Patents as “public franchises”: The U.S. Supreme Court’s decision in Oil States Energy Services, LLC v Greene’s Energy Group, LLC

Aaraf Dewan, M.Sc.
Student Writer, Windsor Law LTEC Lab 
Dual J.D., 2019

 

The patent system is heralded as a system created to encourage and incentivize innovation. While patent systems have existed since the 1400s, [1] the motivations behind them, their objectives, and their forms are constantly evolving in order to strike a balance between the rights of the public and the rights of patentees. In the recent U.S. Supreme Court (USSC) decision of Oil States Energy Services, LLC v Greene’s Energy Group, LLC [2], the USSC upheld the constitutionality of inter partes review(IPR) proceedings and found the proceedings did not violate either the Seventh Amendment right to trial by jury or the judicial power under Article III of the Constitution. In Oil States, the USSC stated that the grant of a patent is a matter arising between the government and the public, and as such, characterized patents as a ‘public franchise’ in determining that IPRs did not violate Article III of the Constitution. While the USSC was very careful to limit the scope of its ruling to the specific question before it, this leaves open many questions as to not only its potential impact in other aspects of patent law, but also conceptual debates regarding the nature of patent rights generally.

 

What are inter partes reviews?

In 2012, U.S. Congress passed the Leahy-Smith America Invents Act, which introduced a number of changes to the U.S. patent system. These changes included the introduction of inter partes reviews (IPRs). An IPR is a proceeding before the Patent Trial and Appeal Board (PTAB) where a party can file a petition challenging the validity of patent claims granted by the USPTO. The PTAB reviews the petition and any response filed by the patent owner, and if the PTAB finds that the petition supports a ‘reasonable likelihood’ that the petitioner will prevail with respect to at least one claim, will then hold a hearing between the parties to decide the issue of validity of the claims in question.

 

While IPRs can be a more cost-efficient alternative for challenging patent validity in comparison to court proceedings, they have been met with some criticism. The evidentiary standard for finding patent invalidity in an IPR proceeding is a “preponderance of the evidence”, in contrast to the higher “clear and convincing evidence” standard applied by U.S. courts. Furthermore, to date, the PTAB has applied a broader prosecution standard (i.e. ‘broadest reasonable interpretation’) for claim construction rather than the arguably narrower Phillipsstandard applied in court proceedings, which in an invalidity proceeding such as an IPR, can lead to a greater likelihood of claims reading on prior art. Combined, these factors have led to a finding of invalidity in over 80% of IPR cases.[3] The ability to register patents and develop a patent portfolio is vital to several industries as an important asset growth, protection, and management tool. The process for obtaining a patent can require a significant amount of time and money and the grant of monopoly rights aid patentees to offset these costs. The high rate of invalidity in IPRs creates more uncertainty for patentees regarding the value of their patent portfolio and when determining whether their prosecution costs can be recuperated. However, IPRs are a cost-effective tool for invalidating anticipated and obvious patents which never should have been granted, providing businesses with additional means for combating patent trolls who abuse the patent system. Thus, whether IPRs are “beneficial” for the patent system has garnered some controversy, the core issue boiling down to whether IPRs are an acceptable procedure to determine the validity of patents.

 

Background and Litigation

Oil States Energy Services, LLC (Oil States) and Greene’s Energy Group, LLC (Greene) are competing companies which provide equipment and services for the gas and oil industries. In 2012, Oil States sued Greene in the U.S. District Court of the Eastern District of Texas for infringement of their patent related to the protection of oil-wellheads during hydraulic fracturing.[4]During this time, Greene filed an IPR petition while defending themselves against the infringement action in District Court. While both proceedings ran concurrently, the District Court proceeding concluded first, finding that Greene had infringed Oil States’ patent. However, the IPR proceeding subsequently concluded with a finding that Oil States’ claims held to be infringing were actually invalid. The finding of invalidity in the IPR nullified the District Court’s earlier ruling of infringement.

 

Oil States appealed the PTAB decision to the U.S. Court of Appeals for the Federal Circuit which upheld the PTAB’s finding without further opinion.[5] Oil States appealed to the USSC and certiorari was granted in June 2017 to address the issues of constitutionality of IPRs in respect to Article III and the Seventh Amendment.

 

The Supreme Court

In a 7-2 decision, the USSC held that IPRs did not violate Article III or the Seventh Amendment where such review is simply the reconsideration of a patent grant. Justice Clarence Thomas, in delivering the majority decision, stated that an IPR review of a patent grant fell within the public-rights doctrine, as a reconsideration of the government’s decision to grant a ‘public franchise’.[6] The fact that binding decisions, some adversarial elements, and court-like procedures were present in IPRs was not sufficient for a finding that PTAB was exercising the judicial power in Article III. In finding no violation under Article III, the Court also found that the right to trial by jury under the Seventh Amendment was not violated “when Congress properly assigns a matter to adjudication in a non-Article III tribunal”.[7]

 

The concurring opinion, delivered by Justice Breyer and joined by Justices Ginsburg and Sotomayor, agreed with the majority opinion. However, the opinion did add that the decision should not be read to say that private rights could only be adjudicated by non-Article III courts.[8] The dissent, delivered by Justice Gorsuch, cited McCormick Harvesting Machine Co. v. Aultman,[9] and argued that the power to revoke a patent was under the judicial power and argued against the majority’s narrow interpretation of McCormickas a case deciding on specific statutes then in force, not the Constitution. [10]

 

The Future of IPRs

The high rate of invalidity findings in IPR cases has developed significant debate as to whether IPRs have improved the patent system. Amicus curiaebriefs were filed by third parties from various different industries in the Oil Statescase. Technology companies like Apple and Dell filed briefs in support of the IPRs as being a beneficial force for combating patent trolls by significantly reducing the costs of litigation. However, brand name pharmaceutical companies AbbVie, Allergan, and Celegene filed a brief in support of the petitioner, arguing against the constitutionality of IPRs. They argued that the high rate of invalidity in IPRs has had a negative impact by making it harder to recuperate research and development costs when their patents are invalidated.

 

While IPRs were upheld to be constitutional inOil States, it should be noted that the Court was very careful only discussing the constitutionality of IPRs in the context of post-grant patent reviews by the PTAB. The Court specifically stated they would not comment on the constitutionality of retroactive application of IPRs by PTAB on patents issued prior to enactment of the Leahy-Smith America Invents Act, leaving this issue open as a potential future challenge.  The Court was also careful to avoid any suggestion that its ruling in Oil States applied to the question of whether infringement matters, typically considered matters of a private property nature, could be adjudicated outside of an Article III court, a question explicitly left for another day.

 

The Court’s characterization of patent rights within the IPR context as a ‘public franchise’ opens up a fascinating discussion touching on long-standing debates about the nature of intellectual property rights. For instance, Nichia Corporation recently filed with the USSC on June 21, 2018 a petition for writ of certiorariappealing the U.S. Court of Appeals for the Federal Circuit decision from Nichia Corp v Everlight Americas, Inc. [11] In their petition, Nichia Corporation argued that because patents are public franchises, they involve a public interest and so the determination of patent validity should be purely a question of law. Nichia Corporation also argued that the review of the validity on appeal should be conducted de novorather than differential. If the USSC accepts these arguments, the ultimate question of whether a patent is obvious in light of prior art will only be determinable by a judge, not juries. This would also make the Federal Circuit’s treatment of patent obviousness more in line with its own precedent before 2012 [12] and the treatment followed by regional district courts.[13]

 

It appears that the Court in Oil Statescarefully limited the scope of its discussion in order to avoid any sweeping conclusions or characterizations of its conclusions.  As such, the full impact of this ruling on our notions of the nature of patent rights, and intellectual property rights generally, remains to be seen.

 

[1]E Wyndham Hulme, “The History of the Patent System under the prerogative and at Common Law”, (1896) 12 L Q Rev 141 at 141-143

[2]138 S Ct 1365 (2018)

[3]Brett Shandler, “The Hon. Randall R. Rader on ‘The Future of the Patent System’”, AIPPI News(May 22, 2017) online: <https://aippi.org/no-show/the-hon-randall-r-rader-on-the-future-of-the-patent-system/>

[4]2014 WL 12360946 (US Eastern Dist Texas)

[5]639 Fed Appx 639 (2016) (USCA)

[6]Oil States, supra note 2 at 1375

[7]Ibidat 1379

[8]Ibid

[9]169 US 606 (1898)

[10]Oil States, supra at note 2 at 1384

[11]855 F3d 1328 (2017) (USCA)

[12]See Structural Rubber Products Co v Park Rubber Co, 749 F2d 707 (Fed Cir 1984) at 709 for pre-2012 Federal Circuit precedent. The Federal Circuit diverged from its treatment of obviousness as solely a question of law to being a mixed question of fact and law in Kinetics Concepts, Inc v Smith & Nephew, Inc, 688 F3d 1342 (Fed Cir 2012) at 1356

[13]Bergman v Aluminum Lock Shingle Corp of Am, 251 F2d 801 (9yh Cir 1957) at 809;Roberts v Sears, Roebuck & Co, 723 F2d 1324 (7thCir 1983) at 1333

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