The Patent Trial and Appeal Board (the “Board”) issued three decisions earlier this year that restrict the ability of private parties to challenge the validity of patents owned by state entities, including public universities and their affiliate organizations. On January 25, 2017, the Board dismissed three inter partes review (“IPR”) petitions brought by Covidien LP (“Covidien”) against the University of Florida Research Foundation Inc. (“UFRF”).1 The petitions challenged the validity of U.S. Patent No. 7,062,251 (the “’251 patent”) in response to a breach of contract lawsuit filed by UFRF. The Board dismissed the petitions prior to institution determining that (1) sovereign immunity under the Eleventh Amendment is a defense in IPR proceedings and (2) UFRF is entitled to that defense as an arm of the State of Florida.
Under the doctrine of sovereign immunity, the Eleventh Amendment broadly protects states from unconsented lawsuits brought in federal court.2 The Supreme Court has interpreted this protection to encompass not only actions in federal courts but also to encompass certain adjudicative administrative proceedings filed by private parties against a state.3 The Federal Circuit specifically determined that sovereign immunity can be employed by state entities to avoid interference proceedings in the United States Patent and Trademark Office (“USPTO”).4
It is notable that the IPR petitions filed by Covidien were not in response to a prior-filed patent infringement action but emerged from a breach of contract lawsuit. UFRF brought the lawsuit in Florida state court alleging that Covidien, a licensee of the ’251 patent, breached the license agreement.5 Covidien filed a counterclaim in state court seeking a declaratory judgment that it did not infringe the ’251 patent.6 Covidien also successfully sought to remove the case from state court to federal court.7 Following removal, UFRF argued that it was immune from the declaratory judgment counterclaim based on the Eleventh Amendment.8 The District Court for the Northern District of Florida agreed and remanded the suit back to the Florida state court.9 Covidien appealed the remand, and that appeal is currently pending.10
In the IPR proceedings, the Board first evaluated whether IPRs are adjudicatory proceedings subject to the Eleventh Amendment.11 Covidien argued that sovereign immunity was irrelevant in IPRs, because the procedure was merely a means for the patent office to take “a second look at an earlier administrative grant of a patent.”12 Covidien asserted that IPRs were not directed against the state but to the patent itself.13 Further, Covidien argued that it “is contrary to common sense and to the Patent Act itself” to decide that the Board has the authority to issue a patent but not to reconsider that decision when the patent is held by a state entity.14
The Board rejected Covidien’s arguments. It reasoned that IPRs are adversarial contested cases between two parties and incorporate procedures resembling civil litigation in federal courts, including pleadings (e.g., the petition), discovery, and the use of the Federal Rules of Evidence.15 As such, the Board concluded that the “considerable resemblance” between IPRs and civil litigation “is sufficient to implicate the immunity afforded to the States by the Eleventh Amendment.”16 The Board cited Vas-Cath and observed that the Federal Circuit determined that interference proceedings “can indeed be characterized as a lawsuit” when deciding whether sovereign immunity applies.17 Thus, where a patent owner demonstrates that it is an arm of the state, the patent owner is “entitled to assert its sovereign immunity as a defense to the institution of an inter partes review.”18
The Board next assessed whether UFRF qualified as an arm of the State of Florida. “To determine whether an entity is an ‘arm of the State’ in carrying out a particular function, courts look to factors that include: (1) how state law defines the entity; (2) what degree of control the State maintains over the entity; (3) where the entity derives its funds; and (4) who is responsible for judgments against the entity.”19 In applying the factors, the Board first noted that the District Court in the related lawsuit previously determined that UFRF is an arm of the State of Florida.20 The Board also concluded that (1) the parties “indisputably” agreed that the University of Florida is an arm of the State of Florida and UFRF is a “direct-support organization” of the University; (2) the University maintains a “significant degree of control of UFRF’s operation;” (3) the University maintains “control over UFRF’s finances;” and (4) the State of Florida controls “UFRF’s ability to issue debt.”21 Based on the balance of these factors, the Board determined that UFRF is an arm of the State of Florida and dismissed the three pending petitions.22
Because there was no related patent infringement (or declaratory judgment) action initiated by UFRF, the Board did not decide whether the existence of such an action would result in a waiver of sovereign immunity by UFRF.
These decisions should be well received by patent-owning entities or universities that consider themselves an arm of the state. Moreover, under 35 U.S.C. § 314(d) and developing case law, the Board’s dismissal is likely not appealable based on its timing prior to institution. The petitioner, however, may file a writ of mandamus; and in such case it would be interesting to see whether the Federal Circuit would be willing to review these decisions in any manner.