Merck v. Gnosis S.P.A.

Merck v. Gnosis S.P.A.
820 F.3d 432 (Fed. Cir. 2016)
Authored by Bailey Gallagher

Statement of Facts: Merck, or MSD as it is called internationally, is a healthcare company that develops, manufactures, and distributes pharmaceuticals across the globe. See About Us, Merck, http://www.merck.com/about/home.html (last visited Feb. 12, 2017). Merck owns Patent No. 6,011,040 (“the ’040 patent”), which protects the company’s ownership rights to a process that uses folates to lower homocysteine levels in humans, an amino acid linked to cardiovascular, ocular, neurological, and skeletal disorders. Merck v. Gnosis, 808 F.3d 829, 831 (Fed. Cir. 2015).

Gnosis challenged claims 1–3, 5, 6, 8, 9, 11–15, and 19–22 of the ’040 patent, filing a formal complaint with the United States Patent and Trademark Office’s Patent Trial and Appeal Board (“PTAB”). Id.  PTAB initiated inter partes review (“IPR”) of the contested claims. Merck then canceled six of the challenged claims, leaving PTAB to review the patentability of claims 8, 9, 11, 12, 14, 15, and 19–22. Id.  PTAB invalidated these claims for obviousness. Id. at 832.

Merck appealed this decision to the Federal Circuit, and a panel of three Circuit Judges, applying the deferential “substantial evidence” standard of review, affirmed PTAB’s conclusions. Merck brought a petition for rehearing en banc.

Procedural History: The three-judge panel held that the “claimed method of treating elevated levels of homocysteine would have been obvious to a person of skill in light of the prior art” and was thus patent ineligible. Id. at 839. Merck then filed a petition with the Federal Circuit for rehearing en banc, arguing that because Congress intended courts to review PTAB rulings for proper application of the “preponderance of the evidence” standard as established by the America Invents Act (“AIA”), the Federal Circuit must review PTAB’s orders for “clear error” rather than “substantial evidence.” The petition was referred to the panel that originally heard Merck’s appeal. The panel subsequently referred the petition and its response to the petition to the remaining Circuit Judges. The judges took a poll and the poll failed. This decision expresses the court’s response to Merck’s petition for rehearing en banc.

Question Presented: Must the court apply the more searching “clear error” standard of review, rather than the “substantial evidence” standard, when reviewing appeals from IPR proceedings under the AIA?

Holding: The court denied Merck’s petition for rehearing en banc, declining to apply the more searching “clear error” standard of review for PTAB’s factual findings when reviewing appeals from IPR proceedings under the AIA.

Reasoning: Under Section 706 of the Administrative Procedure Act (“APA”), the “substantial evidence” standard is the proper standard of review when considering an appeal arising from an IPR proceeding under the AIA.

Concurring Opinion: Judge O’Malley joined in the majority’s holding, but wrote separately to express his opinion that the “substantial evidence standard of review makes little sense in the context of an appeal from an IPR proceeding.” Merck v. Gnosis, 820 F.3d 432, 433 (Fed. Cir. 2016). He concluded, however, that current Supreme Court and Federal Circuit precedent compelled the court to apply that standard. He determined that any change in the appropriate standard for reviewing an appeal from an IPR proceeding must come from Congress, codified in the AIA, rather than the judiciary.

O’Malley relied, in part, on the Supreme Court’s decision in Dickinson v. Zurko, which held that “5 U.S.C. § 706 of the APA does apply to Board findings, and the Federal Circuit must use the framework set forth in that section.” Id. (quoting Dickinson v. Zurko, 527 U.S. 150, 152 (1999)). O’Malley also looked to the Federal Circuit’s decision in In re Gartside, in which the court determined that it must use one of the standards presented in Section 706 of the APA when reviewing an appeal from an IPR proceeding. Section 706 sets forth two standards of review: (1) the “arbitrary and capricious” standard, and (2) the “substantial evidence” standard. In In re Gartside, the court concluded that the “substantial evidence” standard was appropriate for review of PTAB’s factual findings. According to O’Malley, In re Gartside “controls [the Federal Circuit’s] standard of review for all Board proceedings, including those under the AIA.” Merck, 820 F.3d at 434.

O’Malley discussed Congress’s intent with respect to authorizing PTAB to conduct IPR proceedings for patent review under the AIA. In permitting such proceedings, Congress intended to create an alternative to expensive litigation in district court. In light of this purpose, O’Malley concluded that it would make the most sense for courts to review such proceedings under the same standard they would use when reviewing factual findings of district court judges, the “clear error” standard.  O’Malley reasoned that while in Zurko, the Supreme Court referred to “clear error” review as “court/court” review rather than “court/agency” review, IPR proceedings do not adhere to the typical “court/agency” review structure present in Zurko. Unlike most agency proceedings, Congress established IPR proceedings as an alternative to litigation in district court. Reviewing an IPR decision is therefore more analogous to “court/court” review, to which courts apply the “clear error” standard, than to “court/agency” review, to which courts apply the “substantial evidence” standard as well as other standards of review that the APA prescribes. The similar natures of IPR and district court proceedings suggests that the same “clear error” standard should apply to each.

Despite Congress’s intent for authorizing IPR proceedings for patent review under the AIA, O’Malley reasoned that the court is bound by Supreme Court and Federal Circuit precedent. Thus, although applying the “clear error” standard to this appeal and other similar appeals for review of PTAB’s factual findings seems to make the most sense, the APA’s “substantial evidence” standard is appropriate until Congress or the Supreme Court explicitly changes the standard of review.

Dissenting Opinion: Judge Newman dissented from the court’s denial of petition for rehearing en banc, reasoning that applying the “substantial evidence” standard of review to IRP proceedings under the AIA contravened the Act’s legislative purpose. Newman concluded that the “substantial evidence” standard is overly deferential to PTAB. Instead, Congress contemplated that the courts would apply a more searching standard of review, like the “clear error” standard, when reviewing PTAB’s factual findings. Newman determined that a close analysis of the legislative history and purpose of the AIA reveals that Congress intended for PTAB’s decisions to be reviewed on the same standard as would district court holdings. It is the Federal Circuit’s responsibility, she reasoned, to interpret a statute in accordance with its legislative purpose.

Newman distinguished this case from Zurko, which O’Malley concluded prevented the court from applying any standard of review other than the two outlined in Section 706 of the APA to PTAB’s findings. Unlike the law in Zurko, the statute here created a quasi-judicial body that conducted proceedings as a substitute for district court actions. Zurko is thus not controlling in this case under Newman’s analysis.

Newman finally concluded that because the PTAB proceedings at issue are between private parties and impose estoppel against the petitioner, rather than for providing an agency grant, the deferential “substantial evidence” standard is not commensurate with the quasi-judicial nature of such proceedings. Newman resolved that the AIA’s substantial departures from the APA, including its provisions for direct appeal to the Federal Circuit, its removal of district court review, and its imposition of estoppel against private parties engaged in PTAB proceedings, evidenced congressional intent to create a quasi-judicial body whose decisions would be reviewed under the same searching standard as would district court proceedings. Under this analysis, Newman determined that the court should have granted en banc review to ensure the alignment of the appellate standard of review with the legislative purpose.

 

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