IP Law Daily Patent Act’s process for appointing PTAB judges is unconstitutional
Friday, November 1, 2019

Patent Act’s process for appointing PTAB judges is unconstitutional

By Cheryl Beise, J.D.

Severing the portion of the Patent Act restricting removal of the APJs is sufficient to render the APJs "inferior officers" and remedy the constitutional problem.

The U.S. Court of Appeals for the Federal Circuit has held that the Patent Act’s scheme for appointing Administrative Patent Judges (APJs) to serve on Patent Trial and Appeal Board panels violates the Appointments Clause of Article II of the U.S. Constitution because the Act makes the APJs "principal officers" of the United States, requiring appointment by the President rather than the Secretary of Commerce. To cure the violation, the Federal Circuit held that severing the portion of the Patent Act restricting removal of the APJs is sufficient to render the APJs "inferior officers" and remedy the constitutional appointment problem. Because the Board decision in the case under appeal was made by a panel of APJs that were not constitutionally appointed at the time the decision was rendered, the decision was vacated and the case remanded for reassignment to a new PTAB panel. The Federal Circuit clarified that the impact of this case is "limited to those cases where final written decisions were issued and where litigants present an Appointments Clause challenge on appeal" (Arthrex, Inc. Smith & Nephew, Inc., October 31, 2019, Moore, K.).

Arthrex, Inc. owns U.S. Patent No. 9,179,907 (the ’907 patent), directed to a knotless suture securing assembly. Smith & Nephew, Inc. and Arthrocare Corp. (together, "S&N") petitioned for inter partes review of claims 1, 4, 8, 10–1 2, 16, 18, and 25–28 of the ’907 patent. A three-judge panel of the Patent Trial and Appeal Board instituted review and ultimately concluded that all challenged claims were unpatentable as anticipated.

On appeal, Arthrex argued that the appointment of the Board’s Administrative Patent Judges by the Secretary of Commerce, as currently set forth in Title 35, violates the Appointments Clause, U.S. Const., art. II, § 2, cl. 2.

Waiver. S&N and the government first argued that Arthrex waived the Appointments Clause challenge by not raising it before the Board. Although the general rule is that a federal appellate court does not consider an issue not raised below, the Federal Circuit decided to exercise its discretion to deviate from the general rule, given the exceptional importance of the issue. The court noted that in Freytag v. Commissioner of Internal Revenue, 501 U.S. 868, 878–79 (1991), the Supreme Court exercised its discretion to decide an Appointments Clause challenge despite petitioners’ failure to raise a timely objection at trial.The Court explained that the case was one of the "rare cases in which we should exercise our discretion to hear petitioners’ challenge to the constitutional authority." Id. at 879. "Like Freytag, this case implicates the important structural interests and separation of powers concerns protected by the Appointments Clause," the Federal Circuit said.

APJ appointments. Section 6 of the Patent Act establishes within the USPTO a Patent Trial and Appeal Board, consisting of the Director, the Deputy Director, the Commissioner for Patents, the Commissioner for Trademarks, and administrative patent judges. The provision provides "The administrative patent judges shall be persons of competent legal knowledge and scientific ability who are appointed by the Secretary, in consultation with the Director." 35 U.S.C. § 6(a). In addition, 35 U.S.C. § 3(c) provides that "Officers and employees of the Office shall be subject to the provisions of title 5, relating to Federal employees." Title 5 U.S.C. § 7513(a) permits agency action against those officers and employees "only for such cause as will promote the efficiency of the service."

Arthrex argued that the APJs who presided over this inter partes review were not constitutionally appointed because they were principal officers who were not appointed by the President with the advice and consent of the Senate.

The Appointments Clause of Article II provides:

[The President] . . . shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

The Federal Circuit framed the issue as "whether APJs are ‘Officers of the United States’ and if so, whether they are inferior officers or principal officers; the latter requiring appointment by the President as opposed to the Secretary of Commerce." In light of the rights and responsibilities in Title 35, Federal Circuit concluded that "APJs are principal officers."

The court explained that the Supreme Court had held that "Officer of the United States," as opposed to a mere employee, is someone who exercises "significant authority pursuant to the laws of the United States." Buckley v. Valeo, 424 U.S. 1, 125–26 (1976). Neither S&N nor the government disputed that APJs are officers as opposed to employees. The APJs exercise significant discretion when carrying out their function of deciding inter partes reviews. They oversee discovery, hear oral arguments, and issue final written decisions containing fact findings and legal conclusions, ultimately deciding the patentability of the claims at issue.

The only question is whether APJs are principal or inferior officers. While there is no "exclusive criterion for distinguishing between principal and inferior officers for Appointments Clause purposes," the Supreme Court in Edmond v. United States emphasized three factors: (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. 520 U.S. 651, 664–65 (1997).

The Federal Circuit noted that there are more than 200 APJs, and a minimum of three must decide each inter partesreview. However, the only two presidentially appointed officers that provide direction to the USPTO are the Secretary of Commerce and the Director, and neither of them, individually or in combination, "exercises sufficient direction and supervision over APJs to render them inferior officers." The Director cannot nullify or reverse a final written decision issued by a panel of APJs. Only the PTAB itself has the authority to grant rehearings and to issue final written decisions. The Director’s ability to designate a Board decision as precedential and his potential participation in the recently created Precedential Opinion Panel did not qualify as "supervision" of the Board. The insufficient review within the agency over APJ panel decisions supported the conclusion that APJs are principal officers.

The court found that the level of supervision factor favored a finding that APJ’s are inferior officers. It was undisputed that the Director exercises a broad policy-direction and supervisory authority over the APJs. Among other things, the Director has the authority to promulgate regulations governing the conduct of inter partes review and the authority to designate the panel of judges who decides each inter partes review.

However, the removal power factor tipped the balance in favor of concluding that APJs are principal officers. Section 6(c) gives the Director the power to designate the panel who hears an inter partesreview, but the statute does not expressly authorize de-designation. The court declined to find that power to de-designate is presumptively incident to the power to designate. The court determine that the only actual removal authority the Director or Secretary have over APJs is subject to limitations by Title 5. Specifically, APJs may be removed "only for such cause as will promote the efficiency of the service." 5 U.S.C. § 7513(a). The court observed that the limitations on removal in Title 5 are similar to the limitations on removal of Copyright Royalty Judges that the D.C. Circuit found unconstitutional in Intercollegiate Broadcasting System, Inc. v. Copyright Royalty Board, 684 F.3d 1332 (2012).

Severability remedy. Having determined that the current structure of the Board under Title 35 is unconstitutional, the court turned to the appropriate remedy, bearing in mind the mandate to refrain from invalidating no more of a statute than is necessary to cure the constitutional defect.

The government argued that because 35 U.S.C. § 3(c) requires that Officers and employees of the Office shall be subject to the provisions of title 5, the court could construe Title 5’s "efficiency of the service" standard to permit removal in whatever circumstances the Constitution requires. However, the court found that construing the words "only for such cause as will promote the efficiency of the service" as permitting at-will, without-cause removal is not a plausible construction, particularly given that the provision pertains to nearly all federal employees. The court declined to construe the provision one way for APJs and another for other federal employees.

The government next argued that the court could construe the statute as providing the Director the authority to unilaterally revise a Board decision before it becomes final. The court found no authority in the statute for such a construction. "The statute is clear that Board decisions must be rendered by at least three Board judges and that only the Board can grant rehearing," the court said. Alternatively, the government recommended that the court simply sever the "three-member clause." While this suggestion plausibly could suffice to render ALJs inferior officers, the court rejected this option, reasoning 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."

Finally, the government suggested partially severing 35 U.S.C. § 3(c), the provision that applies Title 5 to officers and employees of the USPTO. The Federal Circuit agreed that this was the "narrowest viable approach to remedying the violation of the Appointments Clause." This was the approach established by the Supreme Court in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010), when it found that a "for-cause" restriction on the removal power of the SEC’s Commissioners violated the Constitution. The D.C. Circuit in Intercollegiate also followed this approach by invalidating and severing the restriction on the Librarian of Congress’s removal power over Copyright Royalty Judges.

Severing Title 5’s removal restrictions could be achieved either by severing the words "Officers and" or by concluding that those removal restrictions are unconstitutional as applied to APJs. Similar to the remedy adopted in Intercollegiate, the Federal Circuit decided that latter option was the narrowest possible modification to cure the constitutional violation, while maintaining the scheme Congress created. "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," the court said. The Court accordingly interpreted the removal provisions in Title 5 as not applying to APJs.

Applicability. 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, the Federal Circuit vacated and remand the Board’s decision without reaching the merits. The government again contended that the court should decline to remand the case because Arthrex did not raise the challenge before the Board. The court disagreed, stating that the Board below was not constitutionally appointed and "was not capable of providing any meaningful relief to this type of Constitutional challenge and it would therefore have been futile for Arthrex to have made the challenge there." Therefore, the Appointments Clause challenge was properly and timely raised for the first time on appeal.

The Federal Circuit instructed that on remand a new panel of APJs must be designated and a new hearing granted in this case. The court added that its decision does not affect the initial panel’s institution decision. The court saw "no constitutional infirmity in the institution decision as the statute clearly bestows such authority on the Director pursuant to 35 U.S.C. § 314." The appellate court also left to the discretion of the new PTAB panel whether to allow additional briefing or to render a decision on the existing record.

Finally, the Federal Circuit clarified that the impact of this case is "limited to those cases where final written decisions were issued and where litigants present an Appointments Clause challenge on appeal."

The case is No. 2018-2140.

Attorneys: Anthony P. Cho (Carlson, Gaskey & Olds, PC) for Arthrex, Inc. Charles T. Steenburg (Wolf, Greenfield & Sacks, PC) for Smith & Nephew, Inc. and Arthrocare Corp. Melissa N. Patterson, Appellate Staff, Civil Division, United States Department of Justice, for United States.

Companies: Arthrex, Inc.; Smith & Nephew, Inc.; Arthrocare Corp.

MainStory: TopStory Patent FedCirNews

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