Arthrex v Smith & Nephew: Is the sky falling, or is it business as usual at the PTAB?

Briefing on petitions for rehearing has recently closed in a landmark decision issued by the U.S. Court of Appeals for the Federal Circuit last October. A three-judge panel of the Federal Circuit held that the process by which the secretary of Commerce appoints administrative patent judges, or APJs, to the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office violates the appointments clause of the U.S. Constitution. Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320, 1327 (Fed. Cir. 2019). This ruling could have far-reaching implications given that while "[i]t is unclear how many [APJ]s are employed by the PTAB ... it is safe to say several hundred." Gene Quinn, "One Way or Another, Arthrex Promises to Put the PTAB on Trial," IPWatchdog.com (Nov. 11, 2019).

The Arthrex opinion has resulted in petitions for rehearing by both parties, the USPTO and two amici, amid a flurry of commentary from the legal community analyzing every aspect of the decision. But what the Arthrex decision will ultimately mean for post-grant proceedings at the PTAB is far from clear. Suggested possible outcomes range from the effect being "limited to a small subset of cases" (see Brent Babcock, "What's Next After Arthrex? Reactions Suggest Limited Immediate Effect, But Some Question Whether CAFC Fix Will Hold," IPWatchdog (Nov. 3, 2019)) to "the nuclear option -- invalidate the [entire] statute; then let Congress fix it." See 717 Madison Place, "Oral Argument of the Day: Polaris v. Kingston" (reporting on the oral argument: "Polaris suggested that the court's correction of the statute that was implemented in Arthrex is insufficient and recommended the nuclear option -- invalidate the statute; then let Congress fix it.").

Practically speaking, while the Federal Circuit is considering cross-petitions for rehearing en banc, proceedings continue before the PTAB and the APJs, subject to the Federal Circuit's ruling in Arthrex. While the petitions for rehearing in Arthrex are pending, practitioners and patent litigants should be aware of the impact of the decision on current PTAB proceedings and be on the lookout for forthcoming guidance from the USPTO and the Federal Circuit.

The PTAB's APJs are responsible for adjudicating third-party challenges to the validity of patents previously issued by the USPTO. The 2011 America Invents Act set out the process for appointing APJs to the PTAB, and created new procedures for challenging issued patents, including the most prevalent, inter partes review, which according to the USPTO comprises more than 90% of petitions filed at the PTAB. Since enactment of the America Invents Act, some have criticized the significant power wielded by the PTAB and its high rate of invalidation, going so far as to refer to its APJs as "death squads ... killing property rights." Brian Mahoney, "Software Patent Ruling a Major Judicial Failure, Rader Says," Law360 (Oct. 25, 2013, 6:36 PM). (See also, e.g., Mark Magas, "Consequences for Patent Owners If a Patent Is Unconstitutionally Invalidated by the Patent Trial and Appeal Board," 94 CHI.-KENT L. REV. 79 (2019) ("[AIA's] new proceedings dramatically increased the rate at which claims under review are held invalid, perhaps more than Congress originally intended."). Between Sept. 16, 2012, and Jan. 31, 2020, a total of 10,266 inter partes review petitions were filed at the PTAB. A little less than half of these did not reach institution by the PTAB for a variety of reasons. Of the approximately 5,800 petitions that have been instituted by the PTAB, about 81% of final written decisions resulted in one or more claims of the challenged patents being found unpatentable.)

Under the act, APJs are appointed by the secretary of Commerce, in consultation with the director of the USPTO. 35 U.S.C. Section 6(a).

In Arthrex, a three-judge panel of APJs issued a final written decision in an inter partes review, invalidating numerous claims of Arthrex's medical device patent in view of previously known technology. The patent holder challenged the constitutionality of the decision based on violation of the appointments clause, which requires that "principal officers" of the executive branch be nominated by the president and confirmed by the Senate. In contrast, "inferior officers" may be appointed by the head of a department, such as the secretary of Commerce, as is the case for the PTAB APJs. Based on analysis of a number of factors, the Federal Circuit agreed with Arthrex that the APJs were principal officers, and therefore "must be appointed by the president and confirmed by the Senate; because they are not, the current structure of the Board violates the Appointments Clause." Id. at 1329-35.

In an effort to mitigate the potentially far-reaching effects of its opinion finding the current structure of the PTAB unconstitutional, the Arthrex court severed, and, in effect, rewrote the portion of the America Invents Act causing the problem. As a result, the court granted the director of the USPTO in conjunction with the secretary of Commerce the right to remove APJs from their post. The Arthrex court also attempted to limit the disruptive effect of its decision by limiting its reach to only the case before it, hoping to avoid challenges to all prior PTAB decisions by APJs now deemed to have been unconstitutionally appointed. Arthrex, 941 F.3d at 1340. For all other cases, the court held that appointments clause challenges in this context are "'nonjurisdictional structural constitutional objections' that can be waived when not presented," thus foreclosing any appeals on the same grounds where the time to appeal the PTAB decision has lapsed.

Not surprisingly, both parties and the USPTO have petitioned for rehearing by the full Federal Circuit, and two parties have filed "friend of the court" briefs in support of rehearing. See generally Petitions for Rehearing En Banc, Arthrex, Inc. v. Smith & Nephew, Inc. (Dec. 16, 2019) (18-2140), Dkt. Nos. 77-79. Arthrex seeks to expand the scope of the court's decision to rule on rehearing that the entire American Invents Act be deemed unconstitutional, while the USPTO and Arthrex's opponent seek to restore the status quo and maintain the scope of APJ authority. Briefing on the petitions is complete, and a decision could come at any time. And two Federal Circuit judges, Judge Timothy Dyk, joined by Judge Pauline Newman, criticized the holding in the concurrence of a later decision. Bedgear, LLC v. Fredman Bros. Furniture Co., 783 Fed. App'x. 1029, 1030-31 (Fed. Cir. 2019).

Additionally, a party in at least one case after Arthrex has suggested that the court's severance of the appointment portion of the America Invents Act was improper, and that the appropriate remedy is invalidation of the entire statute. See Appellant Polaris Innovations Ltd.'s Corrected Petition for Rehearing En Banc at 3, Polaris Innovations Ltd. v. Kingston Tech. Co., Inc. (Feb. 28, 2020) (18-1768) (arguing that remand of its case to an unconstitutionally appointed panel of APJs for rehearing after Arthrex was improper and that severance was unavailable as a constitutional remedy).

But what does the Arthrex decision mean for practitioners and their clients? While commentators cannot fully agree on whether it's just business as usual after Arthrex or whether the case is likely to have a major impact on post-grant proceedings, at a minimum, there are several important takeaways that impact current practice:

• Until the Arthrex and follow-on cases are fully resolved, patent owners and others concerned about a PTAB finding of invalidity should consider challenging the constitutionality of the APJs rendering the decision under the appointments clause, as failure to timely bring such a challenge could arguably waive the argument in currently pending proceedings and future appeals.

• Congress has indicated that legislation may be needed to address the issues raised in Arthrex, which could in time address the problems identified by the Federal Circuit. The Patent Trial and Appeal Board and the Appointments Clause: Implications of Recent Court Decisions: Hearing Before the Subcomm. on Courts, Intellectual Property, and the Internet of the H. Comm. on the Judiciary, 116th Cong. (2019) (statement of Rep. Nadler, Chairman, H. Comm. on the Judiciary).

• Regardless of the outcome of the petitions for rehearing, due to the unique constitutional law question and the unusual remedy crafted to reform the statute, some scholars suggest that the U.S. Supreme Court is likely to take an interest in the case.

Thus, while the Arthrex dust is far from settled, practitioners should be mindful of the procedural implications of this decision on their practice today, while monitoring the USPTO and the Federal Circuit for further guidance and developments. 