Last week, we wrote about Arthrex, Inc. v. Smith & Nephew, Inc. and described recent developments that suggested the Federal Circuit was leaning toward holding that all current PTAB judges had been unconstitutionally appointed in violation of the Appointments Clause of Article II. The Federal Circuit has now done just that in a decision that also endeavors to remedy the perceived constitutional defect and will likely create a temporary logjam in the Board’s docket.
Arthrex owns a patent that Smith & Nephew challenged via inter partes review (IPR) before the Board. The Board instituted review, and a typical three-judge panel received briefing, heard oral argument, and issued a final written decision holding the challenged claims unpatentable on anticipation grounds. Arthrex appealed to the Federal Circuit and argued, among other things, that the final written decision had been rendered by unconstitutionally appointed government officers and was therefore void.
The Federal Circuit agreed.
As a preliminary matter, the court excused Arthrex’s failure to raise its constitutional argument before the Board because of the issue’s exceptional importance and because doing so would have been futile—the Board would have had no authority to correct the problem.
Moving to the merits, the court identified the issue as turning on whether PTAB judges are “Officers of the United States” under the Appointments Clause, and if so, whether they qualify as inferior or principal officers. If the latter, the existing practice of appointment by the Secretary of Commerce would not suffice because principal officers require presidential appointment and Senate confirmation.
The court quickly concluded that PTAB judges are government officers because they exercise substantial discretion and authority to resolve patentability disputes on behalf of the United States. Accordingly, the court next considered whether the judges were principal or inferior officers. Quoting the Supreme Court, the Federal Circuit explained that “whether one is an ‘inferior’ officer depends on whether he has a superior” and that “‘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.” Three primary factors guided the analysis: (1) whether an appointed official can review and reverse the officer’s decision, (2) the level of oversight by the appointed official, and (3) the appointed official’s power to remove the officer.
By statute, IPRs require panels of at least three judges to decide each case. The Director of the PTO is presidentially appointed but cannot unilaterally review or reverse final written decisions. At most, the Director can assign himself to a panel tasked with deciding a case or considering a rehearing request, but even then he would hold only one of three votes. Moreover, although the Director can decline to institute review, that ex ante power is not the same as ex post review. The absence of a presidentially appointed official with independent authority to review or reverse final written decisions before they issue was consistent with PTAB judges acting as principal officers.
On supervision, the court concluded that the Director exercises broad policy direction and supervisory authority over PTAB judges. For example, the Director promulgates regulations and policy directives, influences which decisions are designated precedential, designates panels, and determines the judges’ pay. Those supervisory powers weighed toward considering PTAB judges inferior officers.
Unlimited removal power is a “powerful tool for control” of inferior officers. The court concluded that under the existing statute, neither the Secretary nor the Director has unfettered discretion to remove PTAB judges for reasons other than work-related misconduct, indicating that PTAB judges are principal officers. The government suggested the Director could effectively remove a PTAB judge by refusing let the judge hear cases, but even if the power to designate panel members included the power to remove panel members, the court didn’t think that was equivalent to removal authority—especially when 35 U.S.C. § 3(c) and Title 5 give those judges civil service protections.
Weighing the factors, the panel concluded that PTAB judges were principal officers:
The lack of any presidentially-appointed officer who can review, vacate, or correct decisions by the APJs combined with the limited removal power lead us to conclude … that these are principal officers. While the Director does exercise oversight authority that guides the APJs procedurally and substantively, and even if he has the authority to de-designate an APJ from inter partes reviews, we conclude that the control and supervision of the APJs is not sufficient to render them inferior officers. The lack of control over APJ decisions does not allow the President to ensure the laws are faithfully executed because ‘he cannot oversee the faithfulness of the officers who execute them.’
Resolution – Partial Severance of 35 U.S.C. § 3(c)
Having confirmed the constitutional problem, the court turned to considering potential fixes. The court refused to read the statute to give the Director the authority to revise all Board decisions, and it likewise refused to let the Director appoint a single Board member to hear IPRs. Such remedies were too radical, and the three-member panels provide important protections that, in the court’s view, Congress wouldn’t have wanted to give up. The court concluded that a narrower and less disruptive solution lay in severing the portion of 35 U.S.C. § 3(c) that applies Title 5 civil-service protections to PTAB judges. The court thought that Congress would have preferred removable Board members to no Board at all. Notably, the court did not remove protections for all officers at the PTO, just for PTAB judges.
Citing the Supreme Court’s recent Lucia decision, the court held that this IPR needed to be remanded for a new hearing before a new panel of PTAB judges. To be clear, the court saw no constitutional infirmity in the IPR’s institution, which was done by the Director’s designees, but only in the hearing and decision. The court said the new Board panel could choose to proceed on the existing written record, but it could also reopen the record or entertain additional briefing if it desired. Significantly, the panel emphasized that Appointments Clause challenges can be waived and that its decision was “limited to those cases where final written decisions were issued and where litigants present an Appointments Clause challenge on appeal.”
It remains to be seen how many IPRs will be affected by the Arthrex decision. The court’s discussion suggests that pending IPRs will not be affected because, with the offending portion of § 3(c) now severed, PTAB judges will be considered constitutionally appointed “inferior officers” going forward, and subsequent final written decisions will be rendered by judges who were constitutionally appointed at the time the decisions issue. Open questions remain that will likely be sorted out in short order: whether the Appointments Clause challenge is available to petitioners as well as patent owners, whether the PTAB can fix the Appointments Clause problem by rehearing final written decisions not yet on appeal, and whether appellants with cases currently on appeal will be allowed to pursue such arguments without having raised the Appointments Clause issue in their opening briefs (update: the court has wasted little time in holding that the issue must be raised in an opening brief or in an earlier motion).
What seems certain is that at least some other remands will follow for re-adjudication of other IPRs before new panels of the Board. Depending on the number of those cases and the approaches taken by newly assigned panels, there may be substantial near-term disruption and delay in the Board’s docket—and in some cases, different results.