United States v. Arthrex: Power Given To PTAB Patent Judges “Incompatible” With Their Appointment

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The much-awaited U.S. Supreme Court’s decision in United States v. Arthrex, Inc. issued on June 21, 2021 and held that PTAB judges’ power to issue final determinations for the executive branch in IPRs was “incompatible” with the mechanism used to appoint them. For those involved in pending IPRs and pending appeals of IPRs, the billion dollar question this week is: how does Arthrex affect my IPR?

For most IPRs, the answer will be “nothing changes,” but for a few pending IPR appeals, additional remands to the PTAB—beyond what the U.S. Court of Appeals for the Federal Circuit has already granted—may be warranted. Those remands, if granted by the Federal Circuit, will be limited in scope to allow for the PTO director to decide whether to rehear the petition and may not alter the outcome.

Background

Inter partes review (“IPR”) is an adversarial process in which panels of three Administrative Patent Judges (“APJs”) of the Patent and Trademark Appeal Board (“PTAB”) are asked by petitioners—usually defendants who have been sued for patent infringement in district courts—to reconsider whether existing patents should have issued in the first place.

The PTAB, however, isn’t part of the federal court system. It’s an executive adjudicatory body within the Patent and Trademark Office (“PTO”) that was relatively recently established by the America Invents Act of 2011.

Arthrex argued that APJs have been given powers that make them principal officers of the Executive Branch and challenged whether the APJs were properly appointed as principal officers. APJs are appointed by the Secretary of Commerce, who oversees the PTO, not the President. This manner of appointment is permissible for inferior officers, but not principal officers. Principal officers must be appointed by the President with the advice and consent of Senate. If APJs are principal officers, their appointment by the Secretary of Commerce would be unconstitutional.

Federal Circuit’s Arthrex decision

The U.S. Court of Appeals for the Federal Circuit was the first appellate stop for Arthrex. The Federal Circuit issued an opinion in October 2019, agreeing with Arthrex’s argued that the APJs are principal officers who were not appropriately appointed as principal officers. The Federal Circuit’s solution to the Arthrex problem was to hold the only-for-cause removal provision unenforceable and severing that particular statutory provision, thereby allowing the Secretary to remove APJs at will. Arthrex v. Smith & Nephew, Inc., 941 F.3d 1320 (Fed. Cir. 2019) According to the Federal Circuit, their opinion—and the accompanying severance—rendered APJs properly appointed inferior officers. The Federal Circuit remanded Arthrex’s case to the PTAB to be heard by a new panel of now-constitutionally-appointed, inferior officer APJs. No one was happy with this decision and all parties—including the Government—appealed to the U.S. Supreme Court (“Court”). Specifically, while a seeming win for Arthrex, Arthrex sought to dismantle the PTAB and IPR system as unconstitutional not a “fix” as to the appointment of APJs.

The impact of the Federal Circuit’s Arthrex decision

After issuing its decision, the Federal Circuit granted remands to the PTAB in some appeals where the PTAB decision occurred prior to the Federal Circuit’s October 2019 Arthrex opinion. But the Federal Circuit denied remands of PTAB decision occurring after its Arthrex opinion because, in its view, the alleged problem had been corrected. Specifically, in Caterpillar Paving Products Inc., v. Wirtgen America, Inc., the Federal Circuit held that its Arthrex decision limited the “holding ‘to those cases where final written decisions were issued.’” The Caterpillar Paving opinion further noted that PTAB decisions issued after the Federal Circuit’s October 2019 Arthrex opinion, “were no longer rendered by unconstitutional panels.” Id. That said, even the Federal Circuit’s limited remands created a backlog at the PTAB, especially in view of the Federal Circuit’s award of a new PTAB panel hearing. In May 2020, the PTAB issued a general order holding approximately 100 Arthrex-related remands, to wait for the Supreme Court’s decision in the case. PTO Report at 72.

The Supreme Court’s decision

On Monday June 21, 2021, the Supreme Court issued its Arthrex opinion. The Court phrased the question to be answered as: whether the authority of APJs to issue decisions on behalf of the Executive Branch is consistent with the Appointments Clause of the Constitution.

The Court’s answer was a “no.” That “no,” however, came through a fractured opinion, with a majority opinion (Roberts, Alito, Kavanaugh, Barrett) as to Parts I and II authored by Chief Justice Roberts, a concurring-in-part/dissenting-in-part opinion by Justice Gorsuch; a concurring-in-the-judgment-in-part/dissenting-in-part opinion by Justice Breyer (joined by Sotomayor and Kagan), and a dissenting opinion by Justice Thomas (joined by Breyer, Sotomayor, and Kagan as to Parts I and II).

The majority opinion held that “the unreviewable authority wielded by APJs during inter partes review is incompatible with their appointment by the Secretary to an inferior office.” Slip Op. 18-19 (emphasis added). In so deciding, the majority acknowledged that they had side-stepped the question of whether the APJs were in fact inferior officers or principal officers, as the majority opinion “never say[s] whether APJs are principal officers who were not appointed in the manner required by the Appointments Clause, or instead inferior officers exceeding the permissible scope of their duties under that Clause.” Slip Op. at 19. The majority states, “both formulations describe the same constitutional violation: Only an officer properly appointed to a principal office may issue a final decision binding the Executive Branch in the proceeding before us.” Id. That said, as will be discussed further below, the Court corrected the problem as if it is a problem falling in the latter category.

What’s the Court’s solution?

The Court decided not to upend the whole PTAB and IPR system as Arthrex requested, which would have meant placing the whole mess at the foot of Congress. Instead, the Court instructed that the proper correction is to make the APJs’ PTAB decisions “subject to review by the [PTO] Director.” Slip Op. at 20.  As the Court summarized,

The upshot is that the Director cannot rehear and reverse a final decision issued by APJs. If the Director were to have the “authority to take control” of a PTAB proceeding, APJs would properly function as inferior officers.

Slip Op. at 21. The Court concluded that such a remedy could be implemented by selectively invalidating one offending section of the statute. Slip Op. at 22 (“[W]e hold that 35 U.S.C. §6(c) is unenforceable as applied to the Director insofar as it prevents the Director from reviewing the decisions of the PTAB on his own.”).

How will PTO Director review be accomplished?

With Section 6(c) held unenforceable (only insofar as prevented PTO Director review), the Court suggested that the PTO Director should create a procedure for reviewing PTAB decisions:

Because Congress has vested the Director with the “power and duties” of the PTO, §3(a)(1), the Director has the authority to provide for a means of reviewing PTAB decisions. See also §§3(a)(2)(A), 316(a)(4). The Director accordingly may review final PTAB decisions and, upon review, may issue decisions himself on behalf of the Board. Section 6(c) otherwise remains operative as to the other members of the PTAB.

Slip Op. 21 (emphasis added). In an interesting twist, the former Director of the PTO, Andrei Iancu, resigned in January 2021. Drew Hirshfeld took over under the official title “performing the functions and duties” of the director, rather than the title “acting director.” As of yet, President Biden has not announced anyone for the position. After the Court’s Arthrex decision more is riding on his choice of who will take the helm of the PTO.

What about pending appeals of IPRs involving an Arthrex challenge to a final determination?

At this time, there are likely more than a mere handful of appeals from IPRs pending before the U.S. Court of Appeals for the Federal Circuit in which a party has maintained an Arthrex challenge to the constitutionality of the APJs’ final determinations and in which the decisions were issued after the Federal Circuit’s October 2019 Arthrex opinion. The Federal Circuit has been denying remands for PTAB decisions occurring after October 2019 based on its own Arthrex decision.

But the Court has now vacated that decision. In doing so, the Court noted that “regardless whether . . . at-will removal by the Secretary would cure the constitutional problem, review by the Director better reflects the structure of supervision within the PTO and the nature of APJs’ duties, for the reasons we have explained.” Slip Op. at 22.

In view of this, pending IPRs appeals based on a decision prior to the Court’s decision should now be remanded to the PTAB for PTO Director Review. The Supreme Court provided guidance as to how such appeals should be handled:

We also conclude that the appropriate remedy is a remand to the Acting Director for him to decide whether to rehear the petition filed by Smith & Nephew. Although the APJs’ appointment by the Secretary allowed them to lawfully adjudicate the petition in the first instance, see Freytag, 501 U. S., at 881–882, they lacked the power under the Constitution to finally resolve the matter within the Executive Branch. Under these circumstances, a limited remand to the Director provides an adequate opportunity for review by a principal officer. Because the source of the constitutional violation is the restraint on the review authority of the Director, rather than the appointment of APJs by the Secretary, Arthrex is not entitled to a hearing before a new panel of APJs.

Slip Op. at 23. Consequently, and consistently with the Arthrex decision, these IPRs on appeal should be eligible for a remand to the PTO so that the Acting Director can determine whether to rehear the petitions. The first step in obtaining such a remand is to file a motion for remand with the Federal Circuit citing the Supreme Court’s Arthrex decision. The Federal Circuit may decide that its now-vacated Arthrex decision was a sufficient fix to correct the issue, even if not the solution that the Court decided to employ.

The more difficult question for appellants of PTAB decisions is whether any such limited remand and PTO Director review would be an illusory win. With the possibility of several potential additional remands from the Federal Circuit in addition to the 100+ remands that were held awaiting the Court’s decision, the Acting Director may be inclined to deny all requests for rehearing, in effect rubber stamping the APJs final determinations—and sending the appeals back up to the Federal Circuit for review. Such a result would hardly be a victory for anyone. The degree of substantive review will likely turn on who the PTO Director is when the procedure is implemented (i.e., when the PTAB lifts its hold), and the ultimate procedure that is implemented for such review (i.e., will the PTAB set forth such a high standard for obtaining PTO Director review that the Director rarely reviews a PTAB decision). Of course, handing a political appointee such as the PTO Director oversight of all PTAB decisions interjects the possibility of further political interference in an already politically charged patent system. This possibility is particularly ripe where a PTAB decision relates to on-going or potentially unpopular patent litigation. The Federal Circuit will continue to be a judicial branch guard against such potential political executive branch action, but the Federal Circuit has rarely reversed the PTAB decisions as to unpatentability—which will be the subject of an upcoming blog post later this year.

In sum, it remains to be seen whether this decision is a victory for patent owners, even if not the one that Arthrex sought. All indicators today suggest not.

[View source.]

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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