In its decision issued April 24, SCOTUS ruled (7-2) in Oil States Energy Services v. Greene’s Energy Group that inter partes review proceedings (IPRs) conducted by the Patent Trial and Appeal Board (PTAB) do not violate Article III, or the 7th Amendment of the U.S. Constitution. Needless to say, the decision to uphold the constitutionality of IPRs is very disappointing to me and many others in the IP world, and the dissenting opinion by Justice Gorsuch (joined by Chief Judge Roberts) is astute and correct in being highly critical of the reasoning in the majority opinion, especially as it relates to whether the McCormick Harvesting decision was based on a statutory authority issue (per the majority) or a constitutional “separation of powers” issue (per the dissent). See my comments below in that regard. That being said, there may be some potential “silver linings” in this decision, especially when considered in the context of the companion SAS Institute decision (5-4) where Gorsuch’s majority opinion held that PTAB must rule on all claims challenged in an IPR, not just those that are deemed invalid by PTAB.
Let me first say that 7th Amendment challenge was the weakest. Indeed, the majority opinion spent less than a page on that challenge, and the dissent didn’t even comment on that aspect at all.
But as Sherlock Holmes might say, where “the game was afoot” was in the challenge based upon the Article III “separation of powers” issue, namely that only an Article III court (per McCormick Harvesting) can adjudicate the validity of a granted patent. The majority opinion makes several cringe-worthy statements that simply don’t hold up when scrutinized. First, the majority says that the grant of a patent falls within the “public-rights doctrine.” Whether that is correct or not is beside the point. But the majority then makes the astounding “leap of logic” that IPRs “involve the same basic matter as a grant of a patent.” That statement is a manifest and improper conflation of two very distinct and different processes: (1) the grant of the patent (an ex parte examination process); and (2) the determination of the validity of a granted patent (a contested adjudicatory process). Indeed, the majority should have done its “legislative intent” homework. Congress’, and especially the Senate’ version (S.1041) of the AIA characterize IPRs, as well as all other post-grant proceedings as being adjudicative, whereas the grant of the patent is an examination. See especially Matal’s, A Guide to the Legislative History of the America Invents Act, p. 443, footnote 53. To put it bluntly, the examination which grants the patent is in no way “the same basic matter” as an IPR adjudication as the majority opinion would have you believe.
In this regard, in my opinion and others, the advocate for Petitioner Oil States made a tactical error during oral argument in this case. In response to Ginsburg’s initial question that “there must be some means by which the Patent Office can correct errors that it’s made,” the advocate for Oil States started off well by saying the USPTO could correct patents through ex parte reexamination. Unfortunately, that advocate then stumbled when Kagan followed up by asking “what about inter partes reexamination?” by suggesting that inter partes reexamination “was a closer case,” but being an “examination,” was different from IPRs which are “adjudicatory.”
Like others have suggested, I would also have thrown inter partes reexamination “under the bus.” Admittedly, reexamination is an “examination” process while IPRs are an “adjudicatory” one. But the key distinction here is whether the patent owner voluntary initiates the procedure (as certainly can happen in ex parte reexamination-I would also argue that third-party initiated ex parte reexaminations are an entirely different story). In other words, by initiating ex parte reexamination, the patent owner can voluntary waive its constitutional rights on having the validity of its patent determined by an Article III court. By contrast, IPRs (as well as inter partes reexamination) are not initiated by the patent owner, nor can the patent owner opt out of IPRs (or inter partes reexamination) without risking having their patent rights invalidated. That makes the patent owner’s participation in IPRs totally involuntary in terms of not waiving its constitutional right to have the validity of its patent adjudicated in an Article III court.
With respect to what McCormick Harvesting means, the majority treats the holding in this case as a mere issue of lack of statutory authority of the Commissioner of Patents to annul or correct the granted patent. But Gorsuch (as well as I and many others) see McCormick Harvesting quite differently as being based upon a more fundamental constitutional Article III question of “separation of powers,” and especially the independence of the judiciary, versus the potential lack thereof in an administrative tribunal such as PTAB (such lack of independence being well documented through, for example, “panel stacking,” and APJs sitting on IPRs involving former clients). That fundamental Article III question comes directly out of the language used by SCOTUS in McCormick Harvesting, as quoted by Gorsuch in his dissenting opinion:
“It has been settled by repeated decisions of [SCOTUS] that when a patent has [been issued by] the Patent Office, it has passed beyond the control and jurisdiction of that office, and is not subject to be revoked or cancelled by the President, or any other officer of the Government. It has become the property of the patentee, and as such is entitled to the same legal protection as other property.”
Gorsuch’s dissenting opinion further quotes from McCormick Harvesting on the point that “annul[ment]” or “correct[ion]” of a granted patent “for any reason whatever, is vested in the courts of the United States, and not in the department which issued the patent.” If the question were merely one of statutory authority, as opposed to one of constitutional “separation of powers,” SCOTUS would have used very different language in McCormick Harvesting. Indeed, as reflected in McCormick Harvesting, even SCOTUS back in the 19th Century recognized that the grant of a patent was different in character from post-grant proceedings. That the majority opinion refuses to acknowledge this distinction, as even Congress acknowledged in the enabling legislation for IPRs, is mind-boggling, and rightly criticized by Gorsuch’s dissenting opinion.
Another egregious statement in the majority opinion is its characterization of a patent grant as being a “public franchise.” I, other patent attorneys, and may be even Gorsuch, would wince at such a gross mischaracterization of a patent grant. In particular, the analogy by the majority opinion of a patent grant to being similar to “permit[ting] a company to erect a toll bridge” is extremely inapt. Patent grants are in no way similar to a “franchise” which is often for the purpose of permitting someone to do something they may not otherwise legally do. By contrast, patents give the owner to right to tell others they cannot do something, i.e., “make, use, or sell” the claimed invention. And never mind that this gross mischaracterization of patent rights by the majority opinion overlooks and overturns more than 200 years of case law, including that of SCOTUS, some of which is referred to in McCormick Harvesting, as well as the express language in 35 U. S. C. § 261 which characterizes patent rights as “having the attributes of personal property.”
Speaking of 35 U. S. C. § 261, another problematical issue with the majority opinion is its reliance on the prefatory “subject to the provisions of this title” clause of this section of the patent statutes as suggesting that “those provisions include [IPRs].” In effect, the majority views this prefatory clause to 35 U. S. C. § 261 as constituting acceptance of an implied waiver of the patent owner’s right to argue that IPRs are a “taking” of its “personal property” under the 5th Amendment “without due process,” at least as to patents granted (or more accurately, having an effective filing date) on or after March 16, 2013. That view is consistent with the majority opinion’s further statement that Oil States “does not challenge the retroactive application of [IPRs], even though that procedure was not in place when its patent issued.” (As I discuss further below, even the majority opinion recognizes that IPRs implicate the 5th Amendment “takings clause” as it relates to patent grants having effective filing dates prior to March 16, 2013.) Nonetheless, the reliance by the majority on this prefatory clause in 35 U. S. C. § 261 as acceptance of a potential implied waiver of the patent owner’s 5th Amendment “due process” rights is, in my opinion, very suspect. This prefatory clause in 35 U. S. C. § 261 (this section being also titled as relating to “Ownership; assignment”) was present when this particular section of the patent statutes was first included back in 1952, and long before IPRs (or even reexamination procedures) were later added. It is far more logical that this prefatory clause would involve how some other section of the patent statutes affect ownership of patent rights and what that means (and is what is specifically addressed in 35 U. S. C. § 261), or possibly implicates some other sections (such as 35 U. S. C. §§ 101, 102, 103, or 112) which were part of the original 1952 patent statute. But to say that this general (and somewhat ambiguous) prefatory clause necessarily includes any other section of Title 35, especially those added long after 1952 (including those relating to IPRs) is another huge and puzzling “leap in logic” by the majority.
That being said, and following up on the feeling of “doom and gloom” many of us had upon initial issuance of the Oil States decision, there is some reason for hope here in at least reigning in some of the impact of IPRs. The majority opinion concludes by “emphasiz[ing] the narrowness of [its] holding,” i.e., it only addresses the 7th Amendment and Article III challenges. Or as I’ve characterized this portion of the majority opinion, it suggests the wrong questions were asked by Oil States. Instead, it suggests Oil States should have asked the following questions: (1) was retroactive application of IPRs proper, even though that procedure was not in place when Oil States’ patent issued?; and (2) may IPRs be challenged on “due process” and “takings clause” grounds (stating that “our decision should not be misconstrued as suggesting that patents are not property for purposes of the Due Process Clause or the Takings Clause”). With reference to the second question, note in particular that the majority cited the Florida Prepaid case which relates to 11th Amendment sovereign immunity of the states and their institutions. That citation has direct implications in the University of Minnesota’s appeal to the Federal Circuit of PTAB’s ruling (wrong in my view and others) in the Ericsson decision that state institutions (such as state universities) waive their 11th Amendment sovereign immunity in IPRs if they have brought a separate patent infringement suit in federal district court. The second question also certainly implicates whether IPRs, as procedurally structured or as substantively determined, comply with the Administrative Procedures Act (APA). In terms of APA compliance either procedurally or substantively, IPRs are highly vulnerable to attack for many different reasons, including “panel stacking,” as well as failure to ensure that APJs sitting on PTAB panels are free from potential “conflict of interests” or abide by any “code of ethics” similar to those of judges to insure objectivity of and lack of bias by them.
Regarding the first question of retroactive application of IPRs, I’m still astounded that Oil States didn’t offer this aspect as a potential “fall back” position. In fact, during oral argument, Justice Kennedy offered the hypothetical of “we will grant you a patent on the condition that you agree to this procedure, [i.e., IPRs].” Kennedy followed that question up with another one (noting it was a “basic question patent lawyers would probably know the answer”), namely “could Congress say that we are reducing the life of all patents by 10 years?” As even Kennedy understood, Congress can’t retroactively “change the rules” on what a property right provides (and even the majority opinion in Oil States acknowledges that with this first question) without implicating the “due process” and “takings clause” of the 5th Amendment. (I have sneaking suspicion that Kennedy knew that the advocate arguing for Oil States was not a “patent lawyer.”)
That advocate’s response “yes, I think it could” (further stating “that goes to the limited times requirement”) isn’t the answer I would have given Kennedy. Consistent with what I’ve said above, Congress could not constitutionally decrease the patent term for an existing patent right without violating the 5th Amendment “due process” and “takings clause.” In fact, Congress itself is cognizant of this restriction, as evidenced when it last changed the patent term in 1995 to 20 years from filing date, but carved out an exception that, for applications filed before the effective date of that change, the old patent term of 17 years from issue date would remain. (Indeed Roberts further hinted during oral argument that way by pointing to the “takings clause” of the 5th Amendment.)
My original prediction that Gorsuch was clear vote to hold that IPRs unconstitutional in view of Article III proved prophetic, and he at least got Roberts to agree with him. The majority opinion, while extremely disappointing (as well as being plagued with several misstatements and mischaracterizations), still evidences some significant concerns about the constitutionality of IPRs if applied retroactively to patents (like that of Oil States’) having effective filing dates prior to March 16, 2013, and whether there may be other 5th Amendment “due process” and “takings clause” issues to address, including state sovereign immunity under the 11th Amendment. So the story on the constitutionality of IPRs in all circumstances is not over yet.
*© 2018 Eric W. Guttag. All views and opinions expressed herein are those of the author only.