Patent Law’s Future Has Not Escaped Scrutiny of High Court
In late November of last year, the U.S. Supreme Court heard the Oil States Energy Services LLC v. Greene’s Energy Group LLC patent case. What this means, said Luke Holst, patent attorney at McGrath North, is that they have been asked to decide whether the America Invents Act’s most popular patent review procedure, Inter Partes Review (IPR), is constitutional or not.
Ryan T. Grace, patent and trademark attorney and managing partner at Advent LLP, provided background on the case: “The Oil States Energy Services v. Greene’s Energy Group [‘Oil States’] case turns on a process for disputing the validity of a patent created by the America Invents Act (AIA) which was signed into law in 2011. The process is called Inter Partes Review (IPR) and involves an administrative proceeding at the Patent Office. The process is generally faster and cheaper than challenging the validity of the patent in an Article III federal court. Yet, the rules and standards during IPR are much different than those followed by the federal court.
“In this case, Oil States Energy Services [‘Oil States’] attempted to sue Greene’s Energy Group [‘Greene’s Energy Group’] for patent infringement. Greene’s Energy Group filed an IPR asserting that Oil States’ patent should not have been granted in the first place. The Patent Office agreed with Greens Energy Group and cancelled Oil States’ patent,” Grace said.
“The issue before the Supreme Court is Oil States’ assertion that the IPR process is unconstitutional, because private property rights were taken from them by an administrative proceeding (i.e., the IPR). Oil States argues that patent rights are a private property right and adjudication of the patent validity must take place in an Article III federal court with a jury.”
“In response to a growing sense that questionable patents are too easily obtained and are too difficult and expensive to challenge in federal courts, Congress sought to provide a more efficient system for challenging such patents,” said John P. Passarelli, partner at Kutak Rock.
“This will be the United States Supreme Court’s first opportunity to determine whether that ‘more efficient system’ is constitutional, so you have the Supreme Court about to weigh in on this important question as to how litigants can challenge the validity of United States patents.”
Holst added that “proponents of IPRs view the administrative proceedings as a faster, less expensive tool than federal litigation to combat ‘patent trolls’ and challenge the validity of weak patents. Critics believe IPRs undermine U.S. innovation, noting that these administrative proceedings use a different legal standard than the federal courts and are more likely to invalidate a patent, wherein some studies show IPR ‘kill rates’ as high as 90 percent.”
Since this case involves patents, it would seem that only a small number of Americans would be affected.
But that’s not the case. According to Fortune magazine, the “constitutional challenge could topple a major pillar of the current patent system and send economic ripples through the tech and retail sectors.”
Holst claims that “any American who has a creative bone in their body will be affected by the Supreme Court’s decision, whether they are a startup entrepreneur, a CEO of a Fortune 500 company, or simply [someone who] likes to watch Shark Tank. Not only does this decision have the potential of removing a major pillar from the current patent system, it could affect thousands of concluded/pending IPRs and bring a wave of lawsuits that send ripples throughout the national economy.”
“This case will influence the strength of patents and our patent system,” Grace said. “If the Court determines that patents convey a private property right (e.g., if the Court determines that the IPR process is unconstitutional), the value of patents will increase, and patent holders should have more access to capital for innovation and defense of their patents against patent infringers. If the Court determines that patents convey a public property right (e.g., if the Court determines that the IPR process is constitutional), the value of patents will remain at the status quo or even decrease and patent holders will continue to struggle with enforcement of their patents against infringers, especially those who have deep pockets.”
“Our Founding Fathers appreciated the importance of a good patent system to provide incentive for inventions and to protect those who invent,” Passarelli said. “Specifically, the United States Constitution provided to Congress the power ‘To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.’ (Article I, Section 8.)
“I am sure the average American wants to incentivize drug companies to find cures for today’s health care maladies. United States patent protection is what motivates these drug companies to spend billions and billions of dollars in research and development. Of course, patents cover all inventions, including inventions in the sciences, technologies, manufacturing and the like, so the patent system encourages invention. However, equally important is that we must ensure questionable patents aren’t used to frustrate a competitive environment,” Passarelli said.
Grace added that: “IPR proceedings, along with other features of the American Invents Act (AIA), which became effective March 16, 2013, have had the unintended effect of eroding the strength of America’s Patent system. Independent inventors and small companies are often the most adversely affected by IPR proceedings and other provisions of the AIA. IPRs were couched as a cheap and fast method to correct Patent Office errors resulting in the issuing of bad patents. However, the burdens imposed by IPRs fall asymmetrically on patent holders.
“With amendments being very rare, the IPR system has been a red herring for killing – not repairing – patents at abnormally high rates (at one time only around four percent of patents were held valid after IPR). Because of the IPR process, the incentive to innovate has decreased due to the uncertainty of the property right. Consequently, start-ups are having a more difficult time obtaining funding for innovations, and patent holders are having a more difficult time enforcing their rights against infringers with deep pockets because there are fewer investment dollars to help fund patent acquisition and enforcement. This unintended erosion is occurring at the same time Europe, China and other countries are taking steps to strengthen their patents systems, which is incentivizing the investment of research dollars overseas.”
How do Passarelli, Holst and Grace think that the Supreme Court will vote?
Passarelli
“Studies have shown that questionable patents are invalidated at a much higher rate in IPRs than in federal court cases tried to either the court or to a jury,” Passarelli said. “It is impossible to predict how the court will rule based upon statements made by the Justices during oral argument.
“The questions related to whether patent rights are public rights and, thus, susceptible to review by an administrative agency created by Congress (the Patent Office) or whether they are private rights requiring, under the Seventh Amendment of the Constitution, ‘the right of trial by jury’ in a federal court.
“Hopefully the Justices will issue clear instruction to the lower courts and to practitioners so that inventors and those seeking to invalidate wrongfully procured patents can govern their actions accordingly. No one questions the importance of patents to encourage the inventive process.
“However, just about every corporation in America can point to a situation where patents have been abused, which adds significant costs to the consumers of products and services. I think it is a close call as to how the Justices will rule but I would expect the Supreme Court to find that Congress’ IPR system for challenging patents is constitutional.”
Holst
“As a former patent examiner at the USPTO, I understand the significant burdens placed on the examining corps and thus believe IPRs serve as a useful and cost-effective administrative review mechanism for determining whether a patent was correctly issued in the first place,” Holst said. “I have considered arguments presented before the Supreme Court that view patents as a form of private property requiring Article III adjudication unpersuasive.
“Rather, I find more compelling the interpretation of patents as a form of ‘public rights’ akin to leases in public lands that are limited in time, require periodic payments to maintain rights, revert to the public after expiration and subject to administrative revocation.
“The right to appeal an IPR decision to the U.S. Court of Appeals for the Federal Circuit also helps relieve my concerns about encroachment on Article III judicial power. Thus, for these reasons, including the ramifications of potentially affecting thousands of concluded/pending IPRs, I predict that the Supreme Court will preserve the status quo and uphold the constitutionality of IPRs, although the Court may offer guidance that brings Patent Trial and Appeal Board standards more in line with the federal courts.”
Grace
“I believe that patents are a private property right and that IPR and the AIA went too far in attempting to stifle patent litigation,” Grace said. “The result has given patent holders very little leverage against patent infringers with deep pockets. In particular, I like Justice Gorsuch’s statements calling out the ‘private right’ issue:
Justice Gorsuch: Ms. Ho, we have a number of cases that have arguably addressed this issue already, like McCormick, for example, in which this Court said the only authority competent to set a patent aside or to annul it or to correct it for any reason whatever is vested in the courts of the United States. We have cases – and American Bell is another one. We have that wonderful quote from Justice [Joseph] Story indicating that any correction to a patent has to go to a court.
“I have been monitoring the commentary on the oral arguments, and there is little agreement among those watching this case with respect to a likely outcome,” Grace said. “Given the ideology on the bench and the line of questioning, I believe that the court will uphold the constitutionality of IPRs by a narrow margin. Yet, such a discussion would not preclude Congress from taking steps to revamp the IPR process and again strengthenthe U.S. patent system.”
Breaking News at Press Time
The Supreme Court on April 24, in a 7-2 decision, upheld the constitutionality of the America Invents Act process.
The High Court ruled that patent rights were fundamentally a “public right” not “private property.” What this means for the future of patents will be explored here in a future article.
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