Supreme Court Creates Fix for Patent Judges to Avoid Major Changes to Patent Trial and Appeal Board

Arthrex Inc. v. Smith & Nephew Inc., No. 19-1458 (June 21, 2021)

The Supreme Court’s decision in Arthrex v. Smith & Nephew, Inc., issued on June 21, 2021, agreed in substance with the decision by the U.S. Court of Appeals for the Federal Circuit that the appointment of Administrative Patent Judges (APJs), charged with presiding over proceedings before the Patent Trial and Appeal Board (PTAB), was unconstitutional. However, rather than invalidate the statutory structure underlying the PTAB, the Supreme Court opted to sever a portion of the statute it deemed constitutionally offensive. Thus, the Court’s decision is likely to result in more of an administrative shake-up of PTAB proceedings, than a major change in the law.

Arthrex is the owner of a patent that was challenged in inter partes review by Smith & Nephew, Inc. and Arthrocare Corp. Review was instituted, and a panel of three APJs issued a final written decision finding the challenged claims to be unpatentable as anticipated by the prior art. On appeal, Arthrex challenged the appointment of the APJs as violating of the Appointments Clause of Article II of the U.S. Constitution.

Under the Appointments Clause, officers of the United States must be nominated by the President and confirmed by the Senate. The Constitution also provides for the appointment of inferior officers by the President alone or the heads of departments.

The Constitution does not define the differences between principal officers and inferior officers. Instead, it has been left to the courts to flesh out those distinctions. Courts look beyond the nominal rank of the officer, and attempt to discern the extent of direction and control appointed officials have over the challenged officer or employee. One non-exclusive test applied by the courts considers (1) whether an appointed official has the power to review and reverse the officers’ decision; (2) the level of supervision and oversight an elected official has over the officers; and (3) the appointed official’s power to remove the officers.[1]

The Federal Circuit held that APJs were unconstitutionally appointed because the court found they had been given a level of authority consistent with principal officers, without being subject to direct supervision and control by a principal officer. The appellate court’s solution was to sever a portion of the law that protected APJs from being dismissed without cause, reasoning that the ability of the Director of the Patent Office to fire APJs at its discretion provided sufficient oversight to transform APJs into inferior officers.

Both parties, and the government, requested en banc review of the Federal Circuit panel’s decision. But the full appellate court declined to take up the question. All three entities petitioned for certiorari, and the Supreme Court agreed to hear the case.

The case was closely watched by commentators and the patent law community. It was likely that the Court would find fault with the Federal Circuit’s decision. But, potential outcomes could have ranged from reversing the Federal Circuit and holding that APJs were constitutionally appointed, to invalidating as unconstitutional some or all of the 2011 America Invents Act. Justice Gorsuch, in particular, had expressed hostility towards the AIA, faulting the Court in a 2020 dissenting opinion to having “acquiesced to the AIA’s provisions allowing agency officials to withdraw already-issued patents subject to very limited judicial review.”[2]

In a 5-4 decision, with the majority opinion written by Chief Justice Roberts, the Court rejected the Federal Circuit’s proposed fix to bring APJs into constitutional conformance, but substituted their own fix to solve the dilemma without obliterating the PTAB altogether.

The Court’s solution focused on the reviewability of APJ decisions in inter partes review proceedings. The Patent Act permits the PTAB, but only the PTAB, to grant re-hearings of IPR decisions. The Supreme Court found this section to be unenforceable to the extent it precluded the Director from granting rehearing, otherwise leaving the law intact.

The majority did not find the Federal Circuit’s solution to be impermissible. But, it argued that its own solution better reflected the structure of the PTAB and the nature of an APJ’s duties. The Supreme Court permitted the Director to intervene to correct a flawed PTAB decision, rather than limiting the Director’s supervisory authority to removing an APJ after the fact.

Justice Gorsuch authored a spirited concurrence-in-part. Although the Justice agreed that APJs were unconstitutionally appointed, he faulted the majority for making policy decisions by presuming that Congress would have intended to give the Director the authority to grant rehearing if it knew the Court would find its statutory structure to be improper. Justice Gorsuch would have held the appointment of APJs to be unconstitutional and set aside the PTAB’s decision in this case, leaving it to Congress to craft an appropriate remedy.

Justice Breyer, joined by Justices Sotomayor and Kegan also concurred-in-part, but would have found the appointment of APJs to be constitutional. The liberal Justices argued that Congress recognized the value of giving APJs decision making authority independent of political considerations. Considering the lack of formal definitions for principal and inferior officers in the Constitution, the concurrence would have given deference to Congress’s decision to treat APJs as inferior officers. However, because the majority’s decision otherwise left the structure of the PTAB intact, Breyer agreed with the result.

A final opinion in Dissent was filed by Justice Thomas, with whom the liberal Justices joined-in-part. Justice Thomas also would have found the appointment of APJs to be constitutional, but does not join the majority with respect to the result.

The Supreme Court’s Arthrex decision takes a “do no harm” approach to the PTAB that is unlikely to have a significant impact in the conduct of IPRs. The Court purports to only give the Director the discretionary authority to rehear PTAB decisions. There is no requirement that the Director intervene in any given IPR. And the likelihood that the Director would assume that burden in a particular case is probably low. Regardless, the Supreme Court’s decision has created an avenue for review of PTAB decisions that will likely be explored by petitioners and patent owners over the next several years.