USPTO Implementation of Arthrex: Questions from Administrative Law, Part I—Dismissal and Subregulatory Rulemaking

In United States v. Arthrex, No. 19-1434, 141 S.Ct. 1970 (Jun. 21, 2021), Chief Justice Roberts cured an Appointments Clause defect in the Patent Trial and Appeal Board’s (PTAB’s) organic statute by holding that 35 U.S.C. § 6(c) “cannot constitutionally be enforced to the extent that it[] prevent[s] the Director from reviewing final decisions rendered by APJs.” Arthrex, slip op. at 21. Henceforth, rehearings are no longer the exclusive domain of PTAB panels, and the U.S. Patent and Trademark Office (USPTO) must provide at least one path of review that flows through the agency head.

The idea of a new layer of review was proposed by the government itself, in a throwaway alternative position at pages 40-41 of the Government’s reply brief (the government’s lead position asked the Supreme Court to affirm the Federal Circuit’s severance of the protections that gave the PTAB adjudicatory independence similar to administrative law judges’ (ALJs)). Because this remedy was only proposed in the last brief of the case, the Court did not have the benefit of input from either the parties or amici as to the implications of such an approach.

On Tuesday, June 29, 2021, the USPTO published interim guidelines for Director review via two web pages and a webinar. USPTO implementation of an interim Director review process following Arthrex, Arthrex Q&As, and Boardside Chat: Arthrex and  the interim  procedure for Director review. The USPTO changed the rules on the fly on July 20 by updating the Q&A.

This article discusses a number of issues of administrative law that must be addressed before the USPTO can proceed. The PTAB now resembles a poorly-maintained building—after decades of benign neglect, and more than a little old-fashioned cheating to evade work that’s required by the statute, a stress has induced a collapse. Essentially all judgments of the PTAB will be appealable and voidable for underlying procedural error under various administrative law statutes; very few have all the prerequisites to stick. Implementing Arthrex within the law will require substantial resources and significant new machinery within the USPTO, and some of that new implementation may be impossible until a confirmed Director is in place because of limits under the Vacancies Reform Act. It will take at least a year of regulatory reconstruction to implement Arthrex on a solid foundation that will allow the PTAB’s judgments to survive appellate review.  Until then, a great many of the PTAB’s decisions will be challengeable for various past and future failures of the USPTO to observe requirements of law.

Question #1: Can the Director summarily dismiss requests for review, analogously to FRAP 36?

No.  In the first week after Arthrex issued, commentary in the press urged that implementation will be “no big deal,” in part because the USPTO will be able to summarily dismiss most requests for Director review. But that view directly conflicts with the Administrative Procedure Act (APA). The APA disallows anything analogous to Federal Rule of Appellate Procedure (FRAP) 36(a)(2) or Fed. Cir. Rule 36(a).

First, an America Invents Act (AIA) proceeding is a “formal adjudication” under the APA, 5 U.S.C. §§ 554, 556, and 557 (as opposed to informal adjudication under § 555). Dell Inc. v. Acceleron, LLC, 818 F.3d 1293, 1301 (Fed. Cir. 2016). The APA, 5 U.S.C. § 557(b) specifies that “[b]efore … a decision on agency review of the decision of subordinate employees, the parties are entitled to a reasonable opportunity to submit for the consideration of the employees participating in the decisions… exceptions to the decisions … and … supporting reasons for the exceptions.” Then, § 557(c) requires a “ruling on each … exception presented,” and requires that such “decisions … include a statement of… findings and conclusions, and the reasons or basis therefor, on all the material issues of fact, law, or discretion presented on the record.” Thus, § 557(c) doesn’t permit a Rule 36 shortcut.

Second, Union Pacific R.R. Co. v. Brotherhood of Locomotive Engineers and Trainmen General Committee of Adjustment, Central Region, 558 U.S. 67, 71 (2009) reiterates the 200-year-old general rule that agencies cannot decline to exercise jurisdiction where it exists, and an agency with a statutorily-defined scope of jurisdiction cannot adopt regulations to avoid deciding cases within that jurisdiction.

Third, the APA sets minimum standards for written decisions, and requires sufficient explanation to avoid being “arbitrary and capricious.” 5. U.S.C. §§ 555(e), 706(2)(A). The lead case is Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983):

[T]he agency must examine the relevant data and articulate a satisfactory explanation for its action including a “rational connection between the facts found and the choice made.” In reviewing that explanation, we must “consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.”  Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

Another oft-cited opinion is Tourus Records v. DEA, 259 F. 3d 731 (D.C. Cir. 2001), by then-judge Merrick Garland. The Drug Enforcement Administration (DEA) had denied a petition in a single-sentence order, that the grounds were “not adequately supported.” Judge Garland wrote, “[a] ‘fundamental’ requirement of administrative law is that an agency ‘set forth its reasons’ for decision; an agency’s failure to do so constitutes arbitrary and capricious agency action.” Id. at 737. Judge Garland explained both the law and the policy behind the APA’s requirement (5 U.S.C. § 555(e)) that all agency decisions must set forth a reasoned explanation. Even in affirming the PTAB, the Director must give some explanation, with narrow exceptions explained in Roelofs v. Sec’y of the Air Force, 628 F.2d 594, 601 (D.C. Cir. 1980).

Even discretionary action must be explained sufficiently to avoid being “arbitrary and capricious.” AFL-CIO v. NLRB, 471 F.Supp.3d 228, 238 (D.D.C. 2020). Agency failure to explain, or evasion of a key issue, is probably the single most paradigmatic pattern adjudged “arbitrary and capricious.”  Silent failure to explain is evaluated and vacated on an essentially per se basis. State Farm, 463 U.S at 50.

Chief Justice Roberts writes in Arthrex, slip op. at 23, “To be clear, the Director need not review every decision of the PTAB. What matters is that the Director have the discretion to review decisions rendered by APJs.”  “Need not review every decision” contrasts to agencies like the ITC, where full Commission review is mandatory for every decision. The Director’s “discretion” can only be exercised within non-arbitrary, non-capricious procedures, uniformly applied, and within the obligation to provide “reasonable opportunity to submit… exceptions.” 5 U.S.C. § 557(c). Just as the Director’s “discretion” wouldn’t allow dismissal of an individual petition because the Director wants to make a Thursday golf game, “discretion” won’t permit a regulation that is designed to dismiss a whole class just to avoid hard work that is required by law—an agency can be arbitrary and capricious with respect to a class just as for an individual. Cf. Union Pacific R.R., 558 U.S. 67, 71 (2009).

Chief Justice Roberts concluded “the appropriate remedy is a remand to the Acting Director for him to decide whether to rehear the petition.” Arthrex, slip op. at 20. Of course, the Chief Justice meant an implicit proviso “subject to all other requirements of law,” not unfettered discretion to just say “no” without explanation.

Question #2: Can the USPTO use subregulatory rulemaking, such as web pages and POP precedential decision?

No. Arthrex, slip op. at 21, notes that authority to implement Director review lies in 35 U.S.C. § 316(a)(4), that is, by “regulation.”  See also 5 U.S.C. § 553; Aqua Prods., Inc. v. Matal, 872 F.3d 1290, 1329-31 (Fed. Cir. 2017) (Moore, J., concurring) (explaining the meaning of the word “regulation” in § 316(a)). Any new procedure implementing inter partes review (IPR)/post grant review (PGR) invokes the obligation to “prescribe regulations … governing inter partes review under this chapter,” § 316(a)(4).

The USPTO’s June 29 web pages are troubling, precisely because they’re web pages. Statute requires that such notices be run in the Federal Register, not evanescent web pages. 5 U.S.C. § 552(a)(1)(B) and (C). The Director review rule—a rule with billion-dollar consequence—was published on a web page that can be changed or disappear tomorrow. Then, only three weeks later, the USPTO actually did substantially change the rules on the fly by changing the Q&A page. The USPTO gave important elaboration in a Boardside Chat webinar—but it wasn’t recorded, and only the slides are available—there is no record whatsoever of important answers that were given in the Q&A.

One is left mouth agape at an agency that can’t follow one of the simplest requirements in the entire United States Code, and that so disrespects the importance of stable rules and consistent notice to regulated parties—Congress required agencies to publish rules they intend to enforce, and any interpretive commentary, in one authoritative, permanent, and tamper-proof source—the Federal Register. The USPTO’s cacophony of web pages, Trial Practice Guide updates, precedential decisions scattered around nearly a dozen lists on the USPTO website, “informative” opinions that have varying and non-ascertainable standing as precedent, Director’s memoranda on substantive law, and new rules announced by “press release,” are contrary to law. Congress intended that the Federal Register be the “one stop shop” for all binding rules.

Some commenters proposed that the USPTO implement Arthrex via the Precedential Opinion Panel (POP). The POP’s rulemaking authority is mentioned in the same number of statutes as three-dollar bills. Only a year ago, the Federal Circuit pointed out the obvious: the POP has neither grant of rulemaking authority nor procedural foundation in the Patent Act or the APA, and has no carve-out from the many statutes that govern rulemaking. Those were two of several reasons that PTAB decisions are ineligible for Chevron deference. Facebook, Inc. v Windy City Innovations, LLC, 973 F.3d 1321, 1350-51 (Fed. Cir. 2020), reaffirming 953 F.3d 1313, 1342-43; Aqua Prods. 872 F.3d at 1339 (Reyna, J. concurring) (“The Patent Office cannot effect an end-run around [the APA] by conducting rulemaking through adjudication …”).POP precedential decisions are just another form of routine guidance, with no more legal authority than the MPEP or a web page.

As a refresher of basic principles, and to slightly oversimplify, subregulatory guidance has legal effect only as follows:

(a)  Subregulatory guidance may interpret a “genuine ambiguity” in a statute, as the agency’s “first guess” at resolution of the ambiguity. If that interpretation either issues as regulation, or else issues from the component of an agency with rulemaking authority and with procedural formalities that approximate notice-and-comment, that interpretation can have force of law under Chevron deference. (A full catalog of conditions for Chevron or Auer deference, and the hurdles that the PTAB  cannot meet, is presented in The PTAB Is Not an Article III Court, Part 3: Precedential and Informative Opinions, AIPLA Q.J. vol. 47 No. 1 pp. 1-99 (June 2019).)  But guidance issued without the necessary preconditions has no binding force of law against the public. Perez v. Mortgage Bankers Assn., 575 U.S. 92, 97 (2015). If a party offers an alternative interpretation, the agency must entertain the issue, and cannot stand on its guidance as the last word. On judicial review, interpretative guidance of statutory ambiguity is accorded the weak form of deference, Skidmore deference, which means that a court will give the agency’s opinion the weight that its persuasive value warrants. In Windy City and Aqua Prods, a three-opinion majority and a unanimous “additional views” opinion held that because the PTAB lacks rulemaking authority, its opinions (POP or not) are not entitled to Chevron deference.

(b) Subregulatory guidance may interpret a “genuine ambiguity” in a regulation. If issued with high procedural formality (close to notice and comment), that guidance may be eligible for force of law under Auer deference. But no other agency has acted with comparable brazen defiance of administrative law to improvise anything analogous to a “precedential opinion panel,” so there’s no direct precedent to allow a 100% prediction. It seems more likely than not that PTAB POP decisions are not Auer-eligible, because the PTAB lacks rulemaking authority. See Windy City, citing Martin v. Occupational Safety and Health Review Commission, 499 U.S. 144, 154 (1991).

(c)  In ex parte proceedings, guidance that uses mandatory language to state obligations of agency employees with respect to “important procedural benefits” in favor of a party, or “interpretative” guidance interpreting the agency’s statute or regulation, is binding only against agency employees (including ALJs). Because AIA proceedings are inter partes, this form of binding effect never applies to POP decisions or any other guidance purporting to govern AIA trials.

(d) If subregulatory guidance does not interpret ambiguity in an underlying statute or regulation, and the guidance document imposes any new adverse effect or obligation on any party other than the agency, it’s simply a nullity.

No statute authorizes the POP or any similar shortcut as a substitute for § 553 “regulation.” The USPTO has lost two cases on this precise issue (in Aqua Products, by a plurality assembled from three opinions, and in Windy City, in a unanimous “additional views” opinion). Even though there is not yet a majority opinion on the precise issue, the words of the statute and the Court’s reading of that statute are pretty clear. Any other party would modify its conduct to avoid further losses; instead, the PTAB doubled down. Strikingly, in the week after Windy City told the PTAB that it lacked rulemaking authority and that POP decisions lacked force of law, the PTAB reacted with three new precedential decisions, and a dozen in the year since.

The path to regulation takes at least a year, as it winds through many statutes and executive orders. There’s a timeline here starting at page 6. The PTAB’s record of complying with simple law is not encouraging. When a rulemaking law requires hard work and cost-benefit analysis, the PTAB’s record is alarming—for example, in the 2018 “ordinary meaning” rule, the PTAB shortcut many statutory steps, often by the artifice of falsely claiming exemptions from oversight and regulatory review, as explained in An administrative law view of the PTAB’s ‘ordinary meaning’ rule, Westlaw J. Intellectual Property, vol. 25 no. 21, pp. 12-16, 2019 WL 303044 (Jan. 30, 2019).

The APA offers a perfectly good, well-paved road that works just fine for other agencies: the Director can issue an interim rule in the Federal Register, 5 U.S.C. § 553(d)(3), and then follow up with notice-and-comment rulemaking. The PTAB has not explained how continued reliance on rapidly-changing web pages and a “precedential opinion panel” comport with the rule of law, nor has the USPTO ever explained any basis for it to opt out of the APA rulemaking procedure that governs all other agencies.

Looking for the Logic

To be sure, it’s a good thing for an agency to float proposed trial balloons for public comment before formally proposing a rule. For most rules, agencies are required to do so (44 U.S.C. § 3506(c)(2)(A)—another law the USPTO seems to consistently disregard). But the USPTO announced the Director review as an immediately-effective rule. If this were an isolated departure from a technicality, perhaps it would be excusable as human error. But as part of an extended history of ignoring (or outright subverting) rulemaking law, with rules changing on the fly, it’s deeply concerning.

Why would the USPTO so steadfastly resist all requirements of rulemaking law, from the most complex to the simplest (simply publishing in the Federal Register)? Three potential reasons come to mind. First, it’s a lock-in—while parties before agencies crave predictability, agencies crave “flexibility.” Second, Federal Register publication is a signal to various regulatory oversight tribunals in the executive branch that an agency is undertaking rulemaking.  Rulemaking requires an agency to do a number of cost-benefit analyses, to make certain filings at the Office of Management and Budget, Small Business Administration, etc. Someone might think “No Federal Register notice, no hard work.” But these laws cover all “rules” in the broad sense of the APA, Batterton v. Marshall, 648 F.2d 694, 700?01 (D.C. Cir. 1980), so evasion of a statutory procedural requirement just sets up a basis for challenge on judicial review. Third, maybe the USPTO believes that by not publishing in the Federal Register, it insulates itself from judicial review of “arbitrary and capricious” and “without observance of procedure” rulemaking. Though that has naïve appeal with support here and there in dictum, it’s an erroneous view of the law. Bennett v. Spear, 520 U.S. 154, 177 (1997) (opinion letter was sufficiently “final” to permit judicial review). So, while nonstatututory rulemaking shortcuts may look easier in the short term, they shroud all PTAB judgments under a cloud of appealable issues.

Many other questions remain, such as whether the Director can delegate review and what time limits will apply, and we will explore those in Part II of this article.

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