IMPLEMENTATION OF ARTHREX: IMPLICATIONS FROM ADMINISTRATIVE LAW

(transcript from the July 6, 2021 Webinar)

In United States v. Arthrex, No. 19-1434 (Jun. 21, 2021), Chief Justice Roberts cured an Appointments Clause defect in the PTAB’s organic statute by severing a clause in 35 U.S.C. § 6(c) preventing the Director from reviewing the PTAB’s final decisions. Henceforth, rehearings are no longer the exclusive domain of the PTAB, and the PTO must provide at least one path of review that flows through a superior executive officer. This new path of review was apparently proposed by the PTO itself, in a paragraph at pages 40-41 of the Government’s reply brief. Because it was proposed in the last brief of the case, neither the parties nor the amici commented on it.

In the first week after Arthrex issued, commentary in the press urged that implementation will be “no big deal,” in part because the PTO will be able to summarily dismiss most requests for rehearing. But that view directly conflicts with the Administrative Procedure Act (“APA”). Implementing Arthrex within the law will require substantial resources and significant new machinery within the PTO, and some of that new implementation may be impossible until a confirmed Director is in place, because of limits on the authority of acting officials under the Vacancies Act.

PTO’s Interim Guidance

On June 29, 2021, the PTO released an interim procedure that the Patent Trial and Appeal Board established for Director review to implement the Supreme Court’s opinion in Arthrex. Under the interim procedure, the “Director” may now sua sponte review a final written decision, or, alternatively, a party involved in an inter partes review (IPR) or post grant review (PGR) may request Director review of a final written decision. The interim procedure is not said to apply to Director reviews of decisions whether to institute or deny institution. Mechanically, the process for requesting Director rehearing tracks the existing procedure for requesting rehearing by the Precedential Opinion Panel (POP). The dissatisfied party (1) files a Request for Rehearing by the Director in E2E, and (2) emails the rehearing request to the Office at Director_PTABDecision_Review@uspto.gov, copying opposing counsel. At this time, no additional fee is required to request Director rehearing.

The Q&As released with the interim procedure elaborate on the PTO’s stance regarding the interplay between panel rehearings and Director review under the interim procedure:

• A party can request Director rehearing, or in the alternative, panel rehearing.
• A party that requests only Director rehearing may not later request panel rehearing.
• If a panel grants rehearing, parties will be permitted to request Director review of the panel’s rehearing decision.
• A request for Director rehearing or panel rehearing must be filed within 30 days of the entry of a final written decision. Nevertheless, parties whose deadline for requesting rehearing had expired at the time the Arthrex decision issued may request a waiver of the deadline, so long as they request the waiver before the due date for filing a notice of appeal.

The existing POP process presently remains unchanged.

The Office plans to seek feedback from the public on the Director review process, including after the Office provides additional information and updates in the near term.

Although the interim procedures provide a first step for parties unsure of how to proceed after Arthrex, open questions remain. First, the interim guidance does not explicitly address remanded cases, either the cases currently held in abeyance for Arthrex or cases remanded for unrelated reasons. Furthermore, although the interim procedure refers to the “Director”—and Drew Hirschfeld confirmed in a Boardside Chat that he will be executing the interim guidance—  the Office’s own position is that Mr. Hirshfeld is not the Director (or even the “Acting Director,” using the language from Arthrex), but rather a person “performing the functions and duties of the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office (USPTO).” Mr. Hirshfeld’s permanent role is Commissioner for Patents. He was not appointed by the President or confirmed by the Senate, and he is insulated from removal by the President, so constitutional issues may impact the interim procedure until a new Director is appointed and confirmed. (For example, in Collins v. Yellen, decided just two days after Arthrex, the Supreme Court held that decisions by an Acting Director and a Director of another agency are constitutionally different.) In addition, it is unclear whether a “final determination” is indeed “final” for purposes of complying with the statutory one-year timeframe for completing review until the constitutionally required Director rehearing consideration is complete. The Office’s position, confirmed during the Boardside Chat, tries to sidestep this problem by effectively rewriting the statutory language “final determination” as “final written decision.”

Crucially, the interim guidance does not elaborate on the internal review procedures undertaken within the PTO after Director rehearing is requested; it addresses only the process for making the request. The remainder of this article provides implications from administrative law on Director rehearing and what, if anything, can be done to provide a constitutionally compliant path forward.

Can the PTO establish a procedure for summary dismissal, analogous to FRAP Rule 36?

No. The PTO can implement “reasonable” limits on the scope of issues it will accept for Director rehearing but cannot close the Director’s door. An AIA proceeding is a “formal adjudication” under the APA, 5 U.S.C. §§ 554, 556, and 557 (as opposed to informal adjudication under § 555). Dell Inc. v. Acceleron, LLC, 818 F.3d 1293, 1301 (Fed. Cir. 2016). The APA, 5 U.S.C. § 557(c), specifies that, on intra-agency appeal from a formal adjudication, “parties are entitled to a reasonable opportunity to submit for … consideration … exceptions to the decisions … of subordinate employees,” and the “record shall show the ruling on each … exception presented.”.” The APA disallows anything analogous to FRAP 36, setting an unduly narrow standard for granting rehearing or summarily dismissing petitions.

At a minimum, Director rehearing decisions must satisfy standards for not being “arbitrary and capricious.” 5. U.S.C. § 706(2)(A). The lead case is Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983):

[T]he agency must examine the relevant data and articulate a satisfactory explanation for its action including a “rational connection between the facts found and the choice made.” In reviewing that explanation, we must “consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.” Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

Even discretionary action must be explained sufficiently to avoid being “arbitrary and capricious.” AFL-CIO v. NLRB, 471 F.Supp.3d 228, 238 (D.D.C. 2020). Agency failures to explain, or evasion of a key issue, are probably the single most paradigmatic pattern for “arbitrary and capricious.” Silent failure to explain is evaluated and vacated on an essentially per se basis. State Farm, 463 U.S at 50.

Because a Director rehearing arises in the context of a “formal adjudication,” APA § 554(b) and (c), § 556(d) and (e), and § 557(b) and (c) add further requirements, including a requirement to “show the ruling on each finding, conclusion, or exception presented.” Even in affirming the PTAB, the Director must give some explanation, with narrow exceptions explained in Roelofs v. Sec’y of the Air Force, 628 F.2d 594, 601 (D.C. Cir. 1980).

In Arthrex, Chief Justice Roberts writes: “To be clear, the Director need not review every decision of the PTAB. What matters is that the Director have the discretion to review decisions rendered by APJs.” Arthrex, Slip Op. at 23. The language “need not review every decision” contrasts to agencies like the ITC, where full Commission review is mandatory for every decision. The Director’s “discretion” can only be exercised within non-arbitrary, non-capricious procedures, uniformly applied, and within the obligation to provide “reasonable opportunity to submit… exceptions.” 5 U.S.C. § 557(c). Just as the Director’s “discretion” wouldn’t allow dismissal of an individual petition to make his scheduled golf game, “discretion” won’t permit a regulation that is designed to dismiss a whole class, just to avoid hard work that is required by statute—an agency can be arbitrary and capricious with respect to a class just as for an individual. Cf. .Union Pacific R.R. Co. v. Brotherhood of Locomotive Engineers and Trainmen General Committee of Adjustment, Central Region, 558 U.S. 67, 71 (2009).

Chief Justice Roberts concluded “the appropriate remedy is a remand to the Acting Director for him to decide whether to rehear the petition.” Arthrex, slip op. at 20. Of course, the Chief Justice meant an implicit proviso “subject to all other requirements of law,” not unfettered discretion to just say “no.” A summary denial without explanation is a recipe for immediate vacatur by the Federal Circuit.

The Director cannot delegate the decision to grant rehearing to the PTAB itself

The PTO’s June 29 web pages do not indicate a person, office, or group to whom Director reviews will be delegated. The Supreme Court quoted Jeremy Bentham, to explain why decision-makers must be known and named if that decision-maker is to provide due process.  See In re Oliver, 333 U.S. 257, 266-271 (1948). It would be impossible to enforce the APA’s protections against conflicts of interest, partiality, ex parte communications, etc. if the identity of decision-makers remains unknown.

The rehearing cannot be delegated by the Director to the PTAB itself: “Such review simply repeats the arrangement challenged as unconstitutional in this suit.” Arthrex, slip op. at 10. If the Director does not conduct the review personally, reconsiderations must be delegated to members of the Director’s staff that do not report up through the Chief APJ.

The PTO’s web sites do not disclose who will make the decision. The lack of consideration of administrative law and planning in the rest of the PTO’s web pages suggests that the PTO may take insufficient care in this delegation, as well.

What time limits apply?

35 U.S.C. § 316(a)(11) requires that the “final determination” (not final written decision) be issued within one year from the date of institution, extendable on good cause for 6 months.

During the Q&A portion of the PTAB’s July 1 Boardside Chat, Chief APJ Boalick stated that the Director’s rehearing of the final written decision would not implicate the time periods in § 316(a)(11) because the issuance of a FWD stops the clock. He did not explain how equating “decision” with “determination” squares with the plain language of the statute.

What legal mechanisms and procedures are required?

Implementation of a new hearing procedure must be by means of “regulation.” 35 U.S.C. § 316(a)(4). Aqua Prods., Inc. v. Matal, 872 F.3d 1290, 1329-31 (Fed. Cir. 2017) (Moore, J., concurring) (explaining the meaning of “regulation” in § 316(a)). The Supreme Court’s interpretation of Section 6(c) in Arthrex requires authority for the Director to “review decisions rendered by APJs.” Arthrex, Slip Op. at 23, which in turn invokes the obligation to “prescribe regulations … governing inter partes review under this chapter,” § 316(a)(4). In enacting the AIA, Congress left no discretion for the Director to govern AIA trial proceedings by anything other than regulations. There’s no other rulemaking path.

The PTO’s June 29 web pages are troubling, precisely because they are web pages. Statute required that this notice be run in the Federal Register, not an evanescent web page. 5 U.S.C. § 552(a)(1)(B) and (C).

Moreover, Arthrex requires both new regulations, and rescission and amendment of old ones. For example, 37 C.F.R. §§ 42.108 and 42.208 on institution provide that “the Board will authorize the review to proceed,” or “the Board may deny all grounds for unpatentability,” or that “review shall not be instituted unless the Board decides that the information presented in the petition demonstrates” certain likelihoods of success. The exclusive power of the Board to “authorize,” “deny,” or “decide” as written in current regulations may no longer hold, as such institution decisions may be subject to the Director’s review and approval. Similarly, 37 C.F.R. § 42.71(c) providing that “[a] decision by the Board on whether to institute a trial is final and nonappealable” is no longer valid, as that prerogative is now reserved to the Director. Similarly, current 37 C.F.R. § 42.72 provides that the Board has exclusive authority to “terminate a trial without rendering a final written decision,” a provision that is no longer valid, as such decision is subject to the Director’s review and ultimate decision.

Before June 29, commenters proposed that the PTO implement Arthrex via the Precedential Opinion Panel (”POP”). The law is otherwise. First, no guidance (or POP panel) can lawfully override or rescind regulations, for example, those mentioned above (the PTO’s implementation of SAS Institute via an amendment to the Trial Practice Guide was a plain violation of statute). Second, only a year ago, the Federal Circuit pointed out the obvious: the POP has neither grant of rulemaking authority nor procedural foundation in the Patent Act or the APA, and has no carve-out from the many statutes that govern rulemaking, each being a separate ground that PTAB decisions are ineligible for Chevron deference. Facebook, Inc. v Windy City Innovations, LLC, 973 F.3d 1321, 1350-51 (Fed. Cir. 2020), reaffirming 953 F.3d 1313, 1342-43; Aqua Prods. 872 F.3d at 1339 (Reyna, J. concurring) (“The Patent Office cannot effect an end-run around [the APA] by conducting rulemaking through adjudication …“). If a POP decision is not a “regulation,” and is not eligible for Chevron deference, there’s only a tiny remaining class of POP decisions that could possibly be eligible to claim “force of law” (interpretations of ambiguity in regulation, which might be eligible for Auer deference). Except for that small class, POP precedential decisions are just another form of routine guidance, with no more legal authority than the MPEP. That’s been the law for some years. Strikingly, in the week after Windy City, the PTAB reacted with three new precedential decisions, and a dozen in the year since. The APA offers a perfectly good, well-paved road that works just fine for other agencies: the Director can issue an interim rule in the Federal Register, 5 U.S.C. § 553(d)(3), and then follow up with notice-and-comment rulemaking. Other agencies do so many hundreds of times a year. The PTAB has not explained how continued reliance on “precedential opinion panel” comports with the rule of law, or any basis for it to opt out of the APA rulemaking procedure that governs all other agencies.

The POP and similar shortcuts are not substitutes for statutorily-required § 553 rulemaking, that the PTO is obligated to promulgate under. 35 U.S.C. § 316(a)(4).

When can new Arthrex regulations go into effect?

Under the Vacancies Act, the first assistant is authorized to perform the functions and duties of the Director, including oversight of the rulemaking process, 5 U.S.C. § 3345, but new regulations created on his watch cannot be enforced until the vacancy is filled. 5 U.S.C. §§ 3348(a)(2)(B)(ii) and (d). The Vacancies Act specifies that the “functions and duties” that lodge in an acting official are only statutes and those regulations that preexisted the vacancy, not new regulations, and not guidance. So, the PTO may be completely hamstrung in any effort to implement Arthrex until a new Director is appointed and confirmed.

If the new regulations cannot go into effect until a new Director is confirmed, and a final determination must be issued not later than 18 months after institution, the PTAB is in a bind. If the PTAB proceeds in violation of law, the judgments are subject to attack. If the PTAB holds all trials in abeyance until all constitutionally- and statutorily-required procedures and personnel in place, would the indefinite delay comport with due process or constructive takings without just compensation in cases where patent claims were cancelled? 5 U.S.C. §§ 553(d) and 557(b)(2) offer partial solutions, but only partial.

Practical implementation

The above considerations are mandatory legal obligations. The rest of this article suggests implementations of the Arthrex remedy that are most likely to be held lawful in the inevitable legal challenges that will be raised by parties. There is a both a short term and a long term implementation challenge.

The short term problem arising under the Vacancies Act may have no solution. It may be the case that the only solution that can reasonably accommodate Arthrex under the current regulations is to put PTAB proceedings on hold until a Director can be sworn in, and/or denying institutions. The PTO, of course, has this authority under existing statute: Congress vested with the PTO Director plenary discretion to deny institution, even when the threshold for institution is met, and that decision is “final and nonappealable.” 35 U.S.C. §§ 314(d) and 324(e). The PTO Director “is permitted, but never compelled, to institute an IPR proceeding.” Harmonic Inc. v. Avid Tech., Inc., 815 F.3d 1356, 1367 (Fed. Cir. 2016). For this transition period, the PTAB has the option to deny all institutions to ensure “the efficient administration of the Office, and the ability of the Office to timely complete proceedings.” 35 U.S.C. §§ 316(b) and 326(b).

Long term, the most important obligation is § 557(c), “parties are entitled to a reasonable opportunity to submit … exceptions to the decisions … of subordinate employees,” and the “record shall show the ruling on each … exception presented.”

Potential Solution A

Director review must, at minimum, enforce the standards of rationality that are required of all decisions of all agencies, for example, the issues reviewable under 5 U.S.C. § 706(2). E.g., Dennison Mfg Co. v. Panduit Corp., 475 US 809, 811 (1986) (obviousness has separate procedural and substantive aspects, and no substantive review is possible where the tribunal below fails to make the showings required by the relevant procedural rules); Hyatt v. Dudas, 551 F.3d 1307, 1313 (Fed. Cir. 2008) (vacating a judgment of the Board on procedural grounds, and remanding for further decision on substantive issues). Under this proposal, examples of reviewable issues would include at least:

• Silence by the PTAB on an issue that is either an essential prima facie element of the PTAB’s legal theory, or that was fairly raised in a party’s brief. A plausible-but-incorrect explanation would not be reviewable. Absence of explanation, or an explanation “so implausible that it could not be ascribed to a difference in view or the product of agency expertise” would be would result in vacatur and remand.
• A fact conclusion unsupported by substantial evidence, or supported by impermissible evidence (for example, relying on a dictionary of everyday English for definition of a technical term), or failure to consider portions of an evidence document that “fairly detract” from the conclusion.
• Application of an incorrect legal test (but not application of law to fact), ge.g., treating one overlapping statute as a carveout from another, rather than reconciling and applying both in pari materia, or materially misquoting a source.
• Reliance on an improper source of law—e.g., relying on guidance as if it were binding law adverse a party, or relying on guidance when the issue is covered by a statute, regulation, or an authoritative court interpretation thereof.
• Decision on an issue not presented in the briefs, or redefining an issue into something different, and thereby avoiding decision on a properly-presented issue.
• Violation by a PTAB panel of any of the APA’s guarantees of procedural regularity, see, g., 5 U.S.C. §§ 554, 556, and 557.
• Violations falling within any of the classes of “arbitrary and capricious” enumerated in State Farm (see the excerpt at the top of this article)
• Any issue arising under regulation or subregulatory guidance (that is, law created by the Director rather than Congress or the courts) rather than statute, or creation of a “one off” exception to law that by its terms legally binds against the PTO.

Note that almost all are resolvable on a black-and-white basis, and can be resolved by looking at the papers—only one (implausibility of an explanation) involves evaluating evidence, technical judgment, or application of patent law. All are simply “good housekeeping” that the law expects of every agency decision. Best of all, for these kinds of purely procedural issues, good personnel are likely readily available on short notice. There are many administrative law lawyers outside the PTO who can review for these familiar bedrock principles of the APA

The Director has a long history of reviewing ex parte decisions of the PTAB and TTAB for similar procedural deviations from the State Farm standard for “reasoned decisionmaking” and to correct procedural deviations that underlie substantive decisions. In re Oku, 25 USPQ2d 1155 (Comm’r Pat. & TM 1992); Goutzoulis v Athale, 15 USPQ2d 1461 (Comm’r of Pat. and TM 1990) (by petition, overruling an interlocutory decision of the BPAI and remanding for a do-over); Miss Nude Florida, Inc. v. Drost, 198 USPQ 485, 486 (Comm’r of Pat. and TM 1977) (Commissioner [now Director] has authority to oversee the TTAB by interlocutory petition when the issue relates to rules or practice set by the Commissioner and is not part of the central issue, but has discretion to decline in all but extraordinary situations, so long as the issue is reviewable in court); Outdoor Sports Industries Inc. v. Joseph & Feiss Co., 177 USPQ 533, 534 (Ass’t Comm’r for TM 1973) (same). So this is a formalization and proper staffing of an existing path of review to the Director. The antecedents have been in existence for decades; § 316(a)(4) and § 552(a)(1)(B) require the PTO to formally document the procedure by regulation.

Potential Solution B

A more robust solution would be analogous to the ITC, in which an ALJ issues an Initial Determination, and a party may request review by the full ITC. 19 CFR § 210.43 sets forth scope of review that can be petitioned, standard of review, and the like. The Commission issues an order requesting briefing on specific issues, much like a Supreme Court grant of certiorari.

Potential Solution C

Another proven model is the district court review of a magistrate’s report and recommendation, under Fed.R.Civ.P. 59(a) and (b). Depending on the nature of the issue, the standard of review may be either de novo or “contrary to law or clearly erroneous.”

Potential Solution D

An additional solution would be for an experienced examiner to prepare a brief opinion of the PTAB decision for the Director to consider. This would provide – for these most valuable and important patent rights – additional checks and balances, along with improved coordination and consistency within the Office. PTAB decisions might be routed to the primary or supervisory examiner who allowed the claims at issue, to the Technology Center Director for the art unit, or the Technical Quality Assurance Specialists. These individuals are experts in the subject matter and what would have been known or obvious to a person of ordinary skill in the art. With this opinion in hand, the Director would then enter a final determination or (subject to future regulations) reopen the proceeding.

Conclusion

Arthrex implicates a number of principles of administrative law that the PTO must integrate into any implementation of the Arthrex remedy.