USPTO Implementation of Arthrex: Questions from Administrative Law, Part II—the Bigger Picture for Reform

In Part I, we looked at two of the legal principles that govern Arthrex Director review: Director review must be implemented by notice-and-comment “regulation,” not website, and the Administrative Procedure Act (APA) requires that the Director’s decision demonstrate “reasoned decisionmaking.” Today, we’ll look at a few more legal obligations that confine the U.S. Patent and Trademark Office’s (USPTO’s) discretion as the USPTO seeks a lawful implementation of Director review. This Part II concludes with a plea that the USPTO take the public interest seriously, as the public interest is reflected in various statutes outside the Patent Act.

(Questions numbers 1 and 2 are addressed in Part I of this series).

Question #3: Can the Director delegate review to the PTAB?

No. Page 10 of the Arthrex slip opinion points out that rehearing cannot be delegated by the Director to the Patent Trial and Appeal Board (PTAB) itself: “Such review simply repeats the arrangement challenged as unconstitutional in this suit.” If the Director does not conduct the review personally, reviews must be delegated to persons that do not report up through the Chief Administrative Patent Judge (APJ).

Question #4: Can the Director delegate review without identifying the decision makers?

No. The Supreme Court has explained that due process requires that decision-makers be known and named. See In re Oliver, 333 U.S. 257, 266-271 (1948). It would be impossible to enforce the APA’s protections against conflicts of interest, partiality, ex parte communications, etc. if the identity of decision-makers remains unknown. The USPTO’s updated Arthrex Q&A page in answer to D1 states that “an advisory committee established by the Director… will advise the Director on whether decisions merit review” and identified various USPTO components from which committee members will be selected. However, it stated that the “Director will determine whether review will be granted or denied.” Each decision should include the names of the members of the Advisory Committee that participated in the decision.

Question #5: What time limits apply?

35 U.S.C. § 316(a)(11) requires that the “final determination” (as distinct from the final written decision of § 318) be issued within one year from the date of institution, extendable on good cause for 6 months. The statute carefully differentiates between the “final written decision” (FWD) which is subject to one set of deadlines (and allows rehearings and other post-FWD proceedings to extend beyond those deadlines), and the “final determination,” which requires a complete wrap up by a hard immoveable deadline of 18 months from institution (§ 316(a)(11)).

During the Q&A portion of the PTAB’s July 1 Boardside Chat, Chief APJ Boalick stated that the Director’s review of the final written decision would not implicate the time periods in § 316(a)(11) because the issuance of a FWD stops the clock. Judge Boalick did not explain how equating “decision” with “determination” squares with the plain language of the statute.

Question #6: What about Director review of institution decisions?

• 314(d)/§ 324(d) provide that the Director’s decision whether to institute shall be final and nonappealable, not the Board’s. At the very least, a Board panel decision to deny institution seems to be inevitably in the class that requires Director review.

What about decisions to institute? Institution is initially vested in the Director, and delegated to the PTAB. Under common law principles, a principal that has a duty to protect others continues to hold that duty, even if performance is delegated to an agent. Restatement Third, Agency, §§ 7.06, 7.07. The Director has a duty to ensure that the PTAB acts in a “fair, impartial, and equitable manner.” 35 U.S.C. § 3(a)(2)(A). Does that add up to an obligation to review institution decisions? The Director can only ensure the PTAB is acting in a “fair, impartial, and equitable manner” if he stands ready to review to ensure that panels comply with basic rules of “reasoned decisionmaking” under the APA and basic fairness.

Question #7: What about APJ compensation bias?

In the last year, multiple parties have challenged unconstitutional pecuniary bias of the PTAB. New Vision Gaming v. SG Gaming, Inc., Corrected Opening Br., Fed. Cir. No. 20-1399, ECF No. 29 (Jun. 30, 2020); Cellspin Soft, Inc. v. Canon U.S.A., Inc., Corrected Opening Br., Fed. Cir. No 20-1947, ECF No. 45 (Feb. 2, 2021); Mobility Workx, LLC v. Unified Patents, LLC, Opening Br., Fed. Cir. No. 20-1441, ECF No. 21 (Jul. 30, 2020); CustomPlay, LLC v Amazon.com, Inc., Opening Br., Fed. Cir. No. 20-2207, ECF No. 13 (Feb. 5, 2021). These parties’ briefs showed the existence of impermissible ties between IPR/PGR institution decisions and trial phase compensation, evaluation criteria used to determine retention, and bonuses. IP Watchdog has reported on the New Vision case here, here, and here.

US Inventor filed an amicus brief, ECF 45 (Aug. 3, 2020) showing that, to a statistical certainty of over 90%, the PTAB’s compensation structure influences the PTAB’s institution decisions.

In an April IP Watchdog webinar, James Carmichael—a former APJ himself—explained the existence and pull of these financial incentives:

There is a structural incentive to get credit for writing final written decisions. You get more credit for doing the final written decisions, and the only way to get those credits is to institute. And once you’ve done the work of deciding whether to institute, it’s a good deal from a credit perspective, the amount of additional work that you would do to get to the final written decision, in my opinion. It’s a good deal. But I hasten to add, all of the APJs I know are of the absolute highest character and guard against making any decisions based on any kind of personal interest or incentives. There is a structural incentive, but I have never seen it, with the APJs that I deal with, actually making a difference.

IP Watchdog, PTAB Masters 2021, Day 3, at 2:07:33 (Apr 21, 2021).

In June, Dr. Ron Katznelson published a study on the empirical relationship between bonus awards of PTAB judges and their decision types, based on information from the USPTO and Office of Personnel Management. The Pecuniary Interests of PTAB Judges—Empirical Analysis Relating Bonus Awards to Decisions in AIA Trials (June 21, 2021). Dr. Katznelson shows that an APJ’s bonus award is statistically correlated with that APJ’s decisional outcomes.

Legally, due process turns on the incentives created by the PTAB’s compensation structure, and no showing of actual cause of outcome is required. Nonetheless, US Inventor’s brief, Mr. Carmichael’s explanation, and Dr. Katznelson’s article show that both incentives and actual outcome changes exist to a statistically significant degree.

The Director created the flawed compensation structure. The Director can fix it, by simply mirroring the compensation structures for ALJs (which includes no bonus awards), and by walling the APJs that decide institution from the APJs that benefit via compensation and retention for trial phase. Arthrex notwithstanding, it’s not clear that the PTAB can proceed until this is fixed. But that will take time.

Fitting the Pieces into a Bigger Picture for Reform

The USPTO’s lawyers have spent years surrounding the Director with landmines, and Arthrex now requires the “functions and duties” Director to walk through that minefield.

For the transition period until validly-promulgated regulations are in place, the PTAB’s option to deny all institutions to ensure “the efficient administration of the Office, and the ability of the Office to timely complete proceedings” seems to be a duty. 35 U.S.C. §§ 316(b), 326(b); Harmonic Inc. v. Avid Tech., Inc., 815 F.3d 1356, 1367 (Fed. Cir. 2016) (Director “is permitted, but never compelled, to institute an IPR proceeding.”).

Long term, the most important constraints on Director review are § 557(c), “parties are entitled to a reasonable opportunity to submit … exceptions to the decisions … of subordinate employees,” and the “record shall show the ruling on each … exception presented,” and the § 316(a) obligation to act by “regulation,” as discussed in Part I.

But those are still only the tip of an iceberg. The PTAB should be the best operation in the USPTO, and it probably is. This article portrays a culture of shortcutting and/or ineptitude in the PTAB’s legal machinery; the problems pervade USPTO operations and are worse elsewhere (as Julie Burke and Michael Spector described earlier today). This culture is arguably failing the public and failing the honest hard-working employees at the USPTO. Statutory changes in the 1990s gave the USPTO the responsibility of self-funding through user fees, freedom from many of the hiring and management constraints and financial controls that apply to other agencies (§ 3(b)(3)(B), § 42(b)), and exemption from the limits on bonuses that apply to almost all other government employees. Contrast 35 U.S.C. § 3(b)(2)(B) (50% bonuses for PTO senior career staff) to 5 U.S.C. § 4505a(a)(2) (capping most bonuses at 10%, with “exceptional” cases at 20%). Unlike public companies, where laws and stock market rules require compensation be set by independent directors, USPTO bonuses are set by a committee composed almost entirely of the very executives to whom they’re paid. The USPTO and its senior management are now in the position of a company that holds a statutory monopoly—and can exercise it under sovereign immunity. The law shifted incentives for the USPTO’s management and legal culture from the public interest to the pecuniary interest of USPTO career staff, and conduct appears to have shifted with those incentives. Today, too many decisions appear to be made in the USPTO’s (and the individual decision-maker’s) immediate financial interest, and respect for inconvenient laws is often seemingly barely considered. When the law requires the USPTO to spend quality time on the “reasoned decisionmaking” required by the APA, or to limits fees to only honest services, or to evaluate the cost to the public of new rules, in my experience, the USPTO consistently short-shrifts its legal obligations in favor of its fee collections. Over time, conflicts of interest have been increasingly built in as a feature. The USPTO responds to its largest “stakeholders” and PTAB frequent flyers and pays little attention to any other constituency. Employees that don’t shortcut are disadvantaged. That culture seems to have cross-infected from the examining operation over to the PTAB.

The laws I describe in this article are designed to ensure accountability and avoidance of conflicts of interest, to require agencies to engage with the full spectrum of the public to design regulatory programs for benefit of all, to seriously consider cost-benefit analysis and economic effect, and to carefully consider the needs of small inventors and startups, the lifeblood of the American economy. And they ensure that honest and hard-working employees who attend to detail and completeness don’t suffer by comparison. The pattern of omissions I describe in this article is too pervasive to be explained as individual lapses of attention. There are only a few explanations: (a) not a single one of 260 APJs has sufficient “competent legal knowledge,” § 6(a), of the APA, so no one has objected; (b) the supervisory culture makes it impossible for an APJ to raise obviously-unlawful agency conduct to the bosses; or (c) a concerted effort by USPTO senior career staff, Office of General Counsel, and the PTAB itself, to brazenly defy legal obligations.

Arthrex exposes a number of systemic failures of the USPTO’s legal culture and presents an imperative to take a (long) pause for self-reflection and reform. Implementation of Arthrex Director review is an opportunity for the USPTO to take the law seriously, and most importantly, to demonstrate to the public that it takes the law seriously.

Editor’s Note: This article was updated on July 27 to include James Carmichael’s full quote for accuracy.