PTAB Judges are Unconstitutionally Appointed Principal Officers
In a unanimous decision last week, the Federal Circuit found that the administrative patent judges (APJs) at the Patent Trial and Appeal Board (PTAB) are principal officers of the United States, and thus that their appointment by the Secretary of Commerce violates the Appointments Clause of the Constitution.
Arthrex, Inc. v. Smith & Nephew, Inc. et al. 2018-2140 (Oct. 31, 2019) was an appeal from PTAB invalidating the Arthrex’s patent as anticipated. Appellant argued that the appointment of the APJs by the Secretary of Commerce under Title 35 violates the Appointments Clause, U.S. Const. art. II, § 2, cl. 2.The Court first held that the APJs were officers under the Appointments Clause as they exercised significant discretion, issued final written decisions, oversaw discovery, and conducted trials. Thus, APJs were appropriately classified as officers, and not employees. Arthrex, Slip Op. at 8. The question was whether they were inferior officers (therefore properly appointed by the Secretary), or principal officers (who required presidential appointment and Senate confirmation).
The Edmonds Analysis – Distinguishing between Principal and Inferior Officers
To assess whether APJs met the test for an inferior officer, so as to be considered constitutionally appointed, the Court applied the factors from Edmond v. United States, 520 U.S. 651 (1997): “(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.” Arthrex, Slip Op. at 9. The “appointed” official here is the Director of the USPTO, a Presidential appointee.
The Court found that the second factor weighed in factor of the PTAB’s constitutionality as the Director has close “administrative supervisory authority over the APJs” in terms of procedure and pay. However, the remaining two factors did not favor the analysis.
For the first factor, the Court found that though the Director could decide not to institute proceedings, could intervene in an appeal, and sat on the PTAB’s Precedential Opinion Panel, the Director could not “single-handedly review, nullify or reverse a final written decision.” Thus, the Director lacked sufficient review power over APJ panel decisions. Arthrex, Slip Op. at 13.
On the third factor, the Court found that the Secretary and the USPTO Director “lack[ed] unfettered removal authority” and APJs enjoyed for-cause removal protections under 35 U.S.C. § 3(c) through 5 U.S.C. § 7513(a), allowing removal “only for such cause as will promote the efficiency of the service,” requiring a “nexus between the misconduct and the work of the agency.”
Finally, the Court found no other factors to balance the three Edmonds factors to tip the scale in favor of finding the APJs to be inferior officers, holding that “the APJs do not have limited tenure, limited duties, or limited jurisdiction.”
Thus, the Court held that APJs were principal officers, and as such, their appointment by the Secretary was unconstitutional.
Solution – Removing For-Cause Removal Protections
The Court’s cure for the Constitutional violation was severing the portion of the Patent Act giving PTAB judges for-cause removal protections, which it saw as the “narrowest possible” way of addressing the issue. Arthrex, Slip Op. at 24. The Court acknowledged that “[a]lthough the Director still does not have independent authority to review decisions rendered by APJs, his provision of policy and regulation to guide the outcomes of those decisions, coupled with the power of removal by the Secretary without cause provides significant constraint on issued decisions.” Id. at 25-26.
Impact of Arthrex – Practice Notes
The impact of Arthrex is likely to be felt for a while as an en-banc review is likely, followed by a possible Supreme Court review, and at least interim USPTO guidance on the appointment of PTAB judges. While the legal issues play out,
- On November 1, 2019, the Federal Circuit denied an appellant’s attempt to rely on Arthrex and assert an Appointments Clause challenge where the party submitted a notice of “supplemental authority identifying this court’s recent decision in Arthrex” but had “not raise[d] any semblance of an Appointments Clause challenge in its opening briefs or raise[d] this challenge in a motion filed prior to its opening briefs.” Customedia Tech v. Dish Network, 2018-2240 (Fed. Cir. 2019). This outcome suggests that parties must be diligent about preserving the Appointments Clause challenge, should they wish to assert it.
- The cases that are most likely to be affected are those in which the PTAB has issued a Final Written Decision (FWD), and where the affected parties have preserved their Appointment Clause challenges. However, even where challenges are possible, the question remains whether it is necessarily the correct strategic decision, where the Court has left the new panel with the discretion to simply replicate the record of the earlier panel: “[W]e see no error in the new panel proceeding on the existing written record but leave to the Board’s sound discretion whether it should allow additional briefing or reopen the record in any individual case.” Thus, the challenger may well be faced with a panel which may simply affirm the prior panel’s decision, or even render a more negative decision, and it may benefit the appellant to simply seek reversal on the merits.
- How the USPTO responds to this decision remains to be seen. The USPTO is likely to request an en-banc hearing and issue guidance in response to the Court’s ruling. But such short-term solutions may not be adequate and several key questions remain unanswered. For example, if a panel was unconstitutional in the first instance, how can the later panel be compelled to rely on case-dispositive decision reached by that panel in the first instance?
- Further, is the Federal Circuit’s solution of severing the “unconstitutional” portion of the statute adequate? Or is Congressional intervention required to amend the statute to allow it to survive at all? On November 4, 2019, at oral argument, counsel for the appellant in Polaris Innovations Ltd. v. Kingston Tech. Co., No. 18-1768, argued that the Federal Circuit lacked the authority to sever the portion of the Patent Act that limited the ability of PTAB judges to be removed, and so was required to strike down the entire inter partes review system as unconstitutional.
It is highly unlikely that Arthrex is over, and for patent litigants this will be the case to watch for a while to come.
About Dr. Jayashree Mitra:
Partner, Zuber Lawler
Dr. Jayashree Mitra has years of experience in the different facets of the pharmaceutical industry. She has been involved in basic bench research, evaluated the progress of a compound through regulatory approvals, marketed and positioned the drug in the marketplace and litigated the associated patents. She has represented major pharmaceutical companies in Hatch-Waxman litigation, 505(b)(2) applications, and in IPR and PGR proceedings. She has also represented pharmaceutical companies in antitrust actions involving claims of Walker-Process fraud, reverse payment claims, claims under Sherman Act and state antitrust and consumer protection actions. Dr. Mitra has a Ph.D in pharmacology from Yale and a J.D. from Northwestern School of Law, where she was a member of Law Review.
About Brian Beck:
Associate, Zuber Lawler
Brian Beck is a patent and commercial litigator with extensive experience in technologies including pharmaceutical manufacturing processes, mechanical devices, software, and business methods. His previous representations include successful defenses of trade secret lawsuits concerning manufacturing processes for extended release liquid pharmaceutical formulations and transdermal formulations, representation of a French biotechnology company in patent litigation concerning gene editing techniques, and representation of a plaintiff pharmaceutical company in patent and trademark litigation concerning nutritional supplement compositions. He is also a registered patent attorney who has represented clients in the inter partes proceedings before the USPTO. He earned his J.D. from New York School of Law and his B.S. from Princeton University, where he majored in mechanical and aerospace engineering.
About Zuber Lawler:
Zuber Lawler focuses on intellectual property, deals, IPO’s, regulatory work and litigation. The firm manages matters for clients throughout the world from offices in Chicago, Los Angeles, New York and Silicon Valley. Zuber Lawler represents a long list of Fortune companies, global funds and government entities. Zuber Lawler’s attorneys work in languages covering 90% of the world’s population. www.zuberlawler.com