Having it Both Ways: the USPTO’s Inconsistent Positions in In re Lovin and Kappos v. Hyatt

Since 1993, the United States Patent & Trademark Office (USPTO) has pursued an “aggressive campaign” to free itself from oversight by and accountability to the courts. [1]  At the same time, the USPTO has been just as aggressive in ignoring the provisions of the Administrative Procedure Act (APA) and related administrative laws that place responsibilities on the USPTO vis-à-vis the public.  Fortunately, most administrative laws provide the public a remedy exercisable against agency overreaching:  when an agency skirts its obligations, the agency loses its powers of enforcement vis-à-vis the public.  Unfortunately, in July 2011 the Federal Circuit in In re Lovin [2] (opinion authored by Judge Dyk) allowed the USPTO to avoid obligations that the USPTO owes the public under the APA, while giving the USPTO judicial deference on issues where the APA grants none.  A petition for rehearing of the Lovin case would give the en banc Federal Circuit the opportunity to ”right this wrong,” and to give the public the remedy that Congress intended, and to reinforce that the Administrative Procedure Act gives agencies both rights and obligations.

Much of the USPTO’s efforts to insulate itself from judicial oversight now well known.  For example, the history of the USPTO’s “aggressive campaign” for heightened deference vis-à-vis the courts was chronicled by Chief Judge Mayer in In re Zurko,[3] with this campaign culminating in Dickinson v. Zurko.[4]  The newly-enacted America Invents Act (AIA) grants the PTO broad new powers, and reduces the public’s right to seek judicial correction of USPTO error.  The USPTO seeks to avoid even more accountability in its Kappos v. Hyatt appeal currently pending at the Supreme Court.  But one of the USPTO’s major public efforts was rebuffed when the USPTO published five Notices of Proposed Rulemaking in 2006 and 2007 (including the infamous Continuations and 5/25 Claims rules) that would have imposed tens of billions of dollars of costs on the public,[5] as well as shifting burdens of proof, and the like.  In public litigation, the Eastern District of Virginia and Federal Circuit held that many of these rules exceeded the USPTO’s rule making authority.[6]  The Office of Management and Budget in the Executive Office of the President (OMB) declined to approve the USPTO’s 2008 appeal rules in December 2008, with no written decision, other than a directive to remove the rule from approval,[7] and the USPTO’s Federal Register Notice announcing a stay of the effective date.[8]

Meanwhile, out of the public eye, in fall 2007, OMB reviewed four of the five 2006-08 rules under the Paperwork Reduction Act (PRA).  No later than January 2008, OMB “directed” the USPTO to “remove” the Continuations and 5/25 Claims rules from any request for approval.[9]  These were the same rules at issue in the Tafas litigation.  Surprisingly, the USPTO continued to litigate in the Virginia District Court and Federal Circuit until July 2009, without informing the parties or the court of OMB’s “directive” that rendered the case effectively dead.

Having found that it could not obtain its desired amendments to rules through above-board processes, the USPTO shifted to “stealth” proceedings.  This keeps the USPTO’s rule making away from public review, and out of sight of the judiciary or OMB.  For example:

• In April 2007, the USPTO made a major change to restriction practice by issuing a secret memorandum (“restriction practice memo”) to examiners and updating the form paragraphs available for use by examiners.[10]  This restriction practice memo was unpublished and totally unavailable to the public for over two years.  Despite the hundreds of millions of dollars of annual costs that this restriction practice memo imposes on the public, the USPTO simply ignored the requirements of the APA (5 U.S.C. §§ 552(a) and 553), the Regulatory Flexibility Act (RFA, especially 5 U.S.C. §§ 603 and 604), the PRA (44 U.S.C. §§ 3506 and 3507, and 5 C.F.R. Part 1320), Executive Orders 12,866 and 13,422, and a directive from the Executive Office of the President.[11]  The law and the USPTO’s own written procedures require that the USPTO consider this restriction practice memo obsolete and to cease enforcement when the MPEP was republished without this restriction practice memo being incorporated.[12]  Nonetheless, the USPTO continues to defy the law as it continues to enforce this restriction practice memo against applicants.
• For many years, the Board of Patent Appeals has observed that the plain text of the 2004 appeal rules provides that when an appellant raises new arguments in a Reply Brief, the correct procedural safety valve was for the examiner to prepare a Supplementary Examiner’s Answer.[13]  In 2007-08, as part of its proposed appeal rules, the Board attempted to amend these rules to provide that arguments not in the opening Appeal Brief would be waived, and could not be raised in a Reply Brief.[14]  In December 2008, the Executive Office of the President barred the USPTO from implementing the 2008 rules, and in December 2009 specifically instructed the Board to apply only the 2004 appeal rules and no more.[15]  Yet, only two weeks after this Presidential directive, the Board stated that it would enforce this forbidden provision of the 2008 appeal rules.[16] Further, the rationale given by the Board was to replace the text of the regulation:  “Any arguments or authorities not included in the brief or a reply brief filed pursuant to § 41.41 will be refused  consideration by the Board, unless good cause is shown” by rewriting the regulation using ellipses, “any arguments or authorities not included in the brief . . . will be refused consideration by the Board, unless good cause is shown” (ellipses in Borden replacing “or a reply brief” of § 41.41).[17] [18]

The Lovin case involves another example of the USPTO trying to amend its rules without going through the procedures required by law.  The Examiner in Lovin’s case had “rejected” dependent claims, with no explanation whatsoever in the final Office Action , including no identification of the pertinent references relied upon for rejecting these dependent claims.  Lovin appealed to the Board, noting that the relevance of the references to the dependent claims was not apparent, and that the Examiner had not even explained any relevance to these dependent claims.  Under the Board’s long-standing precedent and the plain wording of the pertinent rule (37 C.F.R. § 41.37(c)(1)(vii)), this was sufficient for an Appeal Brief.

In the past, when an appellant complained of an examiner’s failure to explain a rejection, the Board observed that it lacked jurisdiction to decide that precise procedural issue,[19] but acted to ensure that the appellant would not be penalized for the examiner’s failure to observe procedure.  For decades, the Board’s response to an inadequate explanation was to vacate and remand to the examiner for proper examination,[20] request further briefing under 37 C.F.R. § 41.50(a) or (d), or proceed to the merits on first instance.  The Board’s jurisdiction and procedure in such instances is explained in a January 2011 blog post.[21]  But instead, in Lovin’s case, the Board changed the rules “on the fly,” stating that an argument directed to an Examiner’s failure to properly explain a rejection (in fact, silence as to the pertinence of the references) was “tantamount” to no argument at all.[22]

The Federal Circuit panel decision held that the Board’s “interpretation” of the appeal rules was entitled to deference under Auer v. Robbins, 519 U.S. 452, 461 (1997) (Auer deference is similar to Chevron deference—Chevron applies to agency interpretations of statutes, Auer applies to interpretations of regulations).  Once the panel affirmed the interpretation of the appeal rule, the Board also affirmed the Board’s rejection—even though neither the last Office Action nor the Board had ever articulated any basis for the rejection.  (Even the Examiner’s Answer had breached the applicable rules stated in MPEP § 1207.02(A)(9) and (10).)

Lovin’s petition for rehearing and two amici briefs — Regulatory Checkbook Amicus and CFPH Amicus — challenged several aspects of the Board’s and Federal Circuit panel’s decisions:

• The appeal rules are unambiguous, at least in any respect relevant to the Board’s interpretation.  The existence of an ambiguity is an issue of law reviewable by the court de novo.[23]  If the appeal rules are unambiguous, then the Board’s interpretation is not entitled to deference.[24]
• The interpretation advanced by the Board is not within the range of interpretations supportable by the text of the USPTO’s own appeal rules.  An interpretation that is not a “reasonable” interpretation of the plain wording of a regulation is not entitled to deference [25] —indeed, it must be set aside.
• A rule that changes rights and obligations cannot be promulgated by “interpretation,” it requires statutory rule making procedure.[26]  Congress went even further, to clarify that the USPTO cannot promulgate rules through common law “interpretation,” the USPTO must use rule making procedure.  35 U.S.C. § 2(b)(2).  Review for “without observance of procedure” under § 706(2)(C) is nondeferential.
• The interpretation advanced by the Board is not “reasonable,” because it compels appellants to read the Examiner’s mind and respond to that speculative position.
• The interpretation advanced by the Board is incompatible with 5 U.S.C. § 555(e), as well as the Supreme Court’s basic holding on agency decision making, Motor Vehicle Mfr’s Ass’n v. State Farm Mut. Ins. Co., 463 U.S. 29, 43, 52 (1983), both of which require agencies to “articulate … a rational connection between the facts found and the choice made” on an all material issues.  An “interpretation” of a rule that abrogates a statute and basic principle of administrative law is “contrary to law” and invalid, not “reasonable” and eligible for deference.[27]
• The interpretation advanced by the Board abrogates decades of Federal Circuit precedent, placing the burden of proof and obligation to state a prima facie case on the USPTO.[28]  A rule interpretation that is “contrary to law” is not entitled to deference.  Rather, rules that are “contrary to law” are illegal and are to be set aside under 5 U.S.C. § 706(2)(A).  Review under the “contrary to law” prong of § 706(2)(A) is de novo, and no question of deference arises.  The Federal Circuit panel erred in considering questions of deference—which are only applicable in the context of “arbitrary and capricious” review—in deciding a case to be decided under the “contrary to law” review statute.
• The Board cannot change its rules “on the fly” without complying with the APA, RFA, and PRA.  Rule changes “without observance of procedure” are to be set aside under 5 U.S.C. § 706(2)(D).  Review under 5 U.S.C. § 706(2)(D) is “strict,” with no deference.[30]
• Interestingly, the amicus brief of Regulatory Checkbook  notes that the USPTO neglected its obligations under the PRA, and continued to ignore those obligations for years after the Executive Office of the President had begun to penalize the USPTO for its pattern of breach.  Regulatory Checkbook’s brief draws the court’s attention to 44 U.S.C. § 3512 and 5 C.F.R. § 1320.6(c), which provide that for appeals whose briefs were filed before December 22, 2009, an appellant is entitled to adduce any new argument to the Board or to a court “at any time,” and “in any … reasonable manner.”  Thus, while normal circumstances might permit the Board or Federal Circuit to treat some arguments as waived, by statute, they must now consider all such arguments.

Lovin presents the Federal Circuit with an opportunity to rein in the USPTO’s practice of skirting statutory requirements for changing its rules.  The Federal Circuit should grant Lovin’s petition for rehearing en banc, and should give the USPTO what it asked for in Zurko—the USPTO is an “agency,” and is subject to both the powers and the obligations that that implies.  Put differently, the USPTO can’t “have it both ways.”