Federal Circuit Deems PTAB Judge Appointment Process Unconstitutional, Requiring Rehearings for Certain AIA Reviews

November 3, 2019

The Federal Circuit has ruled that the appointment of Patent Trial and Appeal Board (PTAB) administrative patent judges (APJs) by the Secretary of Commerce violates the US Constitution’s Appointments Clause. In an October 31 opinion, the appeals court held in Arthrex v. Smith & Nephew that the statute governing PTAB judge appointments in its then-current form made the APJs principal officers who should have been confirmed by the US Senate (2018-2140). However, the Federal Circuit stopped short of overturning the AIA review regime altogether, limiting its decision in multiple key respects.

In particular, the appeals court implemented a targeted solution to the constitutionality issue by severing the portion of the statute that restricts the APJs’ removal in order to render them inferior officers. The court also limited the scope of its holding—requiring that an affected America Invents Act (AIA) review be reheard by a new panel—to those reviews in which “final written decisions were issued and where litigants present an Appointments Clause challenge on appeal”, suggesting that proceedings already past the point of appeal may be unaffected. Additionally, on November 1, the Federal Circuit further limited the scope of Arthrex in precedential per curiam orders issued in another, unrelated set of appeals (see, e.g., here), holding that an appellant waived any Appointments Clause challenge by failing to raise the non-jurisdictional challenge in its opening appeal briefs.

The Litigation Below and Federal Circuit Briefing

The Federal Circuit’s Opinion

–  The Waiver Issue
–  The Appointments Clause Challenge
–  The Federal Circuit’s Remedies Analysis: Curing the Constitutional Defect

What Comes Next

The Litigation Below and Federal Circuit Briefing

The inter partes review (IPR) here on appeal stemmed from litigation over products used in orthopedic surgery. In November 2016, codefendants Smith & Nephew and Arthrocare (the former’s subsidiary) filed an IPR petition (IPR2017-00275) against a patent (9,179,907) asserted against them in two lawsuits filed by plaintiff Arthrex. The PTAB issued a final decision in May 2018 cancelling all instituted claims, and the patent owner filed a notice of appeal that July. Arthrex argued on appeal, in part, that the three APJs who issued its decision had been unconstitutionally appointed, as principal officers not nominated to and confirmed by the Senate. In March 2019, the US Solicitor General filed a brief in intervention, arguing that Arthrex had forfeited its constitutionality argument by failing to raise it before the Board, and further asserting (as described in detail below) that in any event, the APJs are inferior officers not subject to Senate confirmation. In October, the parties filed supplemental briefs after the court asked them to weigh in on whether any constitutional defects in the statutory language establishing APJ removal requirements could be cured by severing and excising certain language (arguments also addressed below).


The Federal Circuit’s Opinion


The Waiver Issue

Circuit Judge Kimberly A. Moore, writing for a panel including Circuit Judges Jimmie Reyna and Raymond T. Chen, began the Federal Circuit’s analysis by addressing the waiver issue. While acknowledging the general rule that appellate courts do not consider issues on appeal that were not raised below, the Federal Circuit asserted that it has the discretion to deviate from that rule, further noting that the US Supreme Court has allowed appellate review of Appointments Clause objections not asserted previously in litigation below. In particular, the Federal Circuit highlighted the Supreme Court’s 1991 decision in Freytag v. Commissioner of Internal Revenue, in which the latter Court exercised its discretion to hear an Appointments Clause challenge not raised until the appellate stage. The Federal Circuit held that the present case, like Freytag, “is one of those exceptional cases that warrants consideration despite Arthrex’s failure to raise its Appointments Clause challenge before the Board. Like Freytag, this case implicates the important structural interests and separation of powers concerns protected by the Appointments Clause”. The Federal Circuit further stated that in the context of IPR proceedings, “[s]eparation of powers is ‘a fundamental constitutional safeguard’ and an ‘exceptionally important’ consideration” (citation omitted), and concluded that exercising its discretion is appropriate in this case.


The Appointments Clause Challenge

The court then turned to the merits of Arthrex’s challenge, framing the issue at hand as twofold: whether APJs, which “are appointed by the Secretary of Commerce, in consultation with the Director of the USPTO”, are considered “Officers of the United States” under the Appointments Clause in Article II of the Constitution; and if so, whether they are inferior officers or principal officers.

As to the first question, the Federal Circuit held that APJs are “Officers of the United States”, rather than mere employees, a status not disputed by either party or the US government. The reason, explained the court, is that APJs “exercise significant discretion when carrying out their function of deciding inter partes reviews”: They “oversee discovery”, “apply the Federal Rules of Evidence”, and “hear oral arguments”; and at an IPR’s conclusion, they “issue final written decisions containing fact findings and legal conclusions, and ultimately deciding the patentability of the claims at issue”. The similarities between the IPR process and litigation, as observed by the Supreme Court in Oil States, establish a further parallel between this case and Freytag, in which Court held that certain “special trial judges” were “Officers of the United States” for similar reasons.

The Federal Circuit then turned to the question of whether APJs are principal or inferior officers. Here, the court cited the Supreme Court’s 1997 decision in Edmond v. United States, which explained that “[w]hether one is an ‘inferior’ officer depends on whether he has a superior”, while “‘inferior officers’ are officers whose work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.” Although the Court stated that there is no “exclusive criterion”, it set forth three factors for making that determination: “(1) whether an appointed official has the power to review and reverse the officers’ decision; (2) the level of supervision and oversight an appointed official has over the officers; and (3) the appointed official’s power to remove the officers”. The court identified “the central consideration” as the “extent of direction or control that [appointed officials]”—here, the Secretary of Commerce and the USPTO Director—“have over the officers and their decision-making on behalf of the Executive Branch”. “Neither of those officers individually nor combined exercises sufficient direction and supervision over APJs to render them inferior officers”, explained the Federal Circuit, before applying each of the three factors.

For the first factor, the Federal Circuit addressed whether the Director has the authority to review decisions and found that his inability to do so weighed in favor of treating APJs as principal officers. The court’s analysis focused on the manner in which the Director lacks singular control over the process: “There is no provision or procedure providing the Director the power to single-handedly review, nullify or reverse a final written decision issued by a panel of APJs.” By statute, only the PTAB itself may grant rehearings, and such decisions must be made by a panel of at least three APJs. Here, the court rejected the government’s arguments, made in intervention, that the Director has certain tools at his or her disposal sufficient to convey the necessary authority.

Specifically, as to the government’s supporting argument that the Director has the power to intervene in an appeal of an AIA review final decision, the court pointed out that “that authority offers no actual reviewability of a decision issued by a panel of APJs”, merely allowing the director to ask the Federal Circuit to overturn the decision. If no party appeals the decision, then “the Director’s hands are tied”. Furthermore, the court rejected the government’s assertion that the creation of the Precedential Opinion Panel (POP), which may rehear and reverse any Board decision, conveyed additional review authority upon the Director. The Director’s authority, observed the court, is limited to convening a POP and sitting on the panel—but not supervising it. The court also found unpersuasive the government’s argument that the POP’s ability to designate decisions as precedential provides sufficient review authority, as the Director—again, as a mere member—may find himself or herself in the minority on a given decision, while the applicable regulations limit the Director’s authority to convene a POP to deciding only issues of “exceptional importance”.

Thus, given the “substantial power” of APJs “to issue final decisions on behalf of the United States without any review by a presidentially-appointed officer”, and due to the “insufficient review within the agency over APJ panel decisions”, the Federal Circuit concluded that this weighs in favor of a finding “that APJs are principal officers”.

However, the Federal Circuit found that the second factor—“[t]he extent to which an officer’s work is supervised or overseen by another Executive officer”—weighed in favor of a finding of inferior officer status. Here, the court disagreed with Arthex’s argument that the “Director’s oversight authority amounts to little more than high-level, arms-length control”, citing instead the Director’s “broad policy-direction and supervisory authority over the APJs”. That relevant authority included the ability to set regulations governing IPR, to “issue policy directives” and conduct “management supervision” over the Patent Office, the sole power to designate precedential decisions, the discretion over whether to institute any IPR, and authority over APJ compensation. This was similar to the supervisory authority over individuals found to be inferior officers in Edmond and Intercollegiate Broadcasting System v. Copyright Royalty Board, a 2012 decision by the DC Circuit.

The Federal Circuit then turned to the third factor, which addresses the “removal power over an officer”—noting that under the current statutory framework, “both the Secretary of Commerce and the Director lack unfettered removal authority”. The government had argued to the contrary, asserting that the Director’s authority to designate APJs to certain panels was analogous to the removal authority cited in Edmond, as the Director could “potentially remove all judicial function of an APJ by refusing to assign the APJ to any panel” or remove an APJ from an IPR mid-case. However, the Federal Circuit noted that Title 35 references only the power to designate an APJ and is silent on whether the Director has the power to de-designate; while the court noted that in general, when a statute is silent in that regard, the removal power is “presumptively incident to the power of appointment” (citations omitted), it declined to decide whether the Director possesses that authority. Furthermore, the court distinguished the power to designate as “not nearly as powerful” as the authority addressed in Edmond, in which a military Judge Advocate General was allowed “to remove a military judge ‘from his judicial assignment without cause’”. Rather, the only actual removal authority the Director or Secretary holds over APJs flows from Title 5, the relevant requirements from which are incorporated by reference into Title 35. As applied here, the relevant subsection—5 USC Section 7513(a)—provides that APJs may be removed “only for such cause as will promote the efficiency of the service”.

In contrast to the authority here cited by the government, the Federal Circuit held that the most closely applicable case was Intercollegiate. In that decision, the DC Circuit addressed the status of the Copyright Royalty Board’s Copyright Royalty Judges (CRJs), which issue “ratemaking decisions that set the terms of exchange for musical works”. “Both are intellectual property decisions upon which ‘billions of dollars and the fates of entire industries can ride’”, the court noted. More importantly, the USPTO Director’s “inability to review or correct issued decisions by the APJs likens those decisions to ‘the CRJs’ rate determinations [which] are not reversible or correctable by any other officer or entity within the executive branch’”. The restrictions on removal are also similar, allowing the Librarian of Congress to remove a CRJ “for misconduct or neglect of duty”. In Intercollegiate, the DC Circuit “determined that given the CRJs’ nonremovability and the finality of their decisions, [the applicable] supervision functions still fall short of the kind that would render [them] inferior officers”.

Given those three factors, and others it found not to be present here, the Federal Circuit “conclude[d] that APJs are principal officers”: “The lack of any presidentially-appointed officer who can review, vacate, or correct decisions by the APJs combined with the limited removal power lead us to conclude, like our sister circuit in Intercollegiate, which dealt with the similarly situated CRJs, that these are principal officers.”


The Federal Circuit’s Remedies Analysis: Curing the Constitutional Defect

Finally, the Federal Circuit proceeded to determine the proper remedial approach for the constitutionality issue that resulted from the above determination, addressing several arguments raised by the government. It began by rejecting the broadest suggestion, that the court “construe Title 5’s ‘efficiency of the service’ standard to permit removal in whatever circumstances the Constitution requires”, holding that “permitting at-will, without-cause removal is not a plausible construction”. The court further pointed out that this statute applies to all federal employees, and stated that it would not construe the statute “one way for APJs and a different way for everyone else to which it applies”.

While acknowledging that another of the government’s proposals—allowing the Director to appoint a single Board member to hear or rehear any IPR—“would cure the Constitutional infirmity”, the court considered this to be a bridge too far. It held that “that severing three judge review from the statute would be a significant diminution in the procedural protections afforded to patent owners and we do not believe that Congress would have created such a system”, further explaining the benefits of the current, three-judge system (promoting broader APJ experience and providing implicit checks and balances).

However, the Federal Circuit agreed with another suggestion by the government: to “partially sever” 35 USC Section 3(c), which applies Title 5 to “[o]fficers and employees of the” USPTO, thereby removing the for-cause restriction for APJs. The court stated that this would be “the narrowest viable approach to remedying the violation of the Appointments Clause”, and noted that the Supreme Court had taken the same approach in Free Enterprise Fund v. Public Company Accounting Oversight Board (2010), severing an analogous “for-cause” restriction “rather than holding the larger structure of the Public Company Accounting Oversight Board unconstitutional”. This was also the approach taken by the DC Circuit in Intercollegiate.

Of the two possible ways to sever that provision—to remove the “[o]fficers and” language or to conclude that “those removal restrictions are unconstitutional as applied to APJs”—the court chose the latter, narrower option, which was endorsed by the parties and the government. This, the court explained, was the least destructive option with regard to the PTAB overall: “It is our view that Congress intended for the inter partes review system to function to review issued patents and that it would have preferred a Board whose members are removable at will rather than no Board at all.” This solution, the court stated, “renders APJs inferior rather than principal officers”.

The court concluded by vacating and remanding the PTAB’s decision “without reaching the merits” because “the Board’s decision in this case was made by a panel of APJs that were not constitutionally appointed at the time the decision was rendered”. Turning lastly to the broader applicability of its decision, the Federal Circuit indicated that parties must affirmatively raise Appointments Clause challenges in IPRs with already issued final decisions: “Appointments Clause challenges are ‘nonjurisdictional structural constitutional objections’ that can be waived when not presented. . . . Thus, we see the impact of this case as limited to those cases where final written decisions were issued and where litigants present an Appointments Clause challenge on appeal.”

This restriction indicates that parties may not challenge final decisions for which the time for appeal has already passed. The timeframe within which parties may appeal an IPR is relatively narrow: As required by 35 USC Section 142, as implemented in 37 CFR Section 90.3(a)(1), a notice of appeal must be filed “no later than sixty-three (63) days after the date of the final Board decision”, with Subsection 90.3(b)(1) stating that the 63-day period resets when the Board issues a decision on a request for a rehearing. As a result, the impact of Arthrex may be limited to cases decided within those timeframes.


What Comes Next

It is not yet clear if the appellees will move for rehearing en banc, the deadline for which is December 16 (per Federal Circuit Rule 40(e), which provides 45 days to file such a petition when the United States is a party). However, it is likely that the USPTO will issue guidance even before the Federal Circuit issues its mandate in Arthrex.

In the meantime, litigants must contend with Arthrex as it presently stands. Despite the Federal Circuit’s efforts to cabin the scope of Arthrex to appealable or appealed-but-not-yet-briefed final written decisions, numerous AIA review proceedings may be reheard under the Federal Circuit’s decision. Arthrex asserted in its October 29 supplemental brief addressing the Appointments Clause issue that that this may occur for more than 160 IPRs, citing 19 IPRs on appeal in which the parties preemptively raised Appointments Clause challenges in their opening briefs, 100 IPRs with active appeals in which the appellants have not yet filed opening briefs, and 50 IPRs in which final decisions adverse to the patentee have issued and that are still within the appeal window. (No date was provided for this data, but the brief itself was filed on October 29.)

Meanwhile, the Arthrex decision has already begun to affect some existing proceedings. On October 31, the same day that the decision issued, the Federal Circuit vacated and remanded a March 2018 final decision from an IPR filed by Facebook against Fortress Investment Group LLC subsidiary Uniloc 2017 LLC (IPR2016-01756) because the patent holder had raised the Appointments Clause issue in its January 2019 appellate brief (2018-2251). Parties have also begun to file notices of appeal citing Arthrex in certain AIA review proceedings, including two covered business method reviews filed by Miami International Holdings against Nasdaq (CBM2018-00021, CBM2018-00031) and two IPRs filed by Zscaler against Symantec (IPR2018-00912, IPR2018-00913). Additionally, parties have started to preemptively cite Arthrex in attempts to avoid waiving an Appointments Clause challenge; for example, on October 31, patent owner Biogen filed a sur-reply in an IPR filed by Mylan and Sawai (IPR2018-01403) in which it cited Arthrex and reserved its right to raise the Appointments Clause issue, as did patent owner Nike in a preliminary response filed on November 1 in a Puma IPR (IPR2019-01342).

RPX will continue to track the impact of Arthrex in the weeks and months ahead.

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