The Supreme Court’s next term starts in October and will feature more than a few high-profile cases. But lower-profile cases can prove to be just as significant, if not more so. Consider, for example, Oil States Energy Services v. Greene’s Energy Group, which, depending on the outcome, could strengthen property rights in the United States, thereby promoting innovation and economic growth that benefits all Americans.
Oil States Energy considers whether a bureaucratic tribunal, rather than the federal courts, can extinguish patent rights. To understand why this seemingly technical question is important, a quick look at the American patent system is helpful.
Why Patent Rights Are Important
Patent rights are grounded in the U.S. Constitution. Article I, Section 8, Clause 8 authorizes Congress “to promote the Progress of Science and useful Arts, by securing for limited Times to … Inventors the exclusive Right to their … Discoveries.” The First Congress provided for patent protection in the Patent Act of 1790, and patent grants have been authorized under federal law since that time.
Patents are issued by the U.S. Patent and Trademark Office (PTO). As inventors apply for patents, the agency examines their applications and issues patents for all “new and useful” inventions that meet certain detailed statutory criteria. The patent holder then has “the right to exclude others from making, using, offering for sale, or selling” the invention in the United States or “importing” the invention into the country. That right lasts for 20 years from the time of patent application.
As documented in a “friend of the court” brief filed in the Oil States Energy case by 27 leading law professors, American law has long recognized patents as property rights. In 1876, for example, the Supreme Court stated in Consolidated Fruit Jar Company v. Wright that a:
patent for an invention is as much property as a patent for land. The right rests on the same foundation and is surrounded and protected by the same sanctions. There is a like larger domain held in ownership by the public. Neither an individual nor the public can trench upon or appropriate what belongs to the other.
In 1999’s College Prepaid Savings case, the Court further held that patents are property rights secured under the Due Process Clause of the Fourteenth Amendment. Most recently, in Horne v. Department of Agriculture (2015), the Court approvingly cited prior case law holding that a patent “confers upon the patentee an exclusive property in the patented invention.”
Property rights conferred by patents have spurred American economic development throughout our history. They were critical to advances made in the 19th century Industrial Revolution and promoted key technological breakthroughs in the 20th and early 21st centuries. In fields ranging from transportation and communications to pharmaceuticals, many businesses owe their success to patent protection. And a growing number of economic studies focusing on patent systems around the world indicate that robust patent rights stimulate research and development and economic growth.
In short, there are numberous compelling legal and economic arguments for Washington to do all it can to ensure that patent rights are firmly protected.
Problems in the Patent Review System
Unfortunately, the American patent system is now under attack. Over the last decade, court decisions have narrowed the scope of the inventions covered by patents and made it harder for patent holders to exclude third parties from illegally using their innovations. As a result, today “there are many other parts of the world that have more expansive views of what can be patented, including Europe, Australia, and even China.”
Reduced patent protection in the U.S. is beginning to bear bitter fruit. A 2017 U.S. Chamber of Commerce analysis of national patent systems ranked the United States 10th in the world (tied with Hungary); we had previously ranked number one.
What’s worse, the America Invents Act (AIA) of 2011 established a “Patent Trial and Appeals Board” within PTO to review already issued patents at the request of third parties. A key justification for the board was that it could help eliminate “bad quality” patents that should not have been issued in the first place. Moreover, it was supposed to be a “fast track” alternative to sluggish and costly court challenges to patent validity. In reality, however, the vast majority of board reviews occur concurrently with federal court challenges. Thus, the hoped for saving in litigation costs has not occurred. Indeed, the administrative costs of lawsuits plus board challenges may be higher than before the AIA.
Even more seriously, the board reviews have been handled in a way that undermines fundamental rights of patent holders — regardless of whether their patents are strong or questionable. This is because, as a result of PTO regulation, the board reviews are designed to make it harder to uphold patents. The board reviews also fail to meet standards of fundamental fairness employed by the federal courts. The Patent Act states that “a patent shall be presumed valid” and that “the burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity.”
Consistent with this clear statutory dictate, federal trial courts provide a great deal of protection to patent owners whose patent rights are under challenge. To overturn patents, they require “clear and convincing evidence.” This means that a patent will be struck down only if it is substantially more likely than not that it is invalid. The courts also assess the “ordinary and customary meaning” of patent terms in determining patent validity, a well-established neutral standard.
The board, however, determines patent validity based on a mere “preponderance of the evidence” standard — a standard imposed by PTO regulation, not by the Patent Act itself. It means that a patent will be overturned if the panel believes that there is more than a 50 percent chance the patent is invalid. In application, this “fifty-fifty” test means that panels are far more likely to strike down patents than trial courts. Thus the statutory presumption of patent validity means less than it did before the Patent Trial and Appeals Board system existed.
Perhaps even more significantly, panels apply a “broadest reasonable interpretation” standard to patent claims. This test makes it much easier to strike down patents as “overly broad” compared to the federal courts’ “ordinary and customary meaning” standard.
It gets worse. Board review raises serious due process problems, as well. These include: conflicts of interest by panel members; PTO’s “stacking” of panels to produce desired results; abuses in the consideration of supplementary evidence; denial of the opportunity to respond to arguments against patent validity; and arbitrary and capricious denial of the patent holder’s right to amend claims. It all adds up to “a meaningful risk … [of] unfairly stripping inventors of their property rights, which are protected under the Constitution, without the proper safeguards provided in courts to all owners of property rights.”
Randall Rader, a former Chief Judge of the Federal Circuit, likened the Patent Trial and Appeals Board to a “death squad, kind of killing property rights.” John Whealan, PTO’s former chief lawyer (and now a professor at George Washington University Law School) recently stated that board review “is not fair… The PTO doesn’t presume what it does is right.”
The Patent Trial and Appeals Board’s deficiencies raise more than just questions of fairness; they also weaken the American patent system itself. By eliminating numerous statutorily protected patents in a problematic manner, board review makes patents less valuable. Investors will be less willing to invest in new patents covering path-breaking inventions if there is a good chance that copycats seeking to “free ride” on these innovations can get the board to kill the patent rights.
This, in turn, may diminish the incentive to apply for U.S. patents. If so, the R&D efforts that lead to patents will slow. Over time, there may be fewer innovative American products, processes, and medical cures that depend on patent protections. Innovation that could have been pursued here will move to foreign jurisdictions with stronger patent laws. American’s consumers, producers, and national economy would all suffer as a result.
In short, continuing the Patent Trial and Appeals Board review as is poses a clear and present threat to America’s high-tech, innovation economy.
How to Fix It
The best option to fix the Patent Trial and Appeals Board is to get rid of it. There is a powerful legal case that board review violates the U.S. Constitution, and therefore is invalid. This is so for two reasons.
First, enabling the board to extinguish patents arguably violates the Seventh Amendment, which guarantees the right to a civil jury trial in federal lawsuits “at common law” where the value in controversy exceeds $20. The Supreme Court has held that the amendment’s protections apply to the types of cases that existed under the English common law when the amendment was adopted, in 1791. Significantly, lawsuits dealing with the extinguishment of patent rights were viewed as common law cases in 18th century England.
Second, the board system undermines the constitutionally mandated separation of powers. Article III of the Constitution vests the federal judicial power in the U.S. Supreme Court and in inferior federal courts established by Congress. By authorizing board bureaucrats — who are not Article III judges — to review and extinguish patent-based property rights, Congress has ignored this command and substituted executive branch for judicial branch resolution of common-law legal disputes. In its 1898 McCormack v. Aultman decision, the Supreme Court explicitly stated that “the only authority competent to set a patent aside, or to annul it, or to correct it for any reason whatever, is vested in the courts of the United States, and not in the department which issued the patent.”
In June 2017, the U.S. Supreme Court teed up these constitutional questions when it agreed to review the Oil States Energy case. The Supreme Court should do the right thing and strike down board review.
Will it do so? That’s uncertain. As a panel of patent law experts recently noted, in recent years Supreme Court decisions have tended to weaken patent rights. Moreover, the Court did not raise doubts about the board’s constitutionality in recent decisions involving other aspects of board reviews.
If the Court fails to strike down Patent Trial and Appeals Board review, Congress should act. A law that eliminates it, pure and simple, would be the best possible solution.
If that approach proves infeasible, a second best alternative would be to rein in and reform the board process. The STRONGER Patent Act of 2017, introduced last June by Sens. Christopher Coons (D-DE) and Tom Cotton (R-AR), contains provisions that would do just that. Specifically, the STRONGER Act would direct the board to apply the federal court standards in deciding whether patent claims should be struck down. Other STRONGER Act provisions to undo board-related abuses include: immediate appeal to the federal courts of certain board rulings; elimination of repetitive board hearings; and halting board proceedings when the same patent’s validity is being reviewed in a federal court. Such provisions merit close congressional scrutiny.
Bold action is needed to reverse the recent weakening of the U.S. patent system. Absent reform or elimination of the Patent Trial and Appeals Board, American innovation will decline and the economy will suffer.
This piece originally appeared in RealClearPolicy