United States: Federal Circuit: Effect Of Disclaimer Prior To Trial Institution

In Arthrex, Inc. v. Smith & Nephew, Inc., et al., slip op. 2017-1239, the Federal Circuit affirmed the Board's decision to enter an adverse judgment following Patent Owner's disclaimer of all claims challenged in an inter partes review petition before the institution of trial.  At the time of entering the adverse judgment, an estoppel effect attached which precluded Patent Owner from "taking action inconsistent with the adverse judgment, including obtaining in any patent ... [a] claim that is not patentably distinct from a finally refused or canceled claim." Id. at 3 (citing 37 C.F.R. § 42.73(d)(3)(i)).[1]

In the underlying proceeding, an IPR Petition was filed challenging nine claims. Id. at 2.  Patent Owner disclaimed all nine claims as permitted under 37 C.F.R. § 42.107(e), and also filed a Preliminary Response arguing there should be no institution because 37 C.F.R. § 42.107(e) states "[n]o inter partes review will be instituted based on disclaimed claims." Id. (emphasis in original).  As the majority opinion states "[a]t that point, [Patent Owner] confronted 37 C.F.R. § 42.73(b), which provides:

A party may request judgment against itself at any time during a proceeding. Actions construed to be a request for adverse judgment include:

(1) Disclaimer of the involved application or patent;

(2) Cancellation or disclaimer of a claim such that the party has no remaining claim in the trial;

(3) Concession of unpatentability or derivation of the contested subject matter; and

(4) Abandonment of the contest."

Id. at 2-3 (emphasis in original). In order to distinguish § 42.73(b), Patent Owner stated in its Preliminary Response that "[b]y filing the statutory disclaimer, [Patent Owner] is not requesting an adverse judgment." Id. at 3.  Nevertheless, the Board entered an adverse judgment stating "our rules permit the Board to construe a statutory disclaimer of all challenged claims as a request for adverse judgment, even when the disclaimer occurs before the Board has entered a decision on institution." Id. (PTAB citation omitted).

There were two central issues on appeal at the Federal Circuit: (1) whether the adverse final judgment is appealable, and (2) whether the Board properly entered an adverse judgment pursuant to 37 C.F.R. § 42.73(b). Id. at 4, 6.

Whether The Adverse Final Judgment Is Appealable

Regarding the appellate jurisdiction question, the majority opinion first notes that there was no contention that the statutory appeal-bar provision of 35 U.S.C. § 314(d) applied. Id. at 4.  The opinion then notes the general rule that judicial review of final agency actions is presumed and that the "Supreme Court has recognized 'the strong presumption that Congress intends judicial review of administrative action.'" Id. (internal citations omitted).

The majority found jurisdictional authority over the appeal in 28 U.S.C. § 1295(a)(4)(A) which states "an appeal from a decision of—the Patent Trial and Appeal Board of the United States Patent and Trademark Office with respect to . . . inter partes review under title 35." Id. On this point, Petitioners argued that the more specific appeal rights found in 35 U.S.C. § 319 should govern, which only provides an appeal from a final written decision – something which did not exist. Id. at 5.  In rejecting that argument, the majority concluded that § 319 does not "cabin the appeal rights conferred by § 1295," and distinguished language in a previous decision that did not involve the availability of appeal of an adverse judgment decision. Id.  Thus, the majority concluded that "§ 319 does not on its face provide the exclusive means for appeal over IPR decisions not subject to the appeal bar, and § 1295(a)(4)(A) on its face provides a right to appeal." Id. at 6.

Whether The Board Properly Entered An Adverse Judgment Pursuant To 37 C.F.R. § 42.73(b)

As to the question of whether the Board properly entered an adverse judgment pursuant to 37 C.F.R. § 42.73(b), the majority opinion specifically notes that the issue of whether the PTO had authority to adopt the regulation is reserved for another day as the parties had not contested or briefed that issue. Id. at 6-7.  That issue is addressed by Judge O'Malley's concurring opinion, discussed below.

Substantively, Patent Owner's sole argument was that the regulation is not applicable. Id. at 7.  As a first reason, Patent Owner pointed to the fact that its Preliminary Response specifically stated they were not requesting an adverse judgment. Id.  In rejecting that position, the majority noted that Patent Owners could always avoid an adverse judgment through their own characterization of their actions, and the text of the regulation appears to rely on the Board's interpretation of Patent Owner's actions as determinative. Id.

As a second reason for inapplicability, Patent Owner identified subsection 2 of 37 C.F.R. § 42.73(b), which refers to the disclaimer of claims so that there is "no remaining claim in the trial." Id. (emphasis added).  Thus, according to Patent Owner, subsection 2 only applies if trial has been instituted. Id.  In rejecting this second argument, the majority noted the text allows a request for an adverse judgment "at any time during a 'proceeding,' 37 C.F.R. § 42.73(b), and the PTO's rules define 'proceeding' as 'a trial or preliminary proceeding,' which 'begins with the filing of a petition for instituting a trial.'" Id. at 7-8 (citing 37 C.F.R. § 42.2).  The majority also concluded that "[w]hile the rules define 'trial' as requiring 'a contested case instituted by the Board based upon a petition,' 37 C.F.R. § 42.2, the language of subsection 2 relating to remaining claims 'in the trial' can be interpreted as meaning that there is no claim remaining for trial, which occurs when, as here, all of the challenged claims have been cancelled." Id. at 8.

The majority further supported its reasoning by noting that "[t]he purpose of 37 C.F.R. § 42.73(b) is to define the circumstances in which the estoppel provision of 37 C.F.R. § 42.73(d) applies," which itself is to "'provide[] estoppel against claims that are patentably indistinct from those claims that were lost.'" Id. (internal citation omitted).  Thus, according to the majority "there seems to be 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." Id.  Additionally, the majority reasoned that each of the subsections of § 42.73(b) should be applied consistently, i.e., none of the other subsections include any form of time limitation. Id. at 8-9.

Conclusion And Concurring And Dissenting Opinions

All of the foregoing resulted in a final majority conclusion that "the Board's interpretation is consistent with the language of the regulation. We do not reach the questions of whether the regulation is authorized by the statute or whether, if so, it was properly promulgated." Id. at 9.

The second portion of that conclusion leads to Judge O'Malley's concurring opinion, which is provided separately to "point out that [Judge O'Malley has] doubts about whether the Director had the authority under 35 U.S.C. § 316 (or any other statutory provision) to issue that regulation or whether, if so, the regulation was properly promulgated." Id. at 1 (O'Malley, J., concurring).  In the concurring opinion, Judge O'Malley raises a number of issues, which necessarily must be saved for another day as the question of statutory authority and proper promulgation were not contested or briefed by the parties. Id. at 3 (O'Malley, J., concurring) ("[w]e, thus, must save these inquiries for another day—one where the relevant questions are raised and adequately analyzed by the parties.").  Lastly, Judge Newman offers a dissent that focuses chiefly on the "in the trial" language of § 42.73(b)(2) to arrive at the conclusion the regulation is not applicable since there was no "trial."

In sum, Patent Owners would be well advised to consider the ramifications of disclaiming claims prior to institution.  Further, the issues of whether the PTO had appropriate statutory authority to issue its regulation relating to adverse judgment, and whether the regulation was properly promulgated are explicitly reserved for resolution at a later date when parties actually contest such issues and the issues are fully briefed.


[1] Notably, Patent Owner had two continuation applications pending at the time of the entry of the adverse judgment which have since issued, and Patent Owner recently filed another continuation that remained in prosecution at the time of the Federal Circuit opinion.

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