justice Barrett asked whether, in the event the Court found an Appointment Clause violation, giving the Director the power to review PTAB would fix the problem. Smith and Nephew responded that severing the provision requiring board rehearing would be a possible fix.
Arthrex argued that APJs are principal officers because they decide cases free from any superior authority within the USPTO to review APJ decisions. Severing tenure protections does not cure the problem. The fix should be left to Congress.
- Justice Roberts asked why not allow adjudicators like APJs significant leeway instead of giving political appointees the authority to overturn factual findings. Arthrex responded that the standard agency model allows both for an impartial initial decision and for review by principal officers who are accountable to the people.
- Justice Thomas asked whether Congress could fix the problem by giving the Director discretion to overturn APJ decisions. Arthrex responded that Congress took that step with the Trademark Trial and Appeals Board.
- Justice Breyer pointed out that many services and functions in federal government are delegated to inferior officers and employees. Arthrex responded that for adjudication, it is critical that a principal officer has the authority to overturn that decision.
- Justice Sotomayor noted that historically, non-principal officers had the power to make final adjudicatory decisions on behalf of the executive, and principal officers were intended to be policymakers. Here, it's clear that APJs are not policymakers, and only the Director has precedential power.
- Justice Gorsuch asked if the Court could sever the provision that states that only the PTAB may grant rehearing. Arthrex argued that even if the Director had the authority to grant rehearing, the Director could still be outvoted two to one on the rehearing panel. Moreover, the Court should not rewrite the statute to make the Director as a single decision-maker for reviewing APJ decisions.
- Justice Kavanaugh and Justice Barret were also interested in the severability of the provision that only allowed the PTAB, not the Director, to grant rehearing. Arthrex argued that the Court should not rewrite the statute and leave it to Congress to choose the appropriate remedy.
A majority of the justices (Roberts, Gorsuch, Kavanaugh, Barrett, Thomas) appeared inclined to agree with the Federal Circuit and find an Appointment Clause violation. The justices were less interested in the Federal Circuit's remedy. Instead, the justices repeatedly turned to the severance of the provision that allows only the PTAB to grant a rehearing as a possible solution. While unlikely, the Court may still decide to let Congress remedy the problem.
If the Supreme Court upholds the Federal Circuit decision, the IPRs currently in abeyance before the PTAB will be reheard by new APJ panels. Other cases currently before the PTAB or future post-grant proceedings would not be affected.
If the Court holds that there was no Appointment Clause violation, the Court will likely vacate the Federal Circuit's remands under Arthrex and briefing in those appeals would resume. Other cases currently before the PTAB or future post-grant proceedings would not be affected.
If the Court holds that the appointment of APJs was unconstitutional but disagrees with Federal Circuit's remedy, the Court will have to decide if another remedy is appropriate or whether the entire IPR scheme must be struck down.
The Supreme Court's decision is expected in June.