It Matters: A Former Administrative Patent Judge’s Take on Arthrex

As most of us know by now, in Arthrex, Inc. v. Smith & Nephew, Inc., entered on Halloween 2019, a panel of the Federal Circuit held that the administrative patent judges (APJs) of the Patent Trial and Appeal Board (PTAB) were improperly appointed, and remanded the case for a new decision by a properly appointed panel. Almost immediately after, the court entered two orders dismissing motions for remand because the issue had not been timely raised. See Customedia Technologies, LLC v. Dish Network Corp., Nos. 18-2239 & 19-1001 (Fed. Cir., Nov. 1, 2019) (the motions were inferred from letters to the court). The Federal Circuit remanded a case in which the issue had been timely raised. Uniloc 2017 LLC v. Facebook, Inc., No. 18-2251 (Fed. Cir., Oct. 31, 2019). Predictions about the effect on pending cases overlook that the vast majority of PTAB final decisions come in appeals from the patent examining corps. Any of the hundreds of applicants dissatisfied with a recent PTAB appeal decision could appeal to the Federal Circuit and then promptly move for remand to a different panel.

A reader could be forgiven for feeling a sense of déjà vu: in In re DBC, the Federal Circuit similarly found that APJs had been improperly appointed, but the issue was quickly resolved and now is remembered as a minor footnote in patent case law. In re DBC, 545 F.3d 1373 (Fed. Cir. 2008). Arthrex holds the potential to be far more significant. Indeed, Arthrex may prove more trick than treat.

USPTO Appointment Authority Recap

Under the Appointments clause of the Constitution, principal officers of the Executive branch must be nominated by the President and confirmed by the Senate, while “inferior officers” must be appointed by the head of a department, such as the Secretary of Commerce. DBC dealt with a problem created in the American Inventor Protection Act of 1999 (Pub. L. 106-113, 113 Stat. 1501 [Nov. 29, 1999]), which at one point had contemplated making the U.S. Patent and Trademark Office a government corporation rather than an agency and thus had moved appointment authority from the Secretary of Commerce to the Director of the USPTO. Although the legislative plan changed, the hasty passage of the act meant that some vestiges of the original plan were not corrected. Once the defect was identified, Congress passed a correction to restore appointment authority to the Secretary of Commerce (Pub. L. 110-313, 122 Stat. 2014 [Aug. 12, 2008] [making both APJs and Administrative Trademark Judges (ATJs) appointees of the Secretary of Commerce]).

The appointment issue in Arthrex has much older and more complex roots. Nearly a century ago, Congress sought to relieve the Director of the burden of having to decide every rehearing from PTAB decisions, so it authorized final decisions from panels of APJs (Act of March 2, 1927, ch. 273, § 3, 44 Stat. 1335. The names of the agency, the board, the agency head and the board members have changed over time. For simplicity, this article uses the current names in all cases). Any appointments problem was avoided two ways. First, APJs were then Presidential appointees and thus presumptively principal officers. Second, although the legislative change could have appeared to strip the Director of total control over the board decisions, Congress interpreted the statute as not diminishing the Director’s authority over the board [S. Rep. No. 1313, 69th Cong., 2d Sess. 4 (1927), cited in In re Alappat, 33 F.3d 1256, 1534 (Fed. Cir. 1994) (en banc) (plurality decision)]. Indeed, this lack of diminution, combined with the Director’s consistent exercise of authority over the board subsequently was a pivotal factor in the Federal Circuit’s Alappat decision upholding the Director’s power to “stack” board panels (33 F.3d at 1534). In this regard, Arthrex appears to be inconsistent with the en banc Alappat decision. Because an appeals court must go en banc to overturn one of its earlier decisions, Arthrex appears to be on shaky ground unless it is confirmed en banc or by the Supreme Court.

Half a century later, Congress enacted a series of reforms to depoliticize the civil service, including one reform that moved APJs from political appointees to civil servants (Pub. L. 93-601, 88 Stat. 1956 [Jan. 2, 1975]). However well-intended this reform might have been, it had the effect of demoting APJs from principal officers to inferior officers, thus setting the stage for the question raised in Arthrex: does the Director retain sufficient control over these inferior officers in making final decisions? The Arthrex panel asserts that the responsibilities of the political APJs were less than the legal responsibilities of current APJs but cites no basis for this assumption. Arthrex, slip op. 20 (“There can be no reasonable dispute that APJs who decide reexaminations, inter partes reviews, and post-grant reviews wield significantly more authority than their Examiner-in-Chief predecessors.”). Actually, current trials cover only a subset of issues that could be determined in patent interferences.  E.g., Norton v. Curtiss, 433 F.2d 779, 783 [167 USPQ 532] (CCPA 1970) (confirming that the Board of Patent Interferences must decide inequitable conduct as a question ancillary to priority).

Panel Stacking Provides Important Context

Panel stacking has been very controversial in recent years. By statute, the Director chooses the composition of PTAB panels, but cannot independently order a rehearing of a panel decision. In In re Alappat, 33 F.3d 1256, 1534 (Fed. Cir. 1994), decided a quarter century ago, the Federal Circuit sitting en banc expressly held that the Director’s ability to stack panels was the key to retaining policy control over PTAB decision, that this had been the consistent USPTO understanding, and indeed had been the original Congressional understanding when it created the current PTAB structure. In short, the Director’s unfettered ability to stack panels is precisely the power to control Board decisions. The Arthrex panel never discusses this controlling precedent even though it reaches the opposite conclusion.

While panel stacking may look ugly, it has the advantage of transparency. When a panel is stacked, it is apparent that some sort of supervisory control is being exercised. The irony for current critics of panel stacking is that the Arthrex solution—converting APJs into at-will employees—will remove the transparency that stacking provides while also eliminating barriers to Director manipulation. Without civil service protections, APJs become the Director’s pawns, with fewer protections than patent examiners. See What’s Next After Arthrex? Reactions Suggest Limited Immediate Effect, But Some Question Whether CAFC Fix Will Hold (comments of Stephen Kunin, expressing concern about lobbying against individual APJs) (comments of Josh Malone calling for the firing of at least 100 APJs) (comments of Paul Morinville worrying that PTAB practices will flip-flop with every change in Administration). To those who thought panel stacking was bad, Arthrex permits the same level of intervention without the check that transparency provides. It is very hard to imagine this result is consistent with Congressional intent or the public interest.

Arthrex Picked the Wrong Fix

Arthrex purports to fix the appointments problem it identifies by severing the civil service protections of APJs as the least intrusive solution to the problem. This fix, however, is far more intrusive than the court recognized. As an initial matter, the decision does not make clear what is being severed. The court held “that 35 U.S.C. § 3(c)’s provision that USPTO officers and employees are subject to Title 5 cannot constitutionally be applied to Board members with respect to that Title’s removal restrictions, and thus must be severed to that extent.” But this solution does not sever anything; instead it adds a gloss on how section 3(c) is to be interpreted (as not applying to APJs). Yet the decision rejects the same sort of gloss when it is suggested for a different section: “We will not construe 5 U.S.C. § 7513 one way for APJs and a different way for everyone else to which it applies.”

This fix also has a broader scope than Arthrex recognizes. APJs are not the only members of the PTAB: the Director, the Deputy Director, the Commissioner of Patents, and the Commissioner of Trademarks are also members of the Board. Only the Director is a Presidential appointee. The others, like APJs, are appointed by the Secretary of Commerce. Because the Secretary appoints them, it is not clear how they would be at-will employees of the Director rather than the Secretary. Compare Arthrex, slip op. 15 (explaining how the power to remove is presumed to be coincident with the power to appoint) with 35 U.S.C. 3(b)(3)(A) (making all other officers and employees Director appointees). The same point could also be made about the APJs and ATJs, who are also appointed by the Secretary. 35 U.S.C. 6(a).

Indeed, the Commissioners have express statutory removal provisions, making it unlikely “that Congress would have created such a system” in which the Commissioners are at-will employees of the Director. It is also worth noting that the reasoning of Arthrex creates the exact same set of problems for the Trademark Trial and Appeal Board. Arthrex effectively leaves all USPTO officials identified by statute (except the Director) in a dubious status.

Curiously, Arthrex rejects a simpler severance despite agreeing that it would cure the putative Appointments defect. The Department of Justice suggested removing the requirement that the PTAB work in panels of three members . This would have been the simplest solution because, even without the statute, PTAB rules require panels of at least three (37 CFR §§41.2 and 42.2). The Director could simply amend the rules to permit stepping in whenever necessary to exercise policy control with a direct-to-final rule making in a very short amount of time. This fix would have been much simpler to implement, with fewer adverse consequences.

The court rejected eliminating three-member panels as “a significant diminution in the procedural protections afforded to patent owners” and “a radical statutory change to the process long required by Congress in all types of Board proceedings” As noted above, however, eliminating a statutory requirement for three-member panels need not result in a change in ordinary practice. By contrast, the lack of transparency with the court’s approach will have a far more significant effect on procedural protections for the parties. Moreover, nothing about a three-member panel ensures that due process will be ensured or that important issues will not be overlooked. E.g., Gerritsen v. Shirai, 979 F.2d 1524, 1532 (Fed. Cir. 1992) (Board panel abused its discretion); Arthrex, passim (missing the relevance of Alappat).

Indeed, for interlocutory matters, greater use of single-APJ decision making could be a positive good if it allows quicker scheduling of calls with the Board and quicker issuance of interlocutory orders. After a recent call with a single APJ in an interference, for example, a colleague of mine with PTAB trial experience but no previous interference experience remarked on how much more efficient interferences are. In 2012, no one would have imagined such a favorable comparison.

A Dubious Legacy

Arthrex has already generated considerable turmoil. Given its apparent inconsistency with Alappat, there might be even more turmoil to come. The further loss in PTAB transparency may well be the decision’s most enduring legacy.

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