Supreme Court Leaves PTAB Intact, Gives USPTO Director Authority to Review IPR Decisions
June 24, 2021
A divided Supreme Court has issued its long-awaited decision in United States v. Arthrex, upholding the inter partes review (IPR) regime but giving the USPTO director much more power over the Patent Trial and Appeal Board (PTAB) in the process. On June 21, the Court ruled that the appointment of the PTAB’s administrative patent judges (APJs) violated the US Constitution’s Appointments Clause because the USPTO director lacked the ability to sufficiently review their decisions. The Court’s solution was to give the director the authority to review and rehear IPR final written decisions himself or herself. While this remedy largely leaves the IPR status quo intact, it could possibly increase the time it takes to resolve some AIA reviews already well underway.
As previously recounted by RPX, the Federal Circuit held in its October 2019 Arthrex v. Smith & Nephew decision that PTAB APJs, as appointed under the existing statutory regime, were “principal officers” requiring Senate confirmation under the Appointments Clause. To reach that conclusion, the appellate court considered a series of factors addressing the “extent of direction or control” that the Secretary of Commerce and USPTO director have over the APJs, determining that the question turned on whether the director had sufficient power to remove them. The Federal Circuit found that he lacked that authority under a statutory provision requiring that APJ removals only be “for . . . cause”. Rather than eliminate the PTAB altogether, the court chose a more targeted solution to the constitutionality issue by severing that portion of the statute restricting the director’s removal authority over APJs, rendering them inferior officers. A subsequent RPX analysis published in the wake of that decision indicated that hundreds of AIA reviews could be impacted.
In March 2020, the Federal Circuit declined to rehear the case en banc, following months of appellate activity that saw the US government file briefs in both Arthrex itself and a companion case. The denial of the petition for en banc review sparked further debate within the Federal Circuit, with two concurrences and three dissents filed along with the court’s order.
The Supreme Court then granted certiorari in October 2020, agreeing to review questions of constitutionality and remedy but declining to consider whether the Federal Circuit erred by deciding an Appointments Clause challenge not presented to the PTAB in the first instance.
The Supreme Court’s Opinion
Ruling on appeal, Chief Justice John Roberts wrote for the Court, joined by Justices Samuel Alito, Neil Gorsuch, Brett Kavanaugh, and Amy Coney Barrett as to the portion of the opinion addressing constitutionality (Parts I and II) and by Justices Alito, Kavanaugh, and Barrett for the section on remedy (Part III).
The Court began its analysis by recounting the policy rationale behind the Appointments Clause, which requires that certain “noninferior”, or principal, officers be nominated by the president and confirmed by the Senate. By giving the president the power to appoint such officers, the Court explained, this “guarantees accountability for the appointees’ actions because the blame of a bad nomination” would fall upon both the president and Senate (citing Federalist No. 77 by Alexander Hamilton).
– USPTO Director’s Lack of Direct Review Authority Runs Afoul of the Appointments Clause
The Court then turned to the question of “whether the nature of [PTAB APJs’] responsibilities is consistent with their method of appointment”. Here, the Court applied its 1997 decision from Edmond v. United States, in which it held that “Coast Guard Court of Criminal Appeals judges appointed by the Secretary of Transportation” were inferior officers because they were supervised by executive branch officials nominated by the president and confirmed by the Senate, without whose approval they had “no power to render a final decision on behalf of the United States”. Under the supervisory regime considered and upheld in Edmond, some of those executive officials had what amounted to “administrative oversight” over policies and procedures governing the judges’ work, while others held de novo review authority over the judges’ decisions.
In contrast, the Court noted that the USPTO director held “only half of the ‘divided’ supervision” contemplated in Edmond—namely, “administrative oversight”, under which he or she controls APJ pay, controls institution decisions, and selects APJs for PTAB panels. Yet the director is “the boss . . . except when it comes to the one thing that makes the APJs officers exercising ‘significant authority’ in the first place—their power to issue decisions on patentability”, the Court held. In other words, because the USPTO director lacks the review authority that was so “significant” in Edmond, it is unconstitutional that the APJs have the “power to render a final decision on behalf of the United States”. The sole avenue for review within the executive branch, a petition for rehearing, may only be granted by the PTAB, which the Court found “simply repeats the arrangement challenged as unconstitutional in this suit”.
The key principle here, explained the Court, is that “diffusion of power carries with it a diffusion of accountability” (citing its 2010 opinion in Free Enterprise Fund v. Public Company Accounting Oversight Board). For this reason, the Court dismissed a counterpoint raised in Justice Clarence Thomas’s dissent, that the USPTO director still has the authority to take the final step of canceling or upholding a claim following a PTAB decision. That supposed “power”, responded the Court, “is limited to carrying out the ministerial duty that he ‘shall issue and publish a certificate’ canceling or confirming patent claims he had previously allowed, as dictated by the APJs’ final decision”. Simply put, that gets the chain of command backwards, and by implication diminishes accountability for the decision on validity.
Similarly, the Court held that the various mechanisms by which the director may influence an IPR’s outcome, as highlighted by the government and/or Smith & Nephew, also improperly diffuse the director’s authority. These tools include the power over whether to institute trial, the power to “stack” a panel with favorable APJs and pick an entirely new panel for a rehearing decision, and to vacate the institution decision should an unfavorable outcome appear likely. The use of such processes “is not the solution”, countered the Court—“[i]t is the problem”. Even if used successfully, “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”. Moreover, the possibility that the director might remove an APJ from a current or future assignment does not overcome this problem, since this does not allow the director to overturn an already issued final decision. Nor would the threat of removal suffice, explained the Court, as the director may only fire an APJ “for such cause as will promote the efficiency of the service”. Review by the Federal Circuit would not serve to cure the defect either, as such oversight needs to occur within the Executive Branch.
“History reinforces the conclusion that the unreviewable executive power exercised by APJs is incompatible with their status as inferior officers”, the Court further found. Early statutes and Supreme Court decisions both indicate “that adequate supervision entails review of decisions issued by inferior officers”. This “model of principal officer review” is one that Congress has carried “into the modern administrative state” through the Administrative Procedure Act, the Court continued, notwithstanding certain distinguishable examples where other inferior officers “purportedly exercise final decisionmaking authority”.
As a result of the foregoing analysis, the Court held “that the unreviewable authority wielded by APJs during [IPR] is incompatible with their appointment by the Secretary to an inferior office”. While the Court acknowledged Justice Thomas’s criticism that it was not explicitly deciding whether the APJs are principal or inferior officers, it held that “both formulations describe the same constitutional violation: Only an officer properly appointed to a principal office may issue a final decision binding the Executive Branch in the proceeding before us”. The Court further underscored the limited nature of this holding by stating that it was not “set[ting] forth an exclusive criterion for distinguishing between principal and inferior officers for Appointments Clause purposes”.
– Giving the Director Full Review Authority Solves the Constitutional Defect
The Court then turned to the question of how to remedy this unconstitutional appointment scheme, emphasizing the need for a limited solution. Rather than holding the entire IPR regime unconstitutional, as argued by patent owner Arthrex and by Justice Gorsuch in his dissent, the Court ruled that “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”.
Here, the Court noted that “[i]n every respect save the insulation of their decisions from review within the Executive Branch, APJs appear to be inferior officers—an understanding consistent with their appointment in a manner permissible for inferior but not principal officers”. Under 35 USC Section 6(c) of the America Invents Act, only a PTAB panel may hear an IPR, and only the PTAB may grant rehearings—essentially establishing “that the Director cannot rehear and reverse a final decision issued by APJs”. Yet “[i]f the Director were to have the ‘authority to take control’ of a PTAB proceeding, APJs would properly function as inferior officers”.
For this reason, the Court held that Section 6(c) cannot be constitutionally enforced to bar the director from reviewing APJs’ final decisions. Since “Congress has vested the Director with the ‘power and duties’ of the PTO” under Section 3(a)(1), the Court ruled that the director “accordingly may review final PTAB decisions and, upon review, may issue decisions himself on behalf of the Board”. The Court further explained that this solution was preferable to the one proposed by the Federal Circuit and endorsed by the government—the severance of removal restrictions—because “review by the Director better reflects the structure of supervision within the PTO and the nature of APJs’ duties”. The Court then concluded that the proper remedy for this specific case was to remand for rehearing by the USPTO director.
Justice Thomas’s Dissent
Justice Thomas dissented, joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan as to the sections addressing constitutionality. The dissent began by questioning how the APJs could be “principal” officers when they are so far removed from the president in the hierarchy of the executive branch: “Neither our precedent nor the original understanding of the Appointments Clause requires Senate confirmation of officers inferior to not one, but two officers below the President” (emphasis in original).
In any event, Justice Thomas argued that “Congress has discretion to change the default process [of presidential appointment] for ‘inferior’ officers”, and that the Supreme Court has “traditionally used a case-by-case analysis” for evaluating the appointment process chosen. “And those analyses invariably result in this Court deferring to Congress’ choice of which constitutional appointment process works best”.
This principle is reflected in Edmond, continued Justice Thomas—who asserted that under that case’s two-part test, the PTAB’s APJs are inferior officers. First, he argued that they are inferior under that decision’s first, formal requirement that an official merely be “lower in rank to ‘a superior’”, in this case the Secretary of Commerce. Second, Justice Thomas contended that the USPTO director and Secretary of Commerce are also “functionally superior” under Edmond, “because they supervise and direct the work administrative patent judges perform”. In particular, he asserted that “[t]he Director here possesses even greater functional power over the Board than that possessed by the Judge Advocate General”, the administrative overseer considered in Edmond. The director exceeds that official’s authority in that the former “may influence individual proceedings” (emphasis in original) by virtue of powers governing institution, panel selection, and rehearing procedures, explained Justice Thomas. By ignoring these signs that the APJs thus appear to be inferior officers, the Court “suggests most of Edmond is superfluous”—an overly reductive theory for which “there is no precedential basis (or historical support)”.
Furthermore, by failing to follow the “tried-and-true approach” of deciding Appointments Clause issues by simply determining principal vs. inferior officer status, Justice Thomas argued that the Court has created what he deems a “new Appointments Clause doctrine” under which it “polices the dispersion of executive power among officers”. Such an approach, asserted Justice Thomas, is incompatible with the Constitution’s separation of powers doctrine, which is limited to distinctions between the branches of government and not the differences between types of officers within a branch. Moreover, he warned that the Court’s holding that the Appointments Clause “bar[s] any nonprincipal officer from taking ‘final’ action poses serious line-drawing problems” with respect to the categorization of an officer’s various duties.
Writing solely for himself as to remedy, Justice Thomas then criticized the Court’s “ambivalen[ce]” about explicitly determining whether APJs are, or were, principal officers, further asserting that neither of the two possible alternatives supports its chosen solution. Under a reading where the APJs “are principal officers that the Court has converted to inferior officers”, Justice Thomas argued that the Court should have vacated the PTAB’s decision and granted a “new hearing before officers untainted by an appointments violation”. On the other hand, if the APJs were “inferior officers whose decisions must constitutionally be reversible by the Director alone”, which he deemed the “quasi-separation-of-powers view”, then he asserted that the problem is that no constitutional violation occurred at all under the facts of the case: the PTAB had the power to decide the case and lawfully did so, it “did not misinterpret its statutory authority or try to prevent direct review by the Director”, and the “Director [did not] wrongfully decline to rehear the Board’s decision”—since the patent owner did not seek the director’s review (a form of relief not previously contemplated).
The latter scenario, Justice Thomas argued, did not rise to the level of a constitutional violation: “Perhaps the majority thinks Arthrex should receive some kind of bounty for raising an Appointments Clause challenge and almost identifying a constitutional violation. But the Constitution allows us to award judgments, not participation trophies” (emphasis in original).
Justice Breyer’s Concurrence-in-Part and Dissent-in-Part
Justice Breyer concurred in part and dissented in part, joined by Justices Sotomayor and Kagan. While Justice Breyer agreed with the Court’s opinion as to remedy, he joined the portion of Justice Thomas’s dissent dealing with constitutionality and offered two additional considerations.
First, Justice Breyer argued that Congress should be afforded greater deference in how it establishes the duties of inferior officers, as the Constitution grants Congress the authority to vest the appointment of inferior officers “by Law . . . as they think proper”. That language “strongly suggest[s] that Congress has considerable freedom to determine the nature of an inferior officer’s job, and that courts ought to respect that judgment”. Even under the Court’s standard requiring sufficient “control” over the APJs, Justice Breyer asserted that the director’s level of control—as encompassing authority over APJ pay, the power to institute, select APJs for each panel, issue regulations and guidance, and designate decisions as precedential—is already “considerable”.
Second, Justice Breyer argued that in cases like Arthrex, the Court “should conduct a functional examination of the offices and duties in question” that takes into account the Congressional intent behind a statutory limitation “rather than a formalist, judicial-rules-based approach”. Here, Justice Breyer faults the Court’s formalist approach for failing to account for how Congress, in structuring the PTAB, recognized the need to strengthen it with certain “procedural safeguards”: “Given the technical nature of patents, the need for expertise, and the importance of avoiding political interference, Congress chose to grant the APJs a degree of independence”. “More broadly”, Justice Breyer read the Court’s opinion as “one part of a larger shift in our separation-of-powers jurisprudence”, a mistaken shift toward formalism. This approach fails to account for the variety in different areas of “administrative adjudication, which typically demands decisionmaking . . . that is free of political influence”.
Finally, Justice Breyer argued, the nation’s needs change, and a flexible Constitution is required because the judiciary is ill-equipped to anticipate what those needs may be—while the Executive Branch and Congress are better positioned to nimbly interpret legislation.
Justice Gorsuch’s Concurrence-in-Part and Dissent-in-Part
Justice Gorsuch concurred in part and dissented in part. Although he agreed with the majority’s conclusions on constitutionality, he rejected its chosen remedy of statutory severance. While some statutes include “fallback” provisions that explicitly allow for severance when a constitutional defect is identified, “[t]he problem here is that Congress has said nothing of the sort”. There are multiple possible options available to resolve this defect, Judge Gorsuch noted—including the majority’s chosen remedy—but he argued that “[w]ithout some direction from Congress, this problem cannot be resolved as a matter of statutory interpretation. All that remains is a policy choice”.
Rather than severance, Justice Gorusch asserts that the court should have followed “traditional remedial principles” by declining to enforce the applicable statute solely in this case. By instead “gift[ing] the Director a new power that he never before enjoyed” and reallocating powers among executive officials, Justice Gorsuch argued, the Court was improperly overriding the will of Congress. As a result, Justice Gorsuch warned that the majority was endangering the separation of powers, as “its severability analysis seemingly confers legislative power to the Judiciary—endowing us with the authority to make a raw policy choice between competing lawful options”. Determining what a past Congress would have wanted to happen under the circumstances amounts to “[s]peculation that, under traditional principles of judicial remedies, statutory interpretation, and the separation of powers, a court of law has no authority to undertake”.
Justice Gorsuch also reiterated his prior objections to the Supreme Court’s 2018 decision in Oil States that affirmed the constitutionality of IPR under Article III, arguing that the Court was wrong in that case to “allow . . . executive officials to assume an historic judicial function” by permitting the revocation of property rights to be determined outside of an Article III court. That said, Justice Gorsuch conceded that the majority’s decision in Arthrex represented “a very small step back in the right direction by ensuring that the people at least know who’s responsible for supervising [the IPR] process—the elected President and his designees”.
What Comes Next
While the Arthrex ruling preserves much of the IPR status quo, its potential impact will become clearer in the weeks ahead as the USPTO works to establish rules governing how its director will use the review authority established under the Court’s decision. Until those details are decided and made public, it remains to be seen whether dissatisfied PTAB litigants will fare differently when asking the director for a redo.
Regardless, it seems likely that requests for rehearing of final decisions may become more common, at least in the short term. Combined with the fact that the subsequent avenue of Federal Circuit appeal remains available, one result of Arthrex could be that IPRs with soon-to-issue or recently issued final written decisions—and those held in abeyance or remanded due to the Federal Circuit’s Arthrex ruling—could take longer to resolve. (Relatedly, on June 23, the Federal Circuit issued a sua sponte order requiring that PTAB appellants that raised Appointments Clause challenges file briefs within 14 days “explaining how they believe their cases should proceed in light of Arthrex”.) Additionally, vesting the rehearing decision directly in the USPTO director, a presidential appointee, raises the possibility that such review could become more politicized than under the prior system, though the specter of Federal Circuit review could serve as a counterbalance. In any event, Arthrex appears likely to elevate the importance of the USPTO director to an even greater extent and will undoubtedly increase anticipation over President Joe Biden’s selection of a nominee for that role.