In Arthrex, Inc. v. Smith & Nephew, Inc., No. 2017-1239 (Fed. Cir. Jan. 24, 2018), the Federal Circuit affirmed the PTAB’s entry of adverse judgment against Patent Owner Arthrex, before instituting inter partes review. Specifically, the PTAB entered judgment after Arthrex had disclaimed all challenged claims, but before the PTAB decided whether to institute a trial. As a result of the PTAB’s adverse judgment, the Patent Owner is estopped, under 37 C.F.R. § 42.73(d)(3)(1), from obtaining another claim in a continuation application, for example, that is “not patentably distinct” from a canceled claim. Estoppel would not have applied if the PTAB would have instead decided not to institute the IPR.

Arthrex argued that adverse judgment was not appropriate, because the rule addressing adverse judgment states that a patent owner’s “disclaimer of a claim such that the party has no remaining claim in the trial” will be construed as a request for adverse judgment. 37 C.F.R. § 42.73(b)(2). In Arthrex’s view, this rule does not apply because Arthrex did not request adverse judgment, and because the PTAB did not institute a “trial.” See 37 C.F.R. § 42.2 (“Trial means a contested case instituted by the Board based upon a petition.”).

The court disagreed with Arthex’s interpretation of the rule, and pointed out that § 42.73(b) permits a party to request adverse judgment “during a proceeding,” and that “proceeding,” under 37 C.F.R. § 42.2, includes both a “trial” and “preliminary proceeding,” which “begins with the filing of a petition.” According to the court, this indicates that a party’s cancelation of claims before a trial, but after a petition is filed, is properly interpreted to be a request for adverse judgment during a proceeding.

The court further stated: “The rule states that an adverse judgment may be entered after a petition has been filed, but before an IPR proceeding has been instituted.” Slip Op. at 7. But the court has misread the rule (§ 42.73(b)). Although the rule states that adverse judgment may be requested “during a proceeding,” it does not state that adverse judgment may be entered before institution. Moreover, the court’s decision is inconsistent with the “in the trial” requirement of § 42.73(b)(2). The court’s decision also appears to be inconsistent with the PTAB’s recently-designated precedential decision stating that the PTAB cannot consider statutorily disclaimed claims in deciding whether to institute a CBM proceeding. Facebook, Inc. v. Skky, LLC, No. CBM2016-00091, 2017 WL 4349404, at *3 (P.T.A.B. Sept. 28, 2017) (designated precedential as to Section II.B.2).

A concurring opinion authored by Judge O’Malley and a dissenting opinion authored by Judge Newman question whether the PTAB may enter adverse judgment under these circumstances. In addition to discussing Facebook and the text of 37 C.F.R. § 42.73(b)(2), the concurring opinion also states that the court’s decision is inconsistent with 37 C.F.R. § 42.107(e), which states that “no inter partes review will be instituted based on disclaimed claims,” and with Shaw Indus. Group v. Automated Creel Sys., 817 F.3d 1293, 1300 (Fed. Cir. 2016), which states that an IPR “does not begin until it is instituted.” The concurring opinion also questions whether the AIA provides the PTAB with authority to “make patentability determinations with estoppel effect—particularly prior to institution.” Judge O’Malley concurred rather than dissented because in its appeal Arthrex did not raise the issue of the validity of the applicable rule. The dissenting opinion raises some of these same concerns, and also states that the PTAB’s reading of the rules to eliminate the phrase “in the trial” from § 42.73(b)(2) is improper without formal rulemaking under the Administrative Procedure Act, 35 U.S.C. § 2(b)(2)(B).

Although the court upheld the PTAB’s decision to enter adverse judgment before institution in this case, based on the concerns raised by two judges, this issue appears likely to be raised and reconsidered in a future case before the court, or in a request for en banc rehearing of this case.