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IP Alert: Federal Circuit Rules Administrative Patent Judge Appointments Unconstitutional

November 4, 2019

On October 31, in Arthrex, Inc. v. Smith & Nephew, Inc., the Federal Circuit held that the process for appointing Administrative Patent Judges (APJs), defined in Title 35 of the U.S. Code ("the patent statute"), was unconstitutional as enacted. The case potentially will have sweeping ramifications for a large number of pending PTAB appeals. For parties with a pending appeal from the Patent Trial and Appeal Board (PTAB), the Federal Circuit’s decision appears to give a possible right to a rehearing of the matter by a different panel of APJs.

Arthrex filed this appeal in the Federal Circuit following an inter partes review (IPR) where the PTAB found Arthrex’s patent invalid as anticipated. In addition to appealing the PTAB’s decision, Arthrex further contended that the process for appointment of APJs under the patent statute was unconstitutional. Even though Arthrex had not raised this issue before the PTAB, the Federal Circuit decided to exercise their discretion to decide the issue.

Arthrex argued that the appointment of APJs under the patent statute is unconstitutional because it violates the Appointments Clause found in Article II of the Constitution. The Appointments Clause provides: “[The President] shall nominate, and by and with the Advice and Consent of Senate shall appoint . . . all other Officers of the United States.” Under the patent statute, however, APJs are appointed by the Secretary of Commerce, in consultation with the Director of the U.S. Patent and Trademark Office (USPTO). The question, then, under constitutional law precedent, was whether APJs are “Officers of the United States” and further whether they are “principal officers” or “inferior officers.” The Appointments Clause of the Constitution requires principal officers to be appointed by the president, so appointment of principal officers by the Secretary of Commerce would be unconstitutional.

Arthrex argued that the APJs exercise the type of significant authority that renders them “Officers of the United States.” The Federal Circuit agreed, noting that APJs hold an office established by law, exercise significant discretion when deciding IPRs, oversee discovery, hear oral arguments, and issue final written decisions ultimately determining whether patent claims are patentable or not.

Having found APJs to be officers, the remaining question was whether they were principal or inferior officers. In a prior case, the Supreme Court laid out a three-factor test for determining whether an officer was a principal officer or an inferior officer: (1) whether a presidentially appointed official has the power to review and reverse the officers’ decision; (2) the level of supervision and oversight the appointed official has over other officers; and (3) the appointed official’s power to remove the officers. Under Supreme Court precedent, the extent of the direction or control in the relationship is the central consideration. The Federal Circuit found only two officers who provide direction to PTAB APJs—specifically, the Secretary of Commerce and the Director of the USPTO.

Evaluating the first factor, the Federal Circuit noted the significance of whether a presidentially appointed official has the power to review an officer’s decision such that the officer cannot independently “render a final decision on behalf of the United States.” In the case of the PTAB APJs, no presidentially appointed officer has independent statutory authority to review a final written decision by the APJs before the decision issues. Moreover, there is no statutory provision or procedure for the USPTO director to single-handedly review, nullify, or reverse a final written decision of APJs. The Federal Circuit thus found that there is insufficient review within the agency over APJ panel decisions, which weighed in favor of finding the APJs were principal officers.

Turning to the second factor, the Federal Circuit evaluated the level of supervision and oversight exercised by the USPTO director over the APJs. As evidence of supervision, the Federal Circuit found the director has the authority to issue regulations governing the conduct of IPRs, to issue policy directives, and to supervise the management of the USPTO. Moreover, no decision of the PTAB can be designated or de-designated as precedential without the d Director’s approval, and all precedential decisions of the PTAB are binding on future panels. All this led the court to conclude that this factor weighs in favor of finding APJs inferior officers.

Regarding the third factor, the Federal Circuit found that both the Secretary of Commerce and the Director of the USPTO lack unfettered removal authority of APJs. Appellees Smith & Nephew argued that the director effectively has removal authority because of the granted ability to decide to not assign a judge to any panels. The Federal Circuit found this argument unpersuasive and explained that the only actual removal authority the director and the Secretary of Commerce have is found under 35 U.S.C. § 3(c), which provides that all officers and employees of the USPTO are subject to the provisions in another statute governing other federal employees. Specifically, APJs can only be removed from service for “such cause as will promote the efficiency of the service,” meaning for “misconduct [that] is likely to have an adverse impact on the agency’s performance of its functions.” This lack of removal power weighed in favor of finding the APJs were principal officers.

Having considered these three factors, the Federal Circuit concluded that APJs were indeed principal officers, stating, “As such, [APJs] must be appointed by the President and confirmed by the Senate; because they are not, the current structure of the Board violates the Appointments Clause.”

To address the constitutionality issue, the Federal Circuit examined whether any portion of the patent statute should be “severed” to make the APJ appointments constitutional while being the least disruptive. The U.S. Government, an intervenor in this case, proposed several ways to correct the patent statute such that APJs would qualify as inferior officers. The court rejected most of these options and concluded that it was least disruptive to sever the removal provision under 35 U.S.C. § 3(c). This lifts the USPTO director’s restrictions on removing APJs, giving the director sufficient removal power such that APJs are inferior officers who do not need to be appointed by the president and confirmed by the Senate.

Since the PTAB’s decision in this case was made by a panel of APJs who were not constitutionally appointed at the time of the decision, the Federal Circuit vacated and remanded the decision without reaching the merits of the case. The Federal Circuit held that on remand, to cure the constitutional error, a new panel of APJs must be designated and a new hearing granted. The new panel may proceed on the existing record or may exercise their discretion to reopen the record.

The issues decided in this case are likely to be subject to further review, either through a rehearing in front of the Federal Circuit en banc, or if the Supreme Court grants certiorari. Either possibility might reverse this panel decision or change the remedy such that rehearing would not be granted. Assuming the decision stands, this case will have a significant impact on all pending appeals from proceedings at the PTAB, where the APJs on the panel were not subject to unfettered removal by a presidentially appointed officer. In these cases, the final written decisions will likely be vacated and remanded to be reviewed by a new panel of APJs. This will require considerable effort from the PTAB, significantly increasing its caseload for several months.

The Arthrex decision does not settle whether appellants will be allowed to raise an Appointments Clause argument at the Federal Circuit after principal briefs have been filed. In two orders entered on November 1, 2019, the Federal Circuit in Customedia Technologies, LLC v. Dish Network Corp. has already held that the Appointments Clause argument is waived if not argued in the opening appeal brief. Final decisions entered after this decision will likely not be affected, because the Federal Circuit appears to have “fixed” the unconstitutionality of APJ appointments by holding that the USPTO director can remove APJs at will. Fitch Even attorneys will continue to monitor developments related to this case.

For more information on this case, please contact Fitch Even attorney David A. Gosse, coauthor of this alert.

--Fitch Even law clerk Zachary Van Engen cowrote this alert.

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