By Kendra S. Ankrum

The America Invents Act (“AIA”), effective since 2012, established a procedure to challenge patents through inter parties review (“IPR”) before the Patent Trial and Appeal Board (“PTAB”). IPRs have become a popular, cheaper alternative to litigation to challenge the validity of patents based on prior art. Prior art includes any evidence that can establish that the patented invention is neither new nor non-obvious. That is, the invention was already known or available before the patent application was filed.

The use of IPRs to challenge patents has become a fad of sorts in recent years. The increase in IPRs has led to challenges concerning the constitutionality of PTAB proceedings to review and invalidate issued patents.

In 2018, the Supreme Court settled many questions concerning the constitutionality of the PTAB’s and the Patent and Trademark Office’s (“PTO”) authority to adjudicate and cancel patents using post-examination proceedings.[i] The Court held that patents are a public right granting a public franchise and IPR “is simply a reconsideration of that grant.”[ii] But the Court specifically limited the ruling to the constitutional challenges raised under Article III or the Seventh Amendment.[iii] Whether IPR is constitutional under the Fifth Amendment Takings Clause remains an open question.

The Takings Clause provides that “private property [shall not] be taken for public use without just compensation.”[iv] So how does the Takings Clause fit into intellectual property rights, specifically IPR invalidation of patents?

To shed some light on this issue and how the Supreme Court should resolve the question, this article summarizes how courts have interpreted challenges brought under the Fifth Amendment in non-patent intellectual property cases, such as copyrights, trademarks, and trade secrets. It will then provide a short discussion of challenges to the constitutionality of hunting license regulations and how they are instructive in considering the constitutionality of the IPR process. Finally, this article will conclude with a discussion of two cases currently moving through the court system which raise the question of whether invalidation of patents through an IPR is an unconstitutional regulatory taking under the Takings Clause.

Before continuing, it is important to note that courts analyze a regulatory takings challenge first by determining whether the property interest is subject to the Takings Clause, and, if so, through a three-part test known as the Penn Central factors.[v] These factors are the economic impact of the regulation, interference with reasonable investment-backed expectations, and the character of the government action.[vi] In most cases the economic impact and character of the government action lean in favor of finding a taking; it is the type of property interest involved or the investment-backed expectations which are often the deciding factor. The following cases follow this analysis, but the discussion is limited to the relevant factor in each case.

Copyright Regulations

In 2016, the United States District Court for the Central District of California reconciled the coexistence of copyright regulations and the Takings Clause.[vii] In Estate of Graham v. Sotheby’s, 178 F.Supp. 3d 974 (2016), art auction houses challenged a California statute granting artists five percent of future profits from the resale of their artwork as an unconstitutional taking. The court noted that a plaintiff must first demonstrate that they have a constitutionally protected property interest before a claim under the Takings Clause can be evaluated.[viii]

The state regulation under review reallocated property interests between copyright holders and downstream distributors, “a practice that constitutes the very foundation of intellectual property law . . . [and] dates as far back as 1710.”[ix] The founding fathers contemplated the exclusive rights of authors and inventors. They believed these rights were so important that they authorized Congress to create legislation to secure exclusive rights to authors and inventors for their respective works.[x]

The court held that the state regulation did not affect a constitutionally protected property interest because it simply did “what the Copyright Act has done for over a century: it transfers certain interests in intellectual property from downstream owners to original artists.”[xi] Thus, the auction houses “never possessed property interests in the entire resale value of the artwork they purchased” and the statute’s “redistribution of that interest is not an infringement on traditional property rights; instead, it is a valid regulation of intellectual property that has been practiced for hundreds of years.”[xii]

Patent law and the grant of patents likewise have a long history concerning intellectual property rights. However, there is an important distinction. In Sotheby’s, the auction houses did not have a property interest beyond the painting as an article. The original property rights were still vested in the original artists. Whereas a patent has always granted an exclusive property interest in the holder. This is an important distinction because patents create property rights more akin to those protected under the Takings Clause.

Trademark Registration

Another district court case helps shed light on the takings analysis. In the Eastern District of Virginia, the court in Pro-Football, Inc. v. Blackhorse, 112 F.Supp. 3d 439 (E.D. Va. 2015), clarified that trademark registration differs from patents and other property interests.

In this case, the Washington Redskins claimed that the invalidation of their trademark registration was a taking.[xiii] However, the court determined that “a trademark registration does not constitute a property interest under the Fifth Amendment”[xiv] and, therefore, is not a taking. The theory is that the government is not taking the use of the trademark, only the registration of that trademark. This distinction is significant because simply invalidating the registration did not take a property interest protected under the Takings Clause.[xv]

This case highlights the importance of “loss in economic value” in a takings analysis since the court noted that a trademark owner did not lose the use of the trademark. The loss of a patent can mean the loss of all or most of the value of an invention, whereas the loss of a trademark registration still allows for use and common law protection.

Notably, there are differences in the rights granted trademarks and patents because they do not share the same underlying purpose. Patents encourage innovation, whereas trademarks protect consumers from deception and confusion. While there are similarities to the exclusions offered to both patents and trademarks, the question of whether there is actually a substantial loss in economic value (i.e., an economic impact of the regulation) makes the comparison less persuasive.

Trade Secrets

In Ruckelshaus v. Monsanto, 467 U.S. 986 (1984), Monsanto submitted testing data and other trade secrets to the Environmental Protection Agency (“EPA”) to obtain approval for various insecticides.[xvi] Subsequently, after a series of legislative amendments, the EPA was authorized to make data submitted in support of approvals available to the public. Monsanto sued the EPA and asserted that the publication of its data was an unconstitutional taking. The Court held that publication of the data submitted to the EPA constituted a taking of property for which the government must pay just compensation. However, the Court limited the taking to data submitted prior to implementation of the regulation in question.[xvii]

The Monsanto Court made clear that as long as an applicant has knowledge of the regulatory conditions under which data are provided to the EPA, the “voluntary submission of data by an applicant in exchange for the economic advantages of a registration can hardly be called a taking.”[xviii] Therefore, the regulatory scheme governing EPA approvals does not interfere with an applicant’s reasonable investment backed expectations.

The rights granted to Monsanto by the EPA bear a strong resemblance, in the context of establishing a regulatory taking, to the rights granted by a patent. Patents have always been subject to federal regulations set forth by the PTO, just as approvals for pesticides have always been contingent on regulations promulgated by the EPA. This comparison becomes relevant because Monsanto is the only intellectual property related case to reach the Supreme Court on the question of the Takings Clause.

Hunting License Regulations

Government granted licenses provide a comparison between how courts analyze property interests and how the courts view the importance of a regulation’s “interference with reasonable investment-backed expectations” under the takings analysis. In Kafka v. Montana Department of Fish, Wildlife and Parks, 201 P.3d 8 (2007), the Montana Supreme Court held that the change in requirements for a Game Farm License (“GFL”) did not constitute a taking.[xix] Appellants were owners of alternative livestock game farms. Following radical changes to the statute governing GFLs, the game farm owners were no longer able to charge hunters to shoot alternative livestock on their game farms. The changes in the licensing statute eliminated the farmers’ most profitable use of alternative livestock, but not all uses.

The court stated that some licenses may implicate property interests, but the one at issue was a “mere privilege.”[xx] Furthermore, in order to qualify as a compensable property interest, “the Licenses must be transferable, exclusive, and free of any ‘express statutory language precluding the formation of a property right . . .’”[xxi] Although the statute did not contain express language disclaiming a property interest, they did “put the holder on notice that continued compliance with applicable laws and regulations is required for maintenance of the License.”[xxii] Perhaps the most important point to take from this case is the court’s focus on the fact that hunting and gaming is a highly regulated industry, which puts licensees on notice that the regulations were subject to changes.

Although patents are transferable, exclusive, and free of language disclaiming a property interest, they are subject to similar regulatory compliance standards. A patent grant has depended on statutory compliance since the original Patent Act of 1790. And since the Patent Term Restoration Act of 1981, the grant of a patent has been contingent on post-grant proceedings. Moreover, there is a long history of regulation and periodic changes in patent regulations, which put a patent holder on notice that this is a highly regulated field subject to statutory changes.

Unlike hunting regulations, patents are likely to provide holders with a compensable property interest. But similarly to the regulations in Kafka, history “put[s] the holder on notice” of the need to comply with changes in regulations. Therefore, patent holders are unlikely to establish a regulation’s interference with reasonable investment-backed expectations under a takings analysis.

IPRs and the Takings Clause

The Supreme Court has not addressed the constitutionality of IPRs, but there are two recent lower court cases which have addressed this issue. The most recent case was decided by the United States Court of Appeals on July 30, 2019. This case provided the first post-AIA opinion from the Court of Appeals on whether invalidation through an IPR proceeding constitutes a taking.[xxiii]

In Celgene Corp. v. Peter, No. 2018-1171, 2019 U.S. App. LEXIS 22517 (Fed. Cir. July 30, 2019), the PTAB found Celgene’s claims were obvious and invalidated two of Celgene’s patents. The court agreed with the PTAB’s position that “a valid patent is property for purposes of the Takings Clause.”[xxiv] This confirms long standing Supreme Court decisions holding that patents are a private property interest subject to the Takings Clause.

Celgene’s main contention was that because IPRs did not exist prior to the enactment of the AIA, subjecting their pre-AIA patents to an IPR “interfere[d] with its reasonable investment-backed expectations ….”[xxv] The court stated that pre-AIA inter partes reexamination was available since 1999 and ex parte reexamination since 1980. Both of these procedures allowed third party reexamination of an issued patent. Furthermore, the validity of a patent is, and has always been, subject to challenge in a district court.

Although IPRs are the newest version of reexamination, it does not “differ sufficiently from the PTO reconsideration avenues available when the patents were issued to constitute a Fifth Amendment taking.”[xxvi] The court acknowledged the differences, but gave greater weight to how the procedures are similar in purpose and substance. Moreover, the court restated the Supreme Court’s characterization of “district court challenges, ex parte reexaminations, and IPRs as different forms of the same thing – reexamination.”[xxvii] Finally, the court held that retroactive application of IPR proceedings to pre-AIA patents is not an unconstitutional taking because “pre-AIA patents were granted subject to existing judicial and administrative avenues for reconsidering their validity.”[xxviii]

Conversely, in Christy v. United States, 141 Fed. Cl. 641 (2019), the Court of Federal Claims held that patents are not “property for purposes of the Takings Clause.”[xxix]  Christy sued the United States when18 of their claims were invalidated following an IPR proceeding. Christy asserted that “‘each of [its] property rights in the invalidated claims . . . were taken by the federal government for public use . . . .”[xxx]

The Christy court began by discussing Zoltek Corp. v. United States, 4442 F.3d 1345 (2007), to determine whether a patent is property under the Takings Clause. In Zoltek, the circuit court rejected the idea that patent rights are property interests under the Fifth Amendment because property rights are created from state law and patents are created by federal law.[xxxi] The Zoltek court cited a case from 1894 and legislative history to support its holding that “Congress has not expressed any intent that patent rights may be the subject of Takings Clause claims. Since patent rights derive wholly from federal law, Congress is free to define those rights . . . as it sees fit.”[xxxii]

The court disagreed with Christy’s assertion that Oil States v. Greene’s Energy Group, 138 S.Ct. 1365 (2018), acknowledged that patents are property under the Takings Clause. Instead, the court asserted that the Supreme Court did not take a position on whether patents are property for Takings Clause purposes. Rather, the Court characterized patents as a “public franchise,” with “attributes of personal property.”[xxxiii] This led the Christy court to hold that patent rights are not cognizable property interests for Takings Clause purposes.[xxxiv]

The Christy opinion seems to go against established Supreme Court precedent. Specifically, the opinion in Oil States refers to patents as a “public franchise” in the sense that Congress has the power to allow judicial review outside of an Article III court. The Court in Oil States explicitly stated that their “decision should not be misconstrued as suggesting that patents are not property for purposes of the Due Process Clause or the Takings Clause.”[xxxv]

Conclusion

With the contradiction between opinions in Celgene v. Peter and Christy v. United States, it is likely that the Supreme Court will need to answer this question in the near future to solve this circuit split. The Court will likely follow precedent in finding that patents are private property subject to the Takings Clause.

However, because of the similarities between the pre-AIA inter partes reexamination and the AIA implemented IPR, it is unlikely the Court will find a change of expectations. Without a change of expectations which rises to the level of disrupting reasonable investment-backed expectations, it is unlikely a taking under the Fifth Amendment will be found.

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[i] Oil States Energy Servs., LLC v. Greene’s Energy Grp., LLC, 138 S.Ct. 1365 (2018).

[ii] Id. at 1373.

[iii] Id. at 1379.

[iv] U.S. Const. amend, V.

[v] Penn Cent. Transp. Co. v. New York City, 438 U.S. 104 (1978).

[vi] Id. at 124.

[vii] Estate of Graham v. Sotheby’s, Inc., 178 F.Supp. 3d 974 (2016).

[viii] Id. at 991.

[ix] Id. at 994.

[x] Id.

[xi] Id.

[xii] Id.

[xiii] Pro-Football, Inc. v. Blackhorse, 112 F.Supp. 3d 439, 469 (E.D. Va. 2015).

[xiv] Id. at 467.

[xv] Id. at 489.

[xvi] Ruckelshaus v. Monsanto, 467 U.S. 986 (1984).

[xvii] Id. at 1006-07.

[xviii] Id. at 1007.

[xix] Kafka v. Mont. Dep’t of Fish, Wildlife & Parks, 201 P.3d 8 (2007).

[xx] Id. at 20.

[xxi] Id. at 22.

[xxii] Id.

[xxiii] Celgene Corp. v. Peter, No. 2018-1171, 2019 U.S. App. LEXIS 22517 (Fed. Cir. July 30, 2019).

[xxiv] Id. at 26.

[xxv] Id.

[xxvi] Id. at 30.

[xxvii] Id. at 32.

[xxviii] Id. at 29.

[xxix] Christy v. United States, 141 Fed. Cl. 641, 650 (2019).

[xxx] Id. at 657.

[xxxi] Id. at 658.

[xxxii] Id. at 658.

[xxxiii] Id. at 659.

[xxxiv] Id. at 660.

[xxxv] Oil States Energy Servs., 138 S. Ct. at 1369.