Arthrex, Inc. v. Smith & Nephew, Inc. (Fed. Cir. 2018)

By Kevin E. Noonan --

Although having built up a track record for several years and several thousand petitions and "trials," inter partes review proceedings under the Leahy-Smith America Invents Act are still relatively new.  As a statute administered by an administrative agency having the power (and duty) to promulgate rules effecting implementation of that statute, IPRs, like many administrative proceedings, have in due course generated controversies on how the statute has been implemented.  A fair number of these controversies have been reviewed by the Federal Circuit (see "Redline Detection, LLC v. Star Envirotech, Inc. (Fed. Cir. 2015)"; "Aqua Products, Inc. v. Matal (Fed. Cir. 2017)"; "Wi-Fi One, LLC v. Broadcom Corp. (Fed. Cir. 2018) (en banc)") and the Supreme Court (see "Cuozzo Speed Technologies LLC v. Lee (2016)"), and indeed even the constitutionality of the proceedings has put in question (see "Oil States Energy Services, LLC v. Greene's Energy Group, LLC").  This week, the Federal Circuit ruled on the proper interpretation of another PTAB Rule, entry of adverse judgment under 37 C.F.R. § 42.73(b) in Arthrex, Inc. v. Smith & Nephew, Inc., affirming the PTAB's interpretation of the rule.

The case arose in an IPR against Arthrex's U.S. Patent No. 8,821,541; claims 1-9 were challenged (remaining claims 10 and 11 were not) and claim 1 is representative:

1.  A suture anchor comprising: an anchor body having a longitudinal axis, a proximal end, a distal end, a central passage, a first suture opening, and a second suture opening, wherein the central passage extends along the longitudinal axis, the central passage extends from the first suture opening which is located at the proximal end of the anchor body and through a portion of a length of the anchor body, the first suture opening is encircled by a perimeter of the anchor body, and the second suture opening extends through a portion of the anchor body; a rigid support fixed to the anchor body, wherein the rigid support extends across the central passage and has a first portion and a second portion spaced from the first portion, the first portion branching from a first wall portion of the anchor body and the second portion branching from a second wall portion of the anchor body, the rigid support spaced axially away from the first suture opening along the longitudinal axis of the anchor body, and the second suture opening is disposed near the rigid support; and at least one suture strand threaded into the central passage, wherein the at least one suture strand is supported by the rigid support and threaded through the first suture opening and the second suture opening of the anchor body.

Prior to institution of the IPR, Arthrex disclaimed claims 1-9 under 37 C.F.R. § 42.107(e) and filed their preliminary response to the petition, arguing that the Board should dismiss the petition because Rule 107(e) precludes instituting an IPR on disclaimed claims.  Arthrex also asserted in its petition that it was not requesting that the Board enter an adverse judgment, rather Arthrex argued that the Board's rule precluded the Board from instituting the IPR because all the challenged claims had been disclaimed.  Nevertheless, the Board entered an adverse judgment, based on its interpretation of another rule, under 37 C.F.R. § 42.73(b), which states:

A party may request judgment against itself at any time during a proceeding. Actions construed to be a request for adverse judgment include:
    (1) Disclaimer of the involved application or patent;
    (2) Cancellation or disclaimer of a claim such that the party has no remaining claim in the trial;
    (3) Concession of unpatentability or derivation of the contested subject matter; and
    (4) Abandonment of the contest.

(emphasis in opinion).  The significance of entering judgment is that the estoppel provisions of 37 C.F.R. § 42.73(d)(3)(i) attached; these provisions prevent a patent owner from "taking action inconsistent with the adverse judgment, including obtaining in any patent . . . [a] claim that is not patentably distinct from a finally refused or canceled claim."  This rule materially affected the scope of claims Arthrex could pursue in two pending continuation and a third more recently filed applications.  Arthrex appealed; as part of that appeal the Federal Circuit denied Smith & Nephew's motion that Arthrex was precluded from appealing this decision under 35 U.S.C. § 319 because the Board had not entered a Final Written Decision.

The Federal Circuit affirmed, in an opinion by Judge Dyk joined by Judge O'Malley (who filed a concurring opinion) over a dissent by Judge Newman.  The panel first held that the Board's decision was appealable, not falling within the proscriptions of 35 U.S.C. § 314(d) regarding institution decisions.  The panel majority started from the presumption that PTAB decisions were appealable as for any other final administrative agency action.  5 U.S.C. §§ 701,704.  The panel also found support in 28 U.S.C. § 1295(a)(4)(A), which provides for judicial review of final agency action absent statutory provisions precluding review.  The Board did not find the Court's decision in St. Jude Medical, Cardiology Division, Inc. v. Volcano Corp., 749 F.3d 1373 (Fed. Cir. 2014), to be to the contrary, based on the different procedural posture in that case (which considered whether § 1295(a)(4)(A) permitted appeal of the PTAB's decision not to institute, which is precluded by § 314(d)).

Next the panel held that, Arthrex having disclaimed any argument regarding whether the PTAB had exceeded its statutory authority to promulgate the rules, the PTAB properly applied its rules under these circumstances.  The panel rejected the argument that Arthrex had immunized itself from adverse judgment by specifically asserting that it was not requesting adverse judgment by disclaiming claims 1-9; the panel stated that if this was the rule then any patentee disclaiming any claims in an IPR would make the same representation; this would "render the rule a nullity," according to the Court.  Moreover, the panel majority believed that the language of the rule centered around how the Board construed the disclaimer and was not dependent on representations from a patentee.  The panel also rejected Arthrex's argument that an adverse judgment should be entered only if claims are disclaimed after an IPR is instituted; the panel backed the Board's interpretation that "an adverse judgment may be entered after a petition has been filed, but before an IPR proceeding has been instituted."  The Board interpreted the rule to mean that there is no remaining claim "ready for trial," whether the IPR has been instituted or not.  Accordingly, the panel majority stated that

The purpose of the estoppel provision is to "provide[ ] estoppel against claims that are patentably indistinct from those claims that were lost."  For this purpose, there seems to be no meaningful distinction between claims that are cancelled before an IPR proceeding is instituted and claims that are cancelled after an IPR proceeding is instituted [citations omitted].

In Judge O'Malley's concurrence, the Judge agrees with the outcome under the present rule but has "doubts about whether the Director had the authority under 35 U.S.C. § 316 (or any other statutory provision) to issue that regulation or whether, if so, the regulation was properly promulgated."  Specifically, the Judge finds a contradiction with the result here and the result in Facebook, Inc. v. Skky, LLC, No. CBM2016-00091, 2017 WL 4349404, at *3 (P.T.A.B. Sept. 28, 2017), where the Court held that covered business method patent review cannot be instituted on disclaimed claims.  She cites the Board's position in that case as "our case law requires that statutorily disclaimed claims must be treated as if they never existed and therefore those claims cannot support institution of CBM review."  If that is the case, then for Judge O'Malley it should also apply here and "if the Board lacks the authority to institute review based on statutorily disclaimed claims, as § 42.107(e) and Facebook seem to indicate, it is unclear to me why the Board would have the authority to take any other action—particularly prior to institution—with respect to disclaimed claims."

Judge O'Malley also disagreed with the Board's position that the word "proceeding" as used in Rule 73(b) includes both the time before and after institution, i.e., the entire time period from when the petition is filed until a Final Written Decision is issued.  But under Shaw Industries Group, Inc. v. Automated Creel Systems, Inc., 817 F.3d 1293, 1300 (Fed. Cir. 2016), however, "[t]he IPR does not begin until it is instituted."  Entering an adverse judgment in this case seems to the Judge to be a contradiction of this controlling Federal Circuit precedent.  And nowhere in the AIA provisions regarding IPRs can Judge O'Malley find the authority for the Board to enter an adverse judgment in an IPR.

Judge Newman's dissent is based on her opinion that Arthrex had disclaimed all claims challenged in the petition prior to the Board's decision whether to institute an IPR, and accordingly under 37 C.F.R. § 42.107(e) there were no claims against which an adverse judgment could be entered.  For Judge Newman, the relevant language of 37 C.F.R. § 42.73(b) in subparagraph (2) is that "[c]ancellation or disclaimer of a claim such that the party has no remaining claim in the trial" (emphasis in opinion), because under the factual circumstances at bar there was no trial and thus entering an adverse judgment was contrary to the express language of the rule.  Judge Newman believes that the PTAB has exceeded its statutory authority, and it is "[t]he judicial obligation is to assure agency compliance with its legislated authority," citing Nat'l Broad. Co. v. United States, 319 U.S. 190, 224 (1943).  For Judge Newman, "[s]ubsection (b)(2) on its face is directed to disclaimer or cancellation 'in the trial.'  It is not disputed that 'in the trial' can occur only after institution."  Thus, because claims 1-9 were disclaimed before the IPR was instituted, it is a misapplication of the rule for the Board to have entered an adverse judgment.  Any other interpretation is for Judge Newman an explicit change in the rule, which requires rulemaking procedures specified under the APA (35 U.S.C. § 2(b)(2)(B)).

Arthrex, Inc. v. Smith & Nephew, Inc. (Fed. Cir. 2018)
Panel: Circuit Judges Newman, Dyk, and O'Malley
Opinion by Circuit Judge Dyk; concurring opinion by Circuit Judge O'Malley; dissenting opinion by Circuit Judge Newman

Comments

[Atari Man]

What a crock. Judges Dyk and O'Malley say, "You didn't challenge the PTO's authority to promulgate the regulation at issue, so we can't pass judgment on the propriety of the regulation." They both then say, the PTAB properly interpreted the reg, with O'Malley adding, "If it were up to me, I would rule that the reg was improperly promulgated and/or ultra vires." Judge Newman simply says, "If the patentee disclaims the claims before institution of the IPR, there's nothing to have an IPR on."

So two of the three judges agree this "proceeding" should never have made it to the PTAB's desk and the PTAB wasn't authorized to issue its "ruling", yet that "ruling" stands in place and Arthrex is precluded from pursuing similar claims in a continuation application. Ridiculous.

At least Judge O'Malley has made it clear to the next patentee who disclaims claims to avoid an IPR that it should challenge the director's authority to promulgate the regs at issue. Small consolation for Arthrex, though. And there's no guarantee the Judge O'Malley will be on that panel.

[Paul F. Morgan]

But is it really true that one could otherwise obtain valid claims in a continuation that are not patentably distinct from expressly disclaimed claims in a parent application?

[Skeptical]

Mr. Morgan,

I am thinking that you are misunderstanding the nature of what is being disclaimed.

The disclaimer (as I understand it - I provide that it may be I that misunderstand the situation) is related to what the patent holder is seeking to enforce against a particular party, rather than a disclaimer that the claims themselves are invalid against all parties.

[Paul F. Morgan]

Skeptical [Anon?] see 35 USC 253 "Disclaimer."

[skeptical]

Mr. Morgan,

Thank you, that was most helpful.