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Federal Circuit Holds That PTAB May Issue Adverse Judgments Prior to an Institution Decision

On January 24, 2018, the Federal Circuit affirmed a decision of the Patent Trial and Appeal Board (“PTAB”), finding that 37 C.F.R. § 42.73(b) allows the PTAB to enter an adverse judgment prior to an institution decision when the patent owner disclaims all of the challenged claims. In Arthrex, Inc. v. Smith & Nephew, Inc., Arthrex appealed an adverse judgment entered by PTAB in an inter partes review (“IPR”) proceeding. Smith & Nephew filed an IPR petition challenging claims 1-9 of U.S. Patent No. 8,821,541, directed towards suture anchors for use in preventing abrasion and cutting of sutures during attachment. Following the petition, Arthrex disclaimed claims 1-9 and filed a preliminary response arguing that an IPR should not be instituted pursuant to 37 C.F.R. § 42.107(e)[1]. Arthrex further argued that its action of filing a statutory disclaimer should not be taken as a request for adverse judgment. The PTAB issued an adverse judgment under 37 C.F.R. § 42.73(b), stating that it has authority to interpret a statutory disclaimer as a request for adverse judgment even if it occurs prior to an institution decision.

On appeal, two main issues were presented before the Federal Circuit: (1) whether the adverse judgment is appealable; and (2) whether the PTAB properly exercised its authority to enter an adverse judgment pursuant to 37 C.F.R. § 42.73(b).

Adverse Judgments are Final and Appealable

The Federal Circuit held that the language of 28 U.S.C. § 1295(a)(4)(A) provides grounds for appeal in this case. The statute provides that the Federal Circuit shall have jurisdiction “of an appeal from a decision of—the Patent Trial and Appeal Board…with respect to…inter partes review under title 35.” The Federal Circuit held that the adverse judgment satisfied the statute as it is a final decision of the PTAB in an IPR proceeding.

Smith and Nephew argued that 35 U.S.C. § 319 should apply and because the adverse judgment is not a “final written decision” under § 319 it should not be appealable. The Federal Circuit rejected this argument, stating that § 319 on its face does not provide the exclusive circumstances for filing an appeal of an IPR decision and thus does not bar the present appeal. The Federal Circuit held that because the adverse judgment disposed of the IPR proceeding, it was a final decision within the confines of § 1295 and thus appealable.

The PTAB Properly Construed 37 C.F.R. § 42.73(b)

37 C.F.R. § 42.73(b) provides that “[a] party may request judgment against itself at any time during a proceeding. Actions construed to be a request for adverse judgment include…[c]ancellation or disclaimer of a claim such that the party has no remaining claim in the trial.” Arthrex argued that the language “no remaining claim in the trial” should be construed to mean that the section should only apply if a trial has been instituted. The Federal Circuit rejected this interpretation and held that the PTAB’s interpretation was correct. Although the definition of “trial” in the rule requires “a contested case instituted by the Board based upon a petition,”[2] the Federal Circuit held that the present language “in the trial” could be construed to mean that there are no remaining claims for trial. The Federal Circuit also looked to the purpose of the statute as support for its interpretation, arguing that the statute’s purpose is to establish the settings where estoppel under § 42.73(d) would apply. § 42.73(d) precludes a patent owner from obtaining a patent with claims that are not patentably distinct from cancelled claims. The Federal Circuit reasoned that in this case, there is “no meaningful distinction between claims that are cancelled before an IPR proceeding is instituted and claims that are cancelled after an IPR proceeding is instituted.”[3]

Arthrex also argued that because it specifically asserted that it was not requesting an adverse judgment, the PTAB should not have applied the statute. The Federal Circuit disagreed and stated that the PTAB has authority under the statute to construe the actions of a patent owner as a request for adverse judgment. The Federal Circuit stated that it is the PTAB’s characterization of the actions that matters, not the patent owner’s. The Federal Circuit further reasoned that accepting Arthrex’s argument would render the rule useless because then a patent owner would have the ability to always avoid an adverse judgment by simply making an explicit statement.

Judge O’Malley’s Concurrence

Judge O’Malley concurred in the opinion, stating that she agreed that the Federal Circuit has jurisdiction to review adverse judgments and that the PTAB properly interpreted the statute. However, she questioned whether the Director of the USPTO had the authority to issue the regulation in the first place and whether the PTAB has authority to issue adverse judgments prior to an institution decision, suggesting that such a finding may be inconsistent with prior PTAB and Federal Circuit precedent. For example, Judge O’Malley stated that the term “proceeding” in § 42.73(b) has been construed broadly and that the USPTO defines the term to include both a preliminary proceeding and a trial.[4] She argued, however, that in Shaw Industries Group, Inc. v. Automated Creel Systems, Inc., 817 F.3d 1293, 1300 (Fed. Cir. 2016), the Federal Circuit held that an IPR does not begin until it is instituted. She concluded that the PTO’s current interpretation of what constitutes a “proceeding” would be inconsistent with Shaw.

Judge Newman’s Dissent  

Judge Newman dissented from the majority. She argued that the PTAB did not have authority to enter an adverse judgment when the claims were disclaimed prior to an institution decision. Judge Newman argued that the language “in the trial” in § 42.73(b) explicitly refers to procedures in the trial and not at the institution phase. She stated that the PTO regulations provide that a “trial” means “a contested case instituted by the Board based upon a petition”[5] and thus § 42.73(b) should be construed to mean “[c]ancellation or disclaimer of a claim such that the party has no remaining claim in a contested case instituted by the Board based upon a petition.”[6] Judge Newman stated that a trial can only occur after institution and in this case there was no trial. She also noted that the PTAB’s interpretation was contrary to the statute because Arthrex explicitly requested no adverse judgment. She argued that the majority’s view that “estoppels can nonetheless be involuntarily imposed by the PTAB when no claims were subject to trial exceeds the PTAB’s statutory authority.”[7]

Conclusions

The Federal Circuit’s opinion appears to provide some clarity as to the circumstances in which the PTAB may issue an adverse judgment. However, it appears to raise more questions as to the PTAB’s – and more specifically the PTO’s – authority when it comes to adverse judgments. Judge O’Malley raised the important question—a question the majority declined to address—of whether the PTO had authority to issue the regulation in the first place. Adverse judgments, by way of estoppel, can severely impact a party who has multiple continuation applications relating to the patents at issue. As such, this question may be an issue the Federal Circuit faces in the near future.

 

[1] 37 C.F.R. § 42.107(e) provides that “[t]he patent owner may file a statutory disclaimer under 35 U.S.C. 253(a) in compliance with § 1.321(a) of this chapter, disclaiming one or more claims in the patent. No inter partes review will be instituted based on disclaimed claims.”

[2] 37 C.F.R. § 42.2.

[3] Arthrex, Inc. v. Smith & Nephew, Inc., No. 2017-1239, slip op. at 8 (Fed. Cir. Jan. 24, 2018).

[4] 37 C.F.R. § 42.2.

[5] Id.

[6] Arthrex, Inc. v. Smith & Nephew, Inc., No. 2017-1239, slip op. at 4 (Fed. Cir. Jan. 24, 2018) (Newman, J., dissenting).

[7] Id. at 7.