SCOTUS limits patent judges’ power but preserves PTAB review

The justices ruled that the authority of the judges of the Patent Trial and Appeal Board is unconstitutional, but by giving the USPTO director greater oversight, the highest court likely saved this favored tool of generic patent challengers.

The United States Supreme Court ruled Monday that the structure of the country’s patent adjudication tribunal was unconstitutional but declined to eradicate it, instead sending the medical device case at issue to the U.S. Patent and Trademark Office director for further review.

The case centers on whether the decisions of Administrative Patent Judges (APJs) are constitutional under the appointments clause.

In its ruling, the majority held that because APJ determinations during inter partes review (IPR) were not reviewed by the tribunal’s presidentially appointed director, their authority was “incompatible with their appointment by the Secretary of Commerce to an inferior office.”

SCOTUS’ solution? Make sure that someone appointed by the president can overrule their decisions. The justices’ choice? The USPTO director.

“In the end, seven justices said they agree with the court’s proposed remedy, so that is the part of the decision that will have lasting impact: The director now has review authority over all written decisions that PTAB will put out in inter partes reviews,” said Christopher Ricciuti, partner at Oblon, a law firm specializing in intellectual property, in a phone interview. “What remains to be seen is how and how often that power will actually be used.”

According to the justices’ opinion, Smith & Nephew, Inc., and ArthroCare Corp. petitioned for inter partes review of an Arthrex, Inc., patent, and three APJs found the patent invalid. Arthrex appealed, claiming the structure of the PTAB was unconstitutional under the appointments clause.

The Supreme Court has ordered the present case be sent back to the currently acting director, Patent and Trademark Office Commissioner Drew Hirshfeld, for review.

In doing so, it gave Hirshfeld and his followers the authority to review all cases that go through the tribunal moving forward — most notably, its cases centering on inter partes review.

Through inter partes review, PTAB allows companies to challenge existing patents outside of the lengthy patent litigation process by asking the tribunal to reconsider whether they satisfy the requirements that inventions be “novel” (new) and “nonobvious” (i.e., difficult for the average person to come up with on their own). This process has invalidated over 2,000 patents since its inception in 2011.

The ability to do this has been a crucial tool for generics and biosimilars companies seeking to challenge brand medicines’ monopolies without placing their own infringement at issue.

But the question of whether PTAB’s administrative judges are allowed to issue such determinations at all has lingered.

Adjudicating Above Their Constitutional Station

As the court explained in its decision, the APJs were making decisions that should lie with “principal officers.” The problem there is that principal officers must be appointed by the president under advice of the Senate, according to the Constitution’s appointments clause.

The clause allows Congress to assign appointment of “inferior officers,” but those officers are not politically accountable and should therefore have their decisions reviewed by someone in the president’s chain of command, according to the Constitution.

At the PTAB, judges are chosen and overseen by a director who is selected by the president. However, their decisions, which the court called “the final word in the executive branch,” are only reviewed by their fellow APJs, not the director.

“This restriction on review relieves the director of responsibility for the final decisions rendered by APJs under his charge,” the court said.

Chief Justice Roberts delivered the majority opinion, joined in parts I and II by Justices Alito, Gorsuch, Kavanaugh and Barrett, but dissented to in part III by Justice Gorsuch. Justice Breyer issued a separate decision concurring in part and dissenting in part, joined by Justices Sotomayor and Kagan, and Justice Thomas dissented, joined by Justices Breyer, Sotomayor and Kagan as to parts I and II.

The Key: Finality of Decision-Making

The court analyzed its decision on whether PTAB administrative judges were principal or inferior officers based on its prior ruling in Edmond v. United States, which required them to be directed and supervised by someone appointed by the president.

While the Federal Circuit had focused on the director’s role as a supervisor and advisor, SCOTUS said the key to making this determination is where final decision-making power lies. The court looked to its own precedent in Edmond to say that IPR judges were not, at present, acting as inferior officers because their determinations were not evaluated by the tribunal’s director, who is an executive officer.

In their March arguments before the court, the government and Smith & Nephew reasoned that the PTAB director held soft power through the ways they could influence IPR: The director could hire APJs predisposed to deciding “in his preferred manner,” for example.

But, the court countered: “Such machinations blur the lines of accountability demanded by the Appointments Clause and leave the parties with neither an impartial decision by a panel of experts nor a transparent decision for which a politically accountable officer must take responsibility.”

“APJs exercise executive power, and the President must be ultimately responsible for their actions,” the court said.

The Federal Circuit’s Solution? Threaten to Fire Them

The court below wanted to solve the problem by invalidating APJs’ existing tenure protections, saying the Secretary of Commerce could fire them at will.

But SCOTUS said this failed because the Secretary was only allowed to terminate them “for such cause as will promote the efficiency of the service,” not because she disagreed with their rulings.

“The most important practical result of Arthrex for the PTAB’s day-to-day operation is that the tenure protections of administrative patent judges are restored,” said Saurabh Vishnubhakat, a professor at Texas A&M Law School, in an email. “Even for those who thought a constitutional problem existed, making impartial adjudicators decide cases under a cloud of political removal hardly seemed like good public policy — at most, it solved one problem while creating another.”

The High Court’s Fix

To remedy the situation without eradicating the PTAB, the Supreme Court sent Smith & Nephew and Arthrex’s case to the United States Patent and Trademark Office (USPTO) director for review. It further gave the USPTO director power to “issue decisions himself on behalf of the Board,” moving forward.

Notably, while this remedy seeks to maintain the political accountability required in the appointments clause, the current acting PTO director, Drew Hirshfeld, was not politically appointed. Nor is he officially “acting,” according to the Biden administration. He is simply “performing the duties and functions” of a director since Trump-appointed director Andrei Iancu left the position in January, according to an email obtained by Bloomberg.

Still, the court refers to him as “acting director” and is giving him the power to decide whether to rehear Smith & Nephew’s petition, along with a number of others waiting in the wings.

“I expect the director will have the opportunity to decide whether to rehear a number of other cases that were previously remanded to the PTAB and stayed (which had left the status of those patents in limbo pending a decision in Arthrex),” said William H. Milliken, a director at Sterne, Kessler, Goldstein & Fox who issued the firm’s client alert on the case. “However, the mechanics of this review process remain to be seen.”

A Fix With Its Own Potential Problems

“My observation of the USPTO is that in the past, you had the people doing the work on the merits, the APJs, and then the director working on policy objectives — he would never delve into the weeds on the merits of any matter,” said Ricciuti, the Oblon lawyer. “Not only is the director going to be making the policy decisions, but the merit decisions at some level will also rest with the director.”

This seemingly procedural change could raise the stakes on the appointment of USPTO’s next director, Ricciuti explained.

“This decision makes the choice of USPTO director more political: It potentially allows for more lobbying, with interested parties making sure the person is aligned not only on high-level policy but on particular decisions,” Ricciuti said. “There are stakeholders that get their claims brought before PTAB a lot and they might have an interest in swaying the choice of director.”

Recently, top members of the House Subcommittee on Courts, Intellectual Property and the Internet expressed concern with the idea that the USPTO director held such a wide, implicit scope of influence over APJ decisions without the legal authority to do so. The Supreme Court just rendered that power explicit — and legal.

“For those that want to see politics taken out of patent adjudication and protect APJ impartiality, I don’t think this decision necessarily helps,” Ricciuti said.

Smith & Nephew declined to comment on the ruling.

The case is United States v. Arthrex, — S.Ct. — (2021)

The story was updated with a response from Smith & Nephew.