USPTO Refusal to Accept Requests for Director Review of Institution Decisions Not an Appointments Clause Violation

Decision: In re Palo Alto Networks, Inc., No. 22-145 (Fed. Cir. 2022) (precedential).

Analysis and Comments:

In the most recent Federal Circuit decision addressing the topic of USPTO Director Review, the Federal Circuit held that the Director’s “delegation of authority as to whether to institute IPR and PGR proceedings to the [APJs of the Patent Trial and Appeal Board (‘PTAB’)] and the Director’s policy refusing to accept party requests for Director rehearing of decisions not to institute do not violate the Appointments Clause.” Id. at *6.

Palo Alto Networks, Inc. (“PAN”) filed petitions for IPR and PGR on two patents owned by Centripetal Networks, Inc. While PAN’s petitions were pending, the USPTO issued interim guidance stating that the agency “does not accept requests for Director review of decisions on institution.” Id. After the PTAB denied institution of PAN’s petitions, PAN filed Requests for Director Rehearing seeking review of the non-institution decisions. Id. The USPTO denied these requests, stating that “[a]t this time, the [USPTO] does not accept requests for Director Review of decisions on institution . . . .” Id. PAN then sought a writ of mandamus from the Federal Circuit, compelling the USPTO to accept and consider its Requests for Director Rehearing.

Citing United States v. Arthrex, PAN argued that the USPTO’s categorical refusal to accept requests for Director Review of institution decisions violates the Appointments Clause. Id. at *4; 141 S. Ct. 1970 (2021). The Federal Circuit disagreed, noting this case is fundamentally different from Arthrex because, here, there is no statutory or regulatory impediment to the Director’s authority to review institution decisions. In re Palo Alto Networks, Inc., 2022 WL 3364832, at *4. The Director has merely delegated her authority regarding institution to the PTAB and “plainly has the authority to revoke the delegation or to exercise her review in individual cases despite the delegation.” Id.

The Federal Circuit cited the following passage from Arthrex:

In every respect save the insulation of their decisions from review within the Executive Branch, APJs appear to be inferior officers—an understanding consistent with their appointment in a manner permissible for inferior but not principal officers. . . . If the Director were to have the authority to take control of a PTAB proceeding, APJs would properly function as inferior officers.

Arthrex, 141 S. Ct. at 1986–87. The court noted that while “not directly addressing the issue before us, this language strongly suggests that delegation to the [PTAB] of the authority to decide on institution without a mechanism for parties to subsequently request Director review does not present Appointments Clause problems.” In re Palo Alto Networks, Inc., 2022 WL 3364832, at *5.

The Federal Circuit also relied on decisions from other circuit courts, including its own, that have uniformly rejected similar Appointments Clause challenges. Id.; In re Grand Jury Inv., 916 F.3d 1047 (D.C. Cir. 2019); Willy v. Administrative Rev. Bd., 423 F.3d 483, 491 (5th Cir. 2005); Varnadore v. Sec’y of Lab., 141 F.3d 625, 631-32 (6th Cir. 1998). The Federal Circuit also highlighted its decision in Piano Factory Grp., Inc. v. Schiedmayer Celesta GmbH, 11 F.4th 1363 (Fed. Cir. 2021), in which the court rejected an argument that final decisions by the TTAB canceling the registration of a federal trademark do not violate the Appointments Clause. The Federal Circuit reasoned that “the Appointments Clause was intended to prevent unappointed officials from wielding too much authority, not to guarantee procedural rights to litigants, such as the right to seek rehearing from the Director. . . . [W]hether the Director elects to exercise [her review] authority does not affect the status of ATJs [or APJs] as inferior officers under the Appointments Clause.” Id. at 1374.

The Federal Circuit also highlighted the Second Circuit’s recent decision identifying structural authority, rather than supervisory activity, as a key consideration in rejecting Appointments Clause challenges. United States v. Donziger, 38 F.4th 290 (2d Cir. 2022). The Second Circuit stated what matters “is that the [principal officer] ha[s] the discretion to review decisions reviewed by [the inferior officer]” and “[w]hether they were in fact supervised is beside the point.” Id. at 301. “The Constitution does not mandate a minimum level of supervisory activity over the work of inferior officers; rather, it requires as a matter of structural authority that inferior officers be subject to the supervision and direction of principal officers.” Id. The Federal Circuit concluded that institution decisions made by APJs are subject to the same supervision and direction by the Director, even if that authority is not, in fact, exercised. In re Palo Alto Networks, Inc., 2022 WL 3364832, at *6 (emphasis added).

Judge Reyna concurred in the decision but disagreed as to why PAN’s petition for writ of mandamus should be denied. Id. at *6 (Reyna, J., concurring). Judge Reyna opined that two facts undercut PAN’s case. Id. at *7. First, there is no “categorical refusal,” as the Director merely noted she was not accepting requests for review “[a]t this time.” Id. Second, the Director’s subsequent grant of sua sponte review of other institution decisions “pulls the rug out from under PAN’s petition.” Id. (citing OpenSky Indus., LLC v. VLSI Tech. LLC, IPR2021-01064, Paper No. 41 (PTAB June 7, 2022); Pat. Quality Assurance, LLC v. VLSI Tech. LLC, IPR2021-01229, Paper No. 31 (PTAB June 7, 2022)).

The Federal Circuit’s decision allows the USPTO to continue its policy of not accepting requests for Director review of institution decisions. For parties seeking to challenge this policy, two issues may be ripe for review by the Supreme Court: (1) whether a lack of supervisory activity violates the Appointments Clause, and (2) whether the delegation of the Director’s institution authority runs afoul of the Appointments Clause. Challengers might consider framing the Board’s decision on whether to grant institution as an exercise of “significant executive power,” similar to the Board’s issuance of final written decisions in Arthrex. Additionally, challengers may consider attacking the conclusion by the circuit courts that considerations relating to structural authority trump supervisory activity in Appointments Clause challenges, since Arthrex itself stated that under the Appointments Clause, inferior officers “must be directed and supervised by an officer who has been.” Arthrex, 141 S. Ct. at 1976 (emphasis added); Art. II, § 2, cl. 2; cf. Piano Factory Grp., 11 F.4th at 1374 (“Whether the Director elects to exercise [her review] authority does not affect the status of . . . inferior officers under the Appointments Clause.”); Donziger, 38 F.4th at 301 (“Whether [inferior officers] were in fact supervised is beside the point.”). If the circuit courts’ standard persists, challengers may face uphill battles in establishing Appointments Clause challenges.