The Federal Circuit has rejected a constitutional challenge of the USPTO's practice of excluding Patent Trial and Appeal Board (PTAB) institution decisions from its director review process. That interim procedure was created as the result of the US Supreme Court's June 2021 Arthrex decision, which held that the appointment of the PTAB's Administrative Patent Judges (APJs) had been unconstitutional because the director previously lacked the power to review their final validity rulings. In an August 16 precedential decision, the Federal Circuit determined in Palo Alto Networks v. Centripetal Networks that since statutes already give the director the power to control institution, there is no Arthrex-type oversight issue in this context.

The Arthrex Decision, and the USPTO's Creation and Refinement of the Director Review Program

The constitutional provision implicated in Arthrex was the Appointments Clause, which requires that certain "noninferior", or principal, officers be nominated by the president and confirmed by the Senate. This requirement is designed to ensure political accountability by making it clear who is to "blame" for the actions of the appointee. At issue in Arthrex was whether the PTAB's APJs—who are appointed by the Secretary of Commerce and do not undergo Senate confirmation—were acting in violation of the Appointments Clause by issuing final validity decisions under 35 USC Section 6(c), which establishes that panels made up of three APJs shall hear IPRs.

In making that determination, the Supreme Court applied its 1997 decision in Edmond v. United States, which found that officials properly act as inferior officers when they are supervised by principal officers who had both "administrative oversight" over policies and procedures governing their work and de novo review authority over final decisions issued by the officials on behalf of the United States. It was the latter category under which the Supreme Court held that the PTAB APJs were exceeding the proper bounds of their authority: since the USPTO director had no adequate mechanism to directly review final decisions, Section 6(c) essentially granted APJs the sole authority to "issue a final decision binding the Executive Branch". The Court's targeted solution was to give the director that review authority, holding Section 6(c) unconstitutional to the extend it required otherwise.

The Patent Office—then led by Director Andrei Iancu—implemented Arthrex shortly after the decision's issuance through the creation of an interim director review program for both inter partes review (IPR) and post-grant review (PGR) decisions (as well as those issued through the covered business method review program, which ended in 2020 and saw its last final decisions in March 2022). The director's review can address any issue; is conducted de novo (i.e., with no deference to the panel's ruling); and can even be initiated sua sponte (without a request from either party), either in the first instance or after a panel grants or denies rehearing.

While parties may request director review for any issue of fact or law in a final decision, the USPTO provided a list of issues that "may warrant review" in a July 2021 guidance: as later updated in April 2022 under current Director Kathi Vidal, this list explains that director review may be sought due to intervening changes in law, USPTO procedures, or guidance; "material errors of fact or law" in PTAB decisions; "novel issues of law or policy"; "issues on which PTAB panel decisions are split"; "issues of particular importance to the Office or patent community"; or "inconsistencies with USPTO procedures, guidance, or decisions".

In December 2021, the USPTO updated its director review guidance to clarify that it would not accept requests for director review of institution decisions. On May 25, the agency further qualified that requirement, explaining that while parties may only request director review for final written decisions, not institution decisions, the director "has always retained and continues to retain the authority to review such decisions sua sponte"—doing so for the first time in a pair of IPRs, filed by OpenSky Industries and Patent Quality Assurance (PQA) against VLSI Technology LLC, that have sparked allegations of PTAB gamesmanship, as discussed in RPX's Q2 report. On June 22, the USPTO also updated its director review page to indicate that parties should highlight issues of first impression when seeking such review.

The Federal Circuit's Decision in Palo Alto Networks v. Centripetal Networks

The present case arose from a set of PTAB petitions that were denied institution after the USPTO first clarified that director review was not available for such rulings. In March 2022, after the PTAB denied petitions for IPR and PGR filed by Palo Alto Networks against Centripetal Networks, Palo Alto filed a request for director review that the USPTO subsequently declined to accept, citing the aforementioned practice of only permitting parties to seek director review of final written decisions. Palo Alto then filed a mandamus petition with the Federal Circuit in April, challenging the director's "categorical refusal" to accept requests for director review of institution decisions (2022-0145).

Ruling on August 16, the Federal Circuit began by holding that the petition met the court's heightened "extraordinary circumstances" standard for mandamus review of institution decisions as established in Mylan v. Janssen, since the statutes governing IPR and PGR institution bar direct appeals of such decisions—meaning that Palo Alto would otherwise lack an adequate remedy. The court also rejected Centripetal's argument that Palo Alto had forfeited its Appointments Clause challenge by not raising it until after the PTAB's final written decision, based on Supreme Court precedent allowing appellate courts to "forgive waiver or forfeiture of claims that implicate structural constitutional concerns".

However, turning to the merits of the petition, the Federal Circuit disagreed with the petitioner that the denial of director review for institution decisions also violates the Appointments Clause. Rather, the court found that the "case fundamentally differs from Arthrex", even under the assumption that institution decisions constituted "final decision[s] on how to exercise executive power", because there is no "structural impediment" barring the USPTO director from reviewing institution decisions. "Indeed, institution decisions are, by statute, the Director's to make and are only made by the Board as a matter of delegated authority", the court held—adding that the director can "plainly" reverse that delegation or "exercise her review authority in individual cases". Since the institution statute "unambiguous[ly] identifi[es]" the director as the "politically accountable executive officer responsible for institution decisions" and thus preserves the line of accountability up to the President, the court found that there was no Appointments Clause issue.

The Federal Circuit further held that this conclusion is consistent with the Arthrex decision—in particular, with respect to language in which the Supreme Court indicated that there would be no Appointments Clause issue if the director were to have the power to "take control of a PTAB proceeding". "[A]lthough not directly addressing the issue before us, this language strongly suggests that delegation to the Board of the authority to decide on institution without a mechanism for parties to subsequently request Director review does not present Appointments Clause problems". The court drew further support from other appellate rulings finding no Appointments Clause violations in similar instances of delegated authority, including the Supreme Court's 1994 In re: Alappat decision and holdings from various circuit courts both before and after Arthrex.

Judge Reyna's Concurrence: Mandamus Should Have Been Denied Under a Different Rationale

Circuit Judge Jimmie Reyna concurred, agreeing with the court's denial of mandamus review but not its reasoning. While Judge Reyna argued that a "categorical denial" of director review for institution decisions would raise constitutional concerns—or, as he put it, if the window were really "nailed shut"—he found that the issue turned on Director Vidal's statement that such review requests were not being accepted "[a]t this time". This merely amounted to an exercise of the director's "discretion not to invoke her review authority. The window is not nailed shut; it is closed for the moment".

Also significant, in Judge Reyna's view, was that Director Vidal has already invoked that authority by granting sua sponte review of the institution decisions in the OpenSky and PQA IPRs: "In my view, the Director's exercise of discretion to grant review in those two actions pulls the rug out from under [Palo Alto's] petition. The agency window is open after all".

For these reasons, Judge Reyna argued that the petition fell short of the standard required for mandamus review: there is an "adequate means to attain the desired relief" because the USPTO "has a process for the Director to exercise her discretion to accept (and thereby consider) requests for review"; there has not been a showing of an "clear and indisputable right to a writ" that would compel the director to do something she has already done; and because the remedy sought "already exists, the issuance of a writ would not be appropriate under the circumstances".

USPTO Seeks to Formalize Director Review Through Rulemaking

In April 2022, soon after her confirmation as USPTO director, Kathi Vidal announced that the USPTO would be seeking to formalize the director review program after stakeholder input through an official Request for Comment filed in the Federal Register. The agency began to do so on July 19 by filing that Request for Comment seeking feedback on director review and two other governing bodies within the PTAB: the Precedential Opinion Panel (POP), which decides issues of "exceptional importance" to the Board; and and the Circulation Judge Pool (CJP), a new procedure designed to insulate the PTAB's Administrative Patent Judges (APJs) from perceived political pressure.

For more on that Request for Comment and the impacted PTAB programs, see "USPTO Seeks Public Feedback on Changes to PTAB Director Review and Other Interim Programs" (July 2022).

Original publication August 19, 2022

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.