IP Law Daily PTAB’s invalidation of patent claims during AIA review does not breach contract rights or violate Takings Clause
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Wednesday, January 30, 2019

PTAB’s invalidation of patent claims during AIA review does not breach contract rights or violate Takings Clause

By Cheryl Beise, J.D.

Because the issuance of a patent does not provide patentees with contractual rights or property right subject to the Takings Clause of the U.S. Constitution, a patent holder may not recover damages from the government as a result of cancellation of a patent’s claims following inter partes or post-grant review.

A lawsuit seeking to hold the government liable for damages arising out of cancellation of claims of an issued patent following reconsideration of patentability during inter partes review has been dismissed by the U.S. Court of Federal Claims. The court held that patents are public franchises rather than contracts, and that patents do not convey cognizable property interests for purposes of the Takings Clause of the U.S. Constitution. The patent holder’s illegal exaction claim also was dismissed on its merits and because it was displaced by the USPTO’s specific statutory and regulatory scheme governing the return of fees. The patent holder’s implied-in-fact contract and unjust enrichment claims were dismissed without prejudice as outside the court’s subject-matter jurisdiction (Christy, Inc. V. U.S., January 29, 2019, Sweeney, M.).

Christy, Inc., owns by assignment U.S. Patent No. 7,082,640 (the ’640 patent) issued on August 1, 2006, and entitled "Ambient air backflushed filter vacuum." The patent contains 20 claims. In June 2014, Christy and its licensee, CDC Larue Industries, Inc., filed a complaint against Dewalt Industrial Tool Co. and Black & Decker Corp, accusing them of infringing the ’640 patent. Black & Decker filed two petitions for inter partes review (IPR) of the’640 patent. The Patent Trial and Appeal Board instituted both IPRs and the district court case was stayed pending the outcome of the IPRs. On June 24, 2015, the Board issued two final decisions, finding the challenged claims unpatentable as obvious and/or anticipated. On September 7, 2017, the Federal Circuit affirmed one of the Board’s decisions and dismissed Christy’s appeal of the other decision as moot. The USPTO subsequently cancelled claims 1-18 of the ’640 patent and the district court dismissed Christy’s infringement action.

Christy then filed the present suit against the government. Christy requested class certification and sought a declaratory judgment that inter partes review effects a taking without just compensation in violation of the Takings Clause of the Fifth Amendment to the United States Constitution ("Takings Clause"), a breach of contract, and an illegal exaction. Christy also requested damages "including but not limited to expected royalties and other payments related to use of the patents," attorney fees, costs, and pre- and post-judgment interest. The government moved to dismiss Christy’s complaint for lack of subject-matter jurisdiction pursuant to Rule 12(b)(1) of the Rules of the United States Court of Federal Claims ("RCFC") or, alternatively, for failure to state a claim upon which relief could be granted pursuant to RCFC 12(b)(6).

Subject matter jurisdiction. The court found that it had subject matter jurisdiction to consider most of Christy’s claims. The Tucker Act, the principal statute governing the court’ jurisdiction, waives sovereign immunity for claims against the United States, not sounding in tort, that are founded upon the Constitution, a federal statute or regulation, or an express or implied contract with the United States. 28 U.S.C. § 1491(a)(1).

Takings Clause claim. Christy asserted that it had a property right in its claimed invention, as well as "property rights in the issue fees and maintenance fees paid, investments in the underlying technologies to the invalidated claims, and to the monies spent in defending" its patent claims throughout the IPR process. Christy argued that these rights were taken by the government without just compensation. The court noted that it had jurisdiction over this claim because it was not frivolous. Nevertheless, Christy failed to state a plausible Takings Act claim.

To prevail on a takings claim, a plaintiff must "identify[] a valid property interest" under the Fifth Amendment and show a "governmental action [that] amounted to a compensable taking of that property interest." Air Pegasus of D.C., Inc. v. United States, 424 F.3d 1206, 1212-13 (Fed. Cir. 2005). The key issue was whether Christy’s patent was a "valid property interest" for Takings Clause purposes. The court noted that Congress has not expressed any intent that patent rights are property rights that may be the subject of Takings Clause claims.

Christy cited the Supreme Court’s decision in Oil States Energy Services, LLC v. Greene’s Energy Group LLC, 38 S. Ct. 1365 (2018) for the proposition that precedent exists "holding that patents are property subject to a Fifth Amendment taking." The court disagreed with Christy’s reading of Oil States. The court explained that the Supreme Court in Oil States took no position on the issue of whether patents were property for Takings Clause purposes because that matter was not before the court. In analyzing the constitutionality of inter partes review, the Court discussed the nature of the property rights that patent owners have in their patents. The Supreme Court stated that its longstanding precedent teaches that "the decision to grant a patent is a matter involving public rights—specifically, the grant of a public franchise," id. at 1373. The Court further remarked that a handful of prior decisions characterizing patents as "private property" did not contradict that patents are public franchises. Id. at 137.

The court rejected Christy’s argument that patent rights are the equivalent to private rights. The court also rejected Christy’s alternative argument that invention patent rights equated to "land patent" rights. The two rights are distinguishable because the USPTO "exercises continuing authority over invention patents, whereas the government generally cedes ‘all authority or control’ over the land in question when it issues a land patent," the court said. Because patents are pubic franchises, the court concluded that patent rights are not cognizable property interests for Takings Clause purposes.

Contract claims. Christy asserted claims for breach of an express contract or, alternatively, breach of an implied-in-fact contract and breach of the implied duty of good faith and fair dealing arising out of either an express or implied-in-fact contract. Christy satisfied the RCFC 9(k) pleading requirements for these claims.

To support its express contract theory, Christy alleged that the "Patent Certificate memorializes the terms of contract" between itself and the USPTO. Regarding its purported implied-in-fact contract with the USTPO, Christy alleged that the Office had a duty "to keep the patent claims in force as long as [Christy] paid [its] issue and maintenance fees." Christy cited two statutes for the source of those duties—35 U.S.C. § 41 (discussing issuance and maintenance fees) and 35 U.S.C. § 154 (discussing patent terms).

Christy’s reliance on the Patent Act deprived the Court of Federal Claims of jurisdiction over Christy’s claims based on an implied-in-fact contract. The court pointed out that Christy actually alleged that it had entered into an implied-in-law contract, rather than an implied-in-fact contract. As such, the court lacked jurisdiction to consider Christy’s implied-in-fact contract claim. That claim, along with its breach of the implied duty of good faith and fair dealing based on implied contract, were dismissed for want of subject matter jurisdiction.

The court turned to whether Christy’s surviving breach-of-contract claims were plausible claims upon which the court could grant relief. The court found that the remaining breach claims failed as a matter of law because Christy could not demonstrate that it had a valid contract with the USPTO. "The Federal Circuit has reiterated the principle that patents are not contracts in multiple decisions," the court said. The court found those decisions to be persuasive and incontrovertible. Christy contended that the cited Federal Circuit decisions were "inapplicable" to the instant case because they were issued before the Supreme Court’s Oil States decision. However, Oil States decision did not overrule any of the decisions, expressly or by implication. In addition, the Supreme Court’s characterization of patents as public franchises referred to "the right to exclude others from making, using, offering for sale, or selling the [patented] invention throughout the United States. 138 S. Ct. at 1373 "To the extent that the ‘public franchise’ references in Oil States pertained to a contract with the government, the contract was with the government acting in its sovereign capacity, not in a commercial or proprietary capacity," the court added.

Unjust enrichment claim. Christy’s unjust enrichment claim was based on the USPTO’s retention of the patent fees that Christy paid despite the invalidation of Christy’s patent claims. The court dismissed this claim, without objection, for lack of subject-matter jurisdiction.

Illegal exaction claim. In the alternative to its Takings Clause claim, Christy alleged that the PTAB’s invalidation of claims 1-18 of the 640 patent constituted an illegal exaction. According to Christy, the PTAB illegally exacted the issuance and maintenance fees that Christy paid, the investments that Christy made in its claimed invention, the total value of Christy’s patent claims, the value of Christy’s right to exclude, and the attorney fees that Christy spent in defending its claims during inter partes review.

The Tucker Act provides jurisdiction for the Court of Federal Claims to entertain illegal exaction claims "when the exaction is based upon an asserted statutory power." The court explained that a plaintiff must allege a direct relationship between the statute, regulation, or constitutional provision at issue and the alleged exaction in order to invoke the court of claims’ jurisdiction.

The government argued that the court lacked subject-matter jurisdiction to consider Christy’s illegal exaction claim because, among other reasons, the Tucker Act is displaced by a specific statutory and regulatory scheme regarding fee refunds. The court agreed that statutory schemes with their own remedial framework exclude alternative relief under the general terms of the Tucker Act. In this case, the refund of fees paid to the UPSTO is governed by 35 U.S.C. § 42(d), 37 C.F.R. § 1.26, the USPTO’s Manual of Patent Examining Procedure ("MPEP"). Christy’s claim for illegal exaction was dismissed for lack of subject-matter jurisdiction.

The court also determined that even if it had jurisdiction over Christy’s illegal exaction claim, the claim would fail on its merits. To assert a valid illegal exaction claim, plaintiffs must show that: (1) they paid money over to the government, directly or in effect; (2) the exaction was directly caused by the misapplication of a provision of the Constitution, a statute or a regulation; and (3) the violated law provides for a return of money unlawfully exacted. Since Christy obtained the result for which it purposefully and knowingly paid the issuance and maintenance fees, those fees were not illegally exacted. Christy’s request for reimbursement its investment in its invention, the total value of its patent claims, the value of its right to exclude, and the attorney fees spent to defend its claims during IPR were "devoid of merit." The government did not require Christy to pay those funds and no statutes, regulations, or constitutional provisions were misapplied or otherwise violated because Christy did not expend those funds at the government’s direction.

The case is No. 18-657.

Attorneys: Timothy Carl Davis (Heninger Garrison Davis, LLC) for Christy, Inc. Jenna Munnelly, U.S. Department of Justice, for the United States.

Companies: Christy, Inc.

MainStory: TopStory Patent

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