SCOTUS Watch: Oral Arguments in Oil States

On November 27, 2017, the U.S. Supreme Court heard oral arguments in the Oil States Energy Services, LLC v. Greene’s Energy Group, LLC.[1]  This case is discussed in a previous blog posting, but as a recap, the two parties in the litigation are both oil & gas companies, in which Oil States owned a patent for protecting wellheads during the oil fracking process.  Greene’s petitioned for inter partes review (IPR) before the PTAB, which invalidated Oil States’ patent.  Upon appeal, the Federal Circuit rejected Oil States’ arguments and affirmed the PTAB’s invalidation.  Upon grant of certiorari, Oil States argued that the IPR system acted to deprive it of its private property since patents, it argued, is private right and not a public right.

From the get-go, Justice Ginsburg, outlined her position clearly and succintly:

Ms. Ho [Oil States counsel], you outlined your position, but there must be some means by which the Patent Office can correct the errors that it’s made, like missing prior art that would be preclusive.[2]

Justice Ginsburg’s exchange with Allyson Ho discussed the ex parte and inter partes reexamination processes, in which Ho argued there was a fundamental difference between examinational and adjudicational processes, where examinational were allowed under Article III but adjudicational would not.

Justice Kagan interjected with inter partes reexamination, and Ho responded:

I think inter partes reexamination presents a closer case, but it is still fundamentally examinational.[3]

Both Justices Ginsburg and Kagan, based on their questions, seemed inclined to retain the IPR system, as both were forceful in their inquiry about why the IPR system is unconstitutional.  Justice Kagan further opined:

It’s the government trying to figure out whether it made a mistake by granting the patent, which the government sometimes does and knows it sometimes does, but the government wants to put in place a set of procedures that will actually increase the government’s accuracy in figuring out whether it made a mistake.

And that involves listening to a third party that has some interest in the proceeding.  So it seems a bit odd to say, sure, the government can reexamine this, the government can allow a third party to request it, can allow the third party to do some things, but there’s some line that falls short of what the government thinks of the procedures that enable the greatest accuracy.[4]

Justice Breyer also tipped his hand by saying:

. . . I thought it’s the most common thing in the world that agencies decide all kinds of matters through adjudicatory-type procedures often involving private parties.  So what’s special about this one, or do you want to say it isn’t special and all agency proceedings are unlawful?  Because a lot of them would fit the definition, I think, that you propose.[5]

And, when Ho tried to argue the rarity of administrative adjudications where the government was not acting in the position of “enforcer,” Justice Breyer countered:

. . . if the airlines loses your umbrella, for example, and the CAB used to say, you go to the CAB, you complain, they lost my umbrella.  The airline says, no, we didn’t.  Oh, that was unconstitutional?  . . . And, by the way, it didn’t say that your rights, when you fly on an airplane or truck or some other thing regulated, it didn’t say as it does here, subject to the provisions of this title, the matter, your umbrella, or in this case patents, shall be private property.  Uh-huh.  So you have a statute that says you only get the private property if, in fact, you survive the provisions of the title, of which this is one.[6]

Justice Sotomayor also mentioned, regarding the common law Privy Councils which was the historical predecessor of the PTAB:

. . . But in fact that it waned didn’t mean it was eliminated, and it didn’t mean that the Privy Council or the crown though that it no longer had those rights.[7]

And further inquired to Chris Kise, counsel for Greene’s Energy:

. . . I mean, for me, this – what saves this, even a patent invalidity finding, can be appealed to a court.  There’s deference with respect to factual matters, but there is de novo review as to legal matters.  So how can you argue the – the crown, the executive, the PTO, here has unfettered discretion to take away that which it’s granted?[8]

Justice Kennedy weighed in, questioning of Ho that the Patent Clause in the U.S. Constitution grants patents for “limited times”:

. . . [D]oesn’t that show that the patent owner has limited expectations as to the scope and the validity of the property right that he holds?[9]

However, Justice Kennedy also queried of Kise about the Patent Clause, and his argument that IPRs implicate a public purpose:

Securing for limited times authors and inventors the exclusive right, securing to them, not to the [general public].[10]

It appears from his questioning that Justice Kennedy may be the swing vote, as usual.

On the other side, Chief Justice Roberts and Justice Gorsuch vehemently argued that issued patents were private property and generally antagonistic about IPRs.  Chief Justice Roberts noted to Kise:

. . . it strikes me, is simply that you’ve got to take the bitter with the sweet.  If you want the sweet of having a patent, you’ve got to take the bitter that the government might reevaluate it at some subsequent point . . . [H]aven’t our cases rejected that . . . proposition?  We’ve said you . . . cannot put someone in that position.  You cannot say, if you take public employment, we can terminate you in a way that’s inconsistent with due process. [11]

Chief Justice Roberts made this point when Kise tried to argue that Congressional authority gave the USPTO the almost absolute authority to determine the outer limits of patent protection.

Justice Gorsuch tried to make the analogy to land patents (that is, property is deeded by the sovereign (e.g., U.S. government) to a private entity, and it is published for all the world to know) to argue his point that invention patents are private property, by stating:

Do you think it would work if  — if we had land patents subject to the same circumstances, that they could be reexamined at any time over hundreds of years, even after the farmer had sold the land to the developer who built the houses and that the land patent could be revoked by the government by bureaucracy . . . [which amounts to ] [a] monopoly in the use of land.  What’s – what’s the difference between – operative difference, other than obviously one isn’t land?[12]

Needless to say, it was a rather clumsy attempt to equate Fuji apples to Granny Smith apples.

Justice Alito spoke very little, except to pointedly query the historical aspects of whether a patent right was a private right.[13]  All three would appear to be a part of a very rambunctious minority opinion. [14]

The session ended after an hour of arguments.

I do not believe the Court will find IPRs unconstitutional, partly because the Court has already found IPRs, at least in dicta, to be valid extensions of the executive branch, proper delegations by the legislative branch, and therefore, constitutional.  In the recently-decided Cuozzo case, the Count found:

Although Congress changed the name from “reexamination” to “review,” nothing convinces us that, in doing so, Congress wanted to change its basic purposes, namely, to reexamine an earlier agency decision.  Thus, in addition to helping resolve concrete patent-related disputes among parties, inter partes review helps protec the public’s “paramount interest in seeing that patent monopolies . . . are kept within their legitimate scope.”  (citations omitted.)[15]

Coupled with the questioning from the justices, it seems unlikely that the PTAB “death squads” will meet their end.  Rather, there may be some tweaking of the IPR system.  After all, it has worked very well in controlling the patent trolls which was the original aim when the IPR system was started in the AIA.  However, the system may have worked too well.  All new legislation must be tweaked to improve its process.  Five years after its enactment, it may well be time for the IPR process to make some fine-tuning changes.

A decision should be rendered by June 2018.

[1] 639 Fed. App’x 639 (Fed. Cir. 2016), cert. granted, 198 L. Ed. 2d 677 (U.S. Jun. 12, 2017) (No. 16-712).

[2] Oral arguments at 3-4, Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, 198 L. Ed. 2d 677 (2017) (No. 16-712).

[3] Id. at 5.

[4] Id. at 21-22.

[5] Id. at 20-21.

[6] Id. at 19-20.

[7] Id. at 26.

[8] Id. at 34.

[9] Id. at 11.

[10] Id. at 38-39.

[11] Id. at 32.

[12] Id. at 36-37.

[13] Id. at 24-25.

[14] No discussion is made on Justice Thomas’ comments, only because, characteristically, he does not usually say anything during oral arguments, although given his jurisprudential ideology, it would be logical to conclude that he would side with C.J. Roberts and Justices Gorsuch and Alito on this case.

[15] Cuozzo Speed Technologies, LLC v. Lee, 579 U.S.___, 136 S.Ct. 890 (2016) (slip op. at 16).

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SCOTUS Watch: Oil States Oral Hearing Preview

On November 27, 2017, the U.S. Supreme Court will hear oral arguments in the appeal from the Court of Appeals for the Federal Circuit, Oil States Energy Services v. Greene’s Energy Group.[1]  Certiorari was granted earlier this year.  The sole question presented is whether the inter partes reviews – adversarial proceedings held before the United States Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB) and enacted as part of the AIA in 2012 – violates the Seventh Amendment of the U.S. Constitution by terminating a private property right through a non-Article III forum without a jury.

Inter partes proceedings – collectively, inter partes reviews, post-grant reviews, covered business method reviews – and ex parte reexaminations have become important tools utilized by patent owners to combat overly broad issued patents owned by so-called “patent trolls.”  Inter partes proceedings, while expensive, are nothing compared to the costs of a full-blown litigation in the federal courts, which is part of the reason this mechanism has been popular since its enactment almost four years ago.

There is also a large vocal chorus on the other side which finds that inter partes proceedings and the PTAB’s entire post-grant challenge process to be a thorn in the side of strong patent rights.  The high challenge rate at the PTAB, as well as the high invalidity rate, were reasons for the U.S. to drop to tenth in the world in protection of IP rights.

The Federal Circuit already has long held that ex parte reexams do not violate Article III or the Seventh Amendment.[2]  After enactment of the AIA’s post-grant procedures in 2012, the Federal Circuit held the same for inter partes proceedings.[3]  However, neither case made its way to the Supreme Court until Oil States was granted certiorari.

If the Supreme Court finds that patents are, indeed, private property rights, and in doing so, reverses the Federal Circuit and hold inter partes reviews unconstitutional.  However, if it finds patents are public rights (i.e., being issued by a public agency for the betterment of the public as a whole), the Federal Circuit’s decision would be affirmed, and inter partes reviews found constitutional.  Perhaps a possible hint of how the Supreme Court might rule came in a recent trademark case, B&B Hardware, Inc. v. Hargis Indus.[4]  In the majority opinion, Justice Samuel Alito wrote:

The likely reason that Hargis did not directly advance a constitutional argument is that, at least as to a jury trial right, Hardis did not even list the Seventh Amendment as an authority in its appellee brief . . . . To the extent, if any, that there could be a meritorious constitutional objection, it is not before us.[5]

One interesting dicta is what another commentator[6] noted:

It would . . . be desirable if all [patent] cases of this sort could be referred to a commision of intelligent experts and practical men to report their opinion thereon, with their reasons, for the final action of the court . . . . Neither courts nor ordinary juries are perfectly adapted to the investigation of mechanical and scientific questions . . . .[7]

More information will follow after oral arguments.

[1] 639 Fed. App’x 639 (Fed. Cir. 2016), cert. granted, 198 L. Ed. 2d 677 (U.S. Jun. 12, 2017) (No. 16-712).

[2] See Patlex Corp. v. Mossinghoff, 758 F.2d 594, modif’d on rehearing, 771 F.2d 480 (Fed. Cir. 1985).

[3] See MCM Portfolio LLC v. Hewlett-Packard Co., 812 F.3d 1284 (Fed. Cir. 2015).

[4] 575 U.S___; 135 S. Ct. 1293 (2014).

[5] Id. at 1304.

[6] See Dennis Crouch, 1877 Supreme Court Thought’s on Oil States?, Patently-O Blog (Nov. 20, 2017), at https://patentlyo.com/patent/2017/11/supreme-thoughts-states.html.

[7] Quoting Cochrane v. Deener, 94 U.S. 780 (1877).

USPTO Designates Assignor Estoppel Case as Precedential Authority

On August 1, 2017, the USPTO designated a Patent Trial and Appeal Board case as precedential authority.  This case was decided four years ago, on October 25, 2013.  That case, Athena Automation Ltd. v. Husky Injection Molding System Ltd.[1], held that the doctrine of assignor estoppel is not an exception to inter partes review (IPR).[2]

The issue of assignor estoppel arises in this case because the co-inventor of the patent-at-issue, Patent No. 7,670,536, for “Molding System Clamp,” is Robert Dietrich Schad, who is also the founder and former CEO of Husky Injection.  Schad then sold Husky to a private equity firm in 2007, and subsequently founded Athena in 2008.[3]  Husky is the original assignee of the ‘536 patent.  Husky argued that an IPR institution was improper because Schad and Athen were in privity with each other, i.e., both were parties-in-interest who owned the ‘536 patent, of which the interest was later acquired by Husky.

In the PTAB case, the PTAB noted that the AIA only allows “a person who is not the owner of a patent may file with the Office a petition to institute an inter partest review.”[4]  The PTAB determined that since an assignor, by its definition, is no longer an owner of the patent once it has been assigned to another party.  Therefore, the original assignor could file an IPR petition.[5]

The doctrine of assignor estoppel is one of those judicially-mandated equitable mechanisms that prevents the assignor, who in most cases is the inventor of a patent, who has already assigned the rights to a patent or patent application, from later asserting the patent or application has no value.[6]  Therefore, assignor estoppel is a defense to a patent infringement suit.[7]

The case found its way to the Court of Appeals for the Federal Circuit, and became the subject of a fairly recent Federal Circuit decision, Husky Injection Molding Sys. Ltd. v. Athena Automation Ltd.[8]  In that case, Husky appealed the PTAB decision to institute the IPR proceeding and invalidate the ‘536 claims.

As to procedural grounds, the Federal Circuit dismissed Husky’s appeal for lack of jurisdiction because no grounds for review could be established.  The Federal Circuit opinion spent a lot of time getting to how it lacked jurisdiction to hear the Husky appeal, but focused on the Cuozzo standard for determining whether the Federal Circuit could take up an appeal of a PTAB IPR institution decision.[9]  Under Cuozzo, the Federal Circuit could review a decision to institute an IPR if 1) there were constitutional issues presented; or 2) the IPR depended on less closely related statutes, or 3) presented other questions interpretation that go beyond the statute’s section.[10]  The Federal Circuit found that none of these three conditions applied, so it therefore had no jurisdiction to take up the case.

The case is helpful in illustrating a strategic tool for assignors (and inventors) who are hauled to court for infringement of a patent which the inventor conceived before assigning the rights away.  Although the inventor would not be able to question the patent’s validity in court under the doctrine of assignor estoppel, that inventor could still seek invalidation of the patent’s claims before the PTAB.

Outside of the substantive patent law issue of assignor estoppel, the other takeaway from this case is that it is an example of a much smaller company (Athena Automation) filing suit against a much larger one (Husky) and winning.[11]  Of course, the process was lengthy and expensive, but in the end, the small company could claim the victory.

The case will be useful precedent for patent practitioners because Athena Automation is a primer for how the Federal Circuit will deal with PTAB’s IPR decisions.  Further, although assignor estoppel is rarity, the idea of a founder/CEO of Company A who then sells that company and then creates Company B is very common among the startup world, and this issue may arise several more times in the future.

One further side note is that the IPR aspect in Athena Automation is moot, of course, if the Supreme Court rules in favor of the petitioner in Oil States.  The Supreme Court is expected to decide sometime in late 2017.

[1] IPR2013-00290, Paper 18 (PTAB Oct. 25, 2013), Sec. II.A.

[2] See 35 U.S.C. §311(a).

[3] See John Clark, Athena: Robert Schad returns to inejction molding, Plastics Today (June 4, 2013), available at: https://www.plasticstoday.com/content/athena-robert-schad-returns-injection-molding/10803763918936; see also Brian Mudge, Federal Circuit Declines Review of PTAB Assignor Estoppel Ruling, IPR Blog (Oct. 4, 2016), available at: http://interpartesreviewblog.com/federal-circuit-declines-review-ptab-assignor-estoppel-ruling/.

[4] Athena Automation, supra at 12 (quoting 35 U.S.C. §311(a)); see also 37 C.F.R. §42.101.

[5] Id.

[6] See Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220, 1224 (Fed. Cir. 1988).

[7] See Semiconductor Energy Laboratory Co., Ltd. v. Nagata, 706 F.3d 1365, 1369 (Fed. Cir. 2013).

[8] 838 F.3d 1236, 2016 WL 5335500 (Fed. Cir. Sept. 23, 2016).

[9] See Cuozzo Speed Technologies LLC v. Lee, 579 U.S.___, 136 S. Ct. 2131 (2016)

[10] See Husky (slip op. at 14 (quoting Cuozzo, supra, 136 S. Ct. at 2141)).

[11] According to their LinkedIn pages, Athena Automation is under 200 employees, while Husky has nearly 4,000.

SCOTUS Watch: Cert Granted in Oil States: the Constitutionality of IPR Proceedings

By Brent T. Yonehara

On June 12, 2017, the U.S. Supreme Court granted the petition for certiorari in Oil States Energy Services v. Greene’s Energy Group, LLC.[1]  Of the three issues presented by petitioner Oil States, only one will be heard before the Supreme Court, namely:

Whether inter partes review – an adversarial process used by the Patent and Trademark Office (PTO) to analyze the validity of existing patents – violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.

(for the granted petition, see here.)

The other two issues requested by Oil States will not be addressed before the Court.

Inter partes reviews (IPRs) were one of the adversarial proceedings created by the America Invents Act (AIA) in 2012.  IPRs replaced the inter partes reexamination proceedings following enactment of AIA on September 16, 2012.[2]

The immediate question is whether patents, once issued, are either a private right (i.e., a private property right) or a public right, where the validity or invalidity can be determined by a government agency regulating the issuance of patents.  The Court of Appeal for the Federal Circuit, from where this case was last heard, ruled against Oil States’ contention that patent rights are private rights, not public rights, and are not subject to Article III treatment.  To quote Oil States, “ . . . patent rights are property rights, and property rights are pivate rights – not ‘public rights’.”[3]  There are some commentators who believe the Supreme Court will overturn the decision of the Federal Circuit, as it has been apt to do of late.  However, in the very recent B&B Hardware case, the Supreme Court held that TTAB’s decisions received preclusive effect, essentially holding that TTAB was an Article III court.[4]  While B&B Hardware dealt with issue preclusion and trademarks, it could be seen as a corollary to Oil States and patents in that the the Supreme Court might, consistent with its holding in B&B Hardware, extend this concept of Article III treatment to the patent side of the USPTO.  If it does, the Supreme Court will have the permitted the rare act of affirming a Federal Circuit decision.

Depending on the outcome, this case could demolish the entire AIA review adjudication process within the USPTO.

The case should be heard sometime in Fall 2017, with a ruling delivered sometime in early 2018.

[1] 639 F.App’x 639 (Fed. Cir. 2016), cert granted, ___U.S.L.W.___ (June 12, 2017) (No. 16-712).

[2] MPEP 2601.

[3] See Reply Brief for the Petitioner, at 9.

[4] B&B Hardware, Inc. v. Hargis Industries Inc., 575 U.S.___ (2015) (slip op. at 14-15).