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Celgene Corp. v. Peter, the constitutionality of patent review, and what it means for startups
A recent Federal Circuit decision addressing the constitutionality of inter partes review (IPR)—a Patent Office review of a patent that has already been issued—is a positive development for promoting patent quality and leveling the playing field for startups involved in patent litigation. In Celgene Corp. v. Peter, the court held that IPR proceedings which result in the cancellation of issued patent claims are not an unconstitutional taking of private property. While it seems likely the Supreme Court will eventually weigh in on the question, for now IPRs remain available to startups who want to ask the U.S. Patent and Trademark Office (USPTO) to take a second look at weak patents that arguably should have never issued.
A brief primer on the constitutionality of inter partes review.
Before addressing the Celgene decision, it is important to understand what the takings doctrine and IPRs are. Turning first to takings, a “taking” occurs when the government seizes private property. And if the government takes private property for public use, then it has to give the property owner “just compensation.” A well-known example of a taking is eminent domain. As it applies to patents, some have argued that when the USPTO invalidates claims of a previously-issued patent, the government has engaged in a taking.
Second, turning to the definition of IPR, in 2011 Congress passed the America Invents Act (AIA). This law created the IPR procedure whereby people or companies—referred to as “petitioners”—can challenge the validity of issued patents. Some patents claim things that are obvious or not novel, and those patents (which fail to claim actual, new inventions) should have never issued in the first place. The IPR is a mechanism for the USPTO to take a “second look” at those patents and cancel any claims that are invalid over the prior art.
Historically, patent validity could be challenged either through lengthy and expensive district court procedures or reexamination at the USPTO. Congress understood that, at least prior to the AIA, “questionable patents [were] too easily obtained and [were] too difficult to challenge.” So it created IPR as a more efficient alternative, where a petitioner can request a trial-type procedure conducted before the patent office’s Patent Trial and Appeal Board (PTAB), and challenge patent validity on limited grounds.
Recent interest in IPR and takings follows a Supreme Court case addressing separate constitutional arguments. In Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, a patent owner had argued that IPR was unconstitutional and asserted that actions to invalidate a patent should be tried to a jury, not PTAB judges. The Supreme Court disagreed, and held that IPR did not violate either Article III or the Seventh Amendment of the Constitution. However, the Supreme Court left other constitutional issues open—specifically stating that its decision “should not be misconstrued as suggesting that patents are not property for purposes of the Due Process Clause or the Takings Clause” of the U.S. Constitution.
Celgene Corp. v. Peter and the constitutionality of IPRs.
Since the Oil States decision, several parties—including Celgene—have argued that invalidating patent claims through IPR amounts to an unconstitutional taking. The Federal Circuit resolved that issue in Celgene Corp. v. Peter.
The Celgene case concerned two patents directed to a method of distributing drugs that are known to cause birth defects. The PTAB instituted IPRs on both patents, and concluded that many of each patents’ claims were obvious. Celgene appealed.
On appeal, in addition to arguing that the PTAB’s obviousness analysis was flawed, Celgene argued “that the retroactive application of IPRs to patents filed before [the effective date of the AIA] is an unconstitutional taking.” The Federal Circuit disagreed. The bulk of the court’s reasoning focused on the fact that patent validity “has always been subject to challenge in district court” and for nearly forty years there have been mechanisms for the USPTO to reexamine the validity of issued patents. And neither of those procedures (arguing invalidity in court or in reexamination) was an unconstitutional taking.
At bottom, the owners of existing patents have always known that patent validity could be challenged. Even though different mechanisms (including IPR) for challenging a patent have different procedures, the Federal Circuit held that “those differences do not outweigh the similarities of purpose and substance and, at least for that reason, [IRPs] do not effectuate a taking . . . .”
The Federal Circuit’s decision resolves the takings question for now, but Celgene (or another patent owner) may ask for the Supreme Court to weigh-in.
What Celgene and IPR mean for startups.
The Celgene decision is a positive development, confirming the continued availability of IPR as a more efficient and less expensive route to reconsider a patent’s validity. The option of an IPR helps startups who are or may become directly involved in defending a patent lawsuit, and is designed to improve patent quality overall.
If a startup is accused of patent infringement, either through a lawsuit or demand letter, one compelling response is to establish that the asserted patent claims are invalid. A claim might be invalid because another, earlier patent or publication describes the invention or an obvious variant of it. And this is a complete defense to infringement, because you cannot infringe an invalid patent claim. But it can cost several million dollars to raise an invalidity defense in district court. While the cost of an IPR is not cheap—approximately $300,000-$600,000—it is an order of magnitude less expensive than a defending a district court case. Likewise, an IPR takes 12-18 months, whereas a court case can drag on for 3 or more years. If the outcome is the same, and the patent claims are invalid, the IPR is a useful tool to get a quicker, cheaper resolution of patent allegations. And more efficient resolution of those allegations means that startups can re-focus their time and resources on innovation, product development, marketing & sales, fundraising, etc.
The availability of IPR has helped level the playing field in patent litigation, and that has ancillary benefits. For example, patent assertion entities (PAEs, also known as “patent trolls”) can no longer just use the inherent length and expense of patent litigation as leverage to coerce a startup into settling frivolous litigation. Since the AIA passed in 2011, there has been a decrease in the volume of PAE litigation, attributed in part to the availability of IPR and similar processes.
Finally, and as we have explained elsewhere, any efforts to improve patent quality—such as the USPTO’s ability to take a second look at weak patents—are good for startups. When low quality patents flood the system, and there is no efficient way to challenge them, it fuels abusive patent litigation and weakens the overall U.S. patent system.
Disclaimer: This post provides general information related to the law. It does not, and is not intended to, provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.