Inter Partes Reviews Are Constitutional under Article III and the Seventh Amendment
In Oil States, the patent owner challenged the constitutionality of IPR proceedings on appeal from a final written decision of the PTAB. In particular, the patent owner argued that patents, once granted, became private property that could only be revoked by an Article III court and with the protections afforded by the Seventh Amendment right to a jury. The U.S. Court of Appeals for the Federal Circuit summarily affirmed the PTAB’s decision without opinion, having rejected similar arguments regarding IPRs in MCM Portfolio LLC v. Hewlett-Packard Co.
A seven-justice majority of the court agreed with the Federal Circuit that IPRs did not violate Article III’s allocation of the “judicial power” to the courts because patents belong to the class of “public rights,” adjudication of which may be assigned to administrative agencies. As explained by Justice Clarence Thomas, writing for the court, the “public-rights doctrine” applies in certain cases between private parties and the government that could be, but need not be, resolved by courts, and the “reconsideration of the Government’s decision to grant a public franchise” like a patent is one such case. Supreme Court precedent undisputedly held that the decision to grant a patent involved public rights because the exclusive right given to the patentee denies to the public the right to use the patented invention for the life of the patent. IPRs, the court reasoned, involve “the same basic matter as the grant of a patent” and are therefore also “on the public-rights side of the line.”
The Supreme Court also distinguished three of its prior decisions characterizing patents as “private property,” which were relied upon to support the constitutional challenge in the case. The nature of the property interest in patents is that of a “public franchise,” and “[a]s a public franchise, a patent can confer only the rights that ‘the statute prescribes.’” Congress can therefore put conditions and qualifications that regulate patent rights granted pursuant to statute, and “[o]ne such regulation is inter partes review.”
Writing in dissent for himself and the chief justice, Justice Neil Gorsuch argued that IPRs improperly withdrew matters from the judicial sphere that had historically been decided by courts in the pre-constitutional English system and in the United States for most of its history. The dissent and the majority interpreted the historical record differently, including the relevance of patent revocation petitions to the English Privy Council, but the court’s decision ultimately concluded that the Constitution permitted Congress to give the USPTO cancellation authority. The fact that Congress had historically decided not to do so, the court explained, did not preclude Congress from doing so when it created inter partes review.
Having concluded that Congress did not violate Article III by creating the IPR process, the court summarily dispensed with the Seventh Amendment challenge to the proceedings. The decision on the Article III challenge resolved the Seventh Amendment challenge as well because when Congress properly assigns a matter to adjudication in a non-Article III tribunal, “the Seventh Amendment poses no independent bar to the adjudication of that action by a nonjury factfinder.”
While this decision is significant, the court was careful to “emphasize the narrowness of [its] holding.” The court explained that it was not addressing whether other matters, such as infringement, could be determined by a non-Article III tribunal or whether IPRs would be constitutional absent judicial review. The court also stated it was not deciding the constitutionality of retroactively subjecting pre-AIA patents to IPR nor rendering a decision about possible challenges under the Due Process Clause or the Takings Clause. In other words, the court’s decision broadly approved Congressional authority to create administrative proceedings for reviewing issued patents but did not foreclose other constitutional challenges to IPR proceedings on the details of their implementation.
USPTO’s “Partial Institution” Practice Exceeds Its Statutory Authority
In contrast to the fundamental constitutional holding in Oil States, the decision in SAS Institute was a technical exercise in statutory construction regarding the details of the USPTO’s implementation of IPR proceedings. The statute on which the case focused, 35 U.S.C. § 318(a), requires (in relevant part) that the PTAB “issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner” in an IPR not otherwise dismissed. The petitioner in the case, both at the PTAB and before the court, argued that this provision requires the PTAB’s final written decision to address the patentability of every claim challenged in the petition. The USPTO disagreed with this interpretation, arguing that the final written decision need only address claims on which trial had been instituted under 35 U.S.C. § 314, i.e., claims challenged during the proceeding. The Supreme Court, in a 5-4 decision, agreed with the petitioner and remanded the case for further proceedings.
The distinction between claims challenged in the petition and claims challenged during the proceeding exists because of the PTAB’s practice (pursuant to 37 C.F.R. § 42.108(a)) of instituting IPR proceedings “on all or some of the challenged claims and on all or some of the grounds of unpatentability asserted for each claim” (emphasis added). That practice, in turn, derives from the USPTO’s interpretation of 35 U.S.C. § 314, which requires the director of the USPTO (or, in practice, the PTAB to which this authority it delegated) to “determine whether to institute an [IPR] . . . on a petition.” Section 314 also leaves the decision whether to institute to the director’s discretion, as long as “there is a reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged in the petition.”
The court did not find the distinction between claims “challenged in the petition” and claims “challenged during the proceeding” to be a meaningful one because, the court held, the AIA did not authorize the USPTO’s “partial institution” practice. The Supreme Court, in an opinion authored by Justice Neil Gorsuch, explained that the structure of the IPR process envisioned by the AIA is one “in which it’s the petitioner, not the Director, who gets to define the contours of the proceeding.” The court explained that, under § 311, the process begins with “a petition to institute an [IPR],” and, under § 312, the petition describes the challenges to patentability and identifies the claims challenged. The court found it significant that, unlike ex parte reexamination, the director was not authorized to institute IPR on the director’s own initiative. Rather, the institution decision given to the director under § 314—“whether to institute an [IPR] . . . pursuant to a petition”—was a “binary choice” to institute a proceeding on an entire petition or not at all. The court found further support for this interpretation in the AIA’s reference to the patent owner’s “response to the petition,” which it found inconsistent with the idea that the director would define the scope of review in the institution decision, and in § 318(a), the statute requiring the final written decision to address all claims “challenged by the petitioner.”
In each of these instances, the court found the focus of the statute was on the petitioner’s contentions. Hence, in response to the USPTO’s argument that the difference between § 318(a)’s “claim[s] challenged by the petitioner” and § 314’s “claims challenged in the petition,” the court was quick to reject it. “Whatever differences they may display,” the court explained, the “focus on the petitioner’s contentions” counseled against an interpretation that would “give the Director power to decide what claims are at issue.” Also, because the differences could be explained by explicit features of the statute, such as the ability of the patent owner to narrow the proceeding by canceling claims, the court did not support the USPTO’s interpretation.
The court also rejected the USPTO’s argument that the decision partially instituting on the petition in the case was not reviewable on appeal under 35 U.S.C. § 314(d). The court, citing its decision in Cuozzo Speed Technologies, LLC v. Lee, explained that the bar to appellate review in § 314(d) was limited to the director’s “initial determination” under § 314(a) and did not apply to judicial review under the Administrative Procedure Act in cases where the USPTO “has engaged in shenanigans by exceeding its statutory bounds” (internal quotation marks omitted). According to the court, the PTAB’s practice of instituting on less than all claims was an example of this.
The court also acknowledged the petitioner’s argument that it should abandon the Chevron doctrine but declined to do so because the statute, in the court’s view, was clear and unambiguous. Chevron therefore did not apply.
In dissents by Justices Ruth Bader Ginsburg and Stephen Breyer, each joined by all dissenting justices, the court’s minority argued that Chevron deference should apply. The dissent agreed with the USPTO that § 318(a)’s “challenged by the petitioner” is ambiguous and might reasonably refer to claims challenged in the proceeding. In the dissenting view, the absence of any express grant of authority to the director to partially institute proceedings, when considered in light of the discretion whether to institute at all, also does not unambiguously foreclose the existence of such authority. Because the director could choose not to institute a proceeding at all, the dissents point out, the director could deny institution on all claims while signaling a willingness to institute on a narrower petition. “Why should the statute be read to preclude the Board’s more rational way to weed out insubstantial challenges?” the dissents ask, particularly when the alternative would seem to require the PTAB to review several “near frivolous” challenges in order to finally decide one substantial challenge on its merits. The majority dismissed most of the arguments of the dissents as policy arguments to be addressed by Congress, not the court.
Oil States Brings Greater Certainty, While SAS Institute Takes Some Away
While the decision in Oil States could have ended all post-issuance administrative trial proceedings at the USPTO, the court added certainty in upholding their constitutional foundation. Despite that foundation, however, the implementation of the proceedings will have to change after the decision in SAS Institute. The USPTO has issued its initial guidance with respect to SAS.
What impact SAS Institute will have is not yet clear, but the Supreme Court’s decision found that at least one regulation, 37 C.F.R. § 42.108(a), exceeds the USPTO’s statutory authority. This suggests the USPTO will eventually issue a proposed rule-making to replace any affected regulations, but it is too early to say with any certainty what regulations might be proposed. SAS Institute will likely impact patent challenges and practices for petitioners and patent owners before the PTAB and for litigants before district courts, opening the door for more wide-reaching application of estoppel and for more common issuance of stays. ●