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United States v. Arthrex

Will the Supreme Court overrule a controversial patent law ruling from the Federal Circuit?

ArgumentMarch 1, 2021
DecisionTBA
Opinion BelowFederal Circuit
Merits BriefArthrex
Merits BriefSmith & Nephew
Merits BriefUnited States

On Monday, March 1, 2021 the Supreme Court will hear oral arguments in a case asking whether administrative patent judges (APJs) of the U.S. Patent and Trademark Office (USPTO) have been validly appointed to their role. APJs at the USPTO act as decision makers over billions of dollars of intellectual property. 

Inter Partes Review and the Role of APJs

In 2011 Congress created “inter partes review” (IPR), a procedure administered by the USPTO for reviewing (and possibly revoking) previously issued patents.  Any person can petition for IPR of an issued patent by arguing that the patented invention didn’t deserve to be patented in the first place. 

An IPR is a fully adversarial proceeding and is conducted before a panel of at least three APJs.  The IPR petitioner and the patent owner can take discovery, submit evidence and briefs, and present oral argument to the APJ panel.  There are currently about 250 APJs on staff at the USPTO.  These APJs collectively form what is currently known as the Patent Trial and Appeal Board (PTAB) at the USPTO.

At the end of an IPR proceeding, the panel issues a written decision.  The PTAB has the exclusive rights to grant a request to rehear the panel decision.  A final panel decision is appealable only to the U.S. Court of Appeals for the Federal Circuit.  The USPTO has received over 11,000 IPR petitions.  The PTAB and its APJs have invalidated patent claims in 80% of cases that reached final written decisions. 

The Parties and Litigation Background

Arthrex, Inc. is a pioneer in the field of arthroscopy and a leading developer of medical devices and procedures for orthopedic surgery.  This case involves Arthrex’s US Patent No. 9,179,907 (‘907 Patent) which covers a novel surgical device for reattaching soft tissue to bone.  The ’907 Patent discloses a device for securing tissue without knots, reducing surgery times and complications. 

In 2015 Arthrex sued Smith & Nephew, Inc., and its subsidiary Arthrocare Corp. (collectively, S&N) for allegedly infringing the ’907 Patent.  S&N responded to Arthrex’s lawsuit by petitioning for institution of an IPR of the ‘907 Patent.  The PTAB instituted the requested IPR and ultimately held every disputed claim of the ‘907 Patent invalid.  During the IPR proceeding, S&N successfully demonstrated  that the subject matter of the patent was obvious and/or not novel and therefore not patentable.

Arthrex appealed the PTAB decision to the Court of Appeals for the Federal Circuit.  On appeal, Arthrex argued for the first time that the process of appointing APJs to the PTAB violates the Appointments Clause of the Constitution.  Because APJs were not properly appointed, therefore the final IPR decision invalidating the ‘907 Patent should be vacated. 

The Appointments Clause: Principal vs. Inferior Officers

Under the Appointments Clause, the President “shall nominate, and by and with the advice and consent of the Senate, shall appoint . . . officers of the United States.”  U.S. Const. Art. II, § 2.  However, Congress can “vest the appointment of such inferior officers, as they think proper, in the president alone, in the courts of law, or in the heads of departments.”  Id.  The Appointments Clause divides federal officers into two categories: “principal officers” who must be nominated by the President and confirmed by the Senate, and “inferior officers” who may be appointed by department heads.

The Director of the USPTO is the only APJ that is appointed by the President and confirmed by the Senate.  All other APJs are appointed by the Secretary of Commerce and USPTO Director without input from the President or Senate. 

If APJs are principal officers, their appointments are unconstitutional because they were not appointed by the President and confirmed by the Senate.  However, if APJs are inferior officers, their appointments are Constitutional, and their decisions (including the IPR decision invaliding the ‘907 Patent) are binding. 

The Court of Appeals’ Decision

In reviewing the validity of the APJs’ appointment, the Court of Appeals first evaluated whether the APJs are principal or inferior officers.

To distinguish principal from inferior officers the Court of Appeals analyzed three factors outlined by the Supreme Court in Edmond v. United States, 520 U.S. 651 (1997):

(1) whether an appointed official has the power to review and reverse the officers’ decision;

(2) the level of supervision and oversight an appointed official has over the officers; and

(3) the appointed official’s power to remove the officers.

The appeals court held that the first and third factors favored classifying the APJs as principal officers and only the second factor favored classifying them as inferior officers.  Therefore, the Court of Appeals concluded that APJs are principal officers and their appointments were unconstitutional.

The Controversial Remedy by the Court of Appeals

The Court of Appeals did not stop after holding the appointments of APJs to be unconstitutional.  The Court of Appeals attempted to cure the Constitutional defect by severing removal and tenure protections granted to APJs, reasoning that Congress “would have preferred a . . . [PTAB] whose [APJ] members are removable at will rather than no . . . [PTAB] at all.”

The Court of Appeals vacated the IPR decision invaliding the ‘907 Patent and remanded to the to the PTAB for a rehearing before a new panel of properly appointed APJs.  S&N, Arthrex and the US Government all petitioned for rehearing en banc.  In an order accompanied by five separate opinions, the Court of Appeals denied the rehearing request. 

No party was satisfied with the Court of Appeals decision because it didn’t grant a win for anyone.  Arthrex was hoping the panel decision would be reversed, thereby upholding validity of the ‘907 Patent.  S&N wanted the court to rule that the APJs were correctly appointed, so the IPR decision invalidating the ‘907 Patent would stand.  The US government was unhappy having to rework the appointments structure of the APJs.

In short, the decision of the Court of Appeals created more work for everyone and left the winner of the patent dispute undecided.  All the parties petitioned for, and were granted, Supreme Court review.

Arthrex’s Arguments to the Supreme Court

Arthrex tells the Court that the APJs have substantial power and are principal officers, even without the tenure/removal protections that the Court of Appeals severed.  Thus, the Court of Appeals didn’t resolve the Constitutional problem.

According to Arthrex, the term “inferior officer” connotes a relationship with a superior officer who supervises and directs the work of the inferior officer.  The superior officer must be able to correct or retract statements made by the inferior officer in the agency’s name.  APJs are not subject to any such supervision. 

APJ decisions are not appealable within the USPTO and are not reviewable by any superior officer.  Severing the tenure/removal protections gives a superior officers power to punish errors or prevent future mistakes by firing an APJ.  However, allowing a superior officer to fire an APJ does not provide the superior officer with procedural tools for correcting or reversing decisions previously issued by the APJ.  Therefore, even after severing the tenure/removal protections, APJs remain principal officers because they are the USPTO’s final word on an issued patent. 

Arthrex acknowledges that certain procedural tools may be utilized by the USPTO Director to try and indirectly manipulate APJ decisions.  For example, the Director has the authority to promulgate a rule or policy guidance instructing APJs what result to reach on exemplary facts.  The Director may issue such rules or guidance that just happen to match the facts of a specific pending IPR.  The Director may manipulate panel compositions by adding additional APJs to a panel (“panel stacking”) to achieve a desired outcome.  The Director may prematurely terminate an IPR proceeding.  

However, Arthrex argues that such schemes are not viable supervisory options.  In fact, they violate due process and simply substitute one constitutional defect for another.  Additionally, such schemes are all forward looking and are not adequate substitutes for proper supervisory review of issued APJ decisions.  Issuance of rules or policy guidance may enable the Director to affectfuture APJ decisions, but they do not permit him to correct or undo issued decisions that misapplied rules or guidance.  Altering panel composition may permit the Director to influencefuture outcomes and will not changedecisions that have already been made by the panel.  Terminating an IPR proceeding may permit the Director to prevent a decision from issuing but will also not modify or reverse decisions already issued.

Secondly, Arthrex argues that by severing the removal/tenure protections, the court of appeals created an adjudicative regime that is not impartial and not accountable.  Furthermore, it’s a regime that Congress did not intend.  Congress insisted the APJs enjoy the removal/tenure protections to shield the APJs from unseen political pressure and subtle influence.  By severing removal/tenure protections, the Court of Appeals exposed APJs to the undesirable and unseen influence of threatened removal.  Arthrex argues that after the Court of Appeals identified a Constitutional defect, it is now the job of Congress to decide how to remedy that defect. 

The Court of Appeals should not have substituted its judgement that severing the removal/tenure protections is the proper way to fix the appointment problem.  The parties and amici have proposed at least 10 different ways to address the Constitutional defect.  For example, Congress could provide for APJs to be appointed by the President and confirmed by the Senate.  Congress could grant the USPTO Director authority to review APJ decisions.  Congress could do away with IPR proceedings and only allow impartial Article III judges to invalidate issued patents.  Selecting among these options is precisely the sort of policy decision that Congress, not courts, should make.

Arthrex distinguishes Supreme Court cases (e.g., Freytag v. Commissioner, 501 U.S. 868 (1991) and Lucia v. SEC, 138 S. Ct. 2044 (2018)) where final agency adjudicators practically did not have any superior oversight.  In those cases, the respective agency heads could have created a process for reviewing all adjudicatory decisions, although they chose not to do so.

Smith & Nephew’s Arguments to the Supreme Court

S&N argues that the court of appeals incorrectly classified APJs as principal officers.  APJs are inferior officers.  Thus, they have been constitutionally appointed and their decisions (including the IPR decision invalidating the ‘907 Patent) are binding. 

Under the Appointments Clause, oversight of inferior officers does not need to take any particular form.  An inferior officer may exercise significant authority “largely independently” from a superior so long as the inferior officer is directed and supervised at some level by the superior.  APJs are directed and supervised at some level by other superior officers within the USPTO.  Therefore, APJs may be properly appointed by the Secretary of Commerce and USPTO Director without Presidential or Senate input.  

For example, the USPTO Director has powerful tools for controlling the APJs.  The Director controls whether to institute an IPR proceeding.  The Director has the authority to prescribe guidance that is binding on APJs.  The Director controls how many and which APJs sit on any particular PTAB panel.  The Director determines how much APJs are paid.  If dissatisfied with a APJ decision, the Director may add more members to the panel (including himself) and potentially order the matter reheard.  Alternatively, if the Director feels patent claims should not be invalidated, he can prematurely terminate an IPR proceeding. 

Under the Appointments Clause, the relevant inquiry is whether, when all applicable control mechanisms are considered, the officer’s “work is directed and supervised at some level” by other officers.  The Constitutional analysis of deciding whether officers are principal or inferiorrequires a holistic analysis of all the three of the Edmond factors and no single factor is dispositive.  Removal/tenure protections are less significant where a superior can directly review the work of the inferior officer.  Similarly, direct review is less important where a superior sets the overarching policy directives for inferior officers and has mechanisms for controlling the content of decisions promulgated by those inferior officers before they issue.

Overall, the Director exercises administrative oversight by providing management supervision for APJs.  Because the Director has mechanisms for controlling the content of APJ decisions before they are issued, there is little need for the Director to review those decisions after they are issued.  Likewise, because a superior officer (e.g., USPTO Director) has supervisory mechanisms for inducing APJ compliance with directives of the superior, there is no reason to sever removal/tenure protections.  S&N argues the Court of Appeals ignored the overall decisional control mechanisms that clearly classify APJs as inferior officers. 

S&N also points to Supreme Court cases (e.g., Freytag v. Commissioner, 501 U.S. 868 (1991) and Lucia v. SEC, 138 S. Ct. 2044 (2018)) where final agency adjudicators did not have any principal officer oversight.  Although in those cases the relevant agency could have instituted principal officer oversight, they choose not to do so.  Without a process for supervisory review, the agency’s choice in those cases allowed its adjudicators to render final, unreviewable decisions.  Here, the USPTO Director has several available mechanisms for regulating APJ decisions which exceed the review powers of those other agency heads.

S&N also argues that historically, the Supreme Court has respected agency appointment decisions and has not invalidated an appointment made by the head of a department.  The emphasis of the Court of Appeals on direct supervisory control (if adopted by the Supreme Court) would call into question the efficient operations of other agencies (e.g., Department of Veterans Affairs, Department of Health and Human Services) that provide removal/tenure protections to officers that have authority to enter final decisions and are appointed without Presidential or Senate input.

US Government’s Arguments to the Supreme Court

The US Government agrees with S&N that there is no particular form of control that is indispensable for distinguishing principal and inferior officers.  Complete control of every action that an inferior officer takes has never been required, as long as work of the inferior officer remains “supervised at some level.”  If a principal officer is politically accountable for the work of an inferior officer, Congress may choose from a variety of mechanisms for overseeing the work of the inferior officer.

In this case, the Secretary of Commerce and the USPTO Director each have significant authority to determine which individuals will perform functions assigned to APJs.  The Secretary of Commerce in consultation with the Director appoints the APJs in the first instance.  The Director may exclude a particular APJ from one case, from a category of cases, or from all cases.  If the Director believes an APJ will not faithfully and properly apply the relevant statutory provisions, regulations, and agency policies, the Director may exclude that APJ from deciding any cases.  The Director may determine which IPR decisions are precedential and therefore binding on future APJ panels.  The Director may prematurely terminate a previously instituted IPR proceeding before the APJ panel issues a final written decision.  The prematurely terminated proceeding will have no legal consequences for either the IPR petitioner or the patent owner.

Like S&N, the Government argues that the Court of Appeals failed to appreciate the collectiveeffect of various mechanisms by which the Secretary of Commerce and USPTO Director can supervise and direct the work of APJs.  The Court of Appeals zeroed in on the removal/tenure provisions and whether there was a superior officer that could single-handedly review individual APJ decisions.  The Court of Appeals did not sufficiently consider whether other forms of control provided adequate supervision for Appointments Clause purposes.  

Additional Issue: Was The Appointments Clause Challenge Timely?

Before the Court of Appeals, the US Government argued Arthrex forfeited its Appointments Clause challenge by failing to raise the appointment issue during the IPR proceeding itself.  The Court of Appeals rejected the argument, noting the Supreme Court has addressed appointments clause challenges raised for the first time on appeal and that timely resolution of the appointment issue was important given the “wide-ranging effect on property rights and the nation’s economy.”  The Court of Appeals also explained that Arthrex had no incentive to raise the Constitutional issue to the PTAB because the PTAB did not have the authority to hold its own appointments unconstitutional. 

At the petition stage, the US Government asked the Supreme Court to revisit the timeliness issue.  The Court however did not grant certiorari on that question.  However, S&N argues that because Arthrex only raised the appointment issue for the first time on appeal, is not entitled to vacatur of the underlying IPR decision.   Had Arthrex timely raised the issue before APJ panel, the USPTO Director could have tried to avoid any Constitutional problem by assigning himself, or other officers whose appointments Arthrex has not questioned, to preside over Arthrex’s case.  Alternatively, the Director could have tried to avoid any Constitutional problem in subsequent IPR proceedings by temporarily suspending new institution decisions pending judicial review or prompt action from Congress.  By not giving the USPTO an opportunity to act timely, Arthrex exacerbated the consequences of any Constitutional violation in the APJ appointment process.  It is therefore not appropriate to reward such “sandbagging” with any additional relief beyond a declaratory judgment that the APJs were improperly appointed.  Such a declaratory judgment would leave intact the IPR decision invalidating the ‘907 Patent – a win for S&N.

Oral argument in this case is currently scheduled for Monday, March 1, 2021 at 10 am.  In keeping with current public health guidance in response to COVID-19, the Justices and counsel will all participate remotely via teleconference.  A livestream of the teleconference will be available online at C-SPAN.org.

United States v. Arthrex

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About the Author

Jacob Baldinger

Jacob Baldinger

Jacob Baldinger is a partner at Weiss & Arons LLP in Spring Valley, NY, and advises on intellectual property procurement and enforcement.

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