The Office giveth and the Office taketh away

US Supreme Court rejects constitutional challenge to inter partes review process

By Dr. Bolko Ehlgen, LL.M. (Pennsylvania), and Nisha Gera, LL.M.

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The US Supreme Court reviewed the constitutionality of the post-issuance patent review procedure called inter partes review (IPR) in the case Oil States Energy Services, LLC v Greene’s Energy Group, LLC, 138 S. Ct. 1365 (2018). An IPR is conducted before the Patent Trial and Appeal Board (PTAB) as part of the United States Patent and Trademark Office (USPTO). The Supreme Court upheld the IPR process, stating that in this context, patent rights are public rights (rather than private property) that can be adjudicated in a nonjury court. The decision ends a years-long debate over the constitutionality of this highly relevant post-issuance review process. Meanwhile, the discussion regarding the review process before the European Patent Office’s (EPO) Boards of Appeal in Europe, including in the context of the Unitary Patent, is still ongoing.

The IPR process

The America Invents Act (AIA) introduced the IPR process into US patent law. In this administrative review process, the USPTO can reexamine and revoke a patent on limited grounds. IPRs gained relevance because they were cheaper and faster and thus an appealing alterna­tive to challenging patents in litigation. In addition, the standard of proof for invalidating a patent in an IPR – preponderance of the evidence (in other words, more likely than not) – is lower than the “clear and convincing evidence” standard required in district court actions. In court, a party challenging a patent may also face claims for patent infringement. In an IPR, however, only the patent holder faces the risk of revocation.

Any person who is not the owner of the patent may petition for an IPR. If a review is instituted, the process entitles the petitioner and the patent owner to an oral hearing before the PTAB. The grounds available to invalidate the patent are limited compared to a court proceeding. A petitioner may only argue that the patent lacks novelty or is obvious, based solely on earlier patents or printed publications. A decision by the Patent Trial and Appeal Board (PTAB) is subject to review by the Court of Appeal for the Federal Circuit. Statistics show that in the past five years, IPRs have invalidated patent claims at a success rate of around 65 percent.

The Oil States judgment

In this landmark judgment, the petitioner, Oil States Energy Services, LLC, had sued Greene’s Energy Group, LLC, for infringement of Oil States’ patent relating to hydraulic fracturing equipment. Greene’s defended on the grounds that the patent was invalid. Parallel to the district court proceeding, Greene’s requested an IPR, arguing that two claims were unpatentable based on prior art. While the District Court construed the two claims in a way that excluded Greene’s argument regarding invalidity, the PTAB concluded that the two claims were unpatentable. Oil States appealed the PTAB decision, arguing that the IPR process was unconstitutional. The Federal Circuit rejected that argument and affirmed the revocation of the patent.

In its petition to the Supreme Court, Oil States argued that IPRs violate the US Constitution by allowing private property rights to be extinguished in an administrative process instead of an “Article III” forum with a jury. Greene’s Energy and the USPTO contended that patents involve “public rights,” therefore the USPTO has the authority to decide whether a patent was properly granted or not.

Oil States’ constitutionality argument is based on the Seventh Amendment to the US Constitution, which bestows a right to trial by jury, combined with the historical precedent that patent invalidation cases have always been tried in Article III courts. Article III of the US Constitution sets up the judiciary branch. Article III court therefore refers to an “actual” court that is created as part of the judiciary branch. Oil States rejected the notion that patents fall under the public-rights doctrine, which states that rights integrally related to government regulations are most properly adjudicated by the relevant agency. Patent rights, Oil States argued, are not part of government regulation, which is why patent disputes have not historically been “resolved wholly outside the judicial branch.” In defense, Greene’s Energy argued that patents, as rights grounded in federal law, subject to the power of Congress, and “integrally related to particular federal government action,” possess all the characteristics of public rights. Particularly, Greene’s argued, since Congress has set up the USPTO as a specialized administrative agency, Article III of the US Constitution does not require every aspect of a patent dispute to be heard in an Article III court. Greene’s further referred to several post-issuance review proceedings before the USPTO that have already been implemented. The USPTO, which had joined the proceedings, additionally asserted that patent rights come into existence by being granted by the USPTO. No one called for an Article III court during issuance of the patent.

The Supreme Court affirmed the Federal Circuit’s decision by a 7-2 vote. It agreed that inter partes review does not violate Article III or the Seventh Amendment of the US Constitution. The Court ruled that “[i]nter partes review falls squarely within the public rights doctrine.” The Court emphasized that the decision to grant a patent is a matter involving public rights – specifically, the granting of a public franchise. An IPR is simply a reconsideration of that grant. Congress has permissibly reserved the USPTO’s authority to conduct that reconsideration, thus, the USPTO can revoke a patent in an IPR without violating Article III. As for historical practice, the majority of judges “disagree[d …] that, because courts have traditionally adjudicated patent validity in this country, courts must forever continue to do so.” Finally, the judgment specifically highlights its narrowness. The Court did not address the retroactive application of IPRs to patents issued prior to the AIA. The Court also reaffirmed that patents are private property for purposes of the Due Process and Takings clauses, which deal with ensuring proper judicial process and the right of the government to seize private property (Enteignung).

The dissent’s opinion in Oil States

The dissenting opinion stated that the IPR scheme “represents a retreat from the promise of judicial independence.” The dissenting judges believe that the existing Supreme Court precedent suggesting that only a court can revoke a patent (McCormick Harvesting decision) was based on constitutional concerns and not on the patent statute as it existed at the time, as understood by the majority. Since the country’s founding, invention patents protected by the Patent Clause of the US Constitution have been treated differently than ordinary public franchises (for example, the exclusive right to operate a toll bridge) and “required independent judges.” The implementation of IPRs also allows the Director of the USPTO to staff the PTAB panels with judges whom the director believes will vote a certain way. The USPTO director is a political appointee, and his or her adminis­trative agents, rather than an independent judge, will be authorized to decide on matters of patent validity. The dissent further argued that simply because the execu­tive branch could issue patents, it did not follow that the revocation of those patents necessarily belongs to the xecutive branch as well.

Judicial independence of the EPO’s Boards of Appeal and the Unified Patent Court (UPC)

Overall, the case was decided on the premise that patent rights are to be considered “public rights” for the purpose of the constitutionality of the IPR process. There­fore, the US Constitution’s specific protection for private property did not apply. Consequently, since the USPTO de­cides on the granting of a patent, it can also decide on the revocation of patents. Even these rather US-specific constitutional considerations, however, show that there is an underlying concern about an administrative agency’s independence in adjudicating disputes on the validity of patents.

Germany had a similar discussion in the 1950s. The very existence of the German Federal Patent Court is a result of a challenge brought before the Federal Administrative Court for a similar reason as that argued in Oil States – namely, that the appeal senates, which were a part of the German Patent Office, did not constitute a court. Just like the dissent in Oil States, the Federal Administrative Court reasoned that the president was senior to all German Patent Office members and was therefore authorized to change the composition of the appeal senates by simply changing the office’s duty allocation plan.

Similarly, the EPO has been in the spotlight for a number of years for the way its Boards of Appeal and Enlarged Boards of Appeal function. Particularly, the separation of powers between the administration and Boards within the EPC and the independence of the Boards has been questioned. This has led to a reorganization by forming the Boards of Appeal Unit (Rule 12a [1] 1 of the EPC), which is governed by its own president. This new provision of introducing a separate president for the Boards of Appeal is intended to strengthen the separation of powers and to alleviate concerns regarding independence of the Boards. Under the amended rules, the president of the EPO delegates functions and powers to the president of the Boards of Appeal, who in turn is responsible for managing the Boards of Appeal Unit. Furthermore, the president of the Boards of Appeal is accountable solely to the Administrative Council (not to the EPO president) and is subject to its hierarchical and disciplinary authority (Rule 12a [2] 2 of the EPC). However, even the new concept is subject to ongoing criticism. There are a number of constitutional complaints pending in Germany in relation to the EPC and its structure.

A similar constitutional challenge was instituted in April 2017, following which the German Constitution Court delayed ratification of the UPC (see Ehlgen, “Intellectual Property Magazin,” 3/2017: https://www.intellectualproperty-magazin.de/wp-content/uploads/sites/18/2017/08/1_Ehlgen_IP_3_17_geschuetzt.pdf). The complaint was initially thought to relate to concerns about the structure of the EPO. While this aspect is in fact not explicitly addressed in the complaint, it maintains the selection and appointment of the judges of the Unified Court is questionable, and their independence and impartiality cannot be guaranteed. The complaint therefore raises a similar concern with respect to the judicial independence of the UPC. The constitutional complaint highlights that the UPC judges are selected by the Advisory Committee, which in turn is composed of members of the patent profession, therefore allegedly risking the independence of the judges and raising potential conflict of interest concerns.

It will therefore be interesting to see which side of the debate the German Constitutional Court lands on and whether it will derive any insights from the US decision in Oil States. At least for the United States, administrative post-issuance review in the form of the IPR is here to stay.

bolko.ehlgen@linklaters.com