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Arthrex, the Appointments Clause, the Patent Trial and Appeal Board, and what it means for startups
The Federal Circuit’s recent decision in Arthrex, Inc. v. Smith & Nephew, Inc. changes the framework for appointing and removing certain patent office officials—the Administrative Patent Judges (APJs). APJs serve on the Patent Trial and Appeal Board which, among other functions, can take a “second look” at weak or overbroad patents that previously issued, and invalidate claims that should not have issued in the first place. Instead of challenging a low-quality patent in federal court, which takes multiple years and millions of dollars, the Patent Trial and Appeal Board can consider a limited scope of validity challenges in less than 18 months and for a fraction of the cost. Therefore, it is a more accessible place for startups to go to challenge weak patents they are accused of infringing, and has the ancillary benefit of increasing overall patent quality and making the abusive patent litigation business less profitable.
In Arthrex, the court held that previous appointment and removal structures governing APJs violated the Constitution. The court went on to resolve the constitutional problem itself, by ruling that—from now on—APJs can be removed from their position without cause, divesting them of protections afforded to government employees generally, and making them more subject to oversight and supervision by formally appointed political officials.
The implications of the Arthrex decision will continue to unfold, but the patent office’s new authority to remove APJs at-will could mean that their patent validity decisions are more subject to political influence. And APJs can now be removed at-will, which may make the position less attractive, leading to bandwidth and tenure issues that could make the overall Patent Trial and Appeal Board less effective. However, the Arthrex decision is probably not the last word on the topic: the patent office has already signaled it might ask the court to reconsider the decision and the parties may seek Supreme Court review.
A brief primer on the Appointments Clause and the USPTO.
To understand the Arthrex decision, you need to know a bit about the organization of the U.S. Patent and Trademark Office (USPTO). Briefly, APJs are the individuals who make up the Patent Trial and Appeal Board (PTAB). Unlike federal court judges who can decide all types of cases, APJs only consider certain patent application and validity disputes within the USPTO. For example, APJs can hear appeals from patent applicants whose applications were rejected by an examiner. APJs also hear inter partes review and post-grant review proceedings, in which third-parties can challenge the validity of issued patents on limited grounds. These proceedings are a mechanism for the USPTO to take a “second look” at those patents and cancel any claims that are invalid over the prior art.
APJs are appointed by the Secretary of Commerce, in consultation with the Director of the USPTO. The USPTO currently employs over 225 APJs. Each dispute raised to the Patent Trial and Appeal Board is considered by a 3-member panel of APJs. Any party who disagrees with the decision of a PTAB panel can appeal the decision to the Federal Circuit.
The Arthrex case concerns the application of the Constitution’s Appointments Clause to APJs. Under the Appointments Clause, the President is responsible for nominating certain officials, e.g., Supreme Court justices and ambassadors, and those nominations must be confirmed by the Senate. But the Appointments Clause permits a different process for lower-level government officials, specifying that Congress can create laws governing the appointment of what it calls “inferior officers.”
Arthrex v. Smith & Nephew and the appointment of APJs.
In Arthrex, the Patent Trial and Appeal Board had entered a final written decision that several claims of an Arthrex patent were unpatentable because the claims were not novel (i.e., the claims were anticipated by the prior art, and therefore invalid under 35 U.S.C. § 102). Arthrex appealed.
On appeal, the Federal Circuit only addressed issues related to the Appointments Clause. The parties agreed that APJs are officers of the United States, as opposed to employees of the government. Therefore, the question before the court was whether APJs are the type of “principal officers” who can only be appointed by the President with Senate confirmation, or if they are “inferior officers” who can be otherwise appointed.
The court analyzed three factors and concluded that APJs are principal officers. First, the court found that the Director of the USPTO cannot review and reverse APJ panel decisions, which suggests they are principal officers. Second, on the other hand, the Director exercises significant direction and supervisory power over APJs, which suggests they are inferior officers. Third, the court concluded that APJs can only be removed from service “for such cause as will promote the efficiency of the service.” Because they enjoy a for-cause removal standard, and in light of the other two factors, the court concluded that APJs are principal officers.
Once the court held that APJs are principal officers, the court had to address the fact that APJs are appointed by the Secretary of Commerce—and not appointed by the President and confirmed by the Senate—meaning that their appointment and removal process would violate the Constitution.
Instead of invalidating the statute in question, the Federal Circuit only partially invalidated the law that limits the removal of APJs. The court reasoned that, if and once the Director and Secretary can remove APJs without cause, it “provides significant constraint” on APJ decisions and therefore turns APJs into inferior officers.
Finally, turning back to the specifics of Arthrex’s case, the court held that a new panel of APJs had to re-hear the original proceeding. Because there was a constitutional flaw in the process when the APJs had originally evaluated patent validity, Arthrex was entitled to a new hearing.
What Arthrex means for startups.
The full implications of the Arthrex decision remain to be seen. The USPTO has already signaled that it might ask the Federal Circuit to re-hear the case, and one of the parties might ask the Supreme Court to weigh in. So the Appointments Clause question is not completely settled yet.
In terms of immediate impact, the Arthrex decision should not affect open, active proceedings before the Patent Trial and Appeal Board. Because APJs are now subject to removal without cause, that cures what Arthrex identified as constitutional flaws in ongoing proceedings. However, for all proceedings where the PTAB has entered a final decision and an appeal has been or can still be filed, those final decisions may be vacated and remanded for further consideration before a new panel of APJs.
As far as longer-term effects, the impact of this decision will probably depend on how USPTO Directors and Secretaries of Commerce exercise their authority to remove APJs without cause. The role of APJs, and their decisions about patent applications and patent validity, could become more politicized. And the potential loss of job security might make the job less attractive, with practical consequences for APJ bandwidth and tenure.
Overall, the Patent Trial and Appeal Board is valuable for startups, and there is unfortunately a risk the Arthrex decision could weaken the PTAB or make it less effective. The PTAB is designed to improve patent quality generally, and it offers a place where startups facing accusations of patent infringement can go to challenge weak, low-quality, invalid patents. The PTAB offers a more efficient process to challenge patent validity on limited grounds, and the cost of a PTAB proceeding is an order of magnitude less expensive than a defending a district court case. And increased patent quality and more efficient resolution of patent invalidity means that startups can focus their time and resources on innovation and growth.
Disclaimer: This post provides general information related to the law. It does not, and is not intended to, provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
