Fresh From the Bench: Precedential Patent Cases From the Federal Circuit
Ethicon – In a split decision the Circuit holds that the same panel that decides whether to institute an IPR can also make the final determination of validity. The panel first holds that 35 U.S.C. § 314(d) does not preclude the Circuit from hearing Ethicon's challenge to the authority of the Board to render a final decision. On the merits, the majority rejects Ethicon's argument that because the panel of the Board is first exposed to a limited record consisting of the petition and patent holder's preliminary response, there is a risk that the panel may prejudge the case before seeing a full record, thereby depriving a patent holder of a due process right to an impartial decision-maker. The majority also disagrees with Ethicon that the statutory scheme under the AIA precludes the Director from delegating the decision to institute to the same panel of the Board that makes the final decision. According to the majority, the PTO's assignment of the institution and final decisions to one panel of the Board does not violate due process under Withrow v. Larkin, 421 U.S. 35 (1975) and other Supreme Court precedent. The majority also cites to precedent from other Circuits rejecting due process challenges to systems of adjudication combining functions in an agency.
In dissent, Judge Newman argues that post-grant proceedings were intended as quick and cost effective alternatives to litigation, and that the legislative plan established in the AIA has been repeatedly thwarted by the implementing bodies, administrative and judicial. The AIA established a threshold step called "institution" by the Director of the PTO followed by trial and adjudication, by a new adjudicatory body established in the PTO. And as a safeguard of administrative objectivity, the legislation divided the functions of institution and trial into separate bodies within the PTO. This division should be honored by the PTO and by this court.
Ethicon Endo-Surgery, Inc. v. Covidien LP,Fed. Cir. Case 2014-1771
(January 13, 2016)
Covidien petitioned for inter partes review of Ethicon's '070 patent. The PTAB granted the petition and instituted IPR. On the merits, the same Board panel found all challenged claims invalid as obvious. Ethicon appeals, asserting that the Board's final decision is invalid because the same panel made the decision to institute and the final decision. Ethicon also asserts that the Board erred as to obviousness.
The claims of the '070 patent are directed to a surgical device used to staple, secure, and seal tissue that has been incised. The patent claims the use of staples of different pre-formed and formed heights (i.e., heights before and after stapling) and the use of staples with nonparallel legs. It is undisputed that both of these improvements, separately, were known in the prior art. The accused Covidien staplers have been very successful, achieving over $1 billion in product sales within the first three years of their introduction.
The Circuit Has Jurisdiction to Address the Combination of Functions
The PTO, as intervenor, argues that § 314(d) bars us from considering this issue on appeal because it is an issue concerning the institution of an IPR review proceeding. Section 314(d) provides that "the determination by the Director whether to institute an inter partes review shall be final and nonappealable." In re Cuozzo Speed Techs., LLC, 793 F.3d 1268 (Fed. Cir. 2015). It does not, however, preclude review of the final decision. Indeed, § 319 specifically provides for appeal of a final decision: "a party dissatisfied with the final written decision of the Board may appeal the decision." Here, Ethicon does not challenge the institution decision, but rather alleges a defect in the final decision. It argues that the final decision is invalid because it was made by the same panel that instituted IPR. Neither section 314(d) nor Cuozzo prevents us from hearing a challenge to the authority of the Board to issue a final decision.
Due Process Does Not Require That a Different Panel Make the Final Decision
On the merits, Ethicon argues that having the same panel make the decision to institute and then later decide the merits of the IPR raises serious due process concerns. According to Ethicon, because the panel of the Board is first exposed to a limited record consisting of the petition and patent holder's preliminary response, there is a risk that the panel may prejudge the case before seeing a full record, thereby depriving a patent holder of a due process right to an impartial decision-maker. Ethicon argues that to avoid these constitutional concerns, we must construe the statute to preclude the Director from delegating the decision to institute to the same panel of the Board that makes the final decision. We disagree with Ethicon and conclude that, where, as here, there are no other separate procedural-fairness infirmities alleged, the PTO's assignment of the institution and final decisions to one panel of the Board does not violate due process under governing Supreme Court precedent.
The leading case involving due process and the combination of functions is Withrow v. Larkin, 421 U.S. 35 (1975). In Withrow, the question was whether a physician's due process rights had been violated by a state medical board's suspension of his license when the same board both investigated, and then later adjudicated, the issue. The Court held that there was no due process violation, finding that combining the investigative and adjudicatory functions in a single body does not raise constitutional concerns. Similarly, the Court found no due process violation where Administrative Law Judges determine Social Security disability benefits and, at the preliminary stage, "investigate facts and develop the arguments both for and against granting benefits," Sims v. Apfel, 530 U.S. 103 (2000), and "act as an examiner charged with developing the facts." Richardson v. Perales, 402 U.S. 389 (1971). In fact, the Supreme Court has never held combining functions to be a violation of due process, and it has upheld several such practices.
Other appellate courts have also rejected due process challenges to systems of adjudication combining functions in an agency, such as in a system for deciding whether to terminate tenured public employees which combined investigative and adjudicatory functions, in combining functions of investigation, prosecution and adjudication in the Director of the Office of Thrift Supervision when a banker was sanctioned, when a Regional Director of the NLRB exercised both investigative and adjudicative responsibilities in connection with the issuance and resolution of an unfair labor practice complaint, simply because of combined functions when a contract dispute was decided by officials appointed by an officer representing the government, and when, in the anti-dumping context, a Dept. of Commerce official makes both the decision to institute and then the final determination. Ethicon cites no case to the contrary.
Here, combining the decision to institute with the final decision in a single panel is less problematic than the situation in Withrow. The Board first decides whether a petition demonstrates a likelihood of success on the merits, and, if it does, makes a decision to institute IPR. During the merits, the Board decides whether the petition actually succeeds. Both the decision to institute and the final decision are adjudicatory decisions and do not involve combining investigative and/or prosecutorial functions with an adjudicatory function. The IPR procedure is directly analogous to a district court determining whether there is "a likelihood of success on the merits" and then later deciding the merits of a case. As Withrow also made clear, pretrial involvements, such as issuing or denying a preliminary injunction, do not raise any constitutional barrier against the judge's presiding over the later trial. We similarly see no due process concerns in combining the functions of initial decision and final disposition in the same Board panel.
Nor Does the Statutory Scheme Require That Separate Panels Handle the Two Rulings
Ethicon argues that the AIA reflects a congressional intent to withhold the power of the Director to delegate to the Board the power to institute IPR. This was allegedly designed to insulate the Board as final decision maker from the supposed taint of the decision to institute the proceeding. Ethicon argues that because Congress (1) specifically gave the Director the power to institute under § 314(a), (2) did not explicitly give the Director authority to delegate the institution decision to the Board, and (3) gave the Board the power to make the final determination, Congress intended to keep the functions of institution and final decision separate.
There is nothing in the statute or legislative history of the statute indicating a concern with separating the functions of initiation and final decision. Ethicon ignores the longstanding rule that agency heads have implied authority to delegate to officials within the agency, even without explicit statutory authority and even when agency officials have other statutory duties. Congress regularly gives heads of agencies more tasks than a single person could ever accomplish, necessarily assuming that the head of the agency will delegate the task to a subordinate officer.
The implicit power to delegate to subordinates by the head of an agency was firmly entrenched in Fleming v. Mohawk Wrecking & Lumber Co., where the Supreme Court held the administrator of an agency could delegate the power to sign and issue subpoenas to regional administrators despite absence of an explicit authorization in the statute. 331 U.S. 111 (1947). "When a statute delegates authority to a federal officer or agency, subdelegation to a subordinate federal officer or agency is presumptively permissible absent affirmative evidence of a contrary congressional intent." U.S. Telecom Ass'n v. FCC, 359 F.3d 554 (D.C. Cir. 2004); see also Kobach v. U.S. Election Assistance Comm'n, 772 F.3d 1183, 1190 (10th Cir. 2014) (finding that the courts of appeals that have spoken on the issue are "unanimous in permitting subdelegations to subordinates . . . so long as the enabling statute and its legislative history do not indicate a prohibition on subdelegation"). The general principle is so well accepted that the Supreme Court has called it "unexceptional." See United States v. Giordano, 416 U.S. 505 (1974).
Ethicon can point to no legislative history suggesting that delegation is impermissible. Before the AIA, the Director regularly assigned tasks to subordinates. See, e.g., § 131 ("the Director shall issue a patent"); § 132(a) ("the Director shall notify the applicant" of a rejection of a patent application); § 251(a) ("the Director shall" reissue amended patents). This carried over to the AIA, where Congress assigned the Director the decision to institute, necessarily assuming that the popularity of IPR and the short time frame to decide whether to institute IPR would mean that the Director could not herself review every petition.
Moreover, Congress's vesting of broad rulemaking powers in the head of the agency is an alternate source of authority to delegate. As noted in Fleming, rule-making power may itself be an adequate source of authority to delegate a particular function, unless by express provision of the Act or by implication it has been withheld. Here, Congress gave the Director broad rulemaking power to "govern the conduct of the proceedings in the Office," § 2(b)(2), and to "establish and govern IPR under this chapter," § 316(a)(4). The Director promulgated a regulation allowing the Board to institute IPR "on behalf of the Director." 37 C.F.R. § 42.4(a). This rule itself is entitled to Chevron deference. Chevron, U.S.A., Inc. v. Nat. Res. Def Council, Inc., 467 U.S. 837 (1984). The reference to "the Director" in the statute is ambiguous as to whether it requires personal participation, and the regulation is a permissible interpretation of the statute.
The Majority Affirms Rejection of the Claims at Issue
Ethicon does not challenge the Board's finding that all of the claim elements are found in the prior art, nor does it challenge the Board's determination that a person of ordinary skill would have been motivated to combine those prior art elements to come up with the invention in the '070 patent. Ethicon instead argues that the Board did not properly take into account the secondary considerations of non-obviousness. However, the majority holds that there is substantial evidence to support the Board's conclusion that there was no nexus established between the evidence of commercial success and the patented invention. Finally, the majority holds that the Board adequately weighed evidence demonstrating a long-felt but unresolved need.
Judge Newman Dissents
I respectfully dissent, for the majority's holdings are contrary to the AIA. The post-grant proceedings established by the Act were intended as "quick and cost effective alternatives to litigation." That legislative plan has been repeatedly thwarted by the implementing bodies, administrative and judicial. These post-grant proceedings were designed to provide rigorous inquiry and confident adjudication as a surrogate for district court litigation, with the added benefits of administrative expertise and efficiency. As part of this new agency procedure, the Act established a threshold step called "institution" by the Director of the PTO followed by trial and adjudication, by a new adjudicatory body established in the PTO. The "institution" step is a carefully designed threshold, whereby only meritorious challenges will be considered. And as a safeguard of administrative objectivity, the legislation divided the functions of institution and trial into separate bodies within the PTO.
The panel majority states that "there is nothing in the Constitution or the statute that precludes the same Board panel from making the decision to institute and then rendering the final opinion." That is incorrect. The statute requires that these proceedings be separated, the first decision required to be made by the Director, and the second decision made by the Board. This court has now endorsed proceedings in which the Board makes both decisions. This procedure cannot be reconciled with the statute. The majority's endorsement of the PTO's statutory violation departs not only from the statute, but also from the due process guarantee of a "fair and impartial decision-maker."
Comment: Judge Newman has consistently dissented in appeals of AIA rulings where she thinks the majority is making rulings that will not assure an adequate hearing to the parties in a IPR, since it is, as she comments above, "a surrogate for district court litigation." In addition to her dissent in this case, she argued in Merck v. Gnosis S.P.A., Fed. Cir. Case 2014-1779 (Dec. 17, 2015), that the Circuit should not defer to the Board by applying the highly deferential "substantial evidence" standard of review. In In re Cuozzo Speed Techs., LLC, 793 F.3d 1268 (Fed. Cir. 2015), she dissented from the ruling that the broadest reasonable interpretation should be applied in construing claims in AIA proceedings. In Prolitec, Inc. v. ScentAir Techs, Inc., 2015 U.S. App. LEXIS 21037 (Fed. Cir.), she thought the majority had not closely examined whether amendments to the claims should be permitted in IPRs.
Judge Newman may be vindicated in Cuozzo, discussed below, but other than as to the application of the broadest reasonable interpretation in AIA proceedings in which four judges joined her in dissent of the Circuit's decision not to hear Cuozzo en banc, Judge Newman has yet to persuade any of the other Circuit judges that the Circuit should not be so deferential to the PTO in AIA proceedings.