Appellant Raises Due Process Issues in New Vision Gaming and Development v. SG Gaming

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.

Comments

[hardreaders]

"there are distinctions between Tumey and this case that could make a difference to a reviewing court"—That seems like a considerable understatement, even taking into account the two distinctions you did mention.

"These structural circumstances mirror those found to be due process violations in Tumey, Dugan, and Ward."—So I guess there aren't really any meaningful distinctions after all?

Also, is there more than one 1928 Dugan case in existence? The only one I can pull up found there was *no* DP violation.

I suppose you can tell I take a dim view of the argument's chances of success, but like I always say, my input's worth as much as you paid for it. At least there's no Tumey argument that I'm biased in that regard :)

[Kevin E Noonan]

Dear Hard: in some instances we advocate, in others we just try to inform and direct the reader’s attention to an issue like this. Betting against the current regime is unwise, but the Court has hinted on more than one occasion that they would be open to the due process argument if properly presented to them.

As for Dugan I didn’t check it so either I misunderstood their argument or it glossed over that decision.

Thanks for the comment

[skeptical]

Well, no one can doubt that the patent office has set itself up to generate income for itself with the duopoly of "near 100% quality examination" on the front end and the (admittedly suffering from selection bias) near 90% LACK of 'quality' for patents having at least some claims revoked.

ALL of the monies collected on both ends go to the Patent Office for their operations (including salaries and bonuses), eh?

[Paul F Morgan]

I hope this cert petition is not falsely implying that APJs [either individually or as a unit of the PTO] get paid more for instituting IPRs than not instituting them. They are all on straight civil service salaries, and the PTO fees for IPRs do not go to either. The recent great increase in discretionary IPR institution denials even demonstrates what an incentive for that rather than institutions once judicial review thereof was severely restricted.

[hardreaders]

@Kevin Noonan

Thanks as always for taking time to read these comments and reply. I appreciate the distinction between advocacy and informational pieces. My comments weren't meant to critique your post itself, just to probe and pick at the underlying arguments in the brief.

You're of course right that the Court has invited a DP argument, and I can't fault counsel for taking them up on that offer or for pulling out all the stops to undo an adverse judgment against their client. I also actually give them higher marks for creativity than the Arthrex challenge. In patent terms, I see the latter as exceedingly obvious. You have lots of well-known prior art, including Humphrey's Executor and Morrison, the former of which has been around for almost a century. And then you're highly motivated to simply apply that in a different context of APJs. In contrast, plucking out a fairly obscure case from the 20s that was only applied affirmatively (so Dugan aside) one other time many decades later, is definitely unexpected.

But creativity alone doesn't carry the day if the substance is weak. Here I think the same factors that make it creative make it flimsy on the merits. Just the idea that a pretty obscure case like this based on a very unique factual setting that only reoccurred *once* in nearly a century—Dugan (at least as I read it) even distinguished it on *nearly identical* facts—could apply to something vastly different like AIA reviews seems quite implausible on its face—and even that I think is being charitable. I've seen these kinds of obscure SCOTUS case longshot challenges before and they never seem to pan out.

To get into specific distinctions, Paul Morgan already noted a significant one that really seems to undermine the argument. For me another big one is that decisions *to* institute aren't even final decisions for instituted cases; that would of course be the FWD. (Decisions *not* to institute are pretty much final, but I assume New Vision is ok with those!) And in Tumey and its extremely scant progeny, as I understand it the money going into the public purse was coming right out of the individual's pocket. Here in contrast, a patentee isn't personally deprived of anything that could arguably be called "property" simply by a decision in favor of institution.

Last, I see a bit of a "vehicle problem", if you can call it that at the non-SCOTUS level, because this case arises from a CBM. While it's pretty clear the same or a similar argument could be made about IPRs, it is a fact that CBMs sunsetted (at least for now) last fall. So that just seems to give one more possible reason—albeit a relatively peripheral one—for CAFC to toss the case because anything connected to CBMs isn't going to be relevant in the long run.

But again, I'm just an ordinary interwebs punter (Punter of Ordinary Skill in The Art of commenting?), so when I offer prognostications, you definitely want a "salt thereof."

@Paul Morgan

Many thanks for highlighting these key facts about APJ compensation. You also beat me to it in pointing out the current trend that goes *against* institution.

BTW, it's a minor point, but it's not a cert petition—at least not yet, although ultimately I predict it will be. For now it's just a CAFC brief.

[Kevin E Noonan]

Paul: I certainly think the implication was that APJs have a personal stake in instituting CBMs (and by analogy IPRs), at least with regard to bonuses and workload. It was soft-pedaled prudently but nonetheless it was there.

Hard: don't underestimate the importance of these conversations to identify weaknesses (real or putative) in the arguments. Which you have certainly provided, and we thank you.

[skeptical]

Mr. Morgan,

If I recall correctly, the topic of "They are all on straight civil service salaries" was explored over at IPWatchdog awhile back and the conclusion was NOT as your statement suggests (and more in line with Dr. Noonan reflects in his answer).

Bonuses and workload ARE affected by the decision to institute.

As are such "non-hard" things like showing that you are in line with 'taking down bad patents' (whatever THAT happens to mean at the moment in a Political Branch and administrative agency more than a bit insulated from the reflections of voters (outside of the presidential cycle)).

As to "The recent great increase in discretionary IPR institution denials even demonstrates" - there may well be OTHER reasons for this (the till is full, for example). The LARGER issue here though is that whatever behinds the scenes reasoning is just that: behind the scenes and NOT in plain sight - as your post tends to want to paint the picture as.

Hardreaders,

I will take exception to your notion of "Here in contrast, a patentee isn't personally deprived of anything that could arguably be called "property" simply by a decision in favor of institution."

One of the sticks in the bundle of property rights is the existence and level of the presumption of validity. Just ask i4i.

That stick IS taken at the point of decision to institute - REGARDLESS of any actual decision on the merits.

I would also caution you to take words from Paul Morgan with a separate (rather large) grain of salt. He is without a doubt the biggest cheerleader of the IPR (and tangent, the CBM), more so than any other regular patent law blog commentator.

It often appears that there is nothing more pleasing (to Paul) than to have MORE power to denigrate granted patents, and every comment of his can be counted on to spin towards "IPRs/(CBMs) are GOOD things" - regardless of the actual detriments to the general strength of patents that they have actually generated.

[Jonathan R Stroud]

Thanks for the detail and the history, friend. The only thing I will add here is that I don't think it's universally agreed that the Dudas rule changes were universally bad---some of them are things the prosecution bar and companies have been asking for for decades, and most of them would have brought U.S. practice closer in line to generally all other international systems. Limiting continuations, endless claim sets, and other commonsense changes are things that are individually, I think, well within the ambit of what a motivated USPTO could accomplish, and would help prevent the inequality of endless prosecution from well-heeled applicants over smaller inventors who can't afford to pay their way to allowance.