United States: Federal Circuit Splits On Deference To Agency Rules

Last Updated: October 16 2017
Article by Kevin Greenleaf and Scott Cummings

Requires more formality in rulemaking to place burden on patent owners for motions to amend

The US Court of Appeals for the Federal Circuit (the Court), sitting en banc, issued its long-anticipated decision in Aqua Products[i], regarding properly allocating the burden of proving validity (or invalidity) when amending claims during inter partes reviews (IPRs) under the America Invents Act (AIA). In a limited victory for patent owners, a plurality of the fractured Court (five of eleven judges) narrowly concluded that the Patent and Trademark Office (PTO) was prohibited from imposing the burden of proving the validity of amended claims on patent owners through adjudicatory rulemaking because,

  1. The PTO has not adopted a rule placing the burden of persuasion with respect to the patentability of amended claims on the patent owner that is entitled to deference; and
  2. In the absence of anything that might be entitled deference, the PTO may not place that burden on the patentee.[ii]

Beyond these holdings, a majority of the Court was unable to resolve the questions on appeal.[iii] It could agree[iv] only to vacate the decision of the Patent Trial and Appeal Board (PTAB) denying the patent owner's motion to amend, and to remand the case to reassess the validity of the amended claims without placing the burden of persuasion on the patent owner. "The Board must follow this same practice in all pending IPRs unless and until the Director engages in notice and comment rule-making," the majority said. "At that point, the court will be tasked with determining whether any practice so adopted is lawful."

The majority lamented that its job "has not been easy," and emphasized that beyond the order to vacate and remand, its other "cogitations ... are mere academic exercises."[v] These "cogitations" are nonetheless very interesting, as they concern issues of separation of powers and administrative law that are the subject of two important upcoming IP cases, SAS and WiFi One[vi]; other cases before the Supreme Court; and two pending bills: the Separation of Powers Restoration Act (H.R. 76) and the Regulatory Accountability Act (H.R. 5, passed by House, January 11, 2017).

The issue that split the Court was the amount of deference, if any, the judiciary should show to the PTO, an administrative agency. When Congress passed the AIA, it directed the PTO to establish regulations governing motions to amend. In response, the PTO promulgated broad rules using formal notice and comment rulemaking, but the PTAB provided specific guidance through its adjudicatory decisions. For example, the PTAB specified that patent owners, as movants, bear the burden of demonstrating the validity of any proposed amended claims.[vii] After very low rates of granting motions to amend (i.e., completely denying 112 out of 118 motions)[viii] notwithstanding the "repeated recognition [by Congress, the courts and the PTO] of the importance of the patent owner's right to amend during IPR proceedings," a vigorous debate about the PTAB's amendment practice ensued—a debate that spilled over to the Federal Circuit, which issued five fractured opinions, totaling 148 pages, on the issue.

The plurality in Aqua Products held that the PTO's interpretation of its own regulations was not entitled to any judicial deference under the Chevron doctrine[ix] because: (1) the AIA (specifically, 35 USC §316(e)) unambiguously places the burden on the petitioner to demonstrate invalidity, and (2) even if the statute is ambiguous as to motions to amend, the PTAB's informative and representative decisions are informal and thus not entitled to the deference generally due to more formal rules. Similarly, the Court held that the PTAB's interpretations were not entitled to Auer deference (i.e., deference to an agency's interpretation of its own regulations) because there is no formal rule on-point, and the PTO cannot "rewrite its regulation in the guise of 'interpretation.'"[x]

Two concurring opinions agreed in part. Judge Moore warned that Chevron "effected a broad transfer of legislative and judicial function to the executive."[xi] Joined by Judges O'Malley and Newman, Judge Moore emphasized that decisions from an administrative law judge, even if promoted to informative or precedential status, do not rise to the level of substantive rules and do not deserve deference.[xii]

Judge Reyna's concurrence, joined by Judges Dyk and Prost, makes three main points. First, it reiterates that a majority of the Court believes that §316(e) does not clearly place the burden of persuasion for motions to amend. Second, the PTO's analysis that patent owners bear the burden of persuasion in motions to amend deserves no deference. Third, that patent owners bear a burden of production, i.e., they must satisfy minimum requirements for motions to amend. Three more judges—Taranto, Chen and Hughes (a majority of the court), joined this third part of the decision.

Judge Taranto, joined by judges Prost, Chen and Hughes, dissented, finding entirely proper a general rule[xiii] that places the burden of persuasion on the movant in any motion, by implication including motions to amend. The dissent further explained that that it need not rely on Chevron deference to find the PTO's position correct. Therefore, it agreed with the PTAB's denial of the motion to amend because the patent owner failed to meet its burden of demonstrating validity.

Finally, Judge Hughes, joined by Judge Chen, dissented on grounds like Judge Taranto's, noting that they would give either Chevron or Auer deference to the PTAB's placement of the burden to demonstrate validity. Judge Hughes also found disturbing the plurality's belief that Congress's delegation to the PTO to develop "regulations" required notice and comment rulemaking. Judge Hughes said he believes that "regulations" include more than notice and comment rulemaking—they also include guidance and decisions of administrative law judges. In summary, when the statute is ambiguous, Judge Hughes would give deference to almost any agency action, whether through regulation, guidance or adjudicatory decision.

Interested parties hotly debate the propriety of certain actions the PTAB takes, and administrative law is proving to be a potent vehicle for challenging PTAB decisions. Ultimately, the Supreme Court will likely clarify this arcane but important area of administrative law. In the meantime, until the PTO engages in formal notice and comment rulemaking, the decision in Aqua Products could encourage patent owners to file more motions to amend, with higher expectations that they may succeed.

Dentons is prepared to defend its clients' interests before the PTAB in light of these and other important developments.


[i] Aqua Products, Inc. v. Matal, appeal no. 2015-1177 (Fed. Cir. 2017).

[ii] Aqua products, slip op. at 66.

[iii] The two questions presented were as follows:

  1. When the patent owner moves to amend its claims under 35 U.S.C. § 316(d), may the PTO require the patent owner to bear the burden of persuasion, or a burden of production, regarding patentability of the amended claims as a condition of allowing them? Which burdens are permitted under 35 U.S.C. § 316(e)?
  2. When the petitioner does not challenge the patentability of a proposed amended claim, or the Board thinks the challenge is inadequate, may the Board sua sponte raise patentability challenges to such a claim? If so, where would the burden of persuasion, or a burden of production, lie?

[iv] Judges Dyk and Reyna joined in the result, but for different reasons, thus making the vacature and remand a majority decision.

[v] Aqua products, slip op. at 66.

[vi] SAS Institute Inc. v. Matal, Supreme Court dkt. No. 16-696, and Wi-Fi One, LLC v. Broadcom Corp., Fed. Cir. appeal nos. 2015-1944, -1945, and -1946.

[vii] Idle Free Systems, Inc. v. Bergstrom, Inc., IPR2012-00027, paper 26, and MasterImage 3D, Inc. v. Reald Inc., IPR2015-00040, paper 42.

[viii] USPTO, PTAB Motion to Amend Study, 2–4 (Apr. 30, 2016), https://www.uspto.gov/sites/default/files/documents/2016-04-30%20PTAB%20MTA%20study.pdf.

[ix]  Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) (courts should generally defer to an agency's reasonable interpretation of its own ambiguous statutes).

[x] Aqua products, slip op. at 44 (discussing Auer v. Robbins, 519 U.S. 452 (1997)).

[xi] Aqua products, slip op. at 80.

[xii] Aqua products, slip op. at 80.

[xiii] 37 C.F.R. §42.20(c). 

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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