The “inferior” Board: Supreme Court preserves the Patent Trial and Appeal Board, but empowers the PTO Director with final decision-making authority over Board proceedings
| July 13, 2021
United States v. Arthrex, Inc. (also, Smith & Nephew, Inc. v. Arthrex, Inc., Arthrex, Inc. v. Smith & Nephew, Inc.) (Supreme Court)
Decided on June 21, 2021
Chief Justice Roberts wrote the opinion of the Court, with Justices Alito, Thomas, Breyer, Sotomayor, Kagan, Gorsuch, Kavanaugh, and Barrett variously concurring and dissenting.[1]
Summary
In U.S. v. Arthrex, the U.S. Supreme Court confirmed that the Administrative Patent Judges (APJs) of the Patent Trial and Appeal Board are improperly appointed in violation of the Appointments Clause of the Constitution. The Court held that 35 U.S.C. §6(c), which provided that only the Board may grant a rehearing of a final decision arising out of an inter partes review proceeding, was unenforceable insofar as the provision denied the Director the power to review the Board’s decision. To cure the constitutional infirmity, the Court held that the correct remedy was to require that the Director review decisions by APJs.
Details
When Arthrex, Inc. saw their U.S. Patent No. 9,179,907 being invalidated by the Patent Trial and Appeal Board, in an inter partes review brought by Smith & Nephew, Inc., they appealed to the Federal Circuit, challenging not only the substance of the Board’s Final Written Decision, but also the constitutionality of the Board. Arthrex argued that the appointment of the Administrative Patent Judges (APJs) violated the Appointments Clause of the Constitution. And being unconstitutionally appointed, the APJs had no authority to deprive Arthrex of their rights in their patent.
Arthrex’s constitutionality argument might have started out as a long-shot. It was the last of their four arguments on appeal, and occupied only 7 of their 149-page opening brief. Remarkably, it was the one that brought Arthrex the most success.
The Appointments Clause (Art. II, §2, cl. 2) of the Constitution provides that principal officers in the U.S. government must be appointed by the President “and by and with the Advice and Consent of the Senate”. But the Appointments Clause also provides that inferior officers may be appointed by “the President alone, in the Courts of Law, or in the Heads of Departments.”
The America Invents Act of 2011 established the Patent and Trial Appeal Board as a tribunal within the Executive Branch. The Board sits in panels of at least three members drawn from the PTO Director, PTO Deputy Director, the Commissioner for Patents, the Commissioner for Trademarks, and APJs. The Secretary of Commerce appoints the members of the Board, except for the Director, who is appointed by the President.
On appeal at the Federal Circuit, the principal question was whether APJs were principal officers or inferior officers, the former requiring appointment by the President as opposed to the Secretary of Commerce.
To answer the question, the Federal Circuit looked mainly to Edmonds v. United States, 520 U.S. 651 (1997).
In Edmonds, the Supreme Court explained that “[w]hether one is an ‘inferior’ officer depends on whether he has a superior”, and “‘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”. Edmonds, 520 U.S. at 662-63. The Supreme Court in Edmonds articulated three factors that aided in distinguishing between principal and inferior officers: (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. Id. at 664-65. The central consideration was the “extent of direction or control” that the appointed officials had over the officers, because the objective was to preserve the chain of command down from the President, so that “political accountability” may be preserved. Id. at 663.
Following Edmonds,the Federal Circuit found that APJs were principal officers due to the lack of any presidentially appointed officials who could review decisions by APJs, as well as the lack of unfettered authority on the part of the Secretary of Commerce and Director to remove APJs at will. Because APJs were found to be principal officers, their appointments by the Secretary of Commerce, instead of the President, violated the Appointments Clause.
Having found a constitutional violation, the Federal Circuit then fashioned a remedy that severed and invalidated the statutory limitations on the removal of APJs. The Federal Circuit reasoned that making APJs removable at will would render them inferior officers. The Federal Circuit also determined that, because the invalidity decision against Arthrex’s patent was issued by an unconstitutionally appointed Board, the decision must be vacated and remanded to the Board for a fresh hearing before a panel of new, constitutionally appointed APJs.
“This satisfied no one”, as the Supreme Court reflected in U.S. v. Arthrex.
All the parties involved in the Federal Circuit appeal—the government, Arthrex, Smith & Nephew—requested the Court’s review of different aspects of the Federal Circuit’s decision.
Nevertheless, the question before the Court was the same one that faced the Federal Circuit: “[W]hether the PTAB’s structure is consistent with the Appointments Clause, and the appropriate remedy if it is not.”
In a divided 5-4 decision, the Court agreed with the Federal Circuit that APJs were unconstitutionally appointed, but disagreed with the Federal Circuit on the appropriate remedy.
The Court began with the premise that “Congress provided that APJs would be appointed as inferior officers, by the Secretary of Commerce as head of a department”. However, the nature of the APJs’ authority was such that they were really acting as principal officers.
The problem was the lack of supervision over the APJs’ decision-making:
What was “significant” to the outcome [in Edmonds]—review by a superior executive office—is absent here: APJs have the “power to render a final decision on behalf of the United States” without any such review by their nominal superior or any other principal officer in the Executive Branch. The only possibility of review is a petition for rehearing, but Congress unambiguously specified that “[o]nly the Patent and Trial Appeal board may grant rehearings.” [35 U.S.C. § 6(c)]. Such review simply repeats the arrangement challenged as unconstitutional in this suit.
The current setup “diffuses” accountability. The Court recognized that “[he, the Director] is the boss” of APJs in most ways, but the Court was troubled by the Director’s powerlessness over the one source of APJs’ “significant authority”—their power to issue decisions on patentability. In that regard, the Director is relegated to the ministerial duty of issuing a certificate canceling or confirming patent claims. As the Court noted, “[t]he chain of command runs not from the Director to his subordinates, but from the APJs to the Director”.
The government attempted to drum up the Director’s influence over the Board’s decision-making. The government argued that it was the Director who decided whether to initiate inter partes reviews, who could designate APJs predisposed to his views to hear a case, who could vacate an institution decision “if he catches wind of an unfavorable ruling on the way” as long as he intervened before a final written decision, who could “manipulate the composition of the PTAB panel that acts on the rehearing petition”, who could “‘stack’ the panel at rehearing, and who could appoint himself to a panel to reverse a decision at rehearing.
Putting aside the troubling due process and fairness concerns raised by the alleged influences of the Director, the Court criticized the government for creating “a roadmap for the Director to evade a statutory prohibition on review [i.e., 35 U.S.C. § 6(c)] without having him take responsibility for the ultimate decision”:
Even if the Director succeeds in procuring his preferred outcome, such machinations blur the lines of accountability demanded by the Appointments Clause. The parties are left with neither an impartial decision by a panel of experts nor a transparent decision for which a politically accountable officer must take responsibility. And the public can only wonder “on whom the blame or the punishment of a pernicious measure, or series of pernicious measures ought really to fall.”
All this led to the Court’s conclusion that “the unreviewable authority wielded by the APJs during inter partes review is incompatible with their appointment by the Secretary to an inferior office”.
For a solution, the Court disagreed with the Federal Circuit that at-will removal of APJs was the answer. The unconstitutionality of the APJs’ appointments lay in the unreviewability of their decisions, and the Federal Circuit’s proposed solution did not adequately address that problem. The solution must instead empower the Director to review Board decisions:
In our view, however, the structure of the PTO and the governing constitutional principles chart a clear course: Decisions by APJs must be subject to review by the Director.
More particularly, the Court explained that:
The upshot is that the Director cannot rehear and reverse a final decision issued by APJs. If the Director were to have the “authority to take control” of a PTAB proceeding, APJs would properly function as inferior officers.
We conclude that a tailored approach is the appropriate one: Section 6(c) cannot constitutionally be enforced to the extent that its requirements prevent the Director from reviewing final decisions rendered by APJs….The Director may accordingly review final PTAB decisions and, upon review, may issue decisions himself on behalf of the Board. Section 6(c) otherwise remains operative as to the other members of the PTAB.
The Director’s decision is then subject to judicial review:
When reviewing such a decision by the Director, a court must decide the case “conformably to the constitution, disregarding the law” placing restrictions on his review authority in violation of Article II.
Finally, the Court vacated the Federal Circuit’s decision to grant Arthrex a hearing before a new panel of APJs. The Court found sufficient their remedy of a limited remand to the Director to determine whether to rehear Smith & Nephew’s inter partes review petition.
There are few interesting aspects to the Court’s Arthrex opinion.
The Court’s holding is narrow. It applies only to 35 U.S.C. §6(c), which currently provides that “[o]nly the Patent Trial and Appeal Board may grant rehearings”, and only to the extent that section 6(c) prohibits the Director from reviewing the Board’s decisions. The holding also applies only to inter partes reviews—the Court is explicit that “[w]e do not address the Director’s supervision over other types of adjudications conducted by the PTAB, such as the examination process for which the Director has claimed unilateral authority to issue a patent”.
In other words, the Court’s decision is unlikely to bring any radical changes to the Board.
It is also notable that Chief Justice Roberts wrote the majority opinion in Arthrex. In Oil State energy Services, LLC v. Greene’s Energy Group, LLC, 138 S.Ct. 1365 (2018), the Supreme Court held that patent grants involved public rights and the Board’s adjudication of patents without a jury, despite not being an Article III tribunal, was constitutionally permissible. But Chief Justice Roberts joined in the dissenting opinion in that case. The dissent was resolute that the Director and the Board, that is, “a politically appointee and his administrative agents, instead of an independent judge”, should not be permitted to adjudicate patents. Id. at 1380. That is, patent adjudication should be insulated from politics. During the oral argument in Oil State, Chief Justice Roberts raised due process concerns over the Director’s ability to influence Board decisions through panel stacking.
Yet, in Arthrex, Chief Justice Roberts would give the politically appointed Director plenary power to review, modify, and even nullify a Board decision, potentially making the Board vulnerable to political influences. How can Chief Justice Roberts’ positions in Oil State and Arthrex be reconciled?
The Court’s decision in Arthrex also touches on the complex relationship between the PTO, which is an agency, the Board, which is an adjudicatory within the agency, and the Administrative Procedure Act (APA) that is supposed to govern their actions.
The Federal Circuit has suggested in the past that proceedings before the Board are APA-governed formal adjudication subject to the formal adjudication procedures set forth in 5 U.S.C. §§556-557. However, the Court in Arthrex suggested that Board proceedings were actually “adjudication that takes place outside the confines of §557(b)”. If Board proceedings are not subject to the APA, then what, if any, regulatory scheme governs Board proceedings to ensure procedural fairness?
In addition, the plain language of the statutes seems to already authorize the Director to grant rehearings. Section 6(a) provides that “[t]he Director, the Deputy Director, the Commissioner for Patents, the Commissioner for Trademarks, and the administrative patent judges shall constitute the Patent Trial and Appeal Board”, and section 6(c) provides that “[o]nly the Patent Trial and Appeal Board may grant rehearings”. Is the Court really rewriting the statute by giving the Director reviewing powers? Or is the Court merely making explicit what Congress had already intended?
Interestingly, the Court’s opinion referred to the Trademark Modernization Act of 2020, which makes explicit that “the authority of the Director…includes the authority to reconsider, and modify or set aside, a decision of the Trademark Trial and Appeal Board”. The Trademark Modernization Act of 2020 thus shields the Trademark Trial and Appeal Board from copycat constitutional challenges.
What now?
The PTO will now need to issue guidance on how the Court’s holding will be implemented. The PTO’s existing Standard Operating Procedure 2[2] appears to provide a procedural framework for requesting rehearing by the Director, as the SOP2 already establishes the Director’s authority to convene a “Precedential Opinion Panel” to review decisions in cases before the Board and determine, in the Director’s sole discretion, whether to order sua sponte rehearing.
The PTO has its work cut out. Following the Federal Circuit’s decision in Arthrex, Inc. v. Smith & Nephew, Inc., the Chief Administrative Patent Judge of the Board issued a general order holding in abeyance more than 100 Board decisions from post-grant proceedings, which were remanded as a result of the Federal Circuit’s Arthrex decision. See General Order in Cases Remanded under Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320 (Fed. Cir. 2019) (Boalick, Chief APJ, PTAB, May 2020).
Also complicating the situation is the current absence of a Director at the PTO. Is a Commissioner of Patent, serving as an Acting Director, constitutionally authorized to review and potentially modify Board decisions? Can the Secretary of Commerce step in while the PTO awaits a new Director?
[1] This review will focus only on the majority opinion.
[2] https://www.uspto.gov/sites/default/files/documents/SOP2%20R10%20FINAL.pdf.
