Yesterday, a 3-judge panel of the Federal Circuit (Judges Moore, Reyna, and Chen) issued a unanimous decision holding that the USPTO’s appointment practice for Administrative Patent Judges (APJs) violates the U.S. Constitution’s Appointments Clause.  Arthrex, Inc. v. Smith & Nephew, Inc., No. 201-2140 (Fed. Cir. Oct. 31, 2019) (citing U.S. Const., art. II, § 2, cl. 2)).  The Federal Circuit determined that under the USPTO’s current practice, APJs do not receive enough oversight and supervision from the USPTO Director, “the only member of the Board who is nominated by the President and confirmed by the Senate.”  Arthrex, slip op. at 9.

The lack of control over APJ decisions does not allow the President to ensure the laws are faithfully executed because “he cannot oversee the faithfulness of the officers who execute them.”

Arthrex, slip op. at 20 (quoting Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477, 484 (2010)).

Because of the Title 5 employment protections afforded to the USPTO’s “officers and employees” by Section 3(c) of the Patent Act, APJ’s – as officers of the USPTO – may be removed “only for such cause as will promote the efficiency of the service.”  35 U.S.C. § 3(c); 5 U.S.C. § 7513(a).  To cure the Constitutional infirmity of the APJ appointments, the Federal Circuit decided to sever the “officers and” portion of Section 3(c), thereby making APJs removable “at will” (or without cause) by the Director.  Arthrex, slip op. at 25.

The next steps in this developing legal story remain uncertain.  Smith & Nephew could seek a rehearing by the same Federal Circuit panel, as well as a rehearing en banc by the entire Federal Circuit.  In addition, Smith & Nephew could appeal the Federal Circuit’s decision to the U.S. Supreme Court via a writ of certiorari.  So yesterday’s panel decision is not set in stone.

In any event, in the near term, we can expect that the USPTO will issue guidance very soon on how the PTAB plans to implement the Federal Circuit’s Arthrex decision.  In the wake of the SAS Institute Supreme Court decision in 2018, the Federal Circuit issued guidance 2 days later.  SAS Institute Inc. v. Iancu, 584 U.S ___, 138 S. Ct. 1348 (2018).  So stay tuned next week for the USPTO’s take on the import of Arthrex for practice before the PTAB.

What we do know, however, is that that the Federal Circuit’s decision – if it remains law of the land – will likely have a significant impact of dozens of current cases in the “Arthrex window”.  These are cases (a) in which the PTAB has issued a Final Written Decision (FWD), and (b) which still can (or already have) timely introduce(d) an Appointments Clause challenge at the Federal Circuit.  Notably, the Federal Circuit found that Arthrex’ s failure to make such a challenge with the Board did not constitute a waiver of that argument because “the Board could not have corrected the [Constitutional] problem.”  Arthrex, slip op. at 6.

In its decision yesterday, the Federal Circuit further held “that a new panel of APJs must be designated and a new hearing granted.”

Lucia suggests that the remedy is not to vacate and remand for the same Board judges to rubberstamp their earlier unconstitutionally rendered decision.  Like Lucia, we hold that a new panel of APJs must be designated to hear the inter partes review anew on remand.

Arthrex, slip op. at 30 (citing Lucia v. S.E.C., 138 S. Ct. 2044, 2055 (2018)).

With respect to the other pre-FWD aspects of the PTAB trial, the panel concluded that “the decision to institute is not suspect” and “the new panel [may] proceed[] on the existing written record but [we] leave to the Board’s sound discretion whether it should allow additional briefing or reopen the record in any individual case.”  Id.

Accordingly, the USPTO will likely take whatever corrective measures are necessary to ensure that all current and future APJs’ appointments are Constitutional (viz., such that their removal can be at the will of the Director).  For cases in which the PTAB panel has not yet issued a FWD, the PTAB’s corrective APJ appointment measures should cure this particular Constitutional problem going forward.  For cases in the “Arthrex window,” however, the impact will probably be considerably greater.  The PTAB will likely assign a new panel of different APJs and set a new date for a second final hearing, unless those changes are waived by both parties.

Like with the SAS Institute decision, these interim impacts will be significant on dozens of cases, but the practical impacts will be only temporary.  Once the “Arthrex window” cases have moved through the system, the PTAB practice should remain essentially unchanged, both substantively and procedurally.  It will nonetheless be interesting for future commentators to evaluate whether these interim impacts from the Arthrex decision result in any substantive changes in the outcomes of the affected cases.