Rethinking Arthrex: Government and Both Parties Seek Redo with Full Federal Circuit

December 22, 2019

The Federal Circuit’s October decision in Arthrex v. Smith & Nephew has cast doubt upon numerous invalidity proceedings through its holding that the appointment of administrative patent judges (APJs) by the Patent Trial and Appeal Board (PTAB) is unconstitutional. The impact of that opinion could be sweeping, as a recent RPX analysis indicates that Arthrex may allow rehearings for more than 200 America Invents Act (AIA) reviews. Now, the Federal Circuit is facing calls to revisit its holding.

On December 16, the US government sought an en banc rehearing in Arthrex, arguing that the appellant waived the right to bring its challenge and that the court should address the constitutional issue in another case. That same day, both parties also filed petitions for rehearing, with the appellee arguing that the Arthrex panel went too far and the appellant insisting that it did not go far enough.

•   The Government’s Brief: This Holding Should Never Have Issued
•   The Appellee’s Brief: Arthrex Went Too Far
•   The Appellant’s Brief: Arthrex Did Not Go Far Enough

As previously recounted by RPX, the Federal Circuit held in Arthrex that PTAB APJs, as appointed under the existing statutory regime, were “principal officers” requiring Senate confirmation under the Constitution’s Appointments Clause. To reach that conclusion, the court considered a series of factors addressing the “extent of direction or control” that the Secretary of Commerce and USPTO Director have over the APJs, determining that the question turned on whether the Director had sufficient power to remove them. The court found that he lacked that authority under a statutory provision requiring that APJ removals only be “for . . . cause”. Rather than eliminate the PTAB altogether, the Federal Circuit chose a more targeted solution to the constitutionality issue by severing that portion of the statute restricting the Director’s removal authority over APJs, rendering them inferior officers.

Significantly, the Federal Circuit limited the scope of its holding—requiring that an affected 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”. This restriction indicates that Arthrex will also impact already-appealed AIA reviews in which opening appeal briefs have not yet been filed, as well as AIA reviews that have not yet been appealed but are still within the appeal window. By statute, an AIA review notice of appeal must be filed “no later than sixty-three (63) days after the date of the final Board decision”, with that period resetting when the Board issues a decision on a request for a rehearing.


The Government’s Brief: This Holding Should Never Have Issued

-        APJs Are Inferior Officers

The government asserted in its December 16 brief that the panel in Arthrex made three key errors in its decision. First, the government took issue with the panel’s rejection of its argument that the USPTO Director’s APJ assignment authority—which, as characterized by the government, allows him or her to assign an APJ to no cases at all and thereby “effectively remove an APJ from judicial duties”—amounts to a removal power. The government asserted that this weighs in favor of a finding that APJs are inferior officers under the Supreme Court’s decision in Edmond v. United States, which includes the removal power as one of the factors for such a determination. The Arthrex panel noted that the governing statute is silent as to whether the applicable statute allows the Director to de-designate an APJ; while acknowledging that the removal power is “presumptively incident to the power of appointment” when the statute is silent in that regard, it declined to rule on whether the Director has that power. This, the government argues, was an error, as if the Director does possess that authority, “then his authority mirrors that found significant in Edmond, which focused on removal from ‘judicial assignment,’ not from federal employment.”

Additionally, the government argued that the Arthrex panel erred by construing the Commerce Secretary’s ability to remove APJs from federal service—allowed “for any reason to ‘promote the efficiency of the service’” by statute—as akin to the heightened “‘misconduct or neglect of duty’ standard at issue in Intercollegiate Broadcasting System, Inc. v. Copyright Royalty Board”. Rather, the government argued, the “efficiency of the service” standard “has never been understood to impose the type of heightened removal restrictions that some might argue Congress uses to attempt to insulate decision-makers to freely make decisions with which their superiors might disagree”. Furthermore, the government asserted that this standard is the default removal provision for federal employees and “poses no barrier to political accountability”, allowing the “removal of an APJ who fails or refuses to follow the Director’s policy directives”.

The government also argued that the Arthrex panel “gave insufficient weight to the Director’s supervisory and review authority over APJs” for its determination that APJs are superior officers. In particular, the government objected to the panel’s characterization of the Director’s ability to set regulations governing IPR, to “issue policy directives”, and designate decisions as precedential as merely a form of “administrative oversight” distinct from the authority to review APJ decisions. Regardless of that distinction, the government argued that the Director has sufficient control over “the substance of Board decisions”, both through his or her sole discretion to institute—which effectively provides “the ultimate authority to ensure that no Board decision issues absent his agreement to initiate a review and assign a panel”—and through the authority to issue binding policy guidance on the correct interpretation of the law that APJs must follow. The government further argued that the Director has more control over PTAB APJs than the superior-inferior officer relationship in Edmond: In that case, review of inferior-officer judges’ factual findings was not possible where the record contained “competent” evidence, whereas the government argued that the Director is not so constrained as to the PTAB.

Given this interpretation of the Director’s removal and supervisory authority, the government thus argued that APJs are inferior officers under the Appointments Clause, rendering the statute governing APJ appointments constitutional in its current form.

-        Arthrex Waived Its Appointments Clause Argument by Not Raising It Before the PTAB

Second, the government asserted that the Federal Circuit should never have addressed the constitutional issue in the first place, arguing that the patent owner waived that defense by failing to raise it before the PTAB. Here, the government noted that under Federal Circuit precedent (specifically, its 2008 holding in In re: DBC), “litigants must raise such challenges before the judges whom they contend lack a valid appointment”. The Arthrex panel exercised its discretion to excuse Arthrex’s forfeiture, citing the party’s challenge as potentially having a “wide-ranging effect on property rights and the nation’s economy”. However, asserted the government, a better vehicle for addressing the challenge would have been Polaris Innovations v. Kingston Technology, a case argued before the Federal Circuit just days after the Arthrex decision’s issuance, in which the patent owner “properly preserved” the Appointments Clause issue by arguing it before the Board and briefing it on appeal.

Addressing the issue in Polaris, argued the government, would clarify the constitutional issue without incentivizing the litigation conduct of parties like Arthrex, “who may have remained silent before the agency in the hopes that it would prevail and obtain the resultant estoppel benefits vis-à-vis appellees”. The decision in Arthrex, the government further emphasized, could encourage the practice of “sandbagging”, or “suggesting or permitting, for strategic reasons, that the [lower tribunal] pursue a certain course, and later—if the outcome is unfavorable—claiming that the course followed was reversible error”.

In any event, the government continued, Arthrex was incorrect that it could not have raised the Appointments Clause issue before the PTAB. Had it done so, and the Board considered the argument “meritorious”, it could have declined to institute trial or vacated institution, providing Arthrex with “meaningful” and “complete” relief.

Given the cases’ substantive overlap, as well as the aforementioned policy rationale, the government thus recommended that Polaris should be heard en banc alongside the rehearing in Arthrex.

-        Remanding Was Inappropriate Due to the Failure to Raise a Timely Appointments Clause Challenge

Third, the government argued that even if the APJ appointment statute were constitutionally “deficient”, and Arthrex were found to have not forfeited that argument, the fact that it failed to raise that issue before the PTAB made it inappropriate to remand the case for consideration by a new panel. Under the Supreme Court’s 2018 decision in Lucia v. SEC, asserted the government, such relief may be granted “only where the petitioner raised a ‘timely challenge’ before the agency” in question. “At a minimum, Arthrex’s forfeiture should have narrowed the scope of any remand.”


The Appellee’s Brief: Arthrex Went Too Far

-        The Arthrex Panel Gave Insufficient Weight to the Director’s Supervisory Authority

Appellee Smith & Nephew filed its own brief in favor of an en banc rehearing on December 16 as well. The company first argued that the Arthrex panel misapplied Edmond, arguing that under a correct application of that case, APJs are inferior officers—“like the administrative adjudicators in Lucia, in [Freytag v. Commissioner], and in Edmond itself”. While the panel determined that while one of those factors, the extent of the Director’s supervisory authority over APJs, weighed in favor of finding that APJs are inferior officers, the appellee argued that the panel gave insufficient weight to this factor. Rather, asserted Smith & Nephew, supervisory authority is a “central” concern of the Supreme Court on this issue.

Furthermore, Smith & Nephew asserted that the panel inappropriately relied for this factor on the DC Circuit’s 2012 decision in Intercollegiate Broadcasting System v. Copyright Royalty Board, which was decided on “very different facts” and has “never been applied by any other appellate court”. In particular, Smith & Nephew argued that the panel erred by equating PTAB APJs to the copyright royalty judges (CRJs) found to be superior officers in that case. While the USPTO Director controls whether to institute trial, thus controlling what final decisions issue; determines APJ panel assignments, effectively allowing him to remove APJs entirely; governs rehearing procedures; and sets policy for the determination of legal precedent; the Librarian of Congress has no such power over CRJs, asserted Smith & Nephew. In all, the company argued, the Director’s supervisory authority over APJs is sufficient to give him political accountability for their decisions, such that they are inferior officers under the Appointments Clause.

-        The Panel Misconstrued Edmond as a Rigid, Three-Part Test

Smith & Nephew also argued that the panel further erred through its decision to not just “[r]elegat[e] ‘supervision power’ itself to the background”, but also to create a three-part test by elevating “two particular incidents of supervision: whether the Director can unilaterally (1) remove APJs from government employment without cause and/or (2) reverse APJ decisions once issued” (emphasis in original). This, the company claimed, was not supported by Edmond or other Supreme Court decisions. In particular, Smith & Nephew emphasized Edmond’s alleged focus on removing military judges from their “judicial assignment without cause” (emphasis in Smith & Nephew brief), a “limited removal power [that] exactly parallels the Director’s authority to de-designate APJs from assignment on panels”. The Arthrex panel, argued the appellee, erred by focusing instead on Title 5’s restrictions on “removing APJs from government employment entirely”, whereas removal from employment was neither dispositive nor relevant in Edmond. This reading of Edmond, the appellee continued, contradicted other Supreme Court cases in which “front-line adjudicators” capable of issuing final decisions on their agency’s behalf, and that enjoyed removal protections, were nevertheless found to be inferior officers.

-        The Vesting of APJ Appointments in the Commerce Secretary Renders APJs Inferior Officers

Finally, Smith & Nephew argued that the manner in which the America Invents Act (AIA) structures APJ appointments—vesting appointments in the Commerce Secretary, rather than the Director, as the statute exists in amended form—renders them inferior officers. This, the company indicated, turns on the question of how many levels of good-cause removal protection protect an officer, as a proxy for the degree of oversight that the President has over that officer. Here, Smith & Nephew distinguished a case relied upon by the panel, the Supreme Court’s 2010 decision in Free Enterprise Fund v. Public Company Accounting Oversight Board, in which the Court “invalidated arrangements under which inferior officers “determin[ing] the policy” of the United States ‘enjoy[ed] more than one level of good-cause protection’” (emphasis in brief). While in that case legislation restricted the president’s “ability to remove a principal offer, who [was] in turn restricted in his ability to remove an inferior officer”, in this case the president “can remove the Director without cause. Thus, by affording APJs ‘only a single level’ of removal protection, the statutory regime allows for ‘Presidential oversight’”.


The Appellant’s Brief: Arthrex Did Not Go Far Enough

-        Stripping APJs of Tenure Protections Undermines Congressional Intent

Appellant Arthrex filed its own petition for rehearing on December 16 as well, arguing first that the Arthrex panel’s decision to make APJs removable at will violated precedent governing statutory severance. Under the Supreme Court’s 1987 opinion in Alaska Airlines v. Brock, Arthrex asserted, a severance is only proper if two requirements are met. First, the portion of a statute that remains after severance “must function in a manner consistent with the intent of Congress”, as “[c]ourts may not rewrite a statute and give it an effect altogether different from that sought by the measure viewed as a whole. . . . Second, severance is improper if what remains is incapable of functioning independently.”

The Arthrex panel’s solution, argued the appellant, failed both parts of that test. As to the first, Arthrex asserted that making APJs removable at will undermines the intent of Congress in creating the IPR regime. The appellant argued that the legislative history of the statutes establishing IPR shows that “Congress intended IPRs to be a fair, transparent, and objective adjudicative framework in which patent judges would act as independent and impartial adjudicators”. Given IPR’s adjudicative nature, “Congress would not have intended the IPR process to be run by decision-makers who lack the key attributes of impartiality and independence mandated by the Due Process Clause and the Administrative Procedure Act (‘APA’)”. Indeed, Arthrex argued, “Congress has recognized for decades that independence and impartiality are essential for agency adjudicators”, and this is only possible with tenure protections—for otherwise, ALJs would face the pressure of aligning their decisions with the priorities of their supervisors. This intent is further reflected, argued Arthrex, by the fact that the statute here at issue established a for-cause removal requirement, as held by the panel in this case.

As for the second part of the test, concerning whether the remaining portion of the statute could function independently, Arthrex noted that the panel determined—correctly, in its judgment—that eliminating three-APJ panels from PTAB proceedings “would be a radical statutory change to the process long required by Congress in all types of Board proceedings”. This is because such panels, as providing “not only a breadth of backgrounds but also implicit checks and balances”, are a “critical feature of the adjudicative IPR process enacted by Congress”. Eliminating APJ tenure protections, argued Arthrex, would undermine the statutory scheme in much the same way by removing the independence that such an adjudicative system relies upon, allowing the Director to effectively determine the outcome of IPR proceedings since no APJ could oppose him or her without risking the loss of their job. Furthermore, since the Director serves at the pleasure of the president, this would make the PTAB a “quasi-judicial Board” that “would be entirely under executive control at a level not intended by Congress”. Above all, “Congress clearly did not envision a trial only in name. Allowing patents to be cancelled based on policy as opposed to law defeats the object of instilling confidence in the patent system.”

-        The Arthrex Panel’s Remedy Did Not Fix the Constitutional Issue

Even if the severance of the APJ tenure provision were permissible, Arthrex argues that this would not be enough to render the APJs inferior officers, because their decisions are still not sufficiently reviewable by the Director. In “each of the Supreme Court’s key Appointments Clause cases, the principal officer had some level of review over the decision-maker’s decisions”, whereas the Director here lacks such review authority. Specifically, Arthrex asserted, the Director lacks the statutory authority to review or reverse final written decisions, which issue without the Director’s approval. While the PTAB may grant a rehearing, the company continued, the Director cannot “sua sponte review or vacate a final written decision” on his or her own initiative.

As a result, Arthrex argued, the Federal Circuit should hold the entire statute unconstitutional, vacate the final decision in this IPR and grant dismissal, and let Congress determine a constitutional remedy.


Further Analysis

See here for RPX’s detailed analysis of the number of cases that may be impacted by Arthrex. A deep dive on the decision itself can also be found here.

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