Supreme Court’s Arthrex Ruling Calls For Greater PTAB Oversight But Narrows Remands

In the long-awaited decision in United States v. Arthrex, Inc., the U.S. Supreme Court confirmed that the Patent Trial and Appeal Board is unconstitutionally structured, but held that the correct remedy is more limited than the one the U.S. Court of Appeals for the Federal Circuit had granted. Instead of a new hearing before a new panel of the Board, raising an Appointments Clause objection on appeal will only result in a remand to the Director of the Patent and Trademark Office, to allow him or her to decide whether to reconsider the Board’s decision in an Inter Partes Review (IPR) or similar proceeding.

The Supreme Court’s decision was splintered, but a majority agreed on both the constitutional holding and the remedy.

The court’s decision leaves a number of issues unresolved, however, and may require the Federal Circuit to change its approach in some respects. In particular, the Federal Circuit has been firm in denying any relief in any IPR that was decided by the Board at any time after the Federal Circuit’s panel decision in Arthrex. The court’s decision may allow litigants to argue that this temporal limitation is incorrect.

The court’s decision will also require the PTO to create a new procedure for the Director to review IPR decisions. Depending on the timing and other requirements the PTO adopts, this new step could materially affect the timeline of a typical IPR.

Background 

The Appointments Clause of the Constitution provides that officers of the United States must be appointed by the President with the advice and consent of the Senate, except that Congress can allow the heads of departments (among others) to appoint “inferior” officers. The distinction between an “inferior” officer and a “principal” officer therefore determines whether presidential appointment and Senate confirmation are required.

The Patent Trial and Appeal Board is a tribunal within the Patent and Trademark Office. It hears and decides IPRs, as well as all of the other post-grant review proceedings created by the America Invents Act (such as Post Grant Reviews and Covered Business Method reviews). Although the Director of the PTO and certain PTO officials are ex officio members of the Board, it consists mostly of Administrative Patent Judges (APJs). Those officials are not Senate-confirmed; they are appointed by the Secretary of Commerce. Under the relevant statute, APJs can be fired only for cause (“such cause as will promote the efficiency of the service”).

The Board decides cases in panels of three, and appeal goes directly to the Federal Circuit. A party that loses before the Board may seek rehearing before appealing, but “only the [Board] may grant rehearings.” 35 U.S.C. § 6(c). 

Arthrex is a patent owner, and one of its patents was invalidated in an IPR brought by its competitor Smith & Nephew. On appeal to the Federal Circuit, Arthrex argued for the first time that the structure of the Board violated the Appointments Clause. It contended that the IPR challenging its patent should therefore be dismissed.

The Federal Circuit agreed that, under the statute as written, APJs were functioning as principal officers, who cannot be appointed by the Secretary. So the Federal Circuit decided to make them inferior officers, by severing the statute giving them protection from being fired at will. The Federal Circuit panel held that this remedy would completely resolve any Appointments Clause issue in any IPR issued after the panel decision. As for IPRs decided before the Federal Circuit’s decision in Arthrex, the Federal Circuit held that the remedy was a do-over — a remand to the Board for a new hearing before a new panel of APJs.

The government, Arthrex, and Smith & Nephew all sought review by the Supreme Court. Meanwhile, the Federal Circuit remanded several dozen cases to the Board for new hearings. The Board did not hold any new hearings; instead, it held all those cases in abeyance pending the Supreme Court’s decision.

The Supreme Court agreed to decide both whether the Board’s structure complies with the Appointments Clause and whether the Federal Circuit’s remedy was the correct one. It declined to take up a third question the government had raised — whether Arthrex raised the constitutional issue too late.

THE SUPREME COURT’S DECISION

In an opinion by Chief Justice John Roberts, a 5-4 majority of the Court agreed that in deciding IPRs, members of the Board are acting as principal officers, and so a decision by a panel of non-Senate-confirmed APJs violates the Appointments Clause. Justices Samuel Alito, Neil Gorsuch, Brett Kavanaugh, and Amy Coney Barrett joined that portion of the opinion.

Chief Justice Roberts wrote a plurality opinion addressing remedy, concluding that only a remand to the Director is necessary. Justice Neil Gorsuch did not join that part of the opinion; however, three other Justices who dissented on the merits stated that they agreed with the judgment as to remedy. That gave the Chief Justice’s remedy a majority.

Merits: The Court concluded that in the context of an IPR, no principal officer supervises APJs in the task that matters: issuing decisions on patentability. There is no review by any officer of the Executive Branch — not even on rehearing, because only the Board can grant rehearing. 

While the PTO Director has considerable power over both IPRs and APJs, including even selecting individual APJs for an IPR panel, the Director cannot actually control the decision in an IPR. Thus, while APJs look like inferior officers in most respects, “the insulation of their decisions from review within the Executive Branch” makes them function as principal officers in deciding IPRs.

The government had argued that the Director could intervene in IPR decisions by “stacking” the panel that acts on a request for rehearing, changing the membership from the panel that decided the IPR. The Supreme Court was not persuaded: that strategy would allow “the Director to evade a statutory prohibition on review without having him take responsibility for the ultimate decision.”

The Court noted that it was not addressing whether the Director exercised enough supervision over other tasks that the Board performs, such as ex parte appeals during the examination process. Its decision was limited to IPRs (although other forms of post-grant review appear materially identical).

Remedy: The Court declined to adopt Arthrex’s remedy (dismiss the IPR outright) or the Federal Circuit’s (a do-over before a new panel). Rather, a majority of the court (the plurality joining the Chief Justice’s opinion, plus Justices Breyer, Sonia Sotomayor, and Elena Kagan) agreed that the remedy should be limited to ensuring review by the Director.

The Chief Justice’s opinion emphasized that “[d]ecisions by APJs must be subject to review by the Director.” The question was whether that could be achieved by selectively invalidating portions of the statute. The Chief Justice’s opinion concluded that it could. Thus, “Section 6(c) cannot constitutionally be enforced to the extent that its requirements prevent the Director from reviewing final decisions rendered by APJs.” Accordingly, “the Director has the authority to provide for a means of reviewing PTAB decisions … and, upon review, may issue decisions himself on behalf of the Board.” The Chief Justice’s opinion determined that this remedy “better reflects the structure of supervision within the PTO” than the Federal Circuit’s remedy.

As for what to do in pending cases, the Chief Justice’s opinion rejected the new hearing before a new panel that the Federal Circuit had ordered. Rather, the remedy will be a “limited remand” to the Acting Director of the PTO, “for him to decide whether to rehear the [IPR] petition.”

Separate Opinions: As noted, Justice Gorsuch agreed with the majority on the merits but would have invalidated the IPR decision in its entirety rather than sever portions of the statute. He would have left it to Congress to restructure the Board (and, he noted, he continues to think IPR violates due process).

Justice Clarence Thomas, joined by Justices Breyer, Sotomayor, and Kagan, dissented on the ground that APJs are inferior officers and their appointments are therefore valid. Justice Breyer also authored a separate opinion (joined by Justices Sotomayor and Kagan) expanding on his dissenting views on the merits and adding his vote for the majority’s “limited remand” remedy.

IMPLICATIONS OF THE SUPREME COURT’S DECISION

The Federal Circuit will now need to implement the Supreme Court’s holding in several sets of pending cases: (1) those in which it has already ordered a remand; (2) those in which its current precedent would not allow a remand; and (3) those involving Board decisions in proceedings other than IPRs. The PTO will also need to create a procedure for review by the Director.

Narrowing Remands: The government has filed a consolidated cert petition asking the Supreme Court to review dozens of subsequent cases in which the Federal Circuit issued Arthrex remands. The Court will consider that petition at its conference this week. In all likelihood, the Court will vacate the Federal Circuit’s decisions and remand for further consideration in light of Arthrex. The Federal Circuit will presumably need to conform its remand orders to the Supreme Court’s remedy.

Cases Eligible for Remedy: The Federal Circuit has been very strict in holding that no litigant can obtain any Appointments Clause remedy if the IPR final written decision was issued after the panel decision in Arthrex — even if the mandate in Arthrex had not yet issued — on the theory that the panel decision in Arthrex cured the constitutional violation. That reasoning appears to be questionable now that the Supreme Court has held that the crux of the constitutional violation is the absence of review by the Director — which the Federal Circuit’s remedy did not fix. Accordingly, some cases in which the Federal Circuit denied any remedy may now be eligible for at least a limited remand — but only if the appellant did not forfeit the issue. The Federal Circuit has generally required that the Appointments Clause argument be raised, at the latest, in the opening brief on appeal.

The Federal Circuit has also held that IPR petitioners, as opposed to patent owners, may not invoke the Appointments Clause because they voluntarily chose to proceed before the Board. The Supreme Court did not address that rule.

Other PTAB Proceedings: Certain other Board decisions are appealable directly to the Federal Circuit, such as appeals in examination and reexamination matters. The Supreme Court made clear that it was not addressing whether those proceedings suffer from the same constitutional flaw.

PTO Procedure: Heretofore the PTO Director’s role in influencing panel decisions, if any, has been behind the scenes. The Supreme Court has now charged the Director with creating a procedure for reviewing Board decisions — perhaps initially through a Standard Operating Procedure, but eventually through rulemaking to amend the PTO regulations governing trial proceedings before the Board. That could be an opportunity to improve transparency and, if the PTO does conduct a rulemaking, to solicit stakeholders’ input on how to structure review by the Director.

In particular, some parties that lose an IPR may not find it worthwhile to seek review by the Director, especially if speed is an issue and if the Director proves unwilling in practice to reconsider more than a handful of IPR decisions. IPRs are supposed to be speedy and time-limited, but requests for reconsideration — which are not time-limited — are already becoming a source of delay, sometimes very significant delay.

In some other agencies, seeking review of an administrative law judge’s decision before seeking judicial review is optional; in others, it is mandatory. Which model the PTO chooses could be important to litigants trying to project how long an IPR, including an appeal, will take.