Appeals Raise Constitutional Challenge to PTAB Fee and Compensation Structure

Appellants in New Vision Gaming & Development v. SC Gaming, Inc. f/k/a Bally Gaming, Inc.[i] and Mobility Workx, LLC v. Unified Patents, LLC[ii] challenge the constitutionality of the administrative patent judge (APJ) incentive structure, relying on a Prohibition era decision in Tumey v. Ohio, 273 U.S. 510 (1927).[iii]

In that case, the Court struck down an Ohio law that financially rewarded public officials who successfully prosecuted Prohibition cases. In the opinion Chief Justice William Howard Taft wrote that “[e]very procedure which would offer a possible temptation to the average man as a judge… 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.”[iv]

New Vision Gaming & Development v. SC Gaming, Inc. f/k/a Bally Gaming, Inc.

Appellant New Vision urges the Federal Circuit to reverse two Patent Trial and Appeal Board’s (PTAB) covered business method (CBM) reviews, which canceled all claims of two gaming patents. New Vision argues that structural bias at the PTAB violates due process where there exists a “reasonable connection” between a decision to institute and a pecuniary benefit to the APJs. “The average APJ is exposed to unfair influences due to this known connection between the PTAB’s fee collection/budget and the need to generate revenue to cover costs, as … the PTAB is a ‘business unit.’” New Vision notes that “[i]f the PTAB’s overall workload decreases—through decreased institutions—then the PTAB may very well decrease the PTAB budget and be left with a need for fewer line and Lead APJs.” New Vision asserts that, even in the absence of actual bias, APJs lack the judicial independence of Article III judges necessary to address the impermissible appearance of bias.

Mobility Workx, LLC v. Unified Patents, LLC

Appellant Mobility urges the Federal Circuit to reverse a decision invalidating claims in one of its wireless patents. Noting that “the salaries of the [APJs] that decide to institute an inter partes review (IPR) proceeding are derived from the filing fees paid by those challenging a patent—approximately half of which gets refunded if there is no institution decision,” Mobility argues that substantial revenue for APJ salaries and bonuses is inherently tied to the number of IPR proceedings instituted. “Shockingly, the system works in such a way that bonuses are awarded for deciding against patent holders, and APJs are discouraged from writing dissenting opinions,” Mobility asserts, where “the APJ must ask permission from a Vice Chief APJ to receive any credit for that work.”

New Vision and Mobility both also allege that the PTAB is constitutionally flawed because the Office impermissibly combines executive and judicial responsibilities. PTAB leadership positions combine executive responsibilities, overseeing the budget of the PTAB as a “business unit” heavily dependent on institution-generated revenue, while also overseeing AIA decisions to maximize conformity and participating on PTAB institution panels. Thus, both argue, the APJ salary and bonus structure creates impermissible financial incentives for APJs to grant validity reviews that further encroach the Due Process Clause.

New Vision and Mobility premise their arguments on Supreme Court decisions in Tumey and in Ward v. Village of Monroeville.[v] In Tumey, the Court held Ohio regulations unconstitutional that provided financial interests for local mayors to prosecute individuals accused of violating the Prohibition Act. The regulations provided mayors’ bonus pay and municipal funding, using fines from convictions as a source of revenue. The Court found that the mayor’s “direct, personal, substantial pecuniary interest” in compensation paid for through the criminal fines violated due process.[vi] In Ward, the Court found a due process violation where the income from fines and fees was a “major part” of the village’s income in that it constituted between one-third and one-half of the total budget.  “This revenue was of such importance to the village,” the Court noted, “that when legislation threatened its loss, the village retained a management consultant for advice upon the problem.”[vii] The arrangement provided a “possible temptation” because “the mayor’s executive responsibilities for village finances may make him partisan to maintain the high level of contribution from the mayor’s court.”[viii] Thus, the scheme violated due process because there were insufficient procedural safeguards to guarantee a safe trial. As Justice Brennan wrote, “[p]etitioner is entitled to a neutral and detached judge in the first instance.”[ix]

New Vision and Mobility both attempt to distinguish the APJ incentive structure from another Ohio proceeding that was upheld by the Supreme Court in Dugan v. Ohio (1927).[x] Following another Prohibition conviction, the Court found that there was no unconstitutional due process violation posed by the link between fees collected by the mayor and compensation to the mayor for his services as judge. In Dugan, the practice was permitted where the mayor was compensated from a general fund to which fine proceeds were deposited.[xi] The general fund expenditures were controlled by a city commission that included four other people, providing procedural safeguards, and the tie between the mayor and the general fund was sufficiently remote to obviate potential bias.[xii]

The appellants also distinguish the APJ structure from cases involving a much smaller proportion of funds that were linked to decisions.[xiii] Moreover, while the Supreme Court’s recent decision in Thryv, Inc. v. Click-to-Call Technologies, LP[xiv] largely insulates institution decisions from Federal Circuit review, New Vision argues that the decision magnifies the structural appearance of bias.

There is much discussion that it is possible that the Federal Circuit could remand these cases on alternate grounds. For example, New Vision’s appeal requests remand based on Appointments Clause concerns under Arthrex v. Smith & Nephew.[xv] Or, some believe it remains possible that the Federal Circuit may determine that due process issues arise in limited circumstances, such as when an APJ holding a PTAB leadership position plays a role in instituting trial. However, many believe New Vision and Mobility make reasonable arguments demonstrating potential due process and structural bias concerns arising from the APJ incentive structure.

[i] New Vision Gaming & Development v. SC Gaming, Inc. f/k/a Bally Gaming, Inc. (Appeal Nos. 2020-1339, -1400)

[ii] Mobility Workx, LLC v. Unified Patents, LLC (Appeal No. 2020-1441)

[iii] Tumey v. Ohio, 273 U.S. 510 (1927).

[iv] Tumey, 273 U.S. at 532.

[v] Ward v. Village of Monroeville, 409 U.S. 57, 60 (1972).

[vi] Tumey, 273 U.S. at 523.

[vii] Ward, 409 U.S. at 58.

[viii] Id. at 60.

[ix] Id. at 61-62.

[x] Dugan v. Ohio, 277 U.S. 61 (1928).

[xi] Dugan, 277 U.S. at 65.

[xii] Id.

[xiii] Hirsh v. Justices of Supreme Court of Cal., 67 F.3d 708 (9th Cir. 1995); Commonwealth of N. Mariana Islands v. Kaipat, 94 F.3d 574 (9th Cir. 1996); Alpha Epsilon Tau Chapter Housing Association v. City of Berkeley, 114 F.3d 840 (9th Cir. 1997).

[xiv] Thryv, Inc. v. Click-to-Call Technologies, LP, 140 S. Ct. 1367 (2020).

[xv] Arthrex v. Smith & Nephew, 941 F.3d 1320 (Fed. Cir. 2019) (on cert).

This article appeared in the August 2020 issue of PTAB Strategies and Insights. To view our past issues, as well as other firm newsletters, please click here.