Virnetx Inc. v. Cisco Systems and USPTO (intervenor) (Fed. Cir. 2020) (precedential rehearing denial)

In Virnetx, the Federal Circuit issued a non-precedential decision remanding and vacating the PTO decision in light of Arthrex (unconstitutionally appointed PTAB judges cannot cancel a patent).  One difference between this case and artrex is that the Virnetx patents were cancelled via pre-AIA inter partes reexamination rather than inter partes review.  The court found the difference meaningless:

Although this appeal arises out of an inter partes reexamination and not an inter partes review as was at issue in Arthrex, we see no material difference in the relevant analysis. We therefore grant VirnetX’s motion.

Slip Op. (Opinion by Judge O’Malley and joined by Judges Moore and Chen). [VirnetxArthrexI].

The PTO immediately filed a petition for panel rehearing and rehearing en banc.  Those petitions have now been denied. However, the original panel has expanded upon its original opinion in with further justification.

The PTO’s particular contention goes as follows: PTAB judges may be acting as principal officers when ruling over AIA trials, but they are not so high-and-mighty when hearing an inter partes reexamination appeal (or presumably an ex parte appeal from a patent applicant). In response, the Federal Circuit explained that an individual’s Appointment status is associated with the whole person and is related to “all of that appointee’s duties.” See Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991).

The court thus concludes:

[I]f these APJs are unconstitutionally appointed principal officers because of their inter partes review duties in light of Arthrex, it would appear that under Freytag vacatur would be appropriate for all agency actions rendered by those APJs regardless of the specific type of
review proceeding on appeal.

Rehearing Denial. See also Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320 (Fed. Cir. 2019) en banc denied in Arthrex, Inc. v. Smith & Nephew, Inc., 953 F.3d 760 (Fed. Cir. 2020).  Multiple petitions for writ of certiorari are likely coming soon in Arthrex.

Of some interest, the PTO requested that the mandate from that case be delayed, but that motion was denied by the panel. Fed. R. App. P. 41(d)(1).  The PTO had hoped to delay holding remand IPR trials in Arthrex and other similarly situated cases.  In its denial of the stay-of-mandate, the Federal Circuit explained its position:

The delay contemplated by the United States could cause harm. All the cases in this court that are in posture similar to that of Arthrex involve patent claims deemed unpatentable by the Board. The delay contemplated by the United States would cause the continuation of stays in those proceedings and in related proceedings in district courts. Those stays have the effect of leaving the patent claims in force and also could cause the continued obligation to pay fees under license agreements that (as is common) require payment until a final adjudication of invalidity. At the same time, the limited remand proceedings required by the Arthrex decision (in no more than 81 cases) do not seem especially burdensome, given the resources of the Board, which has more than 250 members. . . . We conclude that the public interest under these circumstances favors denying the stay.

ArthrexStayDenial (March 30, 2020) Note here that, the PTAB count is “more than 100 decisions” that have been vacated under Arthrex “and more such Orders are expected.” In a General Order, Chief Administrative Patent Judge Scott Boalick has now ordered “all such cases in administrative abeyance until the Supreme Court acts on a petition for certiorari or the time for filing such petitions expires.”  This General Order from the PTAB appears contrary to the spirit of the the above-quoted order from the Federal Circuit. I expect at least one of the 100+ patentees will attempt an emergency appeal of the general suspension of activity by the PTAB.

by Dennis Crouch

Arthrex v. Smith & Nephew (Fed. Cir. 2022)

In this ongoing litigation IPR litigation, Arthrex has filed another petition for  rehearing — arguing that it still has not received the promised “Director Review” sufficient to cure the appointments clause problem apparent in the prior PTAB decision cancelling its patent claims.

The Supreme Court remanded this case so Arthrex could seek review of the Patent Trial and Appeal Board’s decision by a principal officer appointed by the President and confirmed by the Senate. On remand, Arthrex never received that principal officer review. Instead, Arthrex’s petition was denied by Commissioner Hirshfeld, who purported to exercise the Director’s functions during a vacancy in the office.

Arthrex’s particular argument focuses on the Federal Vacancies Reform Act providing “the exclusive means for temporarily authorizing an acting official to perform the functions and duties” of a principal office.   Hirshfeld did not qualify for that role under FVRA.  If you recall, Hirshfeld was never particularly identified as the “acting director” as a linguistic twist around the statute. Rather, Hirshfeld’s title was “performing the functions and the duties” of the Director.

The merits of the IPR turned on the Board’s decision that Arthrex’s purported priority application did not provide written description support of the challenged claims. The result was that Arthrex could not claim the benefit of that earlier filing data and intervening various prior art references rendered the claims invalid.   In its petition, Arthrex also focuses on this issue and argues that “the Board acted beyond the scope of its statutory grant of authority” when it considered the Section 112 issues.  Rather, under §311(b), review is limited only to consideration of Section 102/103.

Arthrex Petition 2022.  Jeffrey Lamkin argued the case before the Supreme Court and continues to represent Arthrex in this appeal.

Guest post by Professor Andrew C. Michaels (University of Houston Law Center)

With Arthrex certiorari petitions hitting the Supreme Court over the past weeks, one issue that seems to be underappreciated is the judicial retroactivity question raised by Judge Dyk in his Bedgear concurrence, which was joined by Judge Newman.  It is fair to say that these two venerable judges don’t always agree, so on the rare occasion when they team up for a concurrence one might reasonably expect that they have a serious point.  They do, for the dozens of remands now stayed before the USPTO pending the petitions were unnecessary and at least mostly imprudent under the law of retroactivity as properly understood.  If the Supreme Court were to take up this issue, it would have an opportunity to eliminate this wasteful multiplication of administrative hearings, as well as to clarify retroactivity law.

The Supreme Court has stated: “The principle that statutes operate only prospectively, while judicial decisions operate retrospectively, is familiar to every law student.”  Rivers v. Roadway Express, Inc., 511 U.S. 298, 311-12 (1994).  But this fundamental principle was overlooked by the Federal Circuit in its Arthrex decision, where the court ruled that the relevant Administrative Patent Judges were “not constitutionally appointed at the time” they had previously issued final appealable decisions, despite the fact that the court at least purportedly cured the unconstitutionality with its as-applied severance of removal restrictions.  See Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320, 1338-39 (Fed. Cir. Oct. 31 2019).

The Arthrex opinion’s notion that the APJs were not constitutional prior to the decision’s Halloween day release, but then spookily became constitutional as of that day, flies in the face of the Court’s basic retroactivity doctrine, under which the as-applied severance fix should have been considered retroactive.  The court’s decision to treat Halloween 2019 as the “effective date” of its as-applied severance was inappropriately more legislative than judicial in character.  See Paul J. Mishkin, Forward: The High Court, The Great Writ, and the Due Process of Time and Law, 79 Harv. L. Rev. 56, 65-66 (1965) (“the question of an effective date . . . smacks of the legislative process; for it is ordinarily taken for granted . . . that judicial decisions operate with inevitable retroactive effect”).

The Federal Circuit viewed remands as required by the Supreme Court decision in Lucia, despite the fact that in Lucia there was no judicial fix to make retroactive.  If there was a fix in Lucia it came from the agency after the relevant ALJ had heard the case, and was thus properly considered prospective only because the other branches presumptively act prospectively whereas the judiciary at least presumptively acts retroactively.  See Lucia v. SEC, 138 S. Ct. 2044, 2055 n.6 (2018); 783 Fed. Appx. 1029 (Fed. Cir. Nov. 7, 2019) (Dyk, J., concurring in the judgment, joined by Newman, J.).

The judicial retroactivity principal holds for statutory alterations and invalidations.  When a court invalidates a statute, courts generally should treat the invalid statute as though it never existed in the first place.  See Reynoldsville Casket Co. v. Hyde, 514 U.S. 749, 759-60 (1995) (Scalia, J., concurring) (“In fact, what a court does with regard to unconstitutional law is simply to ignore it.  It decides the case ‘disregarding the unconstitutional law,’ . . . because a law repugnant to the Constitution ‘is void, and is as no law.’”) (quoting Marbury v. Madison, 5 U.S. 137 (1803), and Ex parte Siebold, 100 U.S. 371, 376 (1880)).

Similarly, when a court interprets a statute, the newly announced statutory construction is properly considered to have been the law all along.  See, e.g., DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 469 (2015) (“judicial construction of a statute ordinarily applies retroactively”); Rivers, 511 U.S. at 312-13 (“A judicial construction of a statute is an authoritative statement of what the statute meant before as well as after the decision of the case giving rise to that construction.”).

Concurring in the court’s denial of rehearing en banc, Judge O’Malley appeared to suggest that judicial severance is an exception to these general retroactivity principals, claiming that the Court’s decision in Booker makes clear that judicial severance is “necessarily a prospective act.”  See Arthrex, 953 F.3d at 768 (citing United States v. Booker, 543 U.S. 220, 268 (2005)).    This assertion is contrary not only to retroactivity doctrine in general but also even to Booker itself, which in fact held that its judicial severance did have to be considered retroactive.  See Booker, 543 U.S. at 268 (“we must apply . . . our remedial interpretation of the Sentencing Act – to all cases on direct review”) (citing Reynoldsville, 514 U.S. at 752; Harper v. Virginia Dep’t of Taxation, 509 U.S. 86 (1993)).  Nothing in Booker carves out a judicial severance exception to foundational principles of judicial retroactivity.

The reason that a remand for rehearing was appropriate in Booker (despite the retroactivity of the severance) was that the prior statutory misrepresentation of law clearly made a difference, in that it led to Mr. Booker receiving a longer criminal sentence than he properly could have under the corrected statute.  See Booker, 543 U.S. at 227, 245-46.  Similarly in Harper, taxes had been collected under an invalid tax statute, so the Court remanded for state courts to consider refunding the taxes.  See Harper, 509 U.S. at 102.  In both of these cases, governmental action had been taken that adversely affected a party and could not have been taken under the law as correctly understood.  Retroactivity doctrine provides for discretion to remedy these situations when equities so dictate.  See, e.g., James B. Beam Distilling Co. v. Georgia, 501 U.S. 529, 543-44 (1992) (“nothing we say here precludes consideration of individual equities when deciding remedial issues in particular cases”).

The key difference though is that in Arthrex, the prior misrepresentation of law had no such effect.  There is no apparent reason to think that any of the remanded cases would have been decided differently if the relevant APJs had known that they were in fact removable at will, and any argument that actual harm is present would seem to be a tenuous.  Absent actual harm, a discretionary remand was at most prudent in the Arthrex case itself as an incentive creating reward for first winning the Appointments Clause challenge (and even that is questionable), but not in the dozens of other remanded matters.

Concurring in the denial of rehearing en banc, both Judge O’Malley and Judge Moore pointed to a government brief as having “rejected” Judge Dyk’s retroactivity argument.  See Arthrex, 953 F.3d at 764 and n.3, 767 (citing Supp. Br. of United States, Polaris v. Kingston, Nos. 2018-1768, -1831, at 13-14).  That brief asserts that the court’s as-applied severance was not “sufficient to eliminate the impact of the asserted constitutional violation on the original agency decision,” but tellingly provides no suggestion of what that impact might have been.  In any event, the requirement of at least presumptive judicial retroactivity is rooted in Article III and the Court’s jurisprudence, and cannot be overridden or waived by an executive branch brief.  See James B. Beam, 501 U.S. at 549 (Scalia, J., concurring in the judgment) (“‘the judicial Power of the United States’ . . . Art. III, § 1, must be deemed to be . . . the power to say what the law is . . . not the power to change it”).

Apart from the lack of even an assertion of any actual harm caused by the prior statutory mirage of removal restrictions, such harm is unlikely also because the Supreme Court has applied standing (specifically traceability) requirements rather loosely in the Appointments Clause context.  See Free Enterprise Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 511-12 n.12 (2010).  It is one thing to allow litigants to raise Appointments Clause challenges that make no likely difference to their case, but it is another to retrospectively vacate prior agency actions that were almost certainly unaffected by those issues, especially where doing so is not required by and in fact runs counter to the Court’s retroactivity jurisprudence.

Finally, concurring in the denial of rehearing en banc, Judge Moore downplayed the disruption of the unnecessary rehearings, stating that the Arthrex decision would result in at most eighty-one remands.  See Arthrex, 953 F.3d at 764 n.4.  Squaring this statement with the PTAB general order issued on the first of May staying over one-hundred remanded matters (and expecting more to come) pending certiorari petitions would seem to be more than trivial.  Regardless, even if the PTAB chooses not to reopen briefing or the record, a new hearing before a new panel of APJs plus a new final written decision subject to a new appeal, in each of the dozens of remanded matters, is not without significant expense, disruption, and waste.

More to the point though, the disruption is legally improper, as explained further in my forthcoming article, Retroactivity and Appointments, available here: http://ssrn.com/abstract=3650166

The Federal Circuit has issued two recent Arthrex-related orders of note.

In Arthrex, the Federal Circuit held that the appointment process for PTAB judges (Administrative Patent Judges) violates the Appointments Clause of Article II of the U.S. Constitution.  According to the court, these Judges are “principal officers” and thus must be appointed by the President of the United States (rather than merely the head of the Commerce Dep’t).  I explained in a prior post that the court also “issued a cy-près ruling in an attempt to limit the upset” caused by invalidating the appointments of all these judges.  “In particular, the court invalidated a portion of the statute that limited the PTO’s ability to remove APJs from the board. According to the court, that change was enough to reclassify the PTAB Judges as inferior officers that do not need presidential appointment.”  That decision is now up for en banc rehearing — with three separate petitions filed.

Principal Officers: Three En Banc Petitions in Arthrex v. Smith & Nephew

Impact on Ex Parte Examination: In the pending case of In re: Boloro Global Limited, Appeal No. 19-2349 (Fed. Cir. 2020), the Federal Circuit has ordered the USPTO to explain the impact of Arthrex on ex parte patent examination cases:

Within 14 days from the date of filing of this order, the Director [of the USPTO] is directed to submit a supplemental response, not to exceed 20 pages, addressing whether Arthrex should be extended to ex parte examination cases. Boloro’s reply to that supplemental response, which is not to exceed 10 pages, is due within seven days thereafter.

Order of February 5, 2020.

= = = = =

Polaris Innovations Ltd. v. Kingston Tech. Co., Inc., 2018-1831, 2020 WL 504974 (Fed. Cir. Jan. 31, 2020) is parallel to Arthrex and the Federal Circuit vacated the PTAB IPR decision and “remanded to the Board for proceedings consistent with this court’s decision in Arthrex.”  The interesting aspect of the decision the concurring opinion by Judge Hughes and joined by Judge Wallach.  The pair concluded that they were bound by the prior panel decision in Arthrex, but “disagree with the merits” of the holding.  The opinion explains (1) PTAB judges should be seen as inferior officers and (2) if principal officers, the Arthrex panel’s solution is highly questionable.

I believe that viewed in light of the Director’s significant control over the activities of the [PTAB] and Administrative Patent Judges, APJs are inferior officers already properly appointed by the Secretary of Commerce. But if APJs are properly considered principal officers, I have grave doubts about the remedy Arthrex applied to fix their unconstitutional appointment. In the face of an unconstitutional statute, our role is to determine whether severance of the unconstitutional portion would be consistent with Congress’s intent. Given the federal employment protections APJs and their predecessors have enjoyed for more than three decades, I find no legislative intent to divest APJs of their Title 5 removal protections to cure any alleged constitutional defect. … But, given the high standard for finding non-severability, I cannot say that the Arthrex panel’s remedy was improper.

Id.

by Dennis Crouch

Arthrex, Inc. v. Smith & Nephew (Supreme Court 2022)

The Supreme Court issued a major opinion in this case back in 2021, holding  that the IPR scheme was unconstitutional because it placed administrative patent judges in the role of entering final decisions that were unreviewable by any superior executive officer.  United States v. Arthrex, Inc., 141 S. Ct. 1970 (2021).  The Court’s solution was to add a layer of review by the USPTO Director who has gone through the process of Presidential appointment and Senate confirmation. Id.  This is a process that we now call “director review.”  The point of this whole process created at our nation’s founding was an attempt to hold the President politically accountable for the actions of the administration.

Back on remand, the USPTO faced a slight problem. Director Iancu had resigned and President Biden had not yet nominated a successor or even an acting-director authorized by the Federal Vacancies Reform Act (“FVRA”).  Rather, then Commissioner for Patents Drew Hirshfeld stepped in to perform the duties of the USPTO Director but without any Presidential imprimatur.  As a reminder, the Commissioner is not nominated by the President nor confirmed by the Senate. Rather, the Commissioner is appointed by the Secretary of Commerce (just like the PTAB judges). Hirshfeld reviewed the PTAB’s Arthrex decision, and denied the petition for director review.

Now the case is headed back to the Supreme Court with Arthrex arguing that, just like the PTAB judges, Hirshfeld lacked authority to speak for the agency at this level.

Despite this Court’s instructions, Arthrex was not able to seek review by any presidentially appointed, Senate-confirmed principal officer. Nor was Arthrex able to seek review even by an Acting Director. The Director’s position was vacant, and the President had not appointed an Acting Director pursuant to the FVRA. Instead, Arthrex’s petition was denied by the Commissioner for Patents, an inferior officer appointed by the Secretary of Commerce, who purported to exercise the Director’s powers under an internal PTO organization plan. As a result, this case now presents a new important question of federal law: whether the Commissioner’s exercise of authority was consistent with the FVRA.

Arthrex motion for extension.  Arthrex has asked for a 60-day extension for filing its opining petition.  That petition has been granted and so the brief is due Jan 8, 2023.

Jeffrey Lamken (MoloLamken) is representing the patentee.

Uniloc 2017 LLC v. Google LLC (Fed. Cir. 2020) (Appeal Nos. 19-2277 and 19-2307)

Conventional wisdom is now that the Supreme Court will grant certiorari in Arthrex on the questions of (1) whether a PTAB judge is a principal Officer under the U.S. Constitution and if so (2) what result?

In this pair of pending inter partes review appeals, the Federal circuit has agreed with the patentee that the proper course of action at this point is to wait for a resolution of Arthrex:

Uniloc 2017 LLC moves to stay the above-captioned appeals pending final resolution of the Supreme Court’s review of Arthrex, Inc. v. Smith & Nephew, Inc, 941 F.3d 132 (Fed. Cir. 2019), reh’g denied 953, F.3d 760 (Fed. Cir. 2020). Google LLC opposes the motions. . . . The motions are granted.

UnilocStay.  These cases related to  U.S. Patent No. 7,853,000 and 7,804,948 (most of the claims found unpatentable by the PTAB).

The Federal Circuit is not the first-mover in this situation.  The cases remanded to the PTAB on Arthrex grounds have all been administratively stayed pending resolution of Arthrex.  And, the US Gov’t has filed an omnibus petition to the Supreme Court.  Uniloc explains in its stay petition:

Remand to the PTO may ultimately be unnecessary, and cases that have already been remanded are being held in abeyance pending the Supreme Court’s review of Arthrex. Accordingly, Uniloc requests that this appeal be stayed pending resolution of the Supreme Court’s review of Arthrex, including resolution of Petitions for Writ of Certiorari.

UnilocStayPetition.  Google opposed the stay — arguing, inter alia, that Uniloc had waived its Arthrex argument.

by Dennis Crouch

In Arthrex, Inc. v. Smith & Nephew, Inc., 935 F.3d 1319 (Fed. Cir. 2019), the patentee (Arthrex) argued that the inter partes review is an unconstitutional due process violation when applied retroactively against pre-AIA patents. The Federal Circuit rejected the basis for the argument — Although Arthrex filed its patent applications prior to passage of the AIA, the patent issued afterward. In somewhat cryptic analysis the court worte:

That Arthrex filed its patent applications prior to passage of the AIA is immaterial. As the Supreme Court has explained, “the legal regime governing a particular patent ‘depend[s] on the law as it stood at the emanation of the patent, together with such changes as have since been made.’” Eldred v. Ashcroft, 537 U.S. 186, 203 (2003) (quoting McClurg v. Kingsland, 42 U.S. 202, 206 (1843)). Accordingly, application of IPR to Arthrex’s patent cannot be characterized as retroactive.

Id. The two cases cited by the Federal Circuit here are interesting.

McClurg is best known as the case establishing “shop-rights doctrine.”  In the case, the inventor (Harley) created a mold for casting metal cylinders so that the strongest material was toward the outer wall. Harley made the invention while on the job for the defendant Kingsland and Kingsland continued to use the invention for some time with without objection from Harley. Meanwhile, Harley obtained a patent and assigned it to McClurg who later sued Kingsland for infringement. The Supreme Court explained that such a situation created an implied license:

The Circuit Court … held that the defendants might continue to use the invention, … that they might presume a license or grant from Harley.

McClurg v. Kingsland, 42 U.S. 202 (1843).

In Arthrex, the focus on McClurg is for a different reason — congressional plenary power to legislate in the area of patent law — even retroactively.

The inventor in McClurg (Harley) obtained his patent in 1835 – a few months before passage of the Patent Act of 1836 that constituted a major revision of U.S. Patent Law.  By its terms, the new law applied to old patents (with a few exceptions) but the case challenged whether Congress had the power to take such action.  And the Supreme Court offered strong words allowing for Congress modify the law of patents without any restraint:

Whether [the appeal is] well taken or not, must depend on the law as it stood at the emanation of the patent, together with such changes as have been since made; for though they may be retrospective in their operation, that is not a sound objection to their validity; the powers of Congress to legislate upon the subject of patents is plenary by the terms of the Constitution, and as there are no restraints on its exercise.

Id. This is the portion of the decision that is quoted by the Supreme Court in Eldred and again in Arthrex. I should note that the court actually goes on to put a pretty big caveat on congressional plenary power (as mentioned justice Stevens dissent in Eldred):

… so that they do not take away the rights of property in existing patents. . . . This repeal, however, can have no effect to impair the right of property then existing in a patentee, or his assignee, according to the well-established principles of this court in 8 Wheat. 493 [a real property case]; the patent must therefore stand as if the acts of 1793 and 1800 remained in force; …

Patentee Cannot Escape Estoppel via Pre-IPR-Institution Disclaimer

US vs. Arthrex, 19-1434 (Supreme Court 2020).

Earlier this year the Supreme Court granted writ of certiorari on the PTAB appointments clause issues stemming from the Federal Circuit’s determination that (1) PTAB judges were Officers of the United States who should have been appointed by the President (rather than by the Secretary of Commerce), but (2) the appointments problem was curable by eliminating any statutory job security held by the judges (this reduced them to “inferior officers” who are properly appointed by a head of department, such as the Secretary of Commerce).  The court agreed to hear the first two questions, but not the third (regarding waiver/forfeiture).

1. Whether, for purposes of the Appointments Clause, U.S. Const. Art. II, § 2, Cl. 2, administrative patent judges of the U.S. Patent and Trademark Office are principal officers who must be appointed by the President with the Senate’s advice and consent, or “inferior Officers” whose appointment Congress has permissibly vested in a department head.
2. Whether, if administrative patent judges are principal officers, the court of appeals properly cured any Appointments Clause defect in the current statutory scheme prospectively by severing the application of 5 U.S.C. 7513(a) to those judges.
3. Whether the court of appeals in Arthrex erred by adjudicating an Appointments Clause challenge that had not been presented to the agency.

July 22, 2020 Memorandum for the United States.

The case involves three parties.

• Arthrex, whose patent is being challenged in inter partes review. Arthrex brought the appointments clause challenge, but strongly disagrees with the severing “cure.”
• Smith & Nephew, the IPR petitioner. Smith & Nephew fundamentally argues that the the PTAB judges are at most inferior officers and thus were properly appointed.
• US Gov’t intervened in the lawsuit to defend the PTAB decision, and also argues that PTAB judges are inferior officers.

The first round of merits briefing has been filed by the US and Smith&Nephew.  As discussed below, neither party addressed the second question — they will have an opportunity to do so after Arthrex files its opening brief later this month. Additional amicus briefs are expected this week.

• Opening Brief for the United States
• Opening Brief for S&N
• Amicus Brief from Prof. John Harrison

US Gov’t Brief:  In its brief, the US argues strongly that PTAB administrative patent judges “are inferior officers whose appointment Congress permissibly vested in the Secretary of Commerce.”  US Government did not address the second question of curing the Appointments problem.

For its analysis, the US attempted to align its argument with the Supreme Court’s approach in Edmond v. United States, 520 U.S. 651 (1997) (Inferior officers must be “directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.”).

The Gov’t brief walks through the ways that the Secretary of Commerce and USPTO Director (both presidential appointees) possess authority to direct and supervise PTAB judges:

• The Secretary (in consultation with the PTO director) appoints the judges.
• The Secretary can remove the judges for “efficiency” purposes and that includes “failing to follow their supervisors’ instructions.”
• The PTO Director has “unfettered power to decide which adjudicators will sit on any Board panel.”
• The PTO Director has power to “promulgate regulations governing Board proceedings; issue binding policy directives, including instructions regarding how the patent laws and USPTO policies apply to particular fact patterns; and determine which Board decisions are precedential and therefore binding on future panels.”
• “The Director has additional prerogatives regarding the conduct of individual proceedings. He may decide unilaterally whether a particular inter partes or post-grant review will proceed at all, and he possesses substantial authority over any rehearings that the Board may grant.”

Role of Rulemaking: Note here that that one important question arises regarding the extent that the Director has “given-up” authority by rulemaking and by tradition.  Under the promulgated regulations as currently in operation, the PTO Director has delegated substantial authority to the PTAB and to the Chief Judge.  An important example of this is that the PTAB determines institution decisions. A question for the Court will be the extent that those prior rulemakings should be considered when analyzing the officer-status of PTAB judges.

Mechanical Turks: In its opinions, the Federal Circuit also analyzed the situation using Edmond. In its brief, the US asserts that the court’s approach is “deeply flawed.”  Most importantly, the US argues that Edmond should be seen as providing for a flexible and open ended analysis of the level of supervision and control; whereas the Federal Circuit followed a more “mechanistic” of distilling Edmond into three discrete criteria and then focusing solely on those.

Burdensome: An additional important criteria here has to do with the burdensome nature of having the President Nominate and the Senate Confirm a large number of administrative officials. From 1836-1975, the patent judges (then called examiners-in-chief) were appointed by the President.  However, the expansion of the patent system (and administrative state in general) began to identify those appointments as an unneeded burden on the President and thus shifted their appointment to the Secretary of Commerce.  I expect that some members of the court – such as Justice Gorsuch – will see this justification as carrying little weight.

by Dennis Crouch

Arthrex, Inc. v. Smith & Nephew, Inc. (Fed. Cir. 2022).

In 2021, the Supreme Court sided with the patentee in holding that the AIA trial system violated the Appointments Clause of the U.S. Constitution. The Court concluded that PTAB judges were wielding the substantial power of the U.S. Gov’t by cancelling already-issued patent claims.  The Constitution provides that officers wielding such power must be directly tied to the US President via presidential nomination and confirmation by the US Senate.  But, PTAB judges are appointed by the Secretary of Commerce and do not undergo Senate confirmation.  Rather than burning down the entire house, the Supreme Court partially rewrote the statute — adding the presidentially appointed USPTO director as an intermediary with power to accept or reject any PTAB decision stemming from an AIA trial.

The PTAB had originally sided with the patent challenger (Smith & Nephew) in finding the claims unpatentable. After the Supreme Court decision, the case was remanded back to the Patent Office so that the USPTO Director could have the final word from the administrative agency.  Commissioner for Patents Drew Hirshfeld denied the petition for director review.   Although Hirshfeld is currently the USPTO’s highest ranking official, he is not the USPTO Director, nor is he the Acting Director rather he continues in his role as Commissioner for Patents while still “performing the functions and duties of the Director.” Further, Hirshfeld was not nominated by the President or confirmed by the Senate. Rather, just like the PTAB judges found Constitutionally inadequate, Hirshfeld is an inferior officer appointed by the Secretary of Commerce.

Arthrex has now appealed its case back to the Federal Circuit — arguing that Hirshfeld’s denial does not meet the strict requirements imposed by the Constitution and the Supreme Court.  The basic argument here is simple — the Supreme Court held that the PTO’s final agency decision in an IPR must come from a presidentially appointed principal officer.

One issue here is the practicalities of running an administrative agency such as the PTO in the interim following resignation of a presidentially nominated director. From the beginning of the Republic (1791), Congress has authorized temporary appointments in situations where the full nomination-confirmation process might take too much time to complete.  Today, this process is generally provided for by the Federal Vacancies Reform.  That law outlines mechanisms for allowing a temporary acting Director absent Senate confirmation.  However, Hirshfeld does not qualify even for this statutory work-around because he was not the Deputy Director nor was he personally selected by the President.

One aspect of the appointments clause is to draw a direct link to the President.  A final difficulty for Hirshfeld is that his appointment has a 5-year tenure protection and can only be removed early for cause. 35 U.S.C. 4(b)(2).  These tenure protections further limit Presidential power over agency action.

In response, Smith & Nephew rely heavily on United States v. Eaton, 169 U.S. 331 (1898). In Eaton, the Supreme Court permitted approved of a non-presidential appointment of an officer “under special and temporary conditions.”  However, there is a strong suggestion that Eaton was an inferior Officer rather than principal Officer case.  Dir. Hirshfeld has now been standing-in as director for more than one year — on the  four-year-timeline of the Presidency, this is starting to appear permanent.

Oral arguments in this round of the appeal are set for March 30, 2022.

Briefs:

• Arthrex Dir Authority – Arthrex Brief;
• Arthrex Dir Authority – Smith & Nephew Brief;
• USPTO Org Order

Although it is not entirely clear, it appears to me that the original merits panel of Chief Judge Moore, and Judges Reyna and Chen will retain the case and here this petition as well.  This trio decided the original case, with Judge Moore writing the opinion.  The Federal Circuit and Supreme Court both agreed that the PTAB judges were principal officers if the IPR statute was strictly followed. The Federal Circuit offered a different remedy (removing PTAB judge tenure) than the Supreme Court (adding Director Review).  Following the Supreme Court decision, the same panel issued the order to remand the case for Director Review.  However, that remand included a statement that the “court retains jurisdiction over this appeal” and that the appellate proceedings are simply stayed.  Thus, the appeal pending now is using the same docket number (18-2140) and, I expect, will be in front of the same set of judges.

Guest post by Arti K. Rai, Elvin R. Latty Professor of Law and Faculty Director, The Center for Innovation Policy, at Duke Law.

Last Thursday, in Arthrex v. Smith & Nephew (Fed. Cir. 2019), a panel of the Federal Circuit held that the administrative patent judges (APJs) at the PTAB are “principal officers” who must, under the Appointments Clause of the Constitution, be appointed by the President and confirmed by the Senate.  In contrast, the current patent statute provides for APJs to be appointed by the Secretary of Commerce in consultation with the PTO Director.  The panel further determined that it could remedy the constitutional defect by severing APJ removal protections, thereby rendering them inferior officers who can be appointed by “Heads of Departments” like the Commerce Secretary.

As this post details, the panel did a careful job of addressing one of the most knotty constitutional issues raised by PTAB adjudication.  But precisely because the issue is knotty, the panel’s decision is unlikely to represent the last step in the road.  Indeed, the USPTO has already indicated that it may seek en banc review.

All parties agreed, as did the panel (citing Professor John Duffy’s prominent 2007 Patently-O paper), that APJs are officers within the meaning of the Appointments Clause.  The only question was whether APJs are principal or inferior officers.

The panel’s conclusion regarding principal officer status rested on Justice Scalia’s 1997 opinion for the Court in Edmond v. United States.  In that case, the Court held that inferior officers must be “directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.”

According to the panel, PTAB judges lack adequate direction and supervision for two reasons: first, “presidentially appointed officers” cannot “review, vacate, or correct decisions by the APJs”; and, second, these presidentially appointed officers (specifically the Secretary of Commerce and Director) have only “limited removal power.” Although severing APJ removal protections would not give the Director review power over individual decisions, it would, according to the panel, be sufficient to demote APJs to inferior status.

The road ahead will likely be tumultuous.  At the Supreme Court, administrative law has long been a battlefield between various flavors of formalist and functionalist reasoning about how agencies fit into the executive branch and interact with the legislative and judicial branches.  Indeed, in taking its relatively formal approach to the distinction between principal and superior officer, the Edmond Court had to distinguish the considerably less formalist opinion in Morrison v. Olson, written only 9 years earlier.  In Morrison, Justice Scalia had written a stinging dissent, castigating the majority for relying on multiple indicia of inferiority, including limited responsibility, and for not recognizing that “inferior” necessarily means subordinate. Nine years later, Justice Scalia was able to secure 8 votes for his position. (Justice Souter concurred only in part.)

The Arthrex decision also comes during a period of even greater-than-usual Supreme Court turmoil over administrative adjudication.  Most relevant for present purposes, the Court has already decided a steady stream of constitutional and nonconstitutional cases involving the PTAB.  In the most prominent of these cases, Oil States Energy Services v. Greene’s Energy Group, an ideologically diverse coalition of seven Justices ultimately concluded that administrative adjudication of granted patents survived constitutional scrutiny.  But Justice Gorsuch, joined by Chief Justice Roberts, dissented in strong terms, warning against the perils of adjudication by judges who don’t enjoy Article III protections.

Of course, as the Arthrex opinion illustrates, under more formal versions of Appointments Clause jurisprudence, decisions made by actors who are not subject to significant direction and control by a presidentially appointed official may themselves be unconstitutional.  The Supreme Court’s 2018 decision in Lucia v. SEC makes it clear that the Court’s more formalist Justices, including Justices Gorsuch and Roberts, continue to take the Appointments Clause very seriously.  In that decision, all of the Justices who tend to embrace formalism, joined by Justice Kagan, held that as a constitutional matter the administrative law judges of the SEC were officers (albeit inferior officers) who had to be appointed by the politically accountable Commission.

As commentators have discussed, the juxtaposition of Oil States and Lucia in the 2018 term illuminates potential constitutional tensions in administrative adjudication.  Some formalist academics who are particularly concerned about the tension have suggested simply removing large swaths of adjudication from the administrative state and placing it instead in Article III.

Conventional administrative law has taken a different, but still relatively formal, approach.  Conventionally, whether the judge is an administrative law judge (ALJ) (a specific type of judge who enjoys very strong protections against removal) or some other type of administrative judge, she has some level of decisional independence and protection against firing.  However, the judge’s decisions are subject to a right of review by a politically appointed agency head.

What about the patent statute? The statute gives the Director overall responsibility for USPTO “policy direction and management supervision” as well as power to promulgate regulations by which the PTAB is bound.  As for specific PTAB decisions, it provides for “rehearing” of such decisions.

Consistent with the academic literature (for example, this article I coauthored) suggesting that the rehearing mechanism be used to distill from the hundreds of PTAB opinions issued each year certain precedential opinions that bind the agency, the Director has set up an elaborate “Precedential Opinion Panel” (POP) process to rehear PTAB cases that raise important issues. The POP is selected by the Director and by default consists of the Director, the Commissioner for Patents, and the Chief Judge.

The Arthrex panel did note the Director’s general supervisory powers over the PTAB, his regulatory authority, the rehearing provision, and the POP procedure. It emphasized, however, that neither the statute nor the POP procedure explicitly provide for a right of rehearing over specific cases by the Director only.  Presumably, any functional ability the Director might have to persuade the Commissioner for Patents and the Chief Judge is insufficient.

If the Supreme Court were to take the case, what it might decide is anyone’s guess. The cleanest path forward is therefore surgical Congressional intervention that gives the Director an explicit, unilateral right of review.  This approach would cure any perceived constitutional infirmity without subjecting APJs to at-will firing.  If subordination is the key to inferior status, then both formalists and functionalists might agree that, for adjudication, subordination through transparent and reasoned review of the adjudicator works better than subordination through firing.

by Dennis Crouch

Arthrex, Inc. v. Smith & Nephew, Inc. and U.S. as intervenor (Fed. Cir. 2020) (en banc denial)

None of the parties in this case were happy with the Federal Circuit’s original decision in Arthrex and all filed petitions for en banc rehearing.  Those petitions have now been denied in what appears to be a 8-4 split with Judges Newman, Wallach, Dyk, and Hughes expressly dissenting from the denial.  Judge Moore authored the original opinion in the case and also authored an opinion here defending that original opinion. She was joined on the opinion by her original panel members of Judges Reyna and Chen as well as Judge O’Malley explaining that (1) the original decision was correct and (2) conducting a rehearing would “only create unnecessary uncertainty and disruption.”

The Arthrex panel followed Supreme Court precedent to conclude that the administrative patent judges (APJs) of the USPTO’s Patent Trial and Appeal Board were improperly appointed principal officers. It further followed the Supreme Court’s direction by severing a portion of the statute to solve that constitutional problem while preserving the remainder of the statute and minimizing disruption to the inter partes review system Congress created.

Judge Moore Op. Concurring in the en banc denial.  This quote mentions the the “severing” element of the original panel decision. In particular, the court invalidated the removal restrictions of 5 U.S.C. § 7513 as it applies to APJs — thus making it easier for the USPTO director to remove APJs at will. This move – according to the court – was sufficient to shift APJs from principal Officers to inferior Officers and thus “save” the system.

Judge O’Malley wrote her own concurring opinion that included the following statement:

While I agree with Judge Dyk and Judge Hughes that Title 5’s protections for government employees are both important and long-standing, I do not believe Congress would conclude that those protections outweigh the importance of keeping the remainder of the AIA intact—a statute it debated and refined over a period of more than six years.

The leading dissent by Judge Dyk argues that the severance choice here is an improper, “draconian remedy” that “rewrites the statute contrary to Congressional intent.  Judges Hughes and Wallach each wrote their own dissenting opinions – arguing that APJs were already inferior officers based upon the extensive control and authority exerted by the USPTO director.

= = = = =

The basic issue in the case is the Constitutionality of the appointments process for Administrative Patent Judges (APJs) sitting on the Patent Trial & Appeal Board (PTAB).  The Appointments Clause of the U.S. Constitution indicates that all “Officers of the United States” shall be nominated and appointed by the US President with the Advice and Consent of the Senate.  The provision then goes on to say that Congress has the power to alter this process for “inferior Officers, as they think proper.” In particular, Congress may allow inferior Officers to be appointed by “Heads of Departments.”  U.S. Const. Art. II, Sec. 2, Cl. 2.  An improperly appointed officer isn’t really an officer at all and so should have no power to render judgment to cancel privately held property rights.

APJs used to be hired by the USPTO Director.  However, Prof John Duffy shook that cage in his 2007 article: Are Administrative Patent Judges Unconstitutional?, 2007 Patently-O Patent L.J. 21. In the article, Duffy argued that APJs are likely best classified as inferior Officers and thus could be appointed by a Head of Department — namely the Secretary of Commerce.  Congress quickly acted on Duffy’s submission and altered the law to fix the problem.

The America Invents Act (AIA) greatly increased the power of APJ with the advent of inter partes review (IPR) proceedings and the other AIA trials.  The PTAB has become the most frequented patent court in the country and thousands of patents have been cancelled based upon APJ rulings.

After losing before the PTAB in an inter partes review, Arthrex appealed to the Federal Circuit with the argument that the increased power granted by the AIA ratches APJs up to the status of principal Officers rather than inferior Officers.  The result of that conclusion would be that APJs would need Presidential Appointment with Senate consent.  In Arthrex, the Federal Circuit agreed with the contention, but rather than requiring Presidential Appointment, the court decided instead to invalidate a statute that provides job security to APJs.  Since job security (ability to be easily fired by someone other than the President) is an element of the inferior/principal Officer distinction, the Federal Circuit found that severing that portion of the statute was enough to change the nature of the role.

= = = =

The case offers an interesting constitutional query – but is also being used as a tool for those who are hoping for the IPR system to fail.

by Dennis Crouch

Oral Argument set for October 7, 2020 in Google v. Oracle. 

• (1) Whether copyright protection extends to software code and the organizational structure of a programming language; and
• (2) Whether, as the jury found, the petitioner’s use of a software interface in the context of creating a new computer program constitutes fair use.
• What is the role of the Jury in deciding fair use? (Raised by the Court)
• What is the role of patents in the protection of a software code? (Raised by Crouch)

Certiorari Denied:

• Following its first conference, the Supreme Court has denied certiorari in a number of patent cases.  In particular, the court has denied certiorari in all the patent cases ready-for-conference with the notable exception of the Arthrex cases focusing on appointments clause issues are still pending.
• Still Pending: 
  • Constitutional challenge to Admin Patent Judges: United States v. Arthrex, Inc., No. 19-1434; Smith & Nephew, Inc. v. Arthrex, Inc., No. 19-1452; Arthrex, Inc. v. Smith & Nephew, Inc., No. 19-1458; Polaris Innovations Limited v. Kingston Technology Company, Inc., No. 19-1459.  These cases remain the most likely for certiorari. 
• Denied:
  • Retroactive application of IPR to already applied-for patents: Arthrex, Inc. v. Smith & Nephew, Inc., No. 19-1204.
  • AIA Challenge: Sanofi-Aventis Deutschland GmbH v. Mylan Pharmaceuticals Inc., No. 19-1451;
  • Divided Infringement and 271(g): Willowood, LLC v. Syngenta Crop Protection, LLC, No. 19-1147.
  • Federal vs State Law for Patent Licensing: Cheetah Omni LLC v. AT&T Services, Inc., No. 20-68.
  • Right to a Jury Trial on Specific Performance of FRAND license: TCL Communication Technology Holdings Limited v. Telefonaktiebolaget LM Ericsson, No. 19-1269.
  • Patent Eligibility: The Chamberlain Group, Inc. v. Techtronic Industries Co., No. 19-1299.; Thomas v. Iancu, No. 19-1435; Primbas v. Iancu, No. 19-1464; Morsa v. Iancu, No. 20-32.
  • Due Process Issues Regarding Sua Sponte Judicial Order: Ameranth, Inc., Petitioner v. Domino’s Pizza, LLC, No. 19-1351.
  • Appealing IPR Termination:BioDelivery Sciences International, Inc. v. Aquestive Therapeutics, Inc., fka MonoSol RX, LLC, No. 19-1381.
  • Power of PTO To Exclude Patent Attorney: Polidi v. Lee, No. 19-1430; Piccone v. United States Patent and Trademark Office, No. 19-8844.
  • Obviousness – Nexus for Secondary Indicia: SRAM, LLC v. FOX Factory, Inc., No. 20-158.

This Week’s Conference: 

• Voiding a patent after a damage award: Phazzer Electronics, Inc. v. Taser International, Inc., No. 19-1378
• Arthrex Appointments Issue: Essity Hygiene and Health AB v. Cascades Canada ULC, et al., No. 20-131; ESIP Series 2, LLC v. Puzhen Life USA, LLC, No. 20-228; Customedia Technologies, LLC v. Dish Network Corporation, et al., No. 20-135 (also eligibility question)
• Trade Secret Inventorship Question and Federal Jurisdiction: Acer America Corporation, et al. v. Intellisoft, Ltd., (Bruce Bierman), No. 20-313.

Response Requested:

• The “Respondent” has a right to file a response to a petition for writ of certiorari.  However, as a strategy (and money saving device), many repondents waive their right. In cases of interest, the Supreme Court will often request a response.  However, the request for response need only be requested by a single Justice. And, some of the justices have reportedly given authority to their law clerks to file the request.
• Recent CFR’s
  • Are the Fed. Reserve Banks “People” or “the Government”: Bozeman Financial LLC v. Federal Reserve Bank of Atlanta, et al., No. 20-333
  • Reasonable Royalty and Apportionment: Cochlear Corporation, et al. v. Alfred E. Mann Foundation for Scientific Research, et al., No. 20-362
  • Notice and Damages: Arctic Cat Inc. v. Bombardier Recreational Products Inc., et al., No. 20-355

by Dennis Crouch

None of the parties were happy with the outcome in Arthrex v. Smith & Nephew (Fed. Cir. 2019) and all three have now petitioned for en banc review:

• Arthrex- Smith&NephewBrief
• Arthrex-ArthrexBrief
• Arthrex-PTOBrief

In its decision, the Federal Circuit held that the appointment process for PTAB judges (APJs) violates the Appointments Clause of Article II of the U.S. Constitution.  The court explained that these judges are principal officers under the constitution and thus, must be appointed by the President of the United States rather than merely the Head of Department.  However, the court issued a cy-près ruling in an attempt to limit the upset caused by its ruling. In particular, the court invalidated a portion of the statute that limited the PTO’s ability to remove APJs from the board. According to the court, that change was enough to reclassify the PTAB Judges as inferior officers that do not need presidential appointment.  Despite its proposed “cure”, the Federal Circuit held that – in this case – the PTAB decision must be vacated and reheard in front of a new panel of APJs. “We hold that a new panel of APJs must be designated to hear the inter partes review anew on remand.”

Why is no-one happy?:

1. The Patentee would like the case wholly thrown out and argues that the CAFC’s savings-cut was both incorrect and insufficient to convert principal officers to inferior officers.
2. Both the Patent Challenger and USPTO as intervenor want the original final written decision reinstated (cancelling the claims) and argue that the en banc court should find the APJs were already inferior officers.  They also argue that, if APJs are principal officers then the en banc court should reconsider the appropriate remedy for such an appointments clause violation.

More to come on this.

by Dennis Crouch

While the country is still mourning the loss of Justice Ruth Bader Ginsburg and arguing over her replacement, the Supreme Court itself is set to begin its October 2020 term this week.  One of the first orders-of-business will be the Long Conference set for September 29, 2020. At that first conference of the term, the court is set to consider the pile of certiorari briefing completed over the summer.

There are a few key patent cases in the pile:

• Constitutional challenge to Admin Patent Judges:
  • United States v. Arthrex, Inc., No. 19-1434;
  • Smith & Nephew, Inc. v. Arthrex, Inc., No. 19-1452;
  • Sanofi-Aventis Deutschland GmbH v. Mylan Pharmaceuticals Inc., No. 19-1451;
  • Arthrex, Inc. v. Smith & Nephew, Inc., No. 19-1458;
  • Polaris Innovations Limited v. Kingston Technology Company, Inc., No. 19-1459.
  • I believe that it is highly likely that the court will grant certiorari in Arthrex. 
• Retroactive application of IPR to already applied-for patents: 
  • Arthrex, Inc. v. Smith & Nephew, Inc., No. 19-1204.
• Divided Infringement and 271(g):
  • Willowood, LLC v. Syngenta Crop Protection, LLC, No. 19-1147.
• Federal vs State Law for Patent Licensing:
  • Cheetah Omni LLC v. AT&T Services, Inc., No. 20-68.
• Right to a Jury Trial on Specific Performance of FRAND license:
  • TCL Communication Technology Holdings Limited v. Telefonaktiebolaget LM Ericsson, No. 19-1269.
• Patent Eligibility
  • As a whole: The Chamberlain Group, Inc. v. Techtronic Industries Co., No. 19-1299.
  • Software: Thomas v. Iancu, No. 19-1435.
  • Significantly more: Primbas v. Iancu, No. 19-1464.
  • Flash of Genius: Morsa v. Iancu, No. 20-32.
• Due Process Issues Regarding Sua Sponte Judicial Order:
  • Ameranth, Inc., Petitioner v. Domino’s Pizza, LLC, No. 19-1351.
• Appealing IPR Termination:
  • BioDelivery Sciences International, Inc. v. Aquestive Therapeutics, Inc., fka MonoSol RX, LLC, No. 19-1381.
• Power of PTO To Exclude Patent Attorney:
  • Polidi v. Lee, No. 19-1430;
  • Piccone v. United States Patent and Trademark Office, No. 19-8844.
• Obviousness – Nexus for Secondary Indicia:
  • SRAM, LLC v. FOX Factory, Inc., No. 20-158.

= = =

The court has not granted certiorari to any patent cases this term. However, Google LLC v. Oracle America, Inc., No. 18-956 is set for oral arguments on October 7, 2020.  The case focuses on copyright protection in functional aspects of software and thus may well impact patent law.  In December, the court will hear Facebook v. Duguid. Facebook is arguing that the statutory prohibition on certain debt-collection telephone calls is a violation of its free speech rights. A third case that I am watching is Van Buren v. US, which is set for oral arguments at the end of November.  In that case, the question asks “Whether a person who is authorized to access information on a computer for certain purposes violates Section 1030(a)(2) of the Computer Fraud and Abuse Act if he accesses the same information for an improper purpose.”  Here, Van Buren was a police officer who was running searches on the internal databases for a “friend.”