The Federal Circuit Finds the Appointment of APJs Unconstitutional While Simultaneously Implementing a (Narrow) Remedy

On October 31, 2019, in Arthrex, Inc. v. Smith & Nephew, Inc., the Federal Circuit held that administrative patent judges (“APJs”) are principal officers of the United States Patent and Trademark Office; thus, their appointment by the Secretary of Commerce violates the Appointments Clause of the U.S. Constitution. Slip Op. at 2. Simultaneously, the Federal Circuit—as it was required to by Supreme Court precedent—applied a narrow remedy to this solution by severing the statutory removal provisions of 35 U.S.C. § 3(c) as it applies to APJs. In other words, the portion of 5 U.S.C. § 7513(a) that “permits agency action against those officer and employees ‘only for such cause as will promote the efficient of the service,’” no longer applies to APJs. Slip Op. at 25.

A.           What this Decision Does and Does Not Do

Because this decision has garnered a great deal of attention, and because the words “administrative patent judges” and “unconstitutional” in close proximity can lead one to jump to conclusions that are not warranted by this opinion it is worth summarizing what the effects of this decision are before discussing the underlying analysis.

This decision applies not just to post-grant challenges (i.e., inter partes reviews, CBMs, post-grant reviews, ex parte reexaminations). Instead it applies to all decisions by the Patent Trial and Appeal Board, including decisions during the course of examination. That said; however, the Federal Circuit was careful to emphasize that this decision is not meant to have (much) retroactive effect and that parties to hearings/actions before APJs can waive their challenge to the unconstitutionality of the appointment of APJs on appeal. In other words:

We have decided only that this case, where the final decision was rendered by a panel of APJs who were not constitutionally appointed and where the parties presented an Appointments Clause challenge on appeal, must be vacated and remanded. Appointments Clause challenges are “nonjurisdictional structural constitutional objections” that can be waived when not presented. [Freytag v. Commissioner of Internal Revenue, 501 U.S. 868, 878–79 (1991)] Thus, we see the impact of this case as limited to those cases where final written decisions were issued and where litigants present an Appointments Clause challenge on appeal.

Slip Op. at 29.

Additionally, the court held that on remand, “a new panel of APJs must be designated and a new hearing granted.” Id.

It is important to note that by implementing an immediate remedy to the unconstitutionality of the appointment of APJs, the Federal Circuit created a very narrow window for challenging IPR decisions, or other decisions by the PTAB. This remedy, seeking a remand and a hearing before a different panel of APJs, is available only to those parties who:

• Have received a final, appealable decision from the PTAB; and
• Have not waived their challenge to the unconstitutionality of the appointment of APJs.

This decision does not apply, at least as far as the Federal Circuit is concerned, to parties whose post-grant challenges are pending before the PTAB. Indeed, the Federal Circuit expressly held: “on remand the decision to institute is not suspect; we see no constitutional infirmity in the institution decision as the statute clearly bestows such authority on the Director pursuant to 35 U.S.C. § 314.” Slip Op. at 30.

Additionally, in a decision issued the day after the Arthrex decision the court held in Customedia Techs., LLC v. Dish Network Corp. that if this challenge is not included in the opening appellate brief the challenge is waived.

It is a little more open to debate whether parties whose challenges (whether post-grant or during the course of regular reexamination) have already had an oral hearing are entitled to seek a re-hearing. The Federal Circuit’s rationale for requiring a new panel of APJs rehear the IPR on remand suggests that it is only after the PTAB has issued a final decision that the parties should be—if they choose to appeal the final decision—entitled to remand and a new hearing. Slip Op. at 29-30 (“The Supreme Court has explained that when a judge has heard the case and issued a decision on the merits, ‘[h]e cannot be expected to consider the matter as though he had not adjudicated it before. To cure the constitutional error, another ALJ … must hold the new hearing.’”) (citing Lucia v. S.E.C., 138 S. Ct. 2044, 2055 (2018)) (emphasis added). The Federal Circuit did not; however, expressly make such a finding and it will certainly be the case that many parties to hearing before the PTAB will likely choose to raise this issue on appeal.

Finally, the court left it to the Board’s discretion to decide whether the new panel of APJs would rehear the IPR on the written record already developed or “whether it should allow additional briefing or reopen the record in any individual case.” Slip Op. at 30.

B.           The Rationale Underlying the Decision

The decision itself breaks down into three main parts. First, the Federal Circuit considered whether Arthrex had waived this challenge by failing to raise it during the IPR. The Federal Circuit decided that it had not because: (a) “this case … is one of those exceptional cases that warrants consideration despite Arthrex’s failure to raise its Appointments Clause challenge before the Board;” and (b) Arthrex’s “Appointments Clause challenge was properly and timely raised before the first body capable of providing it with the relief sought—a determination that the Board judges are not constitutionally appointed.” Slip Op. at 5, 28.

Second, the court addressed the question of whether APJs are “principal officers,” who have to be appointed by the President with the advice and consent of the Senate. Slip Op. at 6. To make this determination the court first decided that APJs are “Officers of the United States.” Id. at 7-8. Indeed, neither the appellee nor the government, which intervened in this appeal, disputed that APJs are officers as opposed to employees. Id. at 7. Thus, the question turned on whether APJs are “principal officers.” The court focused on the following three factors in making that decision:

• Whether an appointed official has the power to review and reverse the officers’ decision. Here, the court found that the Director of the PTO (the appointed officer in question) did not have sufficient power to review and reverse the APJs decisions and thus this factor weighed in favor of APJs being “principal officers.” Slip Op. at 9-13.
• The level of supervision and oversight an appointed official has over the officers. The Director has sufficient supervision and oversight over APJs for this to weigh against APJs being “principal officers.” Id. at 13-14.
• The appointed official’s power to remove the officers. Because 5 U.S.C. § 7513(a) that “permits agency action against those officer and employees ‘only for such cause as will promote the efficient of the service’” applies to APJs, this factor weighed in favor of APJs being “principal officers.” Id. at 14-19.

The court also considered other limitations (e.g., the fact that prior to the 1975 amendments to Title 35, “‘Examiners-in-Chief’—the former title of the current APJs—were subject to nomination by the President and confirmation by the Senate”) and found that APJs were indeed “principal officers.”

Having reached that decision, the court was left with the task of fashioning the narrowest remedy possible. The court thus rejected the government’s argument that “only for such cause as will promote the efficiency of the service” as permitting at-will, without-cause removal. Slip Op. at 21. The court also rejected the suggestion that the Director be allowed to appoint a single Board member to hear or rehear any inter partes review, as being contrary to Congress’s desire that post-grant challenges be decided expeditiously. Id. at 22-23. Having rejected these other options, the court adopted the government’s recommendation of partial invalidation of Title 5 by removing APJs from the protection of § 7513(a) because all parties and the government agreed that was the “an appropriate cure for an Appointments Clause infirmity.” Id. at 24.

C.           Conclusion

This decision has already generated a lot of press and people are already asking the Federal Circuit to broaden the scope of the decision. It is far too early to predict what will happen next, but it is important to keep in mind that as it currently stands this is a very narrow decision that is going to effect a handful of parties to hearings before the PTAB: those that have received a final, written decision from the PTAB (prior to November 1, 2019) and have not waived their right to challenge the unconstitutionality of the appointment of APJs in their appeal. Of course, it is certain that we have not heard the last word on this, so stayed tuned of further developments.