In Arthrex, Inc. v. Smith & Nephew, Inc., Arthrocare Corp., No. 2019-2140 (Fed. Cir. October 31, 2019), the Federal Circuit raised Patent Owners' hopes that inter partes review (IPR) of patents could potentially be constitutionally defective, based on how Patent Trial and Appeal Board (PTAB) judges are appointed. But the court then dashed those hopes by curing the constitutional defect in the statute controlling Administrative Patent Judge (APJ) appointment. For those accused of patent infringement, breathe easy; IPRs survive and can be used to minimize the threat of patents.
Smith & Nephew, Inc. and Arthrocare Corp. petitioned the United States Patent and Trademark Office (USPTO) to conduct IPR of Arthrex, Inc.'s U.S. patent No. 9,179,907 (the '907 patent). The USPTO granted the petition, and a three member panel of APJs conducted the IPR for the PTAB. In the end, the APJs issued a final, written opinion that many claims of the '907 patent were unpatentable. Arthrex appealed to the Court of Appeals for the Federal Circuit, and argued that appointment of the APJs was unconstitutional and that their ruling should be overturned.
The Appointments Clause in Article II of the U.S. Constitution requires that "officers of the United States" be appointed only by the two step process of (1) nomination by the President followed by (2) advice and consent of the Senate. See the U.S. Const. at Art. II, Cl. 2. In contrast, the patent statute dictates that APJs are appointed by the Secretary of Commerce in consultation with the Director of the USPTO.
There are "principal" officers and "inferior" officers under Appointments Clause law. A principal officer is someone who "exercise[es] significant authority pursuant to the laws of the United States," and must be appointed by the President and confirmed by the Senate pursuant to the Appointments Clause. In contrast, an "inferior officer" is someone who's work is directly supervised by others who have been appointed pursuant to the Appointments Clause. There are three factors used to determine if a person is an inferior officer: "(1) whether an appointed official has the power to review and reverse the officers' decision; (2) the level of supervision and oversight an appointed official has over the officers; and (3) the appointed official's power to remove the officers."
The Federal Circuit noted the following. The Secretary of Commerce and the Director of the USPTO are appointed by the President, and confirmed by the Senate, but APJs are not. Despite the Secretary and Director's position, neither have the power to review, nullify, or reverse the final written decision of a panel of APJs under the patent statute. Also, "APJs have substantial power to issue final decisions on behalf of the United States without any review by a presidentially-appointed officer. Further, an APJ decision is final for the Executive Branch, and an APJ can only be removed from office "for such cause as will promote the efficiency of service." This means that an APJ cannot be fired at will, and is insulated from the power of the Executive. In sum, the Federal Circuit held that an APJ is a principal officer of the United States. For this reason, the patent statute was unconstitutional because it delegated appointment of an APJ to the Secretary of Commerce, rather than the President and Senate.
If the process for appointing APJs is unconstitutional, this could also impact IPRs heard by such APJs. The Federal Circuit, however, addressed this issue through "severability." In short, the Supreme Court has required that courts "refrain from invalidating more of [a] statute than is necessary," and to sever only problematic portions of a statute. Here, the Federal Circuit found reasons to believe that Congress would have preferred to pass a constitutional statute, and the change in interpretation would be minor: APJs would be considered at-will employees. They can be fired at-will, and thereby are subject to the power of the Executive through the Director of the USPTO.
For Smith & Nephew, Inc., Arthrocare Corp., and Arthrex, Inc., the case is reversed and remanded to the USPTO. The Federal Circuit ordered that a new panel of APJs must be designated, and a new hearing held. The new panel can rely on the existing record, request additional briefing, or reopen the record.
While it often grabs headlines when part of a statute is found to be unconstitutional, here, the Federal Circuit was able to salvage the part of the Patent Act addressing IPRs. Some pending IPRs will need to be reheard by APJs appointed according to the Federal Circuit's decision.
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