Next Steps After Celgene: Federal Circuit Ruling on Takings Clause and IPRs Leaves Open Questions

“The Federal Circuit’s decision in Celgene raises some interesting questions, including whether an en banc or cert petition is coming, whether the court should have decided this issue, and the effect this decision may have on pending or future taking-related challenges.”

Fifth Amendment - https://depositphotos.com/201240394/stock-photo-text-fifth-amendment-constitution-gavel.htmlSince the Supreme Court upheld the constitutionality of inter partes review (IPR) a little more than a year ago in Oil States, several patent owners have brought other constitutional challenges to America Invents Act (AIA) trial proceedings. These cases have been slowly percolating at the Patent Trial and Appeal Board (PTAB), the U.S. Court of Federal Claims, and the U.S. Court of Appeals for the Federal Circuit. In many cases, however, the Federal Circuit has declined to address these constitutional claims on the merits, finding them unnecessary to resolve or insufficiently developed by the parties. But early last week, the Federal Circuit for the first time addressed the applicability of the Takings Clause of the Fifth Amendment to IPRs, holding in Celgene Corp. v. Peter, Case No. 18-1167 (Fed. Cir. 2019) “that the retroactive application of IPR proceedings to pre-AIA patents is not an unconstitutional taking under the Fifth Amendment.”

While the court’s holding may appear on its face to forestall current and future Takings Clause challenges to AIA proceedings, its analysis leaves some questions unanswered, and may even provide a narrow path forward for future takings claims. Furthermore, given the Supreme Court’s predilection for addressing both AIA and Takings Clause issues, the Federal Circuit panel’s decision may not be the last word on this interesting issue.

The Celgene Holding

Celgene involved a series of IPR challenges to two patents owned by Celgene and directed to methods for safely providing teratogenic agents, such as thalidomide, to patients without risking distributing the drug to patients who are pregnant or may become pregnant. (The IPRs were filed by the Coalition for Affordable Drugs, the entity associated with hedge fund manager Kyle Bass.)  After the PTAB invalidated as obvious all claims of one patent and all but one claim of the other, Celgene appealed, asserting that the Board erred in finding these claims obvious and that retroactive application of IPRs to these patents—which were filed and issued long before the AIA’s effective date of September 16, 2012—was an unconstitutional “taking” of private property under the Fifth Amendment. After affirming the PTAB’s obviousness finding, the Federal Circuit considered whether the pre-AIA patents’ cancellation through an IPR effected an unconstitutional taking.

Before reaching the merits of Celgene’s takings claim, the Federal Circuit (in an opinion by Chief Judge Prost, joined by Judges Bryson and Reyna) first considered whether Celgene waived its constitutional challenge by not first raising it at the PTAB. Though the court, quoting In re DBC, 545 F.3d 1373, 1378 (Fed. Cir. 2008), noted that “a party generally may not challenge an agency decision on a basis that was not presented to the agency,” here the court found reason to depart from this general rule, explaining that the interests of justice weighed in favor of addressing this retroactive challenge—especially given that similar Takings Clause issued have been raised in several past and pending cases at the Federal Circuit. The court also noted that even if the Takings Clause issue had been raised below, the PTAB would not clearly be able to correct the constitutional defect, as it cannot address constitutional issues. But see Agarwal v. TopGolf Int’l, Inc., No. 18-2270 (Fed. Cir.) (challenging Board’s ruling on takings claim).

Proceeding to the merits of Celgene’s takings challenge, the Federal Circuit looked to the nearly 40-year history of the U.S. Patent and Trademark Office (USPTO) being able to revisit the validity of patents in post-grant proceedings such as ex parte and inter partes reexaminations. According to the court, the USPTO’s ability to review and invalidate patents pre-AIA was both longstanding and quite similar to its ability to do so after enactment of the AIA. Ex parte reexaminations were created in 1980, over two decades before the two patents in Celgene issued, and inter partes reexamination became available shortly before the patents were issued. Thus, both patents were filed for and granted subject to the USPTO’s ability to reexamine the patents’ validity after issuance. The court found it important that reexaminations and IPR invalidate patents on the same substantive grounds—anticipation and obviousness—based on the same categories of prior art and under the same burden of proof (preponderance of the evidence). And while Celgene argued that the procedural differences between prior reexamination proceedings and IPR proceedings were significant enough to devalue patents, the Federal Circuit explained that “no one has a vested right in any given mode of procedure” quoting Denver & Rio Grande W. R.R. Co. v. Bhd. of R.R. Trainmen, 387 U.S. 556, 563 (1967)), and stated that Celgene had not shown “that claims canceled in IPRs, including its own claims, would have fared any better in the preexisting reexamination procedures.” The court concluded that “IPRs do not differ significantly enough from preexisting USPTO mechanisms for reevaluating the validity of issued patents to constitute a Fifth Amendment taking.”

Essentially, the Federal Circuit found that since the advent of ex parte reexamination in 1980, post-grant invalidation of patent rights on anticipation or obviousness grounds at the USPTO is something that was part of the patent bargain. The mere fact that IPRs use different procedural mechanisms to revisit the validity of issued patents as compared to ex parte or inter partes reexamination is not enough to render it unconstitutional.

The Federal Circuit’s decision raises some interesting questions, including whether an en banc or cert petition is coming, whether the Federal Circuit should have decided this issue, and the effect this decision may have on pending or future taking-related challenges.

Next Stop, SCOTUS?          

First, this case seems like a lock for an eventual petition for certiorari. The Supreme Court has shown an affinity for PTAB-related cases, having granted cert in five PTAB cases in the seven years since the AIA went into effect, and has decided over a half-dozen takings case over the past decade, including, just this past term, Knick v. Township of Scott, Pennsylvania. What’s more, Celgene’s counsel is Jones Day’s Greg Castanias, who successfully argued SAS Institute v. Iancu before the Supreme Court.

An issue that the Supreme Court (or the Federal Circuit en banc) may need to grapple with is whether the Federal Circuit should have addressed the merits of Celgene’s constitutional challenge in the first place, or whether it was unripe. It’s important to note that the Takings Clause doesn’t prohibit the government from taking private property—it simply imposes limits on that taking (i.e., it must be for a “public use”) and requires that the property owner be paid “just compensation.”  Because the Tucker Act grants jurisdiction to the United States Court of Federal Claims to decide claims for monetary damages arising out of the Constitution, courts have commonly found that a Takings Clause claim must be brought to the Court of Federal Claims in the first instance, unless Congress has withdrawn the Tucker Act grant of jurisdiction. See Eastern Enterprises v. Apfel, 524 U.S. 498, 520 (1998) (plurality opinion). In fact, Federal Circuit Judge Hughes recently advised in an oral argument that patent owners should “go to the Court of Federal Claims” to assert a takings claim once their patents are cancelled. Trading Tech. Int’l v. IBG LLC, No. 2018-1443 (May 9, 2019).

Because the Federal Circuit reached the merits of the takings argument in Celgene without addressing the potential for a Tucker Act claim or whether the takings claim was unripe, this may be addressed en banc or by the Supreme Court. In fact, in the past the Supreme Court has found that where a suit under the Tucker Act is available as a remedy for any uncompensated taking a party may suffer as a result of a challenged statute, any challenges to the constitutionality of the statute are not ripe until and unless a claim under the Tucker Act is brought. See, e.g., Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1019 (1984). So it’s possible that if Celgene pursues its challenge further in this case, it may be dismissed as unripe.

Implications for the Appeal in Christy v. United States

Notably, however, at least one patent owner has brought a Tucker Act claim for just compensation based on the cancellation of patents in AIA proceedings, and the Celgene decision (if it stands) will have a substantial effect on this case. After having 18 claims of one of its patents cancelled through an IPR proceeding, Christy, Inc. filed a class action suit against the United States under the Tucker Act, seeking compensation on behalf of all patent owners who have had pre-AIA patent claims canceled through AIA trial proceedings. After the United States moved to dismiss, the Court of Federal Claims issued an opinion holding that because patents are “public franchises” per the Supreme Court’s Oil States opinion, they cannot be “private property” for purposes of the Takings Clause. Christy, Inc. v. United States, 141 Fed. Cl. 641, 659-60 (2019). The court granted the government’s motion and dismissed the case.

Last month, Christy filed its opening appeal brief with the Federal Circuit. On appeal, Christy’s argument centers on an issue that was not disputed in Celgene—whether patents are private property for takings clause purposes. Christy focuses primarily on establishing that patents are property under the Fifth Amendment taking clause, and that the AIA’s changes to the patent bargain interfered with Christy’s investment backed expectations.

Christy argues that characterizing a patent as a “public franchise” does not change its nature as property under the Fifth Amendment. See Oil States Energy Servs., LLC v. Greene’s Energy Grp., LLC, 138 S. Ct. 1365, 1373 (2018). Instead, the franchise granted by a patent consists of the same key property right—“the right to exclude everyone from making, using, or vending the thing patented, without the permission of the patentee.” United States v. Line Material Co., 333 U.S. 287, 316 (1948). Christy argues that, like other franchises, such as the right to take tolls, patent franchises are property and are likewise subject to and protected by the provisions of the Fifth Amendment.

The Federal Circuit’s decision in Celgene appears to reject the reasoning of the Court of Federal Claims’ decision in Christy, but also seems likely to still lead to an affirmance. Given the USPTO’s concession in oral argument in Celgene that patents are private property for Takings Clause purposes, the government’s arguments in the Christy appeal may evolve from those offered below. Instead of arguing that patents are not private property—full stop—it seems more likely that the government will take the position that the Federal Circuit’s holding in Celgene forecloses Christy’s claims, and that it is now well-established that IPR proceedings cannot be a taking. In fact, the Federal Circuit this week issued another opinion reiterating its holding in Celgene that the cancellation of patents in IPR proceedings does not effect a taking. Collabo Innovations, Inc. v. Sony Corp., No. 2018-1311, slip op. at 11-12 (Aug. 5, 2019).

The government’s responsive brief in Christy is due on October 25.

After Celgene, do any Takings Challenges Remain?

If the Celgene decision stands, is that the end of the road for all PTAB-related takings claims?  Despite the Federal Circuit’s reasoning that “no one has a vested right in any given mode of procedure,” the Supreme Court has recognized that “fundamental alterations” in patent law could destroy patent owners’ investment backed expectations in their inventions (Festo Corp. v. Shoketsu Kunzoku Kogyo Kabushiki Co., 535 U.S. 722, 739 (2002). Thus, while the Federal Circuit’s holding in Celgene rejected takings claims for IPRs because these were similar enough to preexisting reexamination proceedings, this raises the question as to whether other proceedings, such as covered business method (CBM) reviews, might be treated differently.

In Celgene, the Federal Circuit noted that for the last four decades, patent owners have “had the expectation that the PTO could reconsider the validity of issued patents on particular grounds, applying a preponderance of the evidence standard.”  But in CBMs, Congress for the first time authorized the USPTO to reconsider the validity of issued patents on issues under Section 101 and 112, grounds that were not available in ex parte or inter partes reexamination. Now, instead of needing to satisfy the district court’s clear and convincing evidence standard for invalidity challenges for unpatentable subject matter under Section 101 and for lack of a written description, lack of enablement, or indefiniteness under Section 112, in CBMs the PTAB’s lower preponderance of the evidence standard applies. Judges Taranto and Moore separately mused during oral arguments in Collabo Innovations, Inc. v. Sony Corp., No. 2018-1311 (March 5, 2019) and Trading Tech. Int’l v. IBG LLC, No. 2017-2257 (Mar. 3, 2019), respectively, that CBM proceedings may, in some circumstances, effect a taking.

Late last year we hypothesized that the retroactive applicability of CBM proceedings to pre-AIA patents might give rise to potential claims under the Takings Clause. While the Federal Circuit’s decision in Celgene eliminates such claims for IPRs, it leaves for another day the question of whether differences between the wider grounds available in CBM proceedings versus pre-AIA methods of patent validity reexamination are sufficient to require a different result. Although CBMs are scheduled to expire in September 2020, there are dozens of patent owners who have had patent claims canceled in these proceedings on Section 101 or 112 grounds over the past seven years. Time will tell whether one may bring a claim to seek compensation from the government under the Takings Clause.

The opinions expressed herein are those of the authors alone and do not necessarily reflect the views of Ropes & Gray LLP or any of the firm’s clients.

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The Author

Matthew Rizzolo

Matthew Rizzolo is a partner in the Intellectual Property Litigation practice group of Ropes & Gray, and is resident in the firm’s Washington, DC office. He works extensively with technology companies to both enforce clients’ intellectual property rights and defend clients from patent infringement claims, and litigates in a variety of jurisdictions, including federal district courts throughout the United States, the Federal Circuit, the Patent Trial & Appeal Board, and in Section 337 actions before the United States International Trade Commission. Matt received his J.D. from The George Washington University Law School.

For more information or to contact Matthew, please visit his Firm Profile Page.

Matthew Rizzolo

Kathryn Thornton is an associate in the Intellectual Property Litigation practice group of Ropes & Gray, and is also resident in the firm’s Washington, DC office. She cultivates a diverse practice across false advertising, trademark, patent, and copyright matters. Kathryn has worked on litigation in federal district court, the United States International Trade Commission, the Fourth Circuit, and the Federal Circuit. Kathryn received her J.D. from The George Washington University Law School.

For ore information or to contact Kathryn please visit her Firm Profile Page.

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Discuss this

There are currently 6 Comments comments.

  1. Andy August 8, 2019 9:40 am

    The article states “After the United States moved to dismiss, the Court of Federal Claims issued an opinion holding that because patents are “public franchises” per the Supreme Court’s Oil States opinion, they cannot be “private property” for purposes of the Takings Clause.” Indeed, the ruling in Christy states “patents are neither contracts nor property for Takings Clause purposes.” Yet in Oil States the Supreme Court explicitly stated “Finally, our decision should not be misconstrued as suggesting that patents are not property for purposes of the Due Process Clause or the Takings Clause.” What am I missing here? Sounds like SCOTUS was pretty clear on this? (Understood there is then the further/subsequent argument that patents are a particular type of property, namely a public franchise, in which the government reserves rights to cancel or alter those agreements.)

  2. Anon August 8, 2019 9:44 am

    Making the Tucker Act action a necessary precursor absolutely misses the point of the Knick case.

  3. Night Writer August 8, 2019 10:32 am

    Come on. We all know at this point that the Scotus does whatever it wants to do regarding patents. Who knows what the Scotus will do? All we know is that it will be based on their what outcome they want.

  4. EG August 8, 2019 4:53 pm

    Besides the “takings” issue, there’s also the question of whether application of IPRs to pre-AIA patents is an improper ex post facto law.

  5. mike August 8, 2019 9:24 pm

    @EG: That’s true. See J. Thomas’ concurring opinion in Eastern Enterprises v. Apfel. He says he would be willing to take such a case. Furthermore, there is plenty of info showing the holding in Calder is not correct, as the meaning of ex post facto at the time of the Constitution applied to both civil and criminal law.

    For the inventor who cannot afford nor could have anticipated the new changes and associated risks with the changes that IPRs brought, retroactive application of IPR to preAIA patents is unjust indeed.

  6. Jam August 9, 2019 12:18 pm

    101 should be amended to require that when a granted claim is held to be invalid under 101 but includes patent eligible subject matter under 102 and 103, the court so holding SHALL provide a model claim to the subject matter at issue that is valid under 101, which the patentee may (1) accept or (2) revise with remand to a lower court for further review.

    “SHALL” is there so that the court can’t simply give up and say “nothing valid here”. Rather, the court MUST draft a valid (under 101) claim, which may then be remanded for additional consideration (i.e., under 112).

    Malicious courts may intentionally draft claims that violate 112, which is not good for the instant pantentee. However, it would more quickly create a body of eligible claim prototypes that future patentees and applicants could look to.

    There has to be a way to force the courts to provide meaningful examples for how to draft valid claims (under 101) where there is eligible subject matter (under 102 and 103). As it stands, the judiciary is content to lazily play hide the ball with 101 validity. Maybe, after being forced to draft valid claims, the patent killing judges will start to understand the mess they’ve made.

    A recent example is Genetic Veterinary Sciences v. Laboklin (Fed. Cir. August 9, 2019) where genetic testing claims were invalidated. Come on Federal Circuit, help everyone out and show us what valid claims look like for this type of subject matter. Perhaps the Federal Circuit and Supreme Court are simply afraid of the Sisyphean task of drafting claims under their own judicial exceptions.