Argument Recap / Panel Activity

As we have been reporting, two panels of the Federal Circuit heard oral arguments last week in cases that attracted amicus briefs. In one of these cases, New Vision Gaming & Development, Inc. v. SG Gaming, Inc., the court is reviewing two decisions by the Patent Trial and Appeal Board in covered business method reviews and, in particular, arguments that structural bias within the U.S. Patent and Trademark Office in favor of challenges to patents amounts to a due process violation. Judges Moore, Taranto, and Newman heard the arguments. This is our argument recap.

Matthew J. Dowd argued for New Vision. He asked the court to vacate the Board’s decision on several grounds.

First, he argued, a due process violation, in particular “structural bias that is associated with the current funding and payment system that is associated with the initial decision-making of AIA proceedings,” justifies reversal.

Judge Moore intervened to ask whether the doctrine of constitutional avoidance prevents the court from reaching the due process ground. In response, Dowd argued that, while “there is that concern about constitutional avoidance, . . . that doctrine applies primarily in cases where the court is being asked to invalidate a statute as being contrary to the Constitution.” Judge Moore pressed further, however, asking Dowd to confirm that he is asking the court to “declare something unconstitutional.” Dowd responded that he was “asking [for a finding] that the internal agency procedures that have been implemented here are in violation of the due process clause of the Constitution, so in that respect yes.” But Dowd also maintained his position that “the constitutional avoidance doctrine primarily applies to situations where the court is asked to strike down statutes.”

Judge Moore then asked Dowd whether “there [are] arguments in this case that [ask] us to vacate and remand that don’t require us to decide a new constitutional issue.” After Dowd answered, “I don’t believe so,” Judge Moore then asked whether he was “abandoning [his] Arthrex challenge.” In response, Dowd answered “no.” According to Dowd, the difficulty with having the court address only the Arthrex challenge “is that it leaves the due process argument unresolved.” He maintained that, if the court just vacates and remands, “it doesn’t address the problem with both the problems . . . raised” concerning due process and a forum selection clause.

Continuing to address the due process dispute, Dowd asserted that this case is similar to Patlex v. Mossinghoff, a case decided by the Federal Circuit over 30 years ago. According to Dowd, Patlex “raised questions about the reexam process and the payment system associated with that, and the court in Patlex noted that there was merit in some of the concerns.”

Judge Taranto then asked Dowd what the “concrete mechanism is biasing the Board members’ decisions?” In response, Dowd pointed to Hulu, LLC v. Sound View Innovations, LLC as an example of bias. According to Dowd, in that case “we have a situation where a panel made a decision one way and the panel decided that the case should not be instituted; the precedential opinion panel then stepped in and effectively overruled the . . . initial panel, and since then the panel has instituted in that case; and that is an example where you have the Chief [Administrative Patent Judge] who is essentially wearing two hats.”

Judge Taranto asked a follow-up question: “What is the Chief APJ’s structural bias?” In response, Dowd contended the Chief APJ’s “structural bias is wearing the two hats, both as adjudicator and administrator of a substantial monetary budget, and running the PTAB as a business unit within an agency that is run as a business.” According to Dowd, “since 1992, then 1999, and then in 2011, the law has changed the way the PTO is funded such that it is run as a business unit, [and] the Chief APJ knows its budget is tied to the revenue associated with the institution decision making, which accounts for 40% of the PTAB’s . . . budget and . . . 25% of the PTAB’s overall budget.”

Judge Moore then asked Dowd about waiver. In particular, she asked whether New Vision “raise[d] the due process challenges below before the agency.” In response, Dowd admitted it did not. But Dowd then made three arguments that there was nevertheless no waiver. First, he argued that, “when New Vision was responding to the CBM, the documents . . . revealing the full extent of the structural bias were not available. Second, he argued that he was “not entirely sure how New Vision could have gotten the documents during the PTAB proceeding or even entered them into the PTAB proceeding.” And, third, he argued that “there is no dispute about [the] veracity or authenticity of the documents; they were provided by the PTO from a [Freedom of Information Act] request.”

Judge Taranto then asked Dowd if “anything [could] have been done to eliminate . . . what you say is an unconstitutional biasing effect.” In response, Dowd maintained that, “from a practical perspective, . . . there is little doubt that had we raised this issue before the PTAB, the outcome is the panel would have decided that there is no institutional bias.” 

With regard to the forum selection clause at issue in the case, Judge Moore asked Dowd “why [a statutory provision doesn’t] bar judicial review of [the] forum selection clause issue.” In response, Dowd contended that his argument “is not associated with the merits of the institution decision.” According to Dowd, the Supreme Court’s decision in “Cuozzo specifically requires [Administrative Procedure Act] review under [5 U.S.C.] § 706(2)(a) or (c), and (a) deals with [agency action found to be] arbitrary and capricious.” Dowd contended that “it is arbitrary and capricious for the Board to completely ignore the forum selection clause; the Board gave zero consideration to the forum selection clause; the other side doesn’t dispute that there was a forum selection clause; [and] the other side doesn’t dispute that they were barred from bringing a PTAB decision.”

Dana Kaersvang argued for the U.S. Patent and Trademark Office. She began by contending that New Vision waived its “structural due process” argument. According to Kaersvang, “that whole argument is based on a factual premise, that APJs have some sort of an incentive to institute when they shouldn’t, and there is no record here because they did not present this to APJs, the people who know best how their compensation works and what incentives they face.”

In response, Judge Taranto asked Kaersvang whether “you think you can’t win, or shouldn’t win, on the current record.” In response, she asserted that “we absolutely win on the current record.” According to Kaersvang, “there are three facts we all know to be true, and they settle this case.” First, she argued, “APJs do not make more money if they institute.” Second, she asserted, “an institution decision counts exactly the same as a non-institution decision in the performance review process.” Third, she maintained, the USPTO operates “these proceedings . . . at a loss;” the “PTAB has more than enough work”; and “APJs have all the assignments they want.”

Judge Newman then intervened to ask Kaersvang how to reconcile these facts with “the widespread bonus system for APJs.” According to Kaersvang, under “the APJ bonus system, . . . APJs get paid the same amount no matter how they decide their decisions” and, while “performance reviews take into account the number of decisions they issue,” that is merely one of four factors and does not determine the outcome of the performance review. Moreover, Kaersvang argued, “it is not unconstitutional to have a bonus system that rewards people who work hard and do good work.” Finally, Kaersvang asserted, “in that process a decision to institute counts exactly the same as a decision not to institute.”

Former USPTO Solicitor Nathan K. Kelley argued for SG Gaming. He began by addressing the forum selection clause at issue in the case. He argued that “Mr. Dowd said this morning that the Board completely ignored the forum selection clause.” Kelley asserted, however, that this was not true. According to Kelley, “the Board analyzed the forum selection clause on the terms that New Vision argued . . . , which was that the Board could not institute the review.” Kelley maintained that “nowhere, not anywhere, before the Board did New Vision argue that the Board should exercise its discretion” not to institute review based on the forum selection clause.

Judge Newman asked Kelley to consider a hypothetical situation. She asked Kelley to assume that the court “decide[s] for one reason or another that perhaps [this case] needs to go back, and [the PTAB needs to] conduct a full trial and proceeding, and eventually we reach a tribunal that has authority to reach the forum selection clause and then [that tribunal] decides you are in the wrong forum.” In response, Kelley argued that “the jurisdiction of this court is to review the [final] decision [of the Board], and Congress . . . has said institution decisions are not reviewable.” Moreover, Kelley asserted, “I would push back your honor’s premise that this court is the tribunal in which this issue can be litigated.”

Judge Newman then asked who does have the authority to review the forum selection clause issue. According to Kelley, “the scope of the forum selection clause issue should be decided by a court competent to review that, which would be a district court, and specifically, the district court that the collateral case is already in front of.” Importantly, however, Kelley contended, “at the time at which the underlying CBMs were instituted, New Vision went back to that District Court in Nevada, and said . . . ‘stay your proceedings because the PTAB is going to review the patentability.'”

In rebuttal, Dowd first responded to Kelley’s arguments that New Vision requested a stay of the district court proceedings. According to Dowd, it was only a “request to partially stay.” Moreover, Dowd argued, “at worst New Vision’s arguments may have been in-artful, but there is no question given a forum selection clause the Board should not institute, and whether or not that becomes a per se rule or rebuttable presumption or part of the [exercise of the Board’s] discretion, it was all the same argument, [and] so we have never really waived that argument.”

Dowd then responded to the arguments made by the USPTO. Dowd asserted that, while “the PTO identified several cases that purportedly support their side of the argument, what I would suggest and emphasize is that how our case is different in that you had leadership . . . who [were] wearing two hats who are in control of a substantial portion of the Board’s revenue and budget.”

We will keep track of this case and report on its disposition.