The Three-Legged Stool: The Federal Circuit's Review of the Patent Trial and Appeal Board Under the Administrative Procedure Act

17
Apr

The Three-Legged Stool: The Federal Circuit’s Review of the Patent Trial and Appeal Board Under the Administrative Procedure Act

Recent decisions by the Federal Circuit provide a timely reminder that an appellant may have three distinct avenues to challenge a final written decision by the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office. When the Federal Circuit reviews a decision by the PTAB, the court reviews the PTAB’s findings of fact for substantial evidence and conclusions of law de novo.1 However, the Federal Circuit also reviews the PTAB – as an administrative agency – to ensure that its decisions are not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.

A final written decision by the PTAB must be supported by three equally important legs: factual findings must be supported substantial evidence, legal conclusions must withstand de novo review, and the written decision itself must not be arbitrary and capricious. While this “arbitrary and capricious” standard is theoretically more deferential that “substantial evidence,” it obligates an agency to articulate its reasoning. In practice, and as highlighted recently, PTAB opinions may be vacated if the PTAB fails to articulate the basis for its decision without regard to whether its factual findings might otherwise be supported by substantial evidence. The availability of these different standards of review provide multiple strategies for challenging a PTAB decision that prevailing parties at the PTAB should be prepared to defend.

Evolution of the Standard of Review

Although it is axiomatic today that the Federal Circuit reviews the PTAB’s factual findings for substantial evidence, this was not always the case. For years, the Federal Circuit applied the stricter, less deferential “clearly erroneous” standard.2 This previous standard follows the Federal Rules of Civil Procedure, which provides that “[f]indings of fact, whether based on oral or other evidence, must not be set aside unless clearly erroneous.”3 And for years, the United States Patent and Trademark Office campaigned for the Federal Circuit to apply the more deferential standard prescribed by the Administrative Procedure Act (“APA”). The APA provides that findings should be set aside, inter alia, when they are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or “unsupported by substantial evidence.”4

The question of the proper standard came to a head before the Supreme Court in Dickinson v. Zurko, 527 U.S. 150, 152 (1999). The Federal Circuit had held that Section 559 of the APA permitted the “continued application of the clearly erroneous standard in our review of these fact-findings.”5 That holding was short-lived, however. The Supreme Court granted certiorari and reversed the opinion, holding that the Federal Circuit must use the framework set forth in the APA to review factual findings by the Patent and Trademark Office.6

The Supreme Court identified the standards from the APA that govern judicial review of agency fact-finding, including fact-finding by the Patent Office:

The reviewing court shall (2) hold unlawful and set aside agency findings found to be (A) arbitrary, capricious, or an abuse of discretion, or (E) unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute.7

In holding that the Federal Circuit must apply the standard of review prescribed by the APA, the Supreme Court emphasized the importance of maintaining a uniform approach to judicial review of administrative actions. It explained that “[t]he APA was meant to bring uniformity to a field full of variation and diversity.”8 The Supreme Court rejected the Federal Circuit’s reasoning that Section 559 permitted an exception, concluding that the pre-APA decisions of the Customs and Patent Appeals (CCPA) did not establish “requirements . . . recognized by law” that survive the passage of the APA because this precedent did not unambiguously adopt the alternative “clearly erroneous” standard.9

The Federal Circuit revisited the standard of review the next year in In re Gartside and adopted the “substantial evidence” standard for its review of the Patent Office’s factual findings. The Federal Circuit described the Supreme Court’s prior holding as follows: “In Dickinson v. Zurko, the Supreme Court reversed our en banc decision that held that the appropriate standard of review of PTO findings of fact is the clearly erroneous standard and held that we must apply one of the standards set forth in the Administrative Procedure Act (“APA”) at 5 U.S.C. § 706 (1994).”10 The Federal Circuit further reasoned that “the Supreme Court did not determine whether the correct standard of review for PTO findings of fact is the ‘arbitrary, capricious’ or the ‘substantial evidence’ test” and stated that it “feel[s] compelled to decide that question, in order to secure the standard of review through which we will test the decision of the Board in this case.”11 The Federal Circuit discussed the two standards of review before concluding that “the ‘substantial evidence’ standard is appropriate for our review of Board fact-findings.”12

Notwithstanding this holding, the “arbitrary and capricious” test has remained in the Federal Circuit jurisprudence regarding its review of the Patent Office. For example, a 2002 Federal Circuit opinion cited Gartside for the proposition that “we will set aside legal actions of the Board that are ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,’ and set aside factual findings that are ‘unsupported by substantial evidence.’”13 A 2004 opinion cited that opinion and subtly broadened its proposition: “we set aside actions of the Board that are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, and set aside factual findings that are unsupported by substantial evidence.”14 And at least by 2016, the two standards from the APA were equally available in the eyes of the Federal Circuit: “Under 5 U.S.C. § 706(2)(A), (E), the Board’s actions here are to be set aside if ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law’ or “unsupported by substantial evidence.’”15

Application of the “Arbitrary and Capricious” Standard

The Federal Circuit’s recent decision in Personal Web Technologies, LLC v. Apple, Inc. illustrates the application of the “arbitrary and capricious” standard and the related obligations imposed on the PTAB as an administrative agency.16 The PTAB instituted an inter partes review of a particular patent and concluded that it was unpatentable as obvious in view of two prior-art references. On appeal, however, the Federal Circuit vacated the PTAB’s obviousness determination “because the Board did not adequately support its findings that the prior art disclosed all elements of the challenged claims and that a relevant skilled artisan would have had a motivation to combine the prior-art references to produce the claimed ’310 inventions with a reasonable expectation of success.”17

The Federal Circuit touched on all relevant standards of review. It explained that it “review[s] the Board’s ultimate determination of obviousness de novo and its underlying factual determinations for substantial evidence.”18 However, it also noted that “our review of the Board is rooted not just in the law of obviousness but in basic principles of administrative law” before citing both the “arbitrary and capricious” and the “substantial evidence” standards.19 Quoting a recent case, the Federal Circuit explained that “in order to allow effective judicial review, the agency is obligated to provide an administrative record showing the evidence on which the findings are based, accompanied by the agency’s reasoning in reaching its conclusions.”20 The Court concluded that “[t]he Board, as an administrative agency, must articulate logical and rational reasons for its decision.”21

Applying this standard and its consequential requirement, the Federal Circuit held that the PTAB’s written decision was inadequate. The Federal Circuit focused on the PTAB’s failure to “sufficiently explain and support the conclusions that (1) Woodhill and Stefik disclose all of the elements recited in the challenged claims of the ’310 patent and (2) a relevant skilled artisan would have been motivated to combine Woodhill and Stefik” rather than any defect in the evidentiary record itself.22 Indeed, the Federal Circuit suggested that relevant evidentiary support might be found in column 17 at Woodhill, but concluded that “[w]e might attempt on our own to parse Woodhill, and column 17 specifically, to find such a comparison, but this is not an issue on which we could confidently rely on our independent reading, without more help than we have received from the Board.”23 The Federal Circuit vacated and remanded the PTAB’s final written decision so that it could “reconsider the merits of the obviousness challenge, within the proper procedural constraints.”24

The irony is that the application of a more deferential standard25 gives rise to this requirement of agency fact-finding and record-keeping while the Federal Circuit previously justified the less deferential “clear error” standard by reasoning that it would produce better agency fact-finding.26 The Federal Circuit previously explained that the stricter “clear error” standard “encourages the creation of ‘administrative records that more fully describe the metes and bounds of the patent grant’ and ‘help avoid situations where board fact-finding on matters such as anticipation or the factual inquiries underlying obviousness become virtually unreviewable.’”27 Indeed, the Federal Circuit has consistently favored a stricter review of the PTAB.28 And after the Supreme Court held that it is bound to operate within the construct of the APA, the Federal Circuit focused on the less deferential “substantial evidence” standard prong of that statute. However, the more deferential “arbitrary and capricious” standard remains viable, and the Federal Circuit has held that it requires the PTAB to provide more than an evidentiary record that supports it findings: it must connect the dots for the reviewing court.

Practice Points

Personal Web Technologies and its contemporary cases provide a reminder that a party appealing a final written decision from the PTAB has options beyond challenging the findings of fact for sufficient evidence or the conclusions of law. An appellant can also attack the written decision itself by contending that the PTAB has not provided a sufficient explanation of its findings in accordance with the principles of administrative law. Such a victory may prove pyrrhic, however, to the extent the Federal Circuit merely remands the written decision to the PTAB for an opportunity to correct it. The party will need to weigh its options and applicable strategic considerations (e.g., timing of parallel district court proceedings, etc.) to decide whether to attack such a procedural defect or simply challenge the sufficiency of the evidence.

Likewise, a party should be cognizant of these issues even before the PTAB issues its final written decision. On the one hand, the “arbitrary and capricious” standard can be seen as a review of the quality of the PTAB’s own work product rather than the underlying merits of the litigation. But on the other hand, an inter partes review is an adjudicative process, and the PTAB’s processor has explained that “[t]he Board will not take on the role of advocate for a party, trying to make out a case the party has not adequately stated.” Standing Order ¶ 121.5.2 (BPAI Mar. 8, 2011). A party should clearly support its case – not just so that it may prevail before the PTAB, but also so that the PTAB’s final written decision can withstand judicial scrutiny.

 

1 Meiresonne v. Google, Inc., 849 F.3d 1379, 1382 (Fed. Cir. 2017).
2 E.g., In re Woodruff, 919 F.2d 1575, 1577 (Fed. Cir. 1990); In re Caveney, 761 F.2d 671, 674 (Fed. Cir. 1985); In re Wilder, 736 F.2d 1516, 1520 (Fed. Cir. 1984).
3 FED. R. CIV. P. 52(a)(6).
4 5 U.S.C.A. § 706(2)(A),(E) (West).
5 In re Zurko, 142 F.3d 1447, 1449 (Fed. Cir. 1998), rev’d sub nom. Dickinson v. Zurko, 527 U.S. 150 (1999). Section 559 provides that the provisions of the APA “do not limit or repeal additional requirements imposed by statute or otherwise recognized by law,” and the Federal Circuit concluded that this section freed “Patent and Trademark Office patentability decisions from judicial review under standards enumerated by sections 706(2)(A) (arbitrary or capricious standard applied to informal agency proceedings) and 706(2)(E) (substantial evidence standard applied to formal agency proceeding), to the extent that a statutory or common law standard was a more searching standard and hence an additional requirement recognized prior to 1947 that has not since been statutorily modified.” Id. at 1452.
6 Dickinson v. Zurko, 527 U.S. 150, 152 (1999).
7 Id. (quoting 5 U.S.C.A. § 706(2)) (internal alterations omitted).
8 Id. at 155.
9 Id. at 154-61.
10 In re Gartside, 203 F.3d 1305, 1311 (Fed. Cir. 2000) (citations omitted) (emphasis added).
11 Id. at 1312.
12 Id. at 1315 (citing 5 U.S.C. § 706(2)(E)).
13 In re McDaniel, 293 F.3d 1379, 1382 (Fed. Cir. 2002) (citing Gartside, 203 F.3d at 1316) (emphasis added). The McDaniel opinion misapprehends the cited passage of Gartside, which simply held that the Federal Circuit reviews for abuse of discretion the Patent Office’s decision to resolve issues of patentability that were not placed in issue by the parties. Gartside, 203 F.3d at 1316-17. Gartside did not hold that legal issues are reviewed under the “arbitrary and capricious” standard that it had just rejected for factual findings.
14 In re Sullivan, 362 F.3d 1324, 1326 (Fed. Cir. 2004) (citing McDaniel, 293 F.3d at 1382) (emphasis added). Unlike the McDaniel opinion, the Sullivan did not limit the “arbitrary and capricious” standard to “legal” actions.
15 Pride Mobility Prod. Corp. v. Permobil, Inc., 818 F.3d 1307, 1313 (Fed. Cir. 2016) (citing Sullivan, 362 F.3d at 1326).
16 Personal Web Techs. LLC, v. Apple, Inc., 848 F.3d 987 (Fed. Cir. 2017).
17 Id. at 989.
18 Id. at 991 (citing Gartside, 203 F.3d at 1312).
19 Id. at 992.
20 Id. (quoting Synopsis, Inc. v. Mentor Graphics Corp., 814 F.3d 1309, 1322 (Fed. Cir. 2016)) (internal quotations and alterations omitted) (emphasis added).
21 Id. (quoting Synopsis, 814 F.3d at 1322) (internal quotations and alterations omitted).
22 Id. at 993.
23 Id.
24 Id. at 994.
25 The Federal Circuit explained that the “arbitrary and capricious” standard “is generally considered to be the most deferential of the APA standards of review.” Gartside, 203 F.3d at 1312 (citing 6 Stein et al., Administrative Law § 51.03, at 51–117 (1999) (“The narrowest scope of judicial review of an agency[’s] fact findings is afforded by the arbitrary, capricious, or abuse of discretion test.”)).
26 Dickinson, 527 U.S. at 165.
27 Id. (quoting In re Zurko, 142 F.3d at 1458).
28 When the Supreme Court adopted the APA “substantial evidence” standard over the Federal Circuit’s preferred “clearly erroneous” standard, it noted that the former is somewhat less strict than the latter. Id. at 162 (citing Universal Camera Corp. v. NLRB, 340 U.S. 474, 477 (1951) (analogizing “substantial evidence” test to review of jury findings and stating that appellate courts must respect agency expertise)).

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