United States: Licensees Stymied By Sovereign Immunity Both In Federal Court And At PTAB

Last Updated: February 22 2017
Article by Allen M. Sokal

Licensees Covidien LP, Medtronic PLC, and Medtronic, Inc., failed to obtain any relief, at least so far, in federal court or at the Patent Trial and Appeal Board (PTAB) because of parallel holdings that patent owner University of Florida Research Foundation, Inc. (UFRF), is entitled to Eleventh Amendment immunity. University of Florida Research Foundation, Inc. v. Medtronic PLC, Case No. 1:16-cv-00183-MW/GRJ, 2016 WL 3869877 (N.D. Fla. Jul. 15, 2016); Covidien LP v. University of Florida Research Foundation, Inc., IPRs 2016-01274, 2016-01275, and 2016-01276 (PTAB Jan. 25, 2017).

The proceedings began when UFRF filed an action in a Florida state court for breach of a patent license contract against the licensees. The license contract required the licensees to permit UFRF to audit the licensees' books to verify the licensees' accounting. After the licensees refused to permit UFRF to audit records related to products that the licensees claimed fell outside the scope of the licensed patents (disputed products), UFRF filed its state action for breach of contract and breach of the implied duty of good faith and fair dealing and for a declaratory judgment on its right to an accounting. The licensees counterclaimed for declaratory judgments of noninfringement and invalidity and for a declaratory judgment that the disputed products are not "Licensed P roducts" because they do not infringe valid patents. Based on the counterclaims, the licensees removed the state action to the United States District Court for the Northern District of Florida. The licensees also filed petitions in the three IPRs identified above.

The federal district court issued its decision first. UFRF claimed Eleventh Amendment immunity. Applying a four-factor test,1 the court determined that UFRF is an arm of the state.  Specifically, it found that (1) UFRF licenses patents for the benefit of a state university pursuant to Florida statutes and (2) is controlled by the state and university. The court further found that (3) UFRF derives much of its income from the development and commercialization of the inventions of the university's researchers. As to the fourth prong of the four-factor inquiry—who bears financial responsibility for judgments entered against UFRF—the court reasoned that although the record was silent, any financial harm to UFRF would harm the university, which unquestionably was an arm of the state. Thus, the court concluded that unless UFRF had waived its immunity, the Eleventh Amendment entitled it to immunity from suit in a federal court.2

The court decided that UFRF had not waived immunity because it did not appear in federal court voluntarily, and the court therefore remanded the case to the state court. It reasoned that UFRF filed its breach of contract action in state, not federal, court, and the licensees' counterclaims, over which federal courts have exclusive jurisdiction, were not clearly compulsory.

If it were clear in this case that Defendants' counterclaim is compulsory, there might be good reason to treat the initial act of bringing the suit to be a waiver of immunity. . . .  As UFRF points out, an automatic waiver rule even when a counterclaim is not clearly compulsory would effectively force state entities to waive Eleventh Amendment immunity in any case involving patents by allowing defendants to file meritless counterclaims that relate to patent issues not presently raised or contested by the sovereign.

2016 WL 3869877 at *4 (internal quotation marks omitted). The court therefore remanded the case to the Florida state court, without deciding whether the counterclaims were actually, even though not clearly, compulsory.

The PTAB next issued its order in the three IPRs, while the licensees' Federal Circuit appeal of the district court's remand to the state court was pending. UFRF again claimed sovereign immunity. Relying heavily on the district court's reasoning, the PTAB decided that UFRF was entitled to sovereign immunity under the Eleventh Amendment. Of course, besides deciding whether UFRF was entitled to sovereign immunity, the PTAB had to decide further whether a state's sovereign immunity is a defense to a petition for an IPR. Deciding that it was, the PTAB dismissed the petitions for inter partes review.

Citing Federal Maritime Comm'n v. South Carolina State Ports Auth., 535 U.S. 743, 753-61 (2002) (FMC), and Vas-Cath, Inc. v. Curators of Univ. of Missouri, 473 F.3d 1376, 1383 (Fed. Cir. 2007), the PTAB observed that the Eleventh Amendment protects states from not only federal court actions, but also federal adjudicative administrative proceedings, "depending on the nature of those proceedings." Order at 4. Specifically, the PTAB noted that the Supreme Court in FMC "examined the nature of the Commission's adjudication proceedings to 'determine whether they are the type of proceedings from which the Framers would have thought the States possessed immunity when they agreed to enter the Union.'" Id. at 6 (citing 535 U.S. at 756). FMC, the PTAB noted, enumerated the common features generally possessed by both administrative adjudications and judicial proceedings, including that they are adversarial, are conducted before a trier of fact insulated from political influence, entitle a party to present his case orally or through documents, base the decision exclusively on testimony, exhibits, and pleadings, and entitle the parties to know the findings and conclusions on all of the issues. Order at 6-7 (citing FMC at 756-57). The PTAB further noted that the FMC Court held that sovereign immunity applied to the Commission's proceedings because of their "overwhelming" similarities with civil litigation, including procedural rules and the roles of the judges in prescribing the order of the presentation of evidence, disposing of procedural requests, ruling on motions, examining witnesses, scheduling briefing, and issuing a decision on all material issues, including the bases for the decision. Order at 7.

The PTAB relied also on the Federal Circuit's decision in Vas-Cath, supra. In that case, the Federal Circuit held that a state university was not entitled to sovereign immunity in an appeal to the district court under 35 U.S.C. § 146 from an interference decision by the Patent and Trademark Office Board of Patent Appeals and Interferences in the state's favor. The district court dismissed that appeal by the private party, Vas-Cath, based on sovereign immunity, and Vas-Cath appealed that decision to the Federal Circuit. The Federal Circuit reversed the decision because the state had waived its immunity by voluntarily instituting the proceedings in the PTO.

The Federal Circuit explained that interference proceedings before the Board, like the administrative proceedings in FMC, bear "strong similarities" to civil litigation, including adverse parties, examination and cross-examination of witnesses, production of documentary evidence, findings by an impartial adjudicator, a judge who schedules and administers the proceedings, and similar rules of procedure and evidence. 473 F.3d at 1382-83. And since the statute authorizes judicial review of the adjudicatory proceeding that the state voluntarily entered into, the state waived its immunity from that federal court review. Id. at 1383.

Based on the similarity of the proceedings before the Commission in FMC and before the Board of Patent Appeals and Interferences in Vas-Cath to the proceedings in inter partes reviews, the PTAB concluded that absent a waiver, UFRF was immune from IPR proceedings.  "On the whole, considering the nature of inter partes review and civil litigation, we conclude that the considerable resemblance between the two is sufficient to implicate the immunity offered to the States by the Eleventh Amendment." Order at 24. And since there was no waiver because UFRF did not voluntarily enter into the IPRs, the PTAB dismissed the petitions.

In a footnote, however, the PTAB added a caveat to its ruling: "Because there is no related federal district court infringement (or declaratory judgment of validity) case brought by Patent Owner, we do not decide here whether the existence of such a case would effect a waiver of sovereign immunity." Order at 26 n.4. There was, of course, an action for breach of a patent license agreement, but that action did not yet seek or require a decision on infringement or validity.

Two days after the PTAB issued its decision, on January 25, 2017, the Federal Circuit issued an order in the appeal from the district court's remand to the Florida state court. Appeal No. 2016-2422 (Fed. Cir. Jan. 27, 2017) (nonprecedential order). The Federal Circuit order required the parties to show cause why the appeal should not be dismissed rather than transferred to the Eleventh Circuit. The Federal Circuit reasoned that it is a court of limited jurisdiction, including appeals "[i]n any civil action arising under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents." Order at 3 (quoting 28 U.S.C. § 1295(a)(1) (emphasis added)). Applying the "well-pleaded complaint" rule, the Federal Circuit interpreted UFRF's complaint as a contract claim seeking an accounting that did not depend on resolution of any patent infringement issues, even though UFRF's ultimate right to monetary relief might give rise to a compulsory counterclaim under the patent laws. Order at 4. And the Federal Circuit held that the licensees' counterclaims were not compulsory. Order at 4-5.

The court concluded therefore that it lacked jurisdiction, but noted that it could transfer rather than dismiss the action if that were in the interest of justice. Order at 5. The court expressed skepticism about the wisdom of transferring rather than simply dismissing the appeal, however, because it suggested that the Eleventh Circuit would also lack jurisdiction, because of 28 U.S.C. § 1447(d) ("An order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise . . . .").  Id. Hence, the Federal Circuit's order to show cause.

Perhaps the solution to avoiding the licensees' conundrum in this situation is to provide in any patent license agreement with a state entity/licensor that in the event of a dispute over whether the activities of the licensee fall within the scope of a valid claim of the licensed patent, the licensor waives its sovereign immunity and agrees that federal forums will have jurisdiction over the dispute.


1 Citing Manders v. Lee, 338 F.3d 1304, 1309 (11th Cir. 2003) (en banc), the court described the four-factor test as follows:

To determine whether [an entity], while engaged in the relevant function, acts as an arm of the state, we conduct a four-factor inquiry, taking into account (1) how state law defines the entity; (2) what degree of control the state maintains over the entity; (3) the source of the entity's funds; and (4) who bears financial responsibility for judgments entered against the entity.

2016 WL 3869877 at *2 (bracketed alteration in the district court's opinion).

2 The Eleventh Amendment provides as follows: "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."

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