On October 31, 2019, a Federal Circuit panel (Judges Moore, Reyna, and Chen), in Arthrex, Inc. v. Smith & Nephew, Inc., No. 2018-2140, held that the appointment of administrative patent judges (APJs) by the Secretary of Commerce under Title 35 violates the Appointments Clause of the United States Constitution. To remedy that violation, the Federal Circuit severed a statutory limitation preventing the at-will removal of APJs by the Secretary of Commerce, and remanded the inter partes review (IPR) that was the subject of the appeal to be heard by a new panel of APJs.
The Arthrex decision provides an avenue for certain IPR participants, under certain circumstances, to seek remand and rehearing of unfavorable IPR decisions.
IPRs are agency proceedings in which a petitioner requests that the Patent Trial Appeal Board (PTAB)—a part of the United States Patent and Trademark Office (USPTO)—reconsider the patentability of previously issued patent claims. If the petition is granted and the IPR is instituted, the IPR proceedings are controlled and decided by a panel of three APJs. APJs are appointed by the Secretary of Commerce, in consultation with the Director of USPTO.
Here, Smith & Nephew petitioned the PTAB for an IPR of Arthrex's patent claims. The PTAB instituted the IPR, and a three-APJ panel issued a final written decision finding the claims unpatentable, as anticipated. Arthrex appealed the final written decision to the Federal Circuit, arguing for the first time on appeal that the APJs' final written decision violated the Appointments Clause.
The Federal Circuit Opinion
In its October 31, 2019 decision, the Federal Circuit first rejected Smith & Nephew's argument that Arthrex had waived its Appointments Clause challenge by not raising it earlier at the PTAB. The Federal Circuit explained that "this case implicates the important structural interests and separation of powers concerns protected by the Appointments Clause"; that "[t]imely resolution is critical to providing certainty to rights holders and competitors alike who rely upon the [IPR] scheme to resolve concerns over patent rights"; and that "this is an issue of exceptional importance, and we conclude it is an appropriate use of our discretion to decide the issue over a challenge of waiver."
Next, the Federal Circuit concluded that APJs are "principal officers" who, under the Appointments Clause, U.S. Const. art. II, § 2, cl. 2, must be appointed by the president with the advice and consent of the Senate. The Federal Circuit explained that whether one is a "principal officer" or, conversely, an "inferior officer" depends on whether one's work is directed and supervised by others who were appointed by presidential nomination with the advice and consent of the Senate. With respect to APJs, the Federal Circuit held that "[t]he only two presidentially-appointed officers that provide direction to the USPTO are the Secretary of Commerce and the Director. Neither of those officers individually nor combined exercises sufficient direction and supervision over APJs to render [APJs] inferior officers." The Federal Circuit in particular noted that (i) "[t]here is no provision or procedure providing the Director the power to single-handedly review, nullify or reverse a final written decision issued by a panel of APJs," and (ii) the Secretary and Director lacked the "unfettered" ability to remove APJs, and instead were constrained by the provisions of Title 5, under which APJs may be removed "only for such cause as will promote the efficiency of the service." 5 U.S.C. § 7513(a).
The Federal Circuit further explained:
While the Director does exercise oversight authority that guides the APJs procedurally and substantively, and even if he has the authority to dedesignate an APJ from [IPRs], we conclude that the control and supervision of the APJs is not sufficient to render them inferior officers. The lack of control over APJ decisions does not allow the President to ensure the laws are faithfully executed because he cannot oversee the faithfulness of the officers who execute them. These factors, considered together, confirm that APJs are principal officers under Title 35 as currently constituted. As such, they must be appointed by the President and confirmed by the Senate; because they are not, the current structure of the Board violates the Appointments Clause. (quotations and citations omitted).
The Federal Circuit then invoked the doctrine of severability to remedy the constitutional violation (i.e., severing problematic portions of a statute while leaving the remainder intact). Here, the Federal Circuit severed 5 U.S.C. § 7513(a)'s limitations on the removal of APJs, thereby allowing the Secretary to remove APJs without cause. The Federal Circuit explained that "we believe severing the restriction on removal of APJs renders them inferior rather than principal officers. Although the Director still does not have independent authority to review decisions rendered by APJs, his provision of policy and regulation to guide the outcomes of those decisions, coupled with the power of removal by the Secretary without cause provides significant constraint on issued decisions."
The Federal Circuit continued, "we are convinced that Congress would preserve the statutory scheme it created for reviewing patent grants and that it intended for APJs to be inferior officers. Our severance of the limits on removal of APJs achieves this. We believe that this, the narrowest revision to the scheme intended by Congress for reconsideration of patent rights, is the proper course of action and the action Congress would have undertaken."
As to the potential effect of its Arthrex decision on other IPR proceedings and APJ determinations, the Federal Circuit noted that "[w]e have decided only that this case, where the final decision was rendered by a panel of APJs who were not constitutionally appointed and where the parties presented an Appointments Clause challenge on appeal, must be vacated and remanded. Appointments Clause challenges are nonjurisdictional structural constitutional objections that can be waived when not presented. Thus, we see the impact of this case as limited to those cases where final written decisions were issued and where litigants present an Appointments Clause challenge on appeal." (quotations and citations omitted).