United States: Substantial Evidence Or Clear Error? Aligning The Standard Of Review For IPR Appeals

Denying Merck's petition for rehearing en banc, the US Court of Appeals for the Federal Circuit refused to decide whether a more searching standard of review (i.e., clear error) is necessary for appeals from inter partes review proceedings. Merck & Cie v. Gnosis S.P.A., et al., Case No. 14-1779 (Fed. Cir., Apr. 26, 2016) (Gnosis I) (per curiam) (O'Malley, Wallach and Stoll, JJ, concurring) (Newman, J, dissenting). The Court refused rehearing of its panel decision affirming the finding by the Patent Trial and Appeal Board (PTAB or Board) of invalidity in an inter partes review (IPR).

In their concurrence to the denial of en banc review, three Federal Circuit judges acknowledged that the current "substantial evidence" standard is seemingly inconsistent with the purpose and content of the America Invents Act (AIA). Nevertheless, they expressed their belief that the Federal Circuit lacks authority to alter the standard of review for Board decisions, and that such is instead a question for Congress. Citing Gartside, the concurring judges noted that the Federal Circuit has consistently reviewed the Board's factual findings, including in IPRs, for substantial evidence. Considering the intent of the AIA, however, the judges explained that Congress in effect created an adjudicative process involving a petitioner, a respondent and a merits proceeding that results in a resolution by administrative judges. Congress also intended IPR proceedings to be a cost-efficient substitute for federal district court litigation.

To the concurring judges, the question of review standard turns on whether Congress intended for IPR proceedings to replace district court litigation. In its Zurko decision, the Supreme Court of the United States refers to "clear error" review as the standard for "court/court" review, and to other standards of review contemplated by the Administrative Procedure Act as "court/agency" review. Under Zurko, if Congress meant to create an adversary, party-instituted proceeding to consider what would otherwise be considered by a district court, then review of a patentability decision in an IPR would be more like court/court review.

To support the notion that IPR examinations are "different in character" than other agency proceedings, such as inter partes reexaminations, the concurring judges noted that IPRs are reviewed in the first instance by three technically trained administrative patent judges (APJs) from the Board. Once instituted, the Board oversees various discovery obligations and hears oral argument. While Congress did not expressly state that IPRs were meant to be a direct substitute for district court proceedings, it enacted substantive and procedural changes that brought IPR proceedings in line with district court proceedings. Being bound by Zurko, however, the concurring judges felt compelled to review factual findings of the Board for substantial evidence, unless and until Congress or the Supreme Court expressly changes the standard.

In dissent, Judge Newman explained that en banc review is necessary to realign the appellate standard of review with the statutory purpose of the AIA. Newman noted her appreciation that a petitioner's allegations of invalidity on the grounds of §§ 102 and 103 can lead to Board proceedings similar to trial in district courts, with discovery, evidence, testimony, briefs, hearings and a written decision. Board decisions can be appealed to the Federal Circuit but not reviewed by a district court. She noted that under the AIA, a final decision results in an estoppel against the petitioner from ensuing any litigation. This result carries significant consequences not only for the patent owner, but also for the petitioner. Judge Newman voiced particular concern about the Federal Circuit adopting a highly deferential standard of review for Board decisions, rather than the full and fair review that she believes aligns with the purpose of the AIA.

Judge Newman contended that precedent does not prohibit objective review of Board decisions, arguing that where Congress creates a new tribunal with the authority to substitute for district court actions, Zurko restrictions do not necessarily apply. She further argued that the AIA was designed to provide an "efficient and economical surrogate" for a district court's determination of patent invalidity, as well as to bind and estop petitioners in any infringement proceedings. In her view, the substantial evidence standard does not conform to the statutory plan of the AIA, since Board proceedings provide a substitute for district court proceedings, and since access to a district court for review is eliminated. Judge Newman argued that given the substantive consequences, it is not reasonable to infer that the legislative intent was to apply the more deferential appealable review of correctness and clear error.

In South Alabama Medical Science Foundation v. Gnosis (Gnosis II), a companion appeal to Gnosis I, the petitioner sought en banc rehearing for the same reasons set forth by Merck & Cie in its petition. Judges O'Malley, Wallach and Stoll concurred in the denial, while Judge Newman dissented for the same reasons as in Gnosis I.

Substantial Evidence Or Clear Error? Aligning The Standard Of Review For IPR Appeals

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