Supreme Court Upholds Constitutionality of IPR Proceedings, But Strikes Down Partial PTAB Final Written Decisions

Tuesday, April 24, 2018

The U. S. Supreme Court issued rulings today in two cases involving inter partes review proceedings (“IPRs”) created by the Leahy-Smith America Invents Act (“AIA”). In the first case, Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, No. 16-712 (U.S. Apr. 24, 2018), the Court ruled in a 7-2 decision that the IPR process does not violate Article III of the U.S. Constitution nor the Seventh Amendment, because it is a permissible exercise of agency regulation over public rights. The Oil States decision may be read as recognizing a broad authority of the U.S. Patent and Trademark Office, proceeding under statutory authority, to review and regulate patents. In the second case, SAS Institute, Inc. v. Iancu, No. 16-969 (U.S. Apr. 24, 2018), the Court rejected the USPTO’s interpretation of 35 U.S.C. § 318(a), which requires the Patent Trial and Appeal Board (“PTAB”) to issue a final written decision on the claims challenged by a petitioner at the conclusion of an IPR trial. In a 5-4 ruling, the Court held that the statute unambiguously requires the PTAB to rule on all challenged claims, not just the claims as to which the PTAB institutes trial, and that the USPTO lacks discretion to implement rules and procedures to the contrary.

Oil States Energy Services, LLC v. Greene’s Energy Group, LLC

The petitioner, Oil States Energy Services, sued the respondent, Greene’s Energy Group, for infringement of U.S. Patent No. 6,179,053 and Greene’s responded by filing an IPR proceeding challenging the patentability of two claims of the ‘053 patent as anticipated by prior art. The district court litigation and the IPR proceeded in parallel, with the district court construing the ‘053 patent claims in a manner that undercut Greene’s invalidity contentions. In the IPR proceeding, however, the PTAB construed the claims differently and issued a final written decision determining that the challenged claims were unpatentable. Oil States appealed to the Federal Circuit, which affirmed in an unpublished decision.

In a 7-2 opinion authored by Associate Justice Thomas, the Court rejected Oil States’ contention that the IPR process violated the separation of powers of Article III and a patent owner’s Seventh Amendment right to a jury trial on the question of patent validity. The Court ruled that the right to exclude conferred in a patent is governed by the “public-rights doctrine.” “[T]he public-rights doctrine applies to matters ‘arising between the government and others, which from their nature do not require judicial determination and yet are susceptible of it.’ Inter partes review involves one such matter: reconsideration of the Government’s decision to grant a public franchise.” Slip op. at 6.

Under the public-rights doctrine, patent rights are governed by statute and subject to statutory schemes providing for regulation by an administrative agency. Since a patent is subject to original review by the USPTO, an issued patent may also be subject to agency review:

The primary distinction between inter partes review and the initial grant of a patent is that inter partes review occurs after the patent has issued. But that distinction does not make a difference here. Patent claims are granted subject to the qualification that the PTO has “the authority to reexamine—and perhaps cancel—a patent claim” in an inter partes review. See [Cuozzo Speed Technologies, LLC v. Lee, 579 U. S. ___, ___ (2016)] slip op., at 3. Patents thus remain “subject to [the Board’s] authority” to cancel outside of an Article III court.

Slip op. at 3.

The Court distinguished the principal cases relied on by Oil States, including McCormick Harvesting Machine Co. v. Aultman, 169 U. S. 606 (1898). Although those cases indicated that only a court could invalidate an issued patent, the Court noted that the decisions described the patent system under the Patent Act of 1870, which did not contain a mechanism for post-grant review of an issued patent. “Those precedents, then, are best read as a description of the statutory scheme that existed at that time. They do not resolve Congress’ authority under the Constitution to establish a different scheme.” Slip op. at 11. In addition, the Court noted that, under 18th Century English law that forms the “backdrop” of the U.S. patent system, issued patents were subject to cancellation by action of the Privy Council, essentially a non-judicial procedure.

The Court also rejected Oil States’ argument that the IPR proceedings violated Article III because they adopted extensive procedures akin to civil litigation. Justice Thomas concluded:

But this Court has never adopted a “looks like” test to determine if an adjudication has improperly occurred outside of an Article III court. The fact that an agency uses court-like procedures does not necessarily mean it is exercising the judicial power.

Slip op. at 15.

Finally, the Court ruled that, since IPRs are permissible under the Constitution, such non-Article III proceedings are not subject to the Seventh Amendment. “Because inter partes review is a matter that Congress can properly assign to the PTO, a jury is not necessary in these proceedings.” Slip op. at 17.

The Oil States decision affirms the AIA post grant proceeding framework as a permissible quasi-litigation system for reviewing the patentability of issued patents. As a practical matter, the decision also avoids the chaos that likely would have resulted from a decision overturning IPRs.

SAS Institute Inc. v. Iancu

ComplementSoft, LLC sued SAS Institute Inc. for infringement of U.S. Patent No. 7,110,936. In response, SAS filed a petition for inter partes review, challenging all 16 claims of the ’936 patent as unpatentable based on either anticipation or obviousness. The PTAB instituted review on nine of the 16 claims, and ultimately issued a final written decision determining that eight of those nine claims were unpatentable. The final written decision did not address the seven claims for which institution was denied.

SAS appealed the PTAB decision to the Federal Circuit, arguing, inter alia, that the PTAB was required by 35 U.S.C. § 318(a) to address all challenged claims, even though it found that the petitioner met the standard for initiating review for only nine claims.  Section 318(a) provides that:

If an inter partes review is instituted and not dismissed under this chapter, the Patent Trial and Appeal Board shall issue a final written decision with respect to the patentability of any patent claim challenged by the petitioner and any new claim added under section 316(d) [permitting amendment of claims during the IPR upon motion by the patent owner].

The Federal Circuit ruled that the PTAB acted within its authority in omitting some challenged claims from the final written decision. SAS Institute Inc. v. Lee, 825 F.3d 1341 (Fed. Cir. 2016). SAS then appealed to the Supreme Court.

In a 5-4 decision written by Associate Justice Gorsuch, the Court ruled that the USPTO’s IPR trial procedures violated the unambiguous requirements of §318(a). Specifically, the Court held that the AIA’s language clearly requires final written decisions to include “any patent claim challenged by the petitioner[.]”

So when §318(a) says the Board’s final written decision “shall” resolve the patentability of “any patent claim challenged by the petitioner,” it means the Board must address every claim the petitioner has challenged. That would seem to make this an easy case. Where a statute’s language carries a plain meaning, the duty of an administrative agency is to follow its commands as written, not to supplant those commands with others it may prefer. Because SAS challenged all 16 claims of ComplementSoft’s patent, the Board in its final written decision had to address the patentability of all 16 claims.

Slip op. at 5.

The Court likened the petition in an IPR proceeding to the plaintiff’s complaint in civil litigation, in that the petitioner identifies and defines the issues to be resolved. “Much as in the civil litigation system it mimics, in an inter partes review the petitioner is master of its complaint and normally entitled to judgment on all of the claims it raises, not just those the decisionmaker might wish to address.” Id.

The Court noted that the USPTO retains significant discretion to adopt procedures to carry out the authority granted to it by Congress in the AIA, but that discretion is confined by the requirements of the statute.

In the Director’s view, he retains discretion to decide which claims make it into an inter partes review and which don’t. The trouble is, nothing in the statute says anything like that. The Director’s claimed “partial institution” power appears nowhere in the text of §318, or anywhere else in the statute for that matter. And what can be found in the statutory text and context strongly counsels against the Director’s view.

 

Id. For example, the Court noted that in ex parte reexamination proceedings, the USPTO Director can select which claims to reexamine. In contrast, the IPR system requires the USPTO to include all challenged claims in the final written decision:

Section 314(a) [governing institution] does not require the Director to evaluate every claim individually. Instead, it simply requires him to decide whether the petitioner is likely to succeed on “at least 1” claim. Once that single claim threshold is satisfied, it doesn’t matter whether the petitioner is likely to prevail on any additional claims; the Director need not even consider any other claim before instituting review. Rather than contemplate claim-by-claim institution, then, the language anticipates a regime where a reasonable prospect of success on a single claim justifies review of all.

Slip op. at 7. Furthermore, Justice Gorsuch continued, the USPTO lacks discretion to alter that requirement:

[W]hile §314(a) invests the Director with discretion on the question whether to institute review, it doesn’t follow that the statute affords him discretion regarding what claims that review will encompass. The text says only that the Director can decide “whether” to institute the requested review—not “whether and to what extent” review should proceed. §314(b).

Slip op. at 8.

Finally, the Court rejected the USPTO’s contention that its procedures were a legitimate exercise in administrative rulemaking, and thus were protected by Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984). The Court held that Chevron deference only applies when the applicable statute is ambiguous:

And after applying traditional tools of interpretation here, we are left with no uncertainty that could warrant deference. The statutory provisions before us deliver unmistakable commands. The statute hinges inter partes review on the filing of a petition challenging specific patent claims; it makes the petition the centerpiece of the proceeding both before and after institution; and it requires the Board’s final written decision to address every claim the petitioner presents for review. There is no room in this scheme for a wholly unmentioned “partial institution” power that lets the Director select only some challenged claims for decision. The Director may (today) think his approach makes for better policy, but policy considerations cannot create an ambiguity when the words on the page are clear.

Slip op. at 12.

Justice Breyer filed a dissent, joined by Justices Ginsburg, Sotomayor, and Kagan (in part), arguing that the USPTO’s procedures should be granted Chevron deference, because the complex AIA statutory framework is ambiguous on the question of whether a final written decision must address all claims challenged in a petition.

The SAS decision is likely to have significant practical and strategic implications. First, the PTAB has employed partial final written decisions as an efficiency measure, obviating the need to prepare detailed final decisions on all challenged claims. In light of SAS, the PTAB may opt to expand the evidence considered during the trial proceedings, and to resolve patentability challenges to all claims identified in a petition, not simply those as to which a trial is instituted. This change may require amendment of some trial procedures as well.

Second, SAS is likely to affect the range of statutory estoppel that results from a concluded IPR proceeding. In view of the Supreme Court’s decision barring partial institution decisions, estoppel will attach to all claims for which PTAB review is sought, regardless of whether a particular ground is instituted on or found to be redundant under 325(d) – assuming redundancy remains viable. Petitioners will thus have to carefully select which claims to challenge in relation to the downstream estoppel implications and factor in the PTAB’s 2016-2017 informative decisions on discretionary denials under 35 U.S.C. § 325(d) in their decision-making. Relatedly, because the PTAB’s determination of non-institution and redundancy will also be part of the final written decision, these determinations will now also be subject appellate review by the Federal Circuit.