Financial CHOICE Act could presage Congressional action on administrative abuses at PTAB

Congressman Jeb Hensarling (R-TX)

This September, Rep. Jeb Hensarling (R-TX) introduced H.R.5983, or the Financial CHOICE Act of 2016, onto the floor of the U.S. House of Representatives. The bill as it’s currently written would amend the Dodd-Frank Wall Street Reform and Consumer Protection Act, a major overhaul of the U.S. financial system enacted by Congress in 2010. Namely, the bill would repeal the Volcker Rule, which restricts financial institutions’ ability to make certain speculative investments; replace the Federal Deposit Insurance Corporation’s (FDIC) authority over the liquidation of failing banks with new provisions regarding bankruptcy; and repeal the Durbin Amendment, which limits the fees that financial institutions can charge retail establishments for debit card processing. The bill is co-sponsored with fellow House Republican Reps. Scott Garrett (R-NJ), Randy Neugebauer (R-TX), Blaine Luetkemeyer (R-MO), Bill Huizenga (R-MI) and Sean Duffy (R-WI).

One of the effects of this bill, were it enacted by Congress as currently written, would be to modify the enforcement activities of the U.S. Securities and Exchange Commission (SEC). Recent coverage of the bill by Bloomberg BNA notes that the proposed legislation would allow parties involved in a legal action to move the action out of SEC tribunal and into U.S. district court. Section 418 of the Financial CHOICE Act, for example, gives any person who is a party to a proceeding brought by the SEC under securities law, and who may be targeted by a cease and desist order or other penalty at the conclusion of the proceeding, can decide to terminate the proceeding and force the SEC to instead seek civil action in federal court rather than an in-house tribunal.

As Bloomberg BNA’s coverage notes, SEC’s in-house tribunals have been criticized in recent months for not offering adequate discovery mechanisms and for speeding defendants into trials before they have had an opportunity to adequately prepare for the proceedings. Administrative proceedings at SEC in-house tribunals ramped up in late 2013 after comments from the agency’s co-director of enforcement Andrew Ceresney indicated that the agency would look to increase the number of agency proceedings overseen by its own administrative law judges. Critics of these activities charged the SEC with overreaching its regulatory authority. In a speech given November 2014, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York (S.D.N.Y.) said that “it is hard to find a better example of what is sometimes disparagingly called ‘administrative creep’ than this expansion of the S.E.C.’s internal enforcement power.” In June 2015, a plaintiff in the U.S. District Court for the Northern District of Georgia (N.D. Ga.) was granted in part a motion for a temporary restraining order on a preliminary injunction ordered by the SEC so that the plaintiff could conduct limited discovery and brief the declaratory judgment claims. The SEC voted this July to make some changes to its administrative court proceedings, but the Financial CHOICE Act’s provision on diverting SEC proceedings into civil actions indicates that some feel that the SEC still applies too much overreach.

Patent owners have raised strikingly similar complaints against the Patent Trial and Appeal Board (PTAB) at the United States Patent and Trademark Office (USPTO). In recent months the United States Court of Appeals for the Federal Circuit has found actions of the PTAB to be arbitrary and capricious, and patent owners have long questioned whether they receive appropriate due process in a proceeding that is almost comically one-sided and in favor of the petitioner (see here and here). The America Invents Act (AIA) specifically says patent owners may amend challenged claims, but the PTAB has interpreted the statute to mean there is a right to file a motion to amend but no associated right to amend. In fact, the PTAB denies virtually all amendment requests, which has prompted the Federal Circuit to decide en banc whether the PTAB is acting appropriately.

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While the Financial CHOICE Act itself doesn’t pose any direct impact to the U.S. patent system, it does highlight a similar issue playing out at the USPTO in recent years. There has been no small amount of criticism hurled at the USPTO for the activities of administrative patent judges (APJs) working at the PTAB. This review board was established with passage of the AIA to provide a more cost-effective path to challenging a patent’s validity than was possible in U.S. district court. However, the entire concept of PTAB has rankled those who argue that the administrative court amounts to little more than a “death squad,” cancelling as much as 95 percent of claims in PTAB proceedings that have been instituted.

Perhaps worse is the fact that the USPTO seems to be unable to register a disconnect between what is happening at PTAB and how those activities are affecting inventors in the U.S. patent system. Despite the fact that the agency maintains that less than half of claims are cancelled, it turns a blind eye to the large chunk of patent claims are “not subject to a final written decision.” That’s much different than the very small percentage of claims which are actually adjudicated by PTAB to be patentable.

Much like opinion of the SEC’s in-house courts began to sour in district court, PTAB ran into legal trouble at the Federal Circuit this November when that court found that PTAB improperly instituted a covered business method (CBM) review. Federal Circuit found that just because a patent involving wireless communication devices could be used for the potential sale of financial services did not make that patent eligible for a CBM review. As a result, there’s judicial record of PTAB proceedings being improperly instituted, somewhat similar to the 2015 SEC case in Northern District of Georgia where that federal agency was rebuffed for its administrative court proceedings.

Some have raised issue over whether procedural processes at PTAB are valid under the U.S. Constitution. A podcast posted this August by The Federalist Society delves into the issue of whether PTAB poses a separation of powers issue, given the fact that it provides the executive branch with the authority to challenge patents. Others have openly asked whether the AIA has placed the USPTO in the role of arms dealer, charging tens of thousands of dollars to innovators to obtain a patent and then charging many hundreds of thousands of dollars to challenge a patent in post grant proceeding. The U.S. Supreme Court has not proven to be savvy to these issues, given its decision this April in Cuozzo Speed Technologies, LLC v. Lee, which reached the conclusion that inter partes review (IPR) proceedings at PTAB are judicially unreviewable even if PTAB exceeds its statutory authority in order to institute such a proceeding.

So the best possibility to challenge the powers of PTAB might exist in Capitol Hill, the same place where PTAB was given life through passage of the AIA. The fact that the recent bill amending SEC administrative courts has Republican support could be encouraging to those who might argue that similar issues are playing out at PTAB. Indeed, if there is need for a remedy at the SEC there must logically also be a need for a statutory fix to the ongoing unfairness of the PTAB.