Tony Volpe, IP litigator and co-founder of Volpe and Koenig. (Credit: PRNewsFoto/BusinessMediation.com)
With the increasing presence of various state arms, like universities and hospitals, involved in research and the licensing of technology, particularly patents, cases concerned with how to apply sovereign immunity to those state related entities are receiving more attention. This increased attention is very evident in the Inter Partes Review proceedings filed in the U.S. Patent and Trademark Office (USPTO) as an alternative to patent litigation in Article III courts.
State assertion of sovereign immunity is not new in federal court patent litigation and recent decisions from the USPTO Patent Trial and Appeal Board (PTAB) appear to signify that state actors will have sovereign immunity protection for a patent challenged in an inter partes review (IPR). In just the first seven months of 2017 the PTAB dismissed three IPRs on the basis of Eleventh Amendment sovereign immunity. The recent PTAB decisions involving sovereign immunity and the implications these decisions are examined below.
The actual text of the Eleventh Amendment is a very brief statement in a single sentence. “The judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another state, or by citizens or subjects of any foreign state.” This Constitution amendment is reported as Congress direct response to the earlier U.S. Supreme Court ruling in Chisholm v. Georgia, 2 U.S. 419 (1793), which held that federal courts had the authority to hear cases in law and equity and the states did not enjoy sovereign immunity from suits made by citizens of a foreign state in federal court. This amendment effectively striped the federal judiciary any authority it may have had to hear cases “between a state and citizens of another state.”
In 2002, The Supreme Court decided Federal Maritime Commission v. South Carolina State Port Authority, 535 U.S. 743 (2002) and held that sovereign immunity does apply to adjudicative administrative proceedings. In Justice Clarence Thomas’ opinion for the majority, he wrote: “If the framers thought is an impermissible affront to a state’s dignity to be required to answer the complaints of private parties in federal courts, we cannot imagine that they would have found it acceptable to compel a state to do exactly the same thing before the administrative tribunal of an agency, … .”
With this decision, the court addressed the scope of sovereign immunity and made it clear that for purposes of an analysis of sovereign immunity administrative tribunals and court are equivalent entities. Since the U.S. Patent and Trademark Office’s Patent Trail and Appeal Board (PTAB) was a creation of the America Invents Act (AIA) of 2011 and the Inter Partes Review (IPR) proceedings did not become available until a year later in 2012, it is not surprising that there are very few cases addressing sovereign immunity in the IPR
The first reported PTAB decision addressing the Eleventh Amendment is Covidien v. University of Florida Research Foundation, Case No. IPR2016-01274 (PTAB, Jan. 25). This case was initiated by the University of Florida’s licensing division, University of Florida Research Foundation Inc. (UFRF) when it sued Covidien, its licensee, in state court for breach of contract and the refusal to pay royalties. Covidien, which was now owned by Medtronic, filed a counterclaim for a declaratory judgment of noninfringement. Covidien was then successful in having the case removed to U.S. District Court for the Northern District of Florida. (This is somewhat curious given the somewhat unsettled state of state courts deciding issues of noninfringement in the context of determining whether contractual royalties are due. See, Rinehart, Amelia Smith (2015) “The Federal Question in Patent-License Cases,” Indiana Law Journal: Vol. 90: Iss. 2, Article 5). Covidien also filed three IPR petitions challenging the validity of the UFRF patents, which put the matter squarely before the PTAB administrative tribunal. In response to these actions, UFRF argued that it was entitled to Eleventh Amendment immunity from Covidien’s declaratory judgment counterclaim in the federal court. The district court agreed with UFRF’s argument and remanded the case to state court.
In the IPR proceedings, UFRF requested leave to move for dismissal on the basis of sovereign immunity. In it subsequent decision, the PTAB ruled that the University of Florida was a public state university and an arm of the State of Florida that was entitled to state sovereign immunity under the Eleventh Amendment. In its decision, the PTAB agreed with the district court’s outcome, and found that the stated that State of Florida exercised sufficient control over UFRF to make it “a state instrumentality entitled to sovereign immunity.”
The PTAB’s ruling reflects its view that IPR proceedings and civil litigation are similar if not nearly identical proceedings and it was not moved by Covidien’s arguments in opposition to UFRF’s sovereign immunity assertion. The PTAB also analyzed the Congressional intent in establishing the IPR proceedings and nothing to support a contention that Congress intended to remove sovereign immunity for states during IPR proceedings. The PTAB decision did not address whether the presence of a pending suit influenced the outcome on its sovereign immunity analysis.
The PTAB next addressed the issue of Eleventh Amendment sovereign immunity in an IPR proceeding in NeoChord v. University of Maryland, Baltimore, Case No. IPR2016-00208, (PTAB, May 23). NeoChord, the petitioner, asserted that the claimed subject matter of the patent owned by the University of Maryland Baltimore (UMB) was unpatentable. The PTAB instituted an IPR proceeding in May 2016, and the matter was ready for trial by November 2016. Just prior to the January 2017, IPR trial, UMB made a belated request to file a motion to dismiss based on Eleventh Amendment sovereign immunity. After agreeing with NeoChord that the prior Covidien decision was not binding in this case, the PTAB proceeded with it Eleventh Amendment sovereign immunity analysis.
Notwithstanding the above view that it was nonbinding, the PTAB panel followed a similar rationale to that of the Covidien panel and dismissed UMB. The PTAB decided that UMB was an arm of the state of Maryland and IPRs are adversarial proceedings appropriate for an assertion of sovereign immunity. The PTAB also reject NeoChord’s argument that UMB waived its sovereign immunity by participating in the IPR proceeding and its late assertion of the defense. The PTAB also noted participation in the proceedings and the delay in raising the defense were not dispositive because the defense can be raised at any time.
The PTAB last addressed Eleventh Amendment sovereign immunity in Reactive Surface v. Toyota Motor, IPR2016-01914 (PTAB July 13). This case added a significant twist in that the patent challenged by Reactive Surface was jointly owned by the Regents of the University of Minnesota and Toyota (collectively UMT). The UMT party sought dismissal pursuant to the Eleventh Amendment sovereign immunity. With respect to the sovereign immunity defense and the prior PTAB decisions in Covidien and NeoChord, this PTAB panel stated: “Both of those decisions [Covidien/Medtronic and NeoChord] concluded that Eleventh Amendment sovereign immunity may be invoked in inter partes review proceedings. Although neither of those decisions is binding on us, we find their reasoning persuasive.”
Still, the panel agreed that the University of Minnesota could assert the defense on its behalf, was an arm of the state, and came under its protection. Accordingly, the PTAB granted the motion in part and stated that the University of Minnesota “cannot be compelled to join this proceeding against their will.” As to the co-owner, Toyota, the PTAB concluded that the IPR could continue as to Toyota without the University of Minnesota, the panel looked to Federal Rule of Civil Procedure 19(b) regarding necessary parties and the Federal Circuit case law, University of Utah v. Max-Planck-Gesellschaft zur Forderung der Wissenschaften, 734 F.3d 1315 (Fed. Cir. 2013), and A123 Systems v. Hydro-Quebec, 626 F.3d 1213 (Fed. Cir. 2010), and concluded: When the absent sovereign party and a remaining party have identical “interests in the asserted patents,” the remaining party adequately represents the interests of the absent sovereign party under Rule 19(b)(1).
Accordingly, the motion to dismiss was granted only as to the university and Toyota remained a party to the IPR.
Although it is clear IPR proceedings sufficiently equate to Article III proceedings and panels in the above IPR proceedings recognized a right to Eleventh Amendment sovereign immunity, the decisions turn on very specific facts and there is no bright line precedential decision from the PTAB or the Court of Appeals for the Federal Circuit to articulate its application. For an entity that sees the desirability of cloaking itself in sovereign immunity, there are several takeaways. One, be certain that the entity controlling licensing of the technology is established to have at least the color of an arm of the state. Two, be certain to make it unmistakable in any license agreement that the licensee is not authorized to take any action that may waive the immunity without prior approval. Three, the licensing entity itself must be certain to not take any action that waives immunity. Four, raise immunity as early as possible; although one IPR panel permitted a belated immunity request, any delay may result in a finding that immunity was waived. Finally, in any mutual relationship or joint development circumstance, be aware of the possibility that the state actor may be granted immunity but the patent will still be at risk because the second party in that circumstance has a unity of interest with the state actor and the IPR will go forward with just the non-state party.
These PTAB decisions present some interesting asides. When and how will there be an established practice that PTAB decisions can be precedential and bind on subsequent panels that address the same legal issue; and will the emphasis in these decisions on the near identify between IPRs and court proceedings have any influence on the question of constitutionality current before the Supreme Court in Oil States Energy Services v. Greene’s Energy Group?