United States: A Path Less Traveled: Where Oil States Meets Bike Trails

This article by counsel Matthew Rizzolo was published by Law360 on May 2, 2018.

In the recent case of Oil States v. Greene's, the U.S. Supreme Court upheld the constitutionality of inter partes review — the popular proceedings created in the America Invents Act and commonly used by defendants to challenge the validity of patents. In doing so, however, the Supreme Court reaffirmed that patents are property rights that are protected by the due process and takings clauses of the Fifth Amendment.1 In the wake of Oil States, some have wondered whether patent owners might raise other constitutional challenges to inter partes review or other U.S. Patent and Trademark Office post-grant proceedings, and much of the initial attention has focused on the due process clause. But the court's reference to the takings clause has received less scrutiny. Clues to what might happen next may come from a surprising place in history — legislation and litigation involving conversions of abandoned railroads to bike trails.

Trails Act Takings

In 1983, Congress enacted a statute, the National Trails System Act Amendments of 1983, which was designed to facilitate the conversion of thousands of miles of unused rail lines crisscrossing the country into public recreational trails. It was no doubt a worthy objective — to incentivize the creation of walking and biking paths over land once occupied by now-abandoned railroad lines. But Congress did not consider that in many cases, the railroads did not actually own the rights-of-way, often instead holding temporary interests known as easements.

A few years after its enactment, the Trails Act was challenged in court as an overreach of congressional authority. In Preseault v. ICC,2 the Supreme Court upheld Congress' authority to pass the statute, finding that it had acted for a proper public purpose. But, as in Oil States, the court noted that the plaintiffs had property rights that were still subject to the Fifth Amendment's takings clause — the requirement that private property cannot be taken for a public purpose without providing just compensation to the owner. As a result, in the last few decades, the U.S. government has litigated dozens and dozens of cases in the U.S. Court of Federal Claims and paid out hundreds of millions of dollars to thousands of property owners who have had bike trails built on abandoned railroad rights of way, either on or adjacent to the property owners' land.

America Invents Act of 2011

Nearly 30 years after the Trails Act, in 2011, Congress enacted the AIA, which created procedures, such as inter partes review and covered business method review, that provided an avenue for the patent office to cancel patent claims that it later found it had erroneously issued. As the Supreme Court recently affirmed in Oil States, patents are special property rights — a "public franchise" — which are expressly provided for in the Constitution. Patents are issued by the government as part of a quid pro quo: in exchange for disclosing new technology to the public, the patent owner is provided with a property right for limited time (currently, 20 years from the filing of the patent application) allowing the patentee to exclude all others from making, using, or selling the patented invention. The Supreme Court has long held (and in Oil States, reiterated) that patents are property rights afforded protection under the takings clause of the Fifth Amendment.

IPRs and CBMs came about over concerns that the patent office was erroneously issuing overbroad or incorrect patents, and that such patents were often asserted by so-called patent trolls. IPRs allow for challenges to all patents on a specific subset of grounds — invalidity for anticipation and obviousness based on printed prior art — that had been used by the patent office since 1980 to revoke issued patent claims. CBMs, on the other hand, allowed for revocation of claims in a narrower set of patents — those relating to financial products or services — but on several additional grounds that had never previously been allowed to be reconsidered by the patent office once a patent issued, such as patentable subject matter, indefiniteness, and lack of written description. Both proceedings applied retroactively, even to patents that had issued prior to the AIA.

Under the patent laws, a patent is presumed to be valid, which means that its claims cannot be revoked or cancelled absent "clear and convincing" evidence that it should not have been issued by the patent office in the first place. Yet Congress also expressly provided that the presumption of validity does not apply in IPRs or CBMs, much as it did not apply in prior post-grant proceedings such as ex parte re-examination and inter partes re-examination. So it's not surprising that since the creation of IPR these proceedings, thousands of patents have been canceled in IPR or CBM proceedings.

For those patents canceled in IPRs as anticipated or obvious, it can be argued that the patent owners agreed as part of the quid pro quo with the government that their patent claim could be cancelled on those grounds, as the patent office has done so for decades. But by broadening the grounds on which a patent's claims could be revoked, CBMs retroactively changed the terms of the patent bargain. The owners of dozens of patents whose claims were cancelled in CBM proceedings on the grounds that they covered unpatentable "abstract ideas," for example, arguably had no reasonable expectation at the time they procured the patents that the patent office could later revoke the patent for this reason. And because a patent provides the patent owner with only a negative right — the right to exclude — once its claims have been canceled by the patent office, the patent has no value whatsoever.

AIA Takings Claims?

It's possible, then, that just like the Trails Act led to widespread takings claims involving real property throughout the United States, we might soon see multiple patent owners filing suits against the U.S. government in the Court of Federal Claims under the Tucker Act,3 arguing that the cancellation of patent claims in certain Patent Trial and Appeal Board proceedings is a taking requiring compensation under the Fifth Amendment. But the success of any such claims is likely dubious in some circumstances, and at most questionable in others.

A plaintiff asserting a takings claim must prove both a cognizable property interest and that this property interest was taken from him by the government. In the context of IPRs, as noted above, the ability for the patent office to cancel the patent claims on the particular grounds formed part of the patent bargain, so a patent owner may have an uphill battle to argue that anything was actually "taken." As Justice Clarence Thomas noted in Oil States, a patent, as a public franchise, is a qualified right — the government has for decades reserved its authority to revoke patent claims on particular grounds, and the patent owner was fully aware of that fact at the time of issuance. While in the context of pre-AIA patents and CBMs, the inquiry is somewhat different (because 35 U.S.C. § 101 and § 112 could never before be considered by the PTO after issuance), a CBM-related takings claim might still face problems. The patent claims are canceled only after the PTO concludes, in a proceeding whose constitutionality has effectively been blessed by the Supreme Court,4 that the property right should never have been granted to the inventor in the first place. Thus, it could be argued that there is no property right that the government has taken for which compensation would be due — while the patent may have existed on paper, it was in fact invalid ab initio.

The parallels with the past are interesting. In the face of constitutional challenges, the Supreme Court found that both the Trails Act and the AIA — and their intended outcomes and benefits to the public — are well within the authority of Congress, which has plenary power over railroads, interstate commerce, and the patent system. And Congress' goals in enacting these statutes were laudable — you'll be hard-pressed to find many people who are in favor of low quality patents, or who prefer abandoned railway lines to well-used bike paths. But a proper public purpose alone isn't enough to prevent takings claims — the mere fact that legislation is intended to benefit the public does not excuse the government from adhering to its constitutional obligation to provide just compensation to the owner of property taken by the government in pursuit of a publicly beneficial objective.

Justice Oliver Wendell Holmes famously said that "a strong public desire to improve the public condition is not enough to warrant achieving the desire by a shorter cut than the constitutional way of paying for the change."5 The history of takings claims associated with the Trails Act tells us that now, in the wake of Oil States, some patent owners whose property rights have been invalidated may argue that doing so in certain patent office proceedings, rather than district court, is a shortcut that requires compensation under the Fifth Amendment. The government may soon find itself defending against patent-related takings litigation at the Court of Federal Claims. Time will tell whether any such claims may be successful.

Footnotes

1. 584 U.S. ___, slip op. at 17 (2018) ("Finally, our decision should not be misconstrued as suggesting that patents are not property for purposes of the Due Process Clause of the Takings Clause.").

2. 494 U.S. 1 (1990).

3. 28 U.S.C. § 1491. This statute provides the Court of Federal Claims with exclusive jurisdiction over claims against the U.S. founded upon the Constitution, including the Takings Clause, which exceed $10,000.

4. While Oil States addressed only the constitutionality of inter partes review, it seems likely that CBM would fare the same under the Court's analysis. However, the Court expressly stated that it was not deciding whether the retroactive effect of the inter partes review statute comported with the Due Process Clause. 584 U.S. ___, slip op. at 17.

5. Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 416 (1922).

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