Recently, the Federal Circuit held that Administrative Patent Judges (“APJs”) comprising the 3-member USPTO Patent Trial and Appeal Board (“PTAB”) are unconstitutionally appointed in violation of the Appointments Clause of the Constitution. The court promptly remedied the violation and limited its effect on other PTAB decisions.

In Arthrex, Inc. v. Smith & Nephew, Inc., 2019 WL 5616010 (Fed. Cir. 2019), Judges Moore, Reyna, and Chen concluded that the current APJs qualify as “principle officers” under the Appointments Clause and thus the current process of appointment by the Secretary of Commerce (the “Secretary”) in consultation with the Director of the USPTO (the “Director”) violates the Constitution. This legal conclusion was sufficient to vacate the PTAB decision and remand back to the PTAB for rehearing with an entirely new panel of APJs. While the Federal Circuit scaled back on the applicability of the holding to other cases, subsequent pleadings have already been submitted raising the same issue and requesting the same relief.

Arthrex, Inc. (“Arthrex”) appealed the PTAB decision invalidating the majority of the claims of U.S. Patent No. 9,179,907. Smith & Nephew, Inc. and ArthroCare Corp. v. Arthrex, Inc., No. IPR2017-00275, 2018 WL 2084866 (P.T.A.B. 2018).  In its appeal brief to the Federal Circuit, Arthrex first raised an Appointments Clause challenge, arguing APJs were “principal officers,” and therefore could not be appointed by the Secretary in consultation with the Director. Smith & Nephew opposed the claim, arguing first that Arthrex could not raise this issue in the first issue on appeal, and second that APJs are “inferior officers” and properly appointed under the Appointments Clause. Several months later, the government filed its own brief as an intervenor, arguing against a finding of Appointments Clause violation.

The Federal Circuit thus faced three questions on appeal: whether or not Arthrex had timely raised its Appointments Clause claim; whether or not the current appointment procedure of APJs violated the Appointments Clause; and if the procedure was a violation, what provisions of the Patent Act must be struck down in order to remedy the violation. The court answered the first two questions in the affirmative, and then turned to Supreme Court and D.C. district court precedent for assistance on answering the third.

Arthrex did not waive its Appointments Clause challenge by first raising it on appeal

The Federal Circuit determined that Arthrex had not waived its opportunity to raise an Appointments Clause violation when it elected to refrain from presenting it to the PTAB first. The court acknowledged the general rule against taking up new issues on appeal that were not properly litigated below, but stated it had discretion in deciding whether to deviate from that general rule in “rare cases,” such as those implicating important structural interests and separation of powers concerns.  The court distinguished In re DBC, 545 F.3d 1373 (Fed. Cir. 2008), noting the basis for deeming the challenge waived in that case was the availability of a remedy at the PTAB level, where the Appointments Clause violation could have been cured simply by switching out the APJs with ones who were properly appointed as “inferior” officers. Here, where the argument is that APJs are “principal” officers and thus all APJs are unconstitutional, the PTAB could provide no such remedy. Therefore, the court held that Arthrex need not have raised its claim at the PTAB level and had not waived its claim by not doing so.

APJs do not comply with the requirements of the Appointments Clause

Turning next to the application of the Appointments Clause, the court identified two questions necessary for the analysis: whether or not APJs were “Officers of the United States” under the Appointments Clause; and if so, whether or not APJs were “principal” officers and as such, were required to be appointed by the President with advice and consent of the Senate.  The court resolved the first question effortlessly, as no party had contested the fact that—at the very least—APJs were recognized as “officers” as contemplated by the Appointments Clause. The point of contention rested on the issue of whether or not the APJs exercised significant authority and lacked supervision to be considered “principal” officers. The court examined three non-exclusive factors established in the Supreme Court case Edmond v. United States, 520 U.S. 651 (1997): (1) whether an appointed official has the power to review and reverse APJs’ decisions, (2) the level of supervision and oversight an appointed official has over the officers, and (3) the extent of an appointed officer’s power to remove an APJ. The court noted that the two relevant appointed officials – the Secretary of Commerce and the Director of the USPTO – lacked independent statutory authority to review APJ decisions, as PTAB decisions are subject to review only through rehearings conducted by the PTAB itself or direct appeals to the Federal Circuit. This indicated that the first factor pointed towards APJs as “principal” officers. On the other hand, the Director’s significant rule-promulgating and policy-determining authority over the conduct of PTAB proceedings indicated that the second factor pointed towards APJs as “inferior” officers.

The final factor, removal authority, bolstered the Federal Circuit’s conclusion that APJs were “principal” officers.  As an initial matter, the court passed over the opportunity to decide one way or the other on the government’s and Smith & Nephew’s argument that the Director’s designation authority (to assign APJs to particular IPR proceedings) presumptively meant that he had removal authority over such proceedings.  Instead, the court focused on the removal authority under the statute.  Removal of APJs was limited to “such cause as will promote the efficiency of the service” which requires a nexus between misconduct of the APJ and the work of the agency. This limitation, the court concluded, tipped the balance towards APJs as “principal” officers.

The remedy

After determining that APJs were “principal” officers, the Federal Circuit remedied the constitutional defect by severing the removal restrictions of APJs.  The court noted similar approaches used in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010), and Intercollegiate Broad. System, Inc. v. Copyright Royalty Board, 684 F.3d 1332 (D.C. Cir. 2012), and determined severing the removal restrictions would be the narrowest viable remedy.  APJs would be subject to unfettered removal power by the Director and thus would become “inferior” officers again, curing the Appointments Clause violation.

Because the panel of APJs that rendered the PTAB’s decision was not constitutionally appointed, the court vacated and remanded the decision.  On remand, a new panel of APJs must be designated to hear the IPR.  The court clarified that this new panel could proceed based on the existing record at its discretion.

The holding was limited to only those cases “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.”  The court concluded the remedy was appropriate considering the purposes of the Appointments Clause and the interest in incentivizing such challenges at the appellate level.

The aftermath

One day after the Arthrex decision, the Federal Circuit demonstrated the limited nature of its holding in that case.  In Customedia Technologies, LLC v. Dish Network Corporation, 2019 WL 5677703 (Fed. Cir. 2019), Dish Network LLC, sought similar relief, citing Arthrex in a notice of supplemental authority. The Federal Circuit succinctly denied the relief deeming the argument waived, thus limiting Arthrex to appellants raising an Appointments Clause challenge within their opening briefs.

A week later, in Bedgear, LLC v. Fredman Bros. Furniture Company, Inc., 2019 WL 5806893 (Fed. Cir. 2019), the Federal Circuit faced another Appointments Clause challenge—one timely raised in the appellant’s opening brief. In a one-paragraph per curiam opinion, the court vacated and remanded the three PTAB decisions on appeal, citing Arthrex.  What followed was a 10-page concurrence by Judge Dyk questioning the remedy in Arthrex and the necessity of remanding the PTAB’s decisions after judicially resolving the constitutional issues.  Judge Dyk recognized the binding nature of the holding in Arthrex, but lamented the “large and unnecessary burdens on the system of inter partes review” imposed by the remedy in Arthrex.  Judge Dyk noted that the court could have fixed the constitutional problem retroactively as well as proactively based on Supreme Court precedent.  Under such an approach, the Arthrex construction of the statute would mean the APJs were properly appointed and their prior decisions would not be invalid.

Whether Anthrex will have far-reaching impact remains to be seen, but it has already been cited in non-patent cases.  See Monica Harold v. Andrew M. Saul, 2019 WL 6003494 (E.D. Pa. 2019) (vacating and remanding after Appointments Clause challenge Social Security Administration ALJs). At a minimum, the Arthrex decision reiterates the importance of carefully examining potential arguments at all stages of litigation and appeal.