On December 9, 2016, the Federal Circuit held an en banc hearing in In re Aqua Products. As noted earlier, one of the questions[1] posed for en banc review had a distinctly administrative law tone. That question asked whether PTO’s rule requiring the patent owner to prove the patentability of its proposed IPR claim amendments ran afoul of 35 U.S.C. § 316(e), the AIA provision generally assigning the burden on patentability issues to IPR petitioners, not patent owners. In re Aqua Prods., Inc., 833 F.3d 1335, 1336 (Fed. Cir. 2016).
The PTO’s en banc briefing proposed that § 316(e) did not preclude the agency from requiring the patent owner to prove the patentability of its proposed IPR claim amendments. In particular, the PTO argued that Congress committed the issue before the Federal Circuit to the PTO’s administrative authority when it vested the agency with power to create “standards and procedures” for claim amendments under 35 U.S.C. § 316(a)(9).
On the other hand, Aqua Products asserted that § 316(e) controlled, overriding § 316(a)(9)’s delegation of authority to the PTO because it unambiguously saddled the petitioner with the burden of proving the unpatentability of the proposed claims.
These arguments present the Federal Circuit with a classic administrative law dispute concerning statutory interpretation. On one side, the PTO argued that its administrative authority requires the court to defer to its interpretation of the relevant law. On the other side, Aqua Products argued that the relevant statute is unambiguous, thus precluding administrative flexibility on the issue.
The Aqua Products En Banc Hearing
The Aqua Products en banc hearing significantly focused on whether the PTO’s rules lawfully assigned the burden of proof in IPR claim amendment practice to the patent owner. Aqua Products argued that § 316(e) unambiguously required the petitioner to prove the unpatentability of the proposed claim amendments, making the PTO’s reassignment on amendment issues unlawful. Conversely, the PTO’s argument centered on the AIA’s delegation of rulemaking authority to the PTO.
As noted, the PTO urged that § 316(e) did not preclude requiring patent owners to prove the patentability of their proposed IPR claim amendments. Even so, much of the PTO’s hearing time centered on questions from the court evincing concern that the agency’s promulgated regulations and adjudicative orders (e.g. Masterimage 3D, Inc v. Reald Inc., IPR2015 -00040 (PTAB July 15, 2015)) were not sufficient under the Administrative Procedure Act (“APA”) to sustain the PTO’s current practice. Judge Reyna, in particular, focused his questions on administrative law issues, asserting at one point that “the PTO cannot establish rules under the adjudicatory process.” En Banc Hearing at 55:04.
Though Judge Reyna was not alone in questioning the PTO’s actions under principles of administrative law, his questions were the most frequent and closely probed serious issues in the PTO’s argument. Judge Reyna’s questions did not appear to dispute the PTO’s authority under the AIA to prescribe practices and procedures governing IPR claim amendments. Rather, his questions centered on the PTO’s lack of a promulgated regulation clearly providing for the patent owner’s current burden of proof.
The PTO responded to these questions citing its precedential order in Masterimage 3D, Inc v. Reald Inc. The PTO argued that this decision supports the agency’s interpretation of the AIA, and, moreover, fully explains the connection between the AIA’s ambiguities and the existing regulations. Even more still, the PTO advanced its position that it has the power to create substantive rules through adjudicative orders, like the one in Masterimage 3D.
But as noted above, Judge Reyna questioned whether the PTO’s reliance on an order, rather than a regulation, to create an administrative rule is proper under the APA. Judge Reyna’s questions focused on the text of § 316(a), stating that § 316(a) appears to require the PTO to create practices and procedures governing IPR through regulations, not orders. Rejoining this point, the PTO argued that the precedential orders cited, though not the result of notice and comment rulemaking, are “sufficiently formal” to warrant either Chevron or Auer deference.
Following the Aqua Products en banc hearing, the Federal Circuit must decide whether § 316(e) precludes the PTO’s current IPR claim amendment practice. The PTO’s arguments proposing deference to the agency are strong. But the en banc hearing revealed at least some discomfort among the Federal Circuit judges that the PTO lacks a regulation squarely deciding the issue before the court.
Administrative Law Issues Implicated by the Aqua Products En Banc Hearing
The outcome of this case is difficult to predict. But it nonetheless raises interesting administrative law issues for future litigants involved in AIA proceedings. Thus, this post analyzes some additional doctrinal points of administrative law.
First, future litigants should consider the import of Judge Reyna’s questions concerning the PTO’s ability to create substantive rules through the adjudicative process (i.e. through proceedings like IPR). As Judge Reyna remarked, § 316(a) provides that the PTO may prescribe regulations creating practices and procedures for IPR. But the seminal administrative law case, SEC v. Chenery Corp., 332 U.S. 194 (1947), ruled that an agency that has the power to issue rules through the rulemaking process has the discretion to use the traditional common law method of rulemaking instead—i.e. to announce broad rules of conduct in the context of adjudication and then to apply these rules as precedent. Thus, in the future, litigants should be aware of Chenery, understanding that, at the very least, it is a doctrinal tool supporting the PTO’s authority to issue rules through adjudicative proceedings like IPR.
Second, future litigants should note that the PTO’s ability to claim Chevron deference turns on more than just the AIA’s ambiguities and whether the agency construes those ambiguities reasonably. The Supreme Court in United States v. Mead Corp., 533 U.S. 218 (2001), ruled that a threshold issue of whether Chevron’s analysis should apply must be resolved before applying Chevron deference to an agency construction of an ambiguous statute. Thus, under Mead, a PTO interpretation of the AIA qualifies for Chevron deference only when Congress (1) granted the agency authority to act with the force and effect of law, and (2) the agency acted pursuant to that authority to create the interpretation before the reviewing court. Id. Though the AIA grants the PTO substantial administrative power to create practices and procedures governing IPR practice, parties may still have avenues to challenge PTO interpretations of the AIA under Mead.
Relatedly, the third point concerns whether the PTO can claim Auer deference for its interpretations of its own regulations. Though the PTO’s correctly notes that the Supreme Court granted agency interpretations of their own regulations “controlling weight,” so-called Auer deference has been significantly curtailed in recent years. In Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 2166 (2012), the Supreme Court held that Auer deference is inappropriate when the agency’s interpretation is plainly erroneous or inconsistent with the regulation or “when there is reason to suspect that the agency’s interpretation does not reflect the agency’s fair and considered judgment.” Thus, although courts generally give PTO interpretations of its own regulations controlling weight, litigants have steady legal footing to argue that Auer is not applicable in all instances.
We will continue to monitor this litigation and provide updates.
[1] The Federal Circuit posed a second question for en banc briefing. It was: “When the petitioner does not challenge the patentability of a proposed amended claim, or the Board thinks the challenge is inadequate, may the Board sua sponte raise patentability challenges to such a claim? If so, where would the burden of persuasion, or a burden of production, lie?”
