Today, many universities own extensive patent portfolios that are managed by sophisticated tech transfer offices. Universities obtain these patents for many reasons, not the least of which is that some portfolios generate millions of dollars in licensing revenues. Recently, a decision of the Patent Trial and Appeal Board found that sovereign immunity prevents IPRs from being instituted regarding patents owned by many state universities. This result is a boon to university patent portfolios, and as explored in this article, universities should consider this new application of sovereign immunity in their licensing and litigation strategies.
Brief background on state sovereign
The law of sovereign immunity can be complex, and a brief description of the current state of the law may be helpful to understanding the effects of the PTAB’s recent decision. The Eleventh Amendment to the U.S. Constitution creates sovereign immunity for states in federal courts, stating that “[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.” Importantly, state sovereign immunity is not limited to suits in which a state itself is a party. Instead, sovereign immunity extends to “state agents and state instrumentalities.” In many cases, sovereign immunity extends to universities that receive state support, depending upon the relationship between the state and the university. In determining whether a university is a state instrumentality, courts consider various factors, including (1) the characterization of the university under state law, (2) the state’s degree of control over the university, (3) the sources of funding for the university, and (4) the state’s responsibility for judgments against the university. Indeed, courts have often found universities to be state instrumentalities even though they receive private donations and revenues from commercial operations.
Even when sovereign immunity applies, however, it is not an impenetrable shield to suit. For example, state officials can often be sued for violating a person’s constitutional rights. Moreover, the protections of sovereign immunity can be waived, and courts have long held that states and their instrumentalities waive sovereign immunity when they initiate lawsuits in U.S. courts.
Sovereign immunity and patent law
Issues of sovereign immunity may arise whenever patent disputes involve state instrumentalities, such as state-supported universities. Occasionally, state instrumentalities are sued as infringers, but more often states and their universities are involved in patent disputes as patent owners. In fact, patent acquisition by U.S. colleges and universities has been increasing for decades. Between 1992 and 2012, university patenting tripled. In 2012 alone U.S. colleges and universities obtained more than 4,600 patents. Many universities that acquire patents are sufficiently intertwined with state governments to enjoy sovereign immunity. For example, courts have explicitly found that sovereign immunity applied to some of the top patenting universities, including the University of California, the University of Georgia, the University of Missouri, the University of North Carolina, North Carolina State University, the University of Maryland, the University of New Mexico, the University of Texas, and the University of Wisconsin.
Even as patent owners, universities may be the target of patent suits when potential infringers seek declarations of non-infringement and invalidity. In such suits, sovereign immunity often applies and protects universities. In contrast, when universities initiate infringement suits, they waive any sovereign immunity, enabling accused infringers to counterclaim for declarations of invalidity and non-infringement. University waivers of sovereign immunity can impact other patent claims as well. For example, if a state university files a declaratory judgment action seeking to establish that it owns a patent obtained by university researchers, the university waives sovereign immunity regarding any compulsory counterclaims, such as a claim by the researchers for damages related to the claimed assignment. Likewise, a university that initiates an interference proceeding in the USPTO waives sovereign immunity regarding a district court review of the USPTO’s decision under 35 U.S.C. § 146. A waiver of sovereign immunity by a university is, however, limited to the dispute in which the waiver is made. For example, a university does not waive sovereign immunity in one lawsuit by later filing a separate lawsuit against the same party regarding the same patent in another jurisdiction. Instead, the waiver of sovereign immunity applies only in the later-filed second suit. As the Supreme Court has stated, “A State’s constitutional interest in immunity encompasses not merely whether it may be sued, but where it may be sued.”
The licensing of university patents further complicates the impact of sovereign immunity on some patent disputes. In patent disputes involving licensees, patent owners are often indispensable parties. For example, if a license is non-exclusive or is exclusive only within a certain field of use, the patent owner must be joined to the suit. Only in the case of exclusive licensees, can a patent dispute continue without the involvement of the patent owner. When a patent is owned by a state university, however, sovereign immunity may prevent the patent owner from being involuntarily joined. For instance, in A123 Sys., Inc. v. Hydro–Quebec, a potential infringer sued the patent licensee of the University of Texas seeking a declaration of non-infringement and invalidity. The Federal Circuit held that the district court properly dismissed the case because the University of Texas was an indispensable party that could not be forced to join the dispute due to issues of sovereign immunity.
Sovereign immunity and IPRs
Recently, issues of sovereign immunity have arisen in an important and relatively new patent context: inter partes review. These administrative proceedings allow a patent challenger to attack the validity of a patent on “a ground that could be raised under section 102 or 103 and only on the basis of prior art consisting of patents or printed publications.” These proceedings have been immensely popular with potential infringers for at least two reasons. First, in district court litigation patents are presumed valid, and any invalidity claim must be supported by clear and convincing evidence. In contrast, a patent challenger in an IPR must only prove invalidity by a preponderance of the evidence. Moreover, patents are given broader constructions in IPRs than in district court litigation. In an Article III district court, the scope of a patent is determined under the familiar Phillips framework by holistically considering the perspective of a person of ordinary skill in the art in the context of the patent, its prosecution history, and limited extrinsic evidence. In an IPR, the validity of a patent is evaluated based on the broadest reasonable interpretation of the patent, and ceteris peribus, broader patents are more likely to be invalid.
On January 25, 2017, the PTAB held that sovereign immunity prevents an IPR from being brought regarding a patent owned by a state university. In Covidien v. University of Florida Research Foundation, Inc., the disputed patent was owned by the University of Florida Research Foundation (“UFRF”), which is the patent licensing arm of the University of Florida. UFRF licensed the patent to Covidien, but after the licensing relationship began to sour, UFRF sued Covidien in state court for breach of the agreement. Ultimately, Covidien petitioned the PTAB to institute three IPRs regarding the licensed patent. In response, UF asserted that sovereign immunity prevented the PTAB from hearing the IPRs.
In detailed, forty-page opinion, the PTAB accepted UFRF’s argument. The PTAB noted that the Supreme Court held in Federal Maritime Commission v. South Carolina State Ports Authority that state sovereign immunity applies in administrative proceedings that exhibit “strong similarities” to adversarial litigation in federal courts. Moreover, the PTAB continued, the Federal Circuit held in Vas-Cath, Inc. v. Curators of University of Missouri that a state university waived sovereign immunity when it initiated an interference proceeding. The Federal Circuit noted, “Like proceedings in the Federal Maritime Commission, contested interference proceedings in the PTO bear ‘strong similarities’ to civil litigation.”
Based on these decisions, the PTAB found that sovereign immunity prevented Covidien from initiating the IPRs. The PTAB provided an extensive list of substantial similarities between civil litigation and IPRs, including similarities in their adversarial nature, pleadings, discovery, briefing, rules of procedure, rules of evidence, and adjudicators. The PTAB recognized that there are also differences between IPRs and civil litigation, but found those differences to be insufficient to prevent Federal Maritime Commission from controlling. The PTAB also found the differences between IPRs and civil litigation to be similar to the differences between interferences and civil litigation, which the Federal Circuit considered insufficient to avoid sovereign immunity issues in Vas-Cath.
The PTAB then found that UFRF was a state instrumentality, even though it is a commercial licensing enterprise separate from the University of Florida. The PTAB noted that Covidien agreed that the University of Florida was an instrumentality of the State of Florida and that the sole function of UFRF is to support the University of Florida through the licensing of intellectual property rights, including the patent that Covidien licensed. The PTAB also noted that UFRF was defined under Florida law as a “direct-support-organization” for the University of Florida, and that that the University of Florida exercised significant control over UFRF. Finally, the PTAB noted that UFRF and the University of Florida are financially intertwined, with the University of Florida claiming both UFRF’s assets and its liabilities. Although Covidien argued that UFRF was self-funded from its licensing efforts rather than receiving funding from the University of Florida, the PTAB found that “the evidence of record weighs more in favor of determining that UFRF is an arm of the State of Florida than not.”
Impact of the PTAB's decision on universities
The immediate impact of the Covidien decision is to limit the use of IPRs to attack university-owned patents, but state-supported universities should also incorporate the decision to their licensing and litigation strategies as well.
To start, the decision likely enhances the value of exclusive licenses to university patents. The Federal Circuit has held that an exclusive licensee can bring infringement suits without joining the patent owner because the licensee “is effectively an assignee.” As a result, the licensee “has standing to sue in its own name, without joining the patent holder.” An exclusive licensee therefore does not act as the agent of the university and likely cannot waive sovereign immunity by filing an infringement lawsuit. Only the patent-owner – that is, the university – can waive its sovereign immunity, and any waiver must be “clear.” Moreover, because state sovereign immunity is grounded in the Eleventh Amendment, it is a constitutional right, and “courts indulge every reasonable presumption against waiver of fundamental constitutional rights.” Courts therefore routinely reject claims of implied or constructive waiver of sovereign immunity. Even if an exclusive licensee for a patent owned by a state university brings an infringement action against an infringer, sovereign immunity should forestall an IPR attacking the patent. When licensed exclusively, university patents thus can be enforced while remaining immune to IPR counterattacks.
The Covidien decision also enhances the value of non-exclusive licenses to patents owned by state universities. To start, a non-exclusive licensee of a patent owned by a state university can use non-legal mechanisms for enforcing its patents, like cease-and-desist letters, without fear that the patent will be attacked through an IPR. Non-exclusive licensees of privately owned patents enjoy no such comfort. Indeed, sovereign immunity may apply to IPRs even if a state university joins with a non-exclusive licensee to file suit against an infringer. The Federal Circuit has held that a waiver of sovereign immunity is specific to an individual action. Indeed, the Court had held that a suit by a non-exclusive licensee and a state university against a potential infringer did not waive sovereign immunity regarding the same parties and the same patent in a different jurisdiction. Consequently, although a state university will waive sovereign immunity in court by filing an infringement action with a non-exclusive licensee, that waiver may not extend to an IPR. On the other hand, the PTAB may consider IPRs and district court litigation more closely linked than two district court actions in different jurisdictions given the stay and estoppel provisions of 35 U.S.C. § 315.
Finally, tech transfer offices should consider the factors identified in the Covidien decision as demonstrating that UFRF was a state instrumentality. While greater autonomy from a university may make businesses, preserving the benefits of sovereign immunity may be worth the trouble.