By Kevin E. Noonan —

Ever since institution of the post-grant review proceedings enacted under the Leahy-Smith America Invents Act were implemented by the U.S. Patent and Trademark Office (through the newly constituted Patent Trial and Appeal Board), parties (particularly patentees who lost patent rights thereby) have challenged the outcome on procedural, substantive, and constitutional grounds (see "Cuozzo Speed Technologies LLC v. Lee"; "SAS Institute Inc. v. Iancu;  Return Mail, Inc. v. United States Postal Service"; "Thryv, Inc. v. Click-to-Call Technologies, LP ").  The most recent (and legally creative) challenge is pending before the Supreme Court (see "U.S. Government Petitions for Certiorari in Arthrex Case"; "Arthrex Files Certiorari Petition in Arthrex Case"), wherein patentee Appellants (and respondents before the Court) argued an Appointments Clause violation because Administrative Patent Judges on the PTAB are principal officers not properly installed with Senate approval.

Appellant in New Vision Gaming and Development* v. SG Gaming (to be heard by the Federal Circuit on April 9th) has taken another tack, arguing that the administrative details of how APJs are paid, bonused, and controlled by the Director could be contrary to patentee's rights to due process (Corrected Brief of Appellant; Reply Brief of Appellant).  The argument is based on Supreme Court precedent in Tumey v. Ohio, 273 U.S. 510 (1927).  In that case, the Supreme Court reversed a criminal conviction under Ohio state law under conditions where the mayor of a village sat in judgment of a defendant accused of violating the state's Prohibition Act.  On appeal, the convicted petitioner argued that the mayor had pecuniary and other interests in his conviction and the petitioner was thus denied due process.  The basis of this allegation was a provision under the law that "[m]oney arising from fines and forfeited bonds shall be paid one-half into the state treasury credited to the general revenue fund, one-half to the treasury of the township, municipality or county where the prosecution is held, according as to whether the officer hearing the case is a township, municipal, or county officer."  Section 6212-19, General Code Ohio.  There were also allegations that monies raised from convictions like the plaintiff's inured to the mayor's benefit as a resident of the village, as well as the law providing direct payments to the mayor.

The Supreme Court based its decision reversing plaintiff's conviction on the "general rule" that "officers acting in a judicial or quasi-judicial capacity are disqualified by their interest in the controversy to be decided" but that "[n]ice questions[] often arise as to what the degree or nature of the interest must be."  But as here, "it certainly violates the Fourteenth Amendment and deprives a defendant in a criminal case of due process of law to subject his liberty or property to the judgment of a court, the judge of which has a direct, personal, substantial pecuniary interest in reaching a conclusion against him in his case."  The Court held that, as a consequence of ratification of the Fourteenth Amendment, such an arrangement violates the requirement for due process of law.  Relevant to Appellant's argument here, the Court stated:

The mayor is the chief executive of the village.  He supervises all the other executive officers.  He is charged with the business of looking after the finances of the village.  It appears from the evidence in this case, and would be plain if the evidence did not show it, that the law is calculated to awaken the interest of all those in the village charged with the responsibility of raising the public money and expending it, in the pecuniarily successful conduct of such a court.  The mayor represents the village and cannot escape his representative capacity.  On the other hand, [under this law] he is given the judicial duty, first, of determining whether the defendant is guilty at all; and, second, having found his guilt, to measure his punishment . . . .  With his interest as mayor in the financial condition of the village and his responsibility therefor, might not a defendant with reason say that he feared he could not get a fair trial or a fair sentence from one who would have so strong a motive to help his village by conviction and a heavy fine?  . . .  A situation in which an official perforce occupies two practically and seriously inconsistent positions, one partisan and the other judicial, necessarily involves a lack of due process of law in the trial of defendants charged with crimes before him.

While acknowledging that the consideration at issue might not motivate some mayors to permit it to influence their judgment, the Court opined that:

[T]he requirement of due process of law in judicial procedure is not satisfied by the argument that men of the highest honor and the greatest self-sacrifice could carry it on without danger of injustice.  Every procedure which would offer a possible temptation to the average man as a judge to forget the burden of proof required to convict the defendant, or which might lead him not to hold the balance nice, clear, and true between the state and the accused denies the latter due process of law.

This led the Court to the conclusion that a "temptation" arising from "structural bias" in a statutory regime can violate the Due Process Clause even in the absence of actual bias.  The subtlety of this argument with regard to the current post-grant review regime is patent:  Appellant is not accusing the USPTO, its Director, or any individual APJs of anti-patent bias (a charge levied perhaps imprudently by others; see, e.g., "Is The PTAB a Death Sentence for Patent Rights?), but raising the structural possibility as being sufficient for the Constitutional infirmity.

The principles enunciated in Tumey have also been the basis for consistent decisions in Dugan v. Ohio, 277 U.S. 61 (1928), and Ward v. Village of Monroeville, 409 U.S. 58 (1972) (notably, where the fines at issue accounted for between 35% to 50% of the village income).  However, it must be mentioned in passing that there are distinctions between Tumey and this case that could make a difference to a reviewing court, including that Tumey involved a criminal proceeding and that the statute at issue was state and not Federal law.

Appellant's argument focuses on institution decisions and their relation to USPTO oversight and the system by which the Office financially rewards APJs based on the economic consequences of institution (versus refusing to institute).  Calling the current regime a "constitutional flaw," Appellant argues that the scheme "creates impermissible incentives for the PTAB, its leadership, and the individual administrative patent judges  . . . and that APJs are 'subjected to performance reviews and management tools by PTAB leadership, and the APJ's salary and bonus structures incentivize higher 'production,' which means more institutions.'"  Taken in conjunction with a lack of judicial independence, Appellant further argues that this raises "conflicting interests" that can raise the possibility — or appearance — of the PTAB granting "borderline petitions[] in order to ensure continued workflow, possible bonuses, and robust PTAB fee collections" (citing USPTO statistics that about $23 million in annual revenues depend on institution of post-grant review provisions).  These assertions are supported by citation to statute (35 U.S.C. § 42; 35 U.S.C. §§ 311(a), 321(a)) and USPTO official utterances such as Setting and Adjusting Patent Fees During Fiscal Year 2017, 82 Fed. Reg. 52,780, 52,780 (Nov. 14, 2017), as well as the PTAB's administrative and performance review structures and standards.

A similar situation arose in the first decade of the 21st Century, where the Office's policies directed a severed diminution in granted patents (motivated by misguided reliance on arguments from academics and interest groups that the Office was granting too many patents of poor quality; see "Law Professors Back USPTO in Tafas v. Dudas Appeal"; "Public Interest Groups Back USPTO in Tafas v. Dudas Appeal").  As a consequence, the Office received greatly diminished allowance fees and consequently greatly diminished maintenance fees, resulting in a budgetary shortfall as those fees made up a significant portion of the USPTO's annual revenues.  The consequences were forestalled, of course, by judicial obstruction of these rules; see "Tafas v. Dudas; SmithKline Beecham Corp. v. Dudas" and "No April Fool's Joke — Tafas and GSK Win on Summary Judgment" and later refusal by then-new Director Kappos to implement them when the Federal Circuit left open that possibility (see "New Rules' Officially Rescinded").

Appellant argues that the circumstances arising in the USPTO's implementation of the post-grant review provisions of the AIA "may very well be unique in the federal government" because "[i]t is entirely user-fee funded, and the PTO's budget is effectively based on its fee collections."  Relying on USPTO statistics, Appellant argues that "[a]bout 40% of the approximately $57 million in annual AIA fee collections depends on granting petitions to institute," thereby drawing the nexus between structural features and due process injury.  In addition, the brief notes the "dual roles" of PTAB leadership in exercising both executive and adjudicatory functions as raising the appearance of unfairness.  This argument is supported in the brief by noting that the Chief APJ, the Deputy, and the Vice Chief APJs all bear some responsibility for institution decisions due to their responsibility to "provide policy direction and ensure the quality and consistency of AIA decisions," while at the same time having "significant responsibilities managing the PTAB's finances as a distinct 'business unit' within the PTO."  These structural circumstances mirror those found to be due process violations in Tumey, Dugan, and Ward.

Exacerbating these conditions is the dependence on institution decisions and the frequency and number thereof on how individual APJs are compensated, evaluated, and bonused, according to Appellant's brief (while being careful to disclaim any specific instance of unethical behavior as opposed to the appearance thereof engendered by PTAB structure; indeed, the brief characterizes the resulting pressures on individual APJs as "unfair"), citing Gibson v. Berryhill, 411 U.S. 564, 578 (1973):

Although a decision to institute does not absolutely guarantee an economic benefit for the APJ, a guarantee is not necessary.  To violate due process, all that is necessary is a reasonable connection between the decision and the pecuniary benefit.

Appellant's argument is thus rooted in structural violations of due process, which it argues "creates too strong a motive and unfair temptation for 'the average man as a judge,'" citing Ward, and which can "sometimes bar trial by judges who have no actual bias and who would do their very best to weigh the scales of justice equally between contending parties," citing Aetna Life Ins. Co. v Lavoie, 475 U.S. 813, 825 (1986).  And a possible balancing consideration, judicial independence, is unavailable to PTAB APJs according to the brief, because these officers lack the independence of Article III judges and Administrative Law Judges in other agencies (a distinction argued at length in Arthrex and referenced in Appellant's brief).

Finally, the brief notes that the Supreme Court's recent decision in Thryv, Inc. v. Click-to-Call Technologies, LP exacerbates the temptation argument, because the Court restricted judicial review of institution decisions.

In addition to these arguments, Appellant's brief raises the question of Appointments Clause infirmity (no doubt to preserve the issue in anticipation of a "favorable" decision by the Supreme Court in U.S. v. Arthrex) and on the merits whether the PTAB erred in holding the claims at issue invalid as being directed to patent-ineligible subject matter under 35 U.S.C. § 101.  On more particularly procedural grounds, the brief also argues that Appellee had eschewed recourse to the PTAB as part of prior licensing agreements between the parties.  But wisely Appellant argues that the USPTO has the ability to remedy the situation, giving the Federal Circuit or Supreme Court an alternative to deconstructing the post-grant review statutory edifice.

The Federal Circuit has shown no inclination to abrogate Congressional prerogatives under the AIA with regard to its post-grant review provisions (and Appellant has provided alternative bases for finding in their favor).  However, the Supreme Court has acknowledged that Due Process concerns could be a basis for finding Congress had overstepped its constitutional authority in establishing the post-grant provisions of the AIA (see "Oil States Energy Services, LLC. v. Greene's Energy Group, LLC (2018)").  Indeed, a running undercurrent in Arthrex at oral argument, from counsel and the Court, was whether the Appointments Clause issues implicated infringement on patentees' due process rights.  Appellant has been careful to ground its due process argument on Supreme Court precedent in this regard, and even more careful to base its argument Calpurnia-esque on the importance of avoiding the appearance of the possibility of impropriety.  To the extent that these concerns resonate either with the Federal Circuit or, failing that, the Supreme Court, Appellant's arguments may provide the most potent rationale for hobbling if not dismantling the post-grant review regime enacted under the AIA.

*Appellant is represented by Matthew J. Dowd, David Boundy, and Robert J. Scheffel.