United States: Federal Circuit Demotes Unconstitutionally Appointed PTAB Judges

With the Supreme Court in Oil States v. Greene’s Energy holding IPRs constitutional under Article III, and the Federal Circuit in Celgene v. Peter holding the retroactive use of IPRs against pre-AIA patents not to be an unconstitutional taking, litigants have recently tested the constitutional viability of the Patent Trial and Appeal Board (PTAB).

We previously, in a blog post, highlighted an Appointments Clause challenge to PTAB judges in another still-pending case, Polaris Innovations Ltd. v. Kingston Tech. Co., No. 18-1768. As of this writing, Polaris has not yet been decided, argument before the Federal Circuit set for Monday, November 4. But the Federal Circuit has finally spoken on the issue, in Arthrex, Inc. v. Smith & Nephew, Inc., No. 18-2140 (decided Oct. 31, 2019). (The Appointments Clause issue in Polaris is the same as in Arthtrex.)

The Federal Circuit held, in a unanimous opinion by Judge Moore that was joined by Judges Reyna and Chen that administrative patent judges (APJs) at the 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. The court, however, cured the constitutional defect by severing application of the Title 5 for-cause removal restrictions to APJS, rendering the APJs instead “inferior officers.” In order words, the court demoted these PTAB judges.

The Court Finds That PTAB Judges Are Principal Officers

Arthrex was an appeal from a PTAB decision in an IPR holding Arthrex’s patent invalid as anticipated. In its appeal, Arthrex contended, among other arguments, that the appointment of the PTAB’s APJs by the Secretary of Commerce violated the Appointments Clause, U.S. Const. art. II, § 2, cl. 2.

At issue was whether PTAB judges were officers—and if so, whether they were inferior officers (whom the Secretary could constitutionally appoint) or principal officers (who require Presidential appointment and Senate confirmation).

The Federal Circuit concluded first that the PTAB judges were, indeed, officers. Comparing them to the SEC administrative law judges (ALJs) in Lucia v. SEC, 138 S. Ct. 2044 (2018), and the Tax Court special trial judges (STJs) in Freytag v. Commissioner, 501 U.S. 868 (1991), the court pointed out that the PTAB judges exercise significant discretion, issue final written decisions, oversee discovery, and conduct trials. Thus, as in Lucia and Freytag, they “exercise significant authority,” see Buckley v. Valeo, 424 U.S. 1, 125–26 (1976), so as to be officers and not merely employees.

The bulk of the Federal Circuit’s analysis concerned whether the PTAB judges were then principal officers, for which there is no bright-line rule. In reaching its decision, the court relied heavily on three factors from Edmond v. United States, 520 U.S. 651 (1997), which it summarized as “(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.” (citing id. at 664–65) (emphasis added); see also Intercollegiate Broadcasting, 684 F.3d 1332, 1338 (D.C. Cir. 2012) (distilling same factors from Edmond).

The second factor (supervision) favored the PTAB’s constitutionality, wrote the court, given the Director’s close “administrative supervisory authority over the APJs” in terms of procedure and pay. But the other two factors weighed against constitutionality.

On the first factor (reviewability), the court found that there was “insufficient review within the agency over APJ panel decisions.” Although the Director can intervene in an appeal, can decide not to institute an IPR, and sits on the PTAB’s Precedential Opinion Panel, the court reasoned that the Director cannot “single-handedly review, nullify or reverse a final written decision.”

On the third factor (removal), the court found it problematic that both the Secretary and the USPTO Director “lack unfettered removal authority.” Regardless of whether or not the Director can remove judges from panels after designating them, the court reasoned, “[t]he Director’s authority to assign certain APJs to certain panels is not the same as the authority to remove an APJ from judicial service without cause.” Moreover, PTAB judges enjoy 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,” and providing certain procedural protections.

Finally, the Federal Circuit noted that, although the three Edmond factors are not the only considerations in determining whether an officer is a principal officer, no other factors weighed in favor of inferior-officer status: “the APJs do not have limited tenure, limited duties, or limited jurisdiction.”

Stripping PTAB Judges of For-Cause Removal Protection

The Federal Circuit held that the Appointments Clause violation could be cured by 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. In doing so, it followed precedent severing for-cause removal protections from statutes at issue in Free Enterprise Fund, 561 U.S. 477 (2010) (for SEC Commissioners), and Intercollegiate Broadcasting, 684 F.3d 1332 (D.C. Cir. 2012) (for Copyright Royalty Judges). With the for-cause removal provision stricken, the court held PTAB judges to be properly appointed inferior officers.

Implications for Pending and Recently Decided Cases

Noting that the PTAB’s decision below had been made by a panel that was not constitutionally appointed, the Federal Circuit ordered the case to be vacated and remanded to a new panel for a new hearing.

The Federal Circuit reasoned that raising such a constitutional challenge at the PTAB would have been futile, as the PTAB lacked the authority to grant any meaningful relief. Thus, raising such a challenge in the first instance on appeal is proper, and failure to raise it before the PTAB itself should not constitute waiver, even in pending IPRs.

And what of ex parte reexamination appeals that are pending or recently decided? Arthrex’s application of the Edmond factors (reviewability, oversight, and removability) would seem essentially the same for PTAB judges in the IPR or ex parte appeal context. But the reasoning for classification of PTAB judges in IPRs as “officers” relied heavily upon the litigation-like, adversarial nature of IPRs in particular (parallel to Freytag and Lucia)—are PTAB judges “officers” at all when acting in an ex parte appeal setting? The impact of Arthrex on ex parte appeals remains to be seen, as does the impact on judges in interferences.

Beyond patents, Arthrex may be felt among trademark cases. The Trademark Trial and Appeal Board (TTAB) comprises administrative judges appointed and protected under the same statutory provisions as the PTAB. Like at the PTAB, TTAB judges oversee appeals of examiner decisions and oversee adversarial proceedings—oppositions—that are final and subject to appeal at an Article III court. Thus, parties appealing TTAB decisions might make an Appointments Clause argument too.

Of course, the Arthrex panel decision is likely to result in a petition for a rehearing en banc, and possibly a cert petition. But for now, how far will Arthrex reach? In concluding, the Federal Circuit wrote: “[W]e see the impact of this case as limited to those cases where final written decisions were issued and where litigants present an Appointments Clause challenge on appeal.” As for recently decided cases in which the issue was not raised on appeal, it has seemingly been waived; the court notes that “Appointments Clause challenges are ‘nonjurisdictional structural constitutional objections’ that can be waived when not presented.”  Does that mean that every party in a recently decided IPR entitled to a new oral argument will seek one? Maybe not. In some cases, perhaps an appellant is better off waiving the Appointments Clause issue and seeking reversal from the court on the merits, especially if the success rate with new panels turns out to be similar to the success rate on Board rehearing.  What a new panel might do on remand remains to be seen, but the end of the opinion suggests some flexibility for the PTAB: “[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.”

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