With Sovereign Immunity, the McCaskill Bill, and Oil States, Big Changes Might Be in Store for Inter Partes Review

by Schwabe, Williamson & Wyatt PC
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When the American Invents Act was passed in 2011, most of us saw the inter partes review process as a streamlined, relatively inexpensive procedure that would permit accused infringers, especially those accused by non-practicing entities, to challenge the validity of patents being asserted against them. While the cost of the proceedings may not have proven to be as economical as originally intended, with even the most simple IPRs costing several hundred thousand dollars, the process has both proven extremely helpful to those accused of infringing questionable patents and raised concerns by individual inventors about the ability of infringers to deploy yet another obstacle to just remedies. The invalidation rate has dropped a little in recent years, but the statistics show that IPRs are still instituted in response to almost two-thirds of the IPR petitions, and of the patent claims that go all the way to Patent Trial and Appeal Board final written decisions, almost four times as many claims have been invalidated as have been sustained.

Public Universities’ Use of the Sovereign Immunity Defense to Dismiss IPRs

Faced with odds stacked against them, some patentees have attempted to avoid the IPR process altogether by taking advantage of the sovereign immunity provided by the 11th Amendment, which provides immunity to states and state entities. This defense was first raised by public universities, who were able to get IPRs dismissed based on sovereign immunity. The first such cases were Covidien LP v. Univ. of Fl. Research Foundation (PTAB, Jan 25, 2017) and NeoChord, Inc. v. Univ. of Md. (PTAB, May 23, 2017). In NeoChord, the PTAB rejected NeoChord’s assertion that the Supreme Court recently had found IPRs to be much like reexaminations, for which sovereign immunity had not been found to be an appropriate defense. Neither of these cases has been heard by the Federal Circuit, but they show that the PTAB is going to be granting these motions, at least as to state-owned entities.

The Allergan/Saint Regis Mohawk Tribe Assignments

The dismissal of the public university IPRs was relatively free of controversy because in each case the research had been performed by university researchers, so the patents had always been owned by state-owned entities. However, in a far more controversial step, an attorney for Allergan thought to apply the IPR sovereign immunity argument to Indian tribes, which the Supreme Court has repeatedly held can effectively assert sovereign immunity.  The patents covering Allergan’s dry-eye medicine Restasis® were assigned to the Saint Regis Mohawk Tribe, with the Tribe granting back an exclusive license to practice the inventions.  Based on this assignment, the Tribe moved to dismiss pending IPRs involving the six patents covering Restasis. Earlier this month the Tribe filed suit against Microsoft and Amazon for infringement of patents the Tribe also acquired from a small tech firm, SRC Labs, which alleges that patents to data processing technologies have been infringed.

The Restasis/Tribe transaction is not an insignificant one. It enables the Tribe to diversify its income from traditional casino and natural resources to what might be an even more lucrative area. The Allergan transaction resulted in the Tribe receiving $13.75 million up front, with additional annual royalties of $15 million as long as the patents are valid. Restasis is Allergan’s second-most successful product, second only to Botox®, with annual revenue of $1.5 billion. The original Restasis patents expired in 2014 but Allergan was able to obtain additional patents that do not expire until 2024. It is these patents, which the generic manufacturers describe as “highly suspect,” that are the subject of the assignment and license-back.

In litigation that is co-pending with the IPR, Judge Bryson of the Federal Circuit, sitting by designation in the Eastern District of Texas, agreed with the generics, ruling on October 16 that four of the six patents are invalid. In a simultaneous ruling on Allergan’s motion to add the Tribe as a plaintiff, Judge Bryson was highly critical of Allergan’s assignment to the Tribe, noting that Allergan should not be able to “rent” sovereign immunity. Judge Bryson granted the motion to add the Tribe as a party but he has not reached a decision on the validity of the Allergan/Tribe transaction. It is not unreasonable to think that the strong feelings expressed in this initial ruling indicate how he and perhaps even the entire Federal Circuit will rule if and when the Allergan/Tribe issue comes before that court.

The McCaskill Bill to Withdraw the Tribal Sovereign Immunity Defense in IPRs

Several Supreme Court cases have held that sovereign immunity for tribes can be abrogated by Congressional action. Looking to form a loophole in the loophole, earlier this month Senator Claire McCaskill, a Democrat from Missouri, introduced a bill stating that tribal sovereign immunity cannot be used to block the Patent and Trademark Office’s review of a patent. Some have decried Senator McCaskill’s bill as having racially discriminatory implications (the bill does not strip universities of similar rights) while others have criticized it  for attempting to take away an opportunity for the tribes to diversify their income base. Many others have applauded her effort, but this is clearly a peripheral attack on a proceeding that is felt by some to be unfair and just too easy for those challenging validity.

The Pending Supreme Court Oil States Case, Which Might Throw Out IPRs Altogether

A more direct challenge on the IPR process is being mounted by Oil States Energy Services. Oil States sued Greene’s Energy Group for infringement of a patent directed to the protection of wellhead equipment from the effects of hydraulic fracturing. A year into the litigation, Greene’s petitioned for inter partes review of the patent, and the district court and the IPR proceedings continued in parallel. The district court issued a narrow claim construction ruling, which would have resulted in the patent claims being valid over the asserted prior art. The Patent and Trademark Office disagreed, deciding on a broader construction, which invalidated the claims as being anticipated by the same prior art at issue in the district court. Oil States’ attempt to amend its claims was denied by the Board.

The Federal Circuit affirmed the Board’s invalidation of the claims and Oil States filed a writ of certiorari to the Supreme Court, arguing that its constitutional rights were violated by the PTAB’s invalidation of its patents without the benefit of a jury trial in an Article III court. Greene’s argues in response was that Congress has plenary power to create, and Oil States is asking the Court to deprive Congress of the power to create, an administrative mechanism designed to promote the core purpose of the patent laws, namely, to ensure only valid patent claims are granted the statutory monopoly. Oral argument is set for the end of November, with a decision expected next spring.

We know that the Supreme Court usually does not take patent cases to affirm, but the result in this case is anything but clear, given the chaos that could result from an all-out invalidation of the IPR process. If this happens, will it mean that all cases in which final judgments of invalidity were rendered based on an IPR invalidation will be reopened, despite the strong public policy in favor of the finality of litigation? Will such a ruling require all issues regarding patent validity to go to a jury, disrupting present practices in which many issues are decided by the judge? Or could the invalidated patents somehow be revived by the PTO, which might provide a new cause of action? Perhaps the Court will take an intermediate approach and rule that with certain safeguards, IPRs can continue. This would be consistent with the Court’s Cuozzo decision of last year in which it appeared favorably disposed toward the IPR process.

One such safeguard was provided in a recent ruling by an en banc Federal Circuit, Aqua Products, Inc. v. Matal (October 4, 2017). This decision held that the patentee should have the right to present amended claims unless the petitioner is able to show that the claims would not be patentable. While prior decisions were not entirely consistent or clear, in the past the PTO had apparently been placing the burden on the patentee to show that new claims were patentable. A majority of the Circuit agreed that that was an impermissible shifting of the burden of proving validity onto the patentee.  

The Next Six Months Will Be Interesting Ones in the Patent World

We’ll know soon if the McCaskill bill receives much support in Congress and from the Oval Office. It is difficult to estimate the chances of that bill becoming law. On the one hand, it clearly discriminates against Native Americans, but on the other, it could be positioned politically as being both pro-competition and pro-consumer (at least as to generic drugs), suggesting there could be bipartisan support. But with neither party wanting to lose votes from minority voters in the 2018 election, the bill might have a tough time.

It’s anyone’s guess how the Supreme Court will rule in Oil States, but the case is likely to be the most important patent case decided in many years. If the Court rejects the constitutional challenges and the McCaskill bill dies in Congress or on the President’s desk, we might have to advise our clients to develop business relationships with local tribes and public universities, both of which could reap untold benefits from co-ownership or assignments and license-backs. In any event, we’re in for a fun ride as these issues are decided.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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