Guest Post by Prof. Gregory Dolin (Baltimore). Prof. Dolin recently filed an amicus brief supporting Celgenes arguments that AIA post-issuance review represents an uncompensatedtakings of pre-AIA patent rights.

Since its passage in 2011, the America Invents Act has been subject to numerous Supreme Court decisions. But thus far, the major constitutional challenge to the Act in Oil States Energy Servs v. Greenes Energy Group has failed. But while the Court the, upheld the AIAs post-issuance review system against an Article III challenge, left a major question open. The Oil States Court stated that it was not resolving whether the application the AIA-created procedures to patents issued prior to the AIAs effective date violates the Takings Clause of the Fifth Amendment. This question is now squarely presented to the Court in Celgene v. Peter. (There are also pendingcases that in addition to the Takings issue raise a Due Process challenge).

Celgene owns two patents generally directed to methods for safely distributing teratogenic or other potentially hazardous drugs while avoiding exposure to a fetus to avoid adverse side effects of the drug. These patents were issued in 2000 and 2001, or more than a decade prior to the enactment of the AIA. These patents were challenged before the Patent Trial and Appeal Board (PTAB) in 2015 in an Inter Partes Review (IPR), and the proceeding resulted in cancellation of all but one of the challenged claims in bothpatents. As with other post-issuance proceedings, but unlike district court litigation, Celgenes patents enjoyed no presumption of validity, and could be cancelled upon preponderance of evidence. Furthermore, in construing Celgenes claims, PTAB utilized the broadest reasonable interpretation (BRI) approach, as was called for by the then-current rules. The interplay of lower standard of proof for cancellation and the BRI standard, combined with the lack of a meaningful opportunity to amend the claims, left patents challenged in IPR particularly vulnerable. (Since that time, the Patent Office issued new rules to amend its procedures and now measures the claims under the Phillips frameworkthe same standard in use by Article III tribunals).

Celgene challenged this procedure in the U.S. Court of Appeals for the Federal Circuit, arguing that by applying a different claim construction standard than in district court and denying the patent a previously existent presumption of validity, the America Invents Act retroactively devalued its property rights in their patents and therefore resulted in the constitutionally compensable Taking in violation of the Fifth Amendment. Relying on its two priordecisions, the Federal Circuit rejected the argument, holding that the presumption of validity is not a property right subject to the protection of the Constitution. Additionally, the Federal Circuit held that Celgene suffered no diminution in its property rights because its patents were always subject to ex parte and inter partes reexamination proceedings, both of which use (or used) the preponderance of the evidence standard with respect to patent validity. Celgene sought certiorari and I, together with Professors Kristen Jakobsen Osenga and Irina Manta filed a brief in support of the petition.

The argument we made in favor of Celgene is relatively straightforward. As the Supreme Court recognized timeandagain, a patent is a property right protected by the Takings Clause of the Constitution. In turn, the decision to procure a patent is fundamentally an investment decision which takes into account the likelihood that a patent would be challenged and survive such a challenge. In addition, the decision to disclose the invention and forgo trade secret protection is essentially a tradeoff: the patentee sacrifices the confidentiality of the invention in exchange for the protections of the patent system. (Admittedly, it is not always possible to keep the invention secret, especially if regulatory approval is necessary as in the case of Food and Drug Administrations approval to market drugs or medical devices. Nonetheless, broadly speaking, an inventor has a choice between patent protection and trade secrecy protection). Depending on the robustness of those protections, the scales of the decision on whether to seek a patent may tip one way or another. Thus, the legal regime existing at the time the applicant filed for the patent constitutes the patentees investment-backed expectation.

The legal regime matters, and IPRs couldnt be more different from reexaminations. As my researchshows, the economic impact of the AIA on patent holders has been profound. The reason behind this significant drop in value is that although administrative review procedures have existed for nearly 40 years, these procedures have always been coupled with a patentees unlimited right to amend the claims in order to preserve their validity. Thus, prior to the AIA the patentee knew that if his patent were challenged one of two things will happen. One option was for the dispute to end up in an Article III court where the claim would rise and fall as written, but where the patent would enjoy a presumption of validity. Alternatively, the dispute would be resolved by the Patent Office where the claims would not be presumed valid, but would be subject to amendments for as long as the patentee was willing to continue prosecuting the patent. The AIA fundamentally altered this balance. Under the AIA, claim patentability can be adjudicated by the PTAB without the presumption of validity and without a robust opportunity to amend the claims. (Although the statute does permit claim amendments, these are not as of right, but must be requested by motion to the PTAB. Since October 2017 when the Federal Circuit held that Motions to Amend must be allowed unless the Patent Office carried its burden to show that claims are unpatentable, the PTAB has granted only 16% of such motions (with an additional 6.5% being granted in part). These already low numbers are a significant improvement from the pre-2017 system where the PTAB granted under 3% of such motions.

It should be acknowledged that Celgene did not seek to amend its claims during the PTAB proceedings, which may make it not an ideal vehicle to resolve the takings claim. On the other hand, given PTABs rejectionist approach to motions to amend, it is quite possible that Celgene was among countless patentees who chose not to bother with filing the motions in the first place. (It is worth noting that Celgenes patents were adjudicated prior to October 2017).

The Supreme Court has previously concluded in Ruckelshaus v. Monsanto Co., that when the government changes the terms of the bargain with an individual, such a change can result in a regulatory taking. In Monsanto, the Court held that the Environmental Protection Agencys public disclosure of data voluntarily submitted to the Agency may, in some circumstances, constitute a taking. The Courts analysis was centered on the legal rules governing the use and disclosure of such data and the nature of the expectations of the submitter at the time the data were submitted. The Court held that the Governments guarantee at the time of submission that the submitted data would remain a trade secret and not be disclosed to third parties formed the basis of a reasonable investment-backed expectation and played a role in the property holders decision whether to submit the data to the EPA in the first place. Celgenes situation is analogous. When it had to make a decision whether or not to obtain a patent or rely on trade secrecy, it made the decision by reference to the then existing government guarantees of patent protections. Changes to that regime are what constitutes a compensable taking.

Before closing, it should be acknowledged that there is a significant issue that is antecedent to the question presented in Celgenes petition. That is whether the Federal Circuit has jurisdiction to hear such claims absent filing of a claim for compensation in the Court of Federal Claims (CFC) and if so, how the Claims Court is supposed to evaluate the value of property lost. That question is embedded in a separate petition before the Supreme Court. The Federal Circuit has recently concluded that the CFC does have jurisdiction to hear such claims, even if on the merits it must reject them. The Government has advanced a contrary view (which the CFC endorsed, though this endorsement is at odds with the Federal Circuits later opinion). It may be that this issue may need to be resolved before (or concurrently with) the issue presented by Celgene.

In sum, the Supreme Court should answer the question whether retroactive application of the AIAs post issuance review procedures to patents issued prior to the passage of the AIA, and which results in their invalidation, constitutes a taking within the meaning of the Fifth Amendmenta question the Court explicitly left open in Oil States. And in my view, the answer should be yes.

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Cancelling Pre-AIA patents and the Takings Clause - Patently-O