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January 27, 2017Client Alert

PTAB Holds That Sovereign Immunity Applies to IPR Proceedings and Is a Defense Available to State Entities

On January 25, 2017, the Patent Trial and Appeal Board (PTAB) issued a decision that significantly impacts the ability of a private party to challenge the validity of patents owned by public universities, university foundations, or any other state entity. In Covidien LP v. University of Florida Research Foundation Inc., IPR2016-01274, -01275, -01276, the PTAB held that Eleventh Amendment sovereign immunity applies to inter partes review (IPR) proceedings. Id. at Paper 21 at 24. In relevant part, the Eleventh Amendment provides (U.S. Const. amend. XI):

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.

In short, the Eleventh Amendment protects a state from being hailed into court by a private party.

The Board first evaluated whether an IPR is an adjudicatory agency proceeding subject to the Eleventh Amendment. An IPR is one of three proceedings created by the American Invents Act (AIA) to streamline the process for resolving the validity of patents before the Board rather than United States federal district courts. The Board reasoned that IPRs are “adversarial contested cases between a patent owner and a petitioner in which the petitioner bears the burden of proof and initiates the proceedings by filing a petition requesting the institution of a trial.” Covidien, Paper 21 at 19-20. The Board further noted that “the Board rules and procedures governing inter partes review resemble civil litigation in federal courts.” Id. at 20-24 (discussing similarities). Accordingly, the Board “conclude[d] that the considerable resemblance between the two is sufficient to implicate the immunity afforded to the States by the Eleventh Amendment.” Id. at 24.

The Board then analyzed whether the patent owner, the University of Florida Research Foundation Inc. (UFRF), qualified as an arm of the State of Florida. In determining whether an entity is an “arm of the State” in carrying out a particular function, the Board noted that “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.” Id. at 28 (citations omitted).

In Covidien, the Board concluded that “the particular function performed by UFRF is the licensing of patents and the collection of royalties from those license agreements on behalf of the University of Florida.” Id. at 29. In applying the four-factor test, the Board further concluded that: (1) UFRF is a “direct-support-organization” of the University of Florida and the parties “indisputably” agreed University of Florida is an arm of the State of Florida; (2) there is a “significant degree of control of UFRF’s operation by the University of Florida”; (3) UFRF “assets and liabilities are considered to be a component of the University of Florida’s finances” and UFRF’s bylaws “demonstrate the University’s control over UFRF’s finances”; and (4) the “State of Florida[] control[s] UFRF’s ability to issue debt.” Id. at 30-39. Based on the balance of the evidence, the Board found that UFRF is an arm of the State of Florida.

Thus, the Board held that 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.” Id. at 39. Based on this conclusion, the Board dismissed each pending petition where UFRF “successfully raised this defense.” Id.

In light of this decision, the defense of sovereign immunity is a powerful tool for public universities or other state entities to use in defending against an IPR, as well as the other two types of proceedings before the PTAB created by the AIA – post grant review and covered business method review.

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