In U.S. v. Arthrex, Inc. (19-1434); Smith & Nephew, Inc. v. Arthrex, Inc. (19-1452); and Arthrex, Inc. v. Smith & Nephew, Inc. (19-1458), a splintered Supreme Court agreed with the Federal Circuit that there is a problem at the United States Patent and Trademark Office (PTO), but disagreed about how to deal with it.
The case centers around the issue of whether Administrative Patent Judges (APJs) are “principal officers.” Such officers need to be appointed by the President and confirmed by the Senate, and the APJs were not. Because making final decisions on patentability is the sort of thing only a principal officer can do, the Court decided that the PTO Director needed to be able to review the APJs decisions. For cases pending in the PTO, the Supreme Court’s opinion will likely be the subject of some type of rule-making or interim procedure to implement its requirements. We are carefully watching what the interim Director does in this respect.
The Supreme Court did not decide how to resolve the situation in the appeals but rather remanded to the Federal Circuit, which will eventually remand to the PTO—a process that will take several months. Nonetheless, the Federal Circuit has two appeals set for oral argument July 8 and 9 that have raised this issue—and it is likely the judges will have questions for government counsel at those arguments.
Parties who are currently before the PTO or engaged in appeals to the Federal Circuit from the PTO will need to consult with counsel on the facts of their cases to decide how Arthrex will be implemented in their cases, and whether to act strategically to get ahead of things.
The appeal addresses not just whether APJs are principal officers, but what to do with APJs and their pending cases—mainly inter partes reviews (IPRs)—if there is such a problem.
The decision is splintered, with Chief Justice Roberts writing 23 pages for the Court. He is joined by Justices Alito, Gorsuch, Kavanaugh, and Barrett for Parts I and II, but Justice Gorsuch drops out for Part III. Justice Gorsuch both concurs and dissents alone. Justice Breyer brings along Justices Sotomayor and Kagan in a partial dissent that concurs with the Chief Justice in the judgment. Justice Thomas dissents in part and carries Justices Breyer, Sotomayor, and Kagan for his Parts I and II, but not III and IV.
It thus seems that the vote is 7-2 for forcing the Director to have the ability to review PTAB decisions. None of the opinions discuss the requirements of the review process itself or how to implement the review on remand from the Court. And as to anything actually said in the Chief Justice’s opinion, the counting gets more difficult.
The Chief Justice’s opinion, at Part I, recounts the Board’s history and the history of this case. Part II analyzes history and case law to conclude that APJs need to be able to have their work product reviewed, not just their general working process. In sub-section A, Part II discusses the Appointments Clause generally. In sub-section B, it applies the Court’s decision in Edmond v. United States, 520 U.S. 651 (1997), to conclude that APJs need to be directed and supervised by an appointee (in this case, the Director), not just in their processes, but also in the substance of the work they put out. (Slip. Op. at 10-11.) The only possibility for such review now is via petition for rehearing under 35 U.S.C. 6(c), but that provision is inadequate because it provides review only by the APJs themselves. The opinion notes that the government identified many ways in which the Director could intervene to correct APJs, including “stacking” panels of APJs and reconstituting them. But the opinion notes: “That is not the solution. It is the problem”—because the Constitution requires that the appointee be politically accountable and take responsibility for the agency’s actions. (Slip. Op. at 12-13.) In sub-section C, the opinion reviews the history of executive supervision over time (both generally and in the PTO), starting with Hamilton’s writings, moving through land patents at the General Land Office, and into the modern administrative state.
The Court departs from the Federal Circuit in finding that an unappointed officer (like an APJ) needs to be supervised, not just in terms of process, but also in terms of agency work product—at least where that work product is adjudication that resolves the property rights of private parties. Mere general supervision is not enough; the Constitution requires specific supervision at the point where the agency does its real work—because the appointee needs to be answerable for that work to the President, and the President to the People.
The trouble comes in Part III, where the Court sets out to correct the problem. The Court first rejects the option of declaring the entire Post-Grant regime unconstitutional and unfixable. Rather, the Court adopts the “clear course” of requiring that “[d]ecisions by APJs must be subject to review by the Director.” To get there, the Court reasons that the Director needs to use 35 U.S.C. § 3(a)(1) so that the Director has the power to review PTAB decisions, even though 35 U.S.C. § 6 does not by its terms provide for such review: “The Director accordingly may review final PTAB decisions and, upon review, may issue decisions himself on behalf of the Board.” The Court notes that the Federal Circuit’s solution of making APJs terminable at-will was not as close a fit for the “structure of supervision of the PTO and the nature of APJs’ duties,” even if that solution were deemed to be constitutional. For remedy, the Court remands for the Director to consider whether to rehear Smith & Nephew’s petition (but with no right to have new APJs hear the case). The Court emphasizes that the Director “need not review every decision,” but must “have the discretion to review decisions rendered by APJs.”
Justice Gorsuch continues his position from Oil States that only Article III courts should be able to take away a patent. But second-best for him is making Article I APJs more accountable, so he joins Parts I and II of Chief Justice Roberts’ opinion and he expands on the hierarchical “chain of dependence” that must exist in the Executive branch. But he would not apply severability because Congress has not suggested a “fallback” position, there are “separate statutory provisions that conspire to create a constitutional violation,” and there is not “only one way out of the problem.” He would thus apply “traditional remedial principles,” such as declining to enforce the statute in this case while explaining what is wrong with it. He then explains general problems with severance—which he terms “legislative séances”—and cites briefs that argued Congress’ intent with the APJs was to insulate APJs from direct oversight by the Director (thus showing that Congress’ intent on APJ supervision was not clear).
Breyer Dissent (with Concurrence in Judgment)
Justice Breyer joins Parts I and II of Justice Thomas’ dissent, and adds two points. First, the Constitution grants Congress some leeway in announcing how much control a superior officer must exert over decisions of inferior officers—and the statutes here fall within such leeway. Second, “the Court, when deciding cases such as these, should conduct a functional examination of the offices and duties in question rather than a formalist judicial-rules-based approach”—i.e., an examination that would consider why Congress enacted a particular limitation and the practical consequences likely to pass from the scheme. Here, such considerations include the availability of rehearing and the need for people with technical expertise to make these decisions. Though Justice Breyer does not agree with Chief Justice Roberts’s constitutional approach, he notes that if he has to accept that there is a constitutional violation, he agrees with the majority’s remedy. (By taking a knee here, he allows for seven justices to support the remedy rather than four—which presumably would be an issue). His general concern is that the Court is unnecessarily pushing too far into the other branches of government.
Justice Thomas begins with a biting note: “The Executive Branch is large, and the hierarchical path from the President to [APJ] is long.” His Part I quickly describes the organization of the PTO with respect to APJs, and the posture of this case. Part II emphasizes that the Court has “been careful not to create a rigid test to divide principal officers … from inferior ones”—and instead uses a case-by-case analysis that typically defers to Congress’ judgment of what works best. He then notes the two-part requirement of Edmond for inferior officers: (1) they must be lower in rank to a “superior,” and (2) their work must be “directed and supervised at some level by others who were” nominated and confirmed. Justice Thomas then explains that the PTO Director has more control over APJs than existed in Edmond—including all sorts of ways to assign and reassign APJs to cases, and the decision whether to institute an IPR. He says Chief Justice Roberts’s only beef is that the Director cannot individually reverse Board decisions—but Edmond doesn’t require that. Looking at the bigger picture, Justice Thomas says the majority has created “a new form of intrabranch separation-of-powers law” by never saying whether APJs are inferior or principal, and not simply asking whether their appointment was legitimate, but instead asking whether their activities are legitimate. This could create problems within other agencies and is not a good fit for a Vesting Clause analysis. In Part III (writing alone now), Justice Thomas takes issue with the majority’s remedy. And in Part IV (still alone), he notes that it might be necessary one day to reconsider the functional element of Edmond, and whether that aligns with other mechanisms for classifying federal employees. In doing so, Justice Thomas provides (perhaps unfairly) the best quote of the day: “The Court today draws a new line dividing inferior officers from principal ones. The fact that this line places administrative patent judges on the side of Ambassadors, Supreme Court Justices, and department heads suggests that something is not quite right.”
A majority of the Court ruled today that the PTO Director needs to have discretion to review APJ decisions in IPRs (and presumably Covered Business Method review and Post-Grant Review, but perhaps not appeals from normal prosecution). The Court split badly on the way there, but the Chief Justice’s main opinion reasons that unappointed officers must be reviewed by an appointed officer (here, the Director) when they are adjudicating property rights of private parties, and not merely be under general employment supervision of an appointed officer.
We will need to watch what the interim Director announces for pending cases and future operation of the PTAB. And we will need to see what the Federal Circuit says about cases pending before it where parties have preserved the Arthrex issue (e.g., during its upcoming July oral arguments).
How any party should act here will depend on a variety of factors, including (a) whether it is patent owner or petitioner, (b) whether it is in the PTO or the Federal Circuit, (c) whether either party has raised the issue in its case in the PTO or in the Federal Circuit already, (d) whether it has parallel litigation (that may be stayed or ongoing), (e) whether it is subject to provisions of the Hatch-Waxman Act, (f) whether it won at the PTO or lost, (e.g., whether it expects that a “rehearing” from the Director will change anything of substance), and (g) a multitude of other case-specific concerns.