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Can states have their (patent) cake and eat it, too?
02-27-2008
by Stephen Albainy-Jenei  | 
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Many of the largest universities and research institutions in the country are state-owned and their inventions are often patented, which brings in much-coveted revenue. In recent years, states have increasingly used the federal courts to enforce these patents through litigation. Since the 1990s, at least 32 states have filed more than 173 patent infringement suits to enforce their rights.
 
While the states are able to use federal jurisdiction when it helps them to enforce their patents and increase revenues, these states simultaneously avoid federal jurisdiction when they themselves are faced with claims of patent infringement by other patent holders.  In those circumstances, the states assert sovereign immunity under the Eleventh Amendment – a rule founded on the principle that subjects can't sue the King.
 
Although state officials acknowledge that this asymmetry is unfair—and although it distorts the free market for inventions—they contend that the sovereign immunity entitles them to the risk-free windfall of suing without being sued.  It just doesn't go both ways.
In Biomedical Patent Management v. State of California, the U.S. Court of Appeals for the Federal Circuit reaffirmed the state's Eleventh Amendment sovereign immunity.  Biomedical Patent Management Co. had sued the state's Department of Health Services claiming the state was infringing U.S. Pat. No. 4,874,693. 
 
The '693 patent claims a method for screening birth defects in pregnant women.  BPMC says that DHS performs laboratory services, and induces others to perform services, that infringe the '693 patent. 
 
In Biomedical Patent Management, even though the state intervened in an earlier, related action that was dismissed for technical reasons, the court said that doesn't mean that it waived sovereign immunity under the Eleventh Amendment in a later case.
 
Sovereign immunity is based on the principal that because the states were sovereign before the Constitution's ratification, they are immune from lawsuits in federal court. The Eleventh Amendment reflects this principle and generally bars states from suits in federal court. The Eleventh Amendment to the United States Constitution provides:
 
The 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.
 
While Congress can pass laws explicitly permitting certain lawsuits against states in federal court, the Supreme Court has expanded the scope of states' immunity from lawsuits.
 
At the district court, Judge Marilyn Hall Patel dismissed the lawsuit but expressed concern over the fact that California could sue for patent infringement on one hand while using sovereign immunity to keep from being sued for patent infringement itself:
 
"The court is indeed troubled by the University of California's ability to reap the benefits of a patent system without being exposed to liability for infringement," she wrote. "Similarly situated private universities enjoy no such advantage."
 
Thus, state universities and research institutions get to have their cake and eat it, too.  The question left in this case is when, if ever, a waiver of immunity in an earlier lawsuit prevents a state from asserting sovereign immunity in a later lawsuit between the same parties.
 
On appeal, the Federal Circuit held that, where a waiver of immunity occurs in an earlier action that is dismissed, or an entirely separate action, the waiver does not extend to the separate lawsuit:
 
In distinguishing from earlier cases, the court made it clear that it did not mean to draw a bright-line rule whereby a state's waiver of sovereign immunity can never extend to a re-filed or separate lawsuit.
 
After considering the general unfairness of the issue, the Federal Circuit held:
 
In sum, we conclude that any unfairness or inconsistency that would arise from permitting DHS to assert sovereign immunity in the present case is not so substantial as to cause us to diverge from the general principles of waiver that we have laid out in this opinion: that a waiver generally does not extend to a separate lawsuit, and that any waiver, including one effected by litigation conduct, must be "clear."
 
Many feel that the rule on voluntary opt-in of federal jurisdiction has created problems of inconsistency and unfairness when a state waives its immunity in one case and then attempts to assert immunity in a case with the same parties and underlying transaction or occurrence.
 
When a state voluntarily invokes federal jurisdiction, it is settled that the state's Eleventh Amendment immunity is waived. However, the scope of the state's waiver is not clear. The courts of appeals have taken different approaches and so there is no uniform principle governing the scope of a state's waiver of Eleventh Amendment immunity
Biomedical Patent Management has now filed an appeal to the U.S. Supreme Court. They have asked the Court to weigh in on these inconsistencies.
 
The petition filed looks at whether a waiver is limited to the case in which it is initially made or extends to other cases involving the same parties and the same transaction.  It also asks whether a state's repeated use of the courts to sue for patent infringement means that the state can be sued by others for infringement.
 
Public policy and fairness would seem to dictate that the states should not be immune from federal court suits arising under the patent laws, especially if they make use of that very system for their own benefit. Whether the federal Constitution authorizes Congress to abrogate state immunity in patent actions, however, is a more difficult question.
 
The problem is not limited to California, however, since all state universities are able to take advantage of the same immunity. Meanwhile, the Bayh-Dole Act, passed in 1980, allows state universities to keep ownership of their faculty's research.  Since passage of the act, universities have become major patent players.
 
It's hard to feel sorry for California. Its University of California system is one of the largest patent holders in the U.S. and has generated about $500 million in revenue in the past five years. As a plaintiff in patent infringement suits, the university has been quite successful.
 
In fiscal year 2006, the university entered into 473 new licenses and revenues for the program were $210 million, which included a $100 million in an up-front payment from Monsanto (NYSE: MON) as part of the settlement in a lawsuit.  In the suit, the university had accused Monsanto of infringing its patent on the recombinant DNA used to make a dairy cow growth hormone, bovine somatotropin, which enhances milk production in dairy cows.  Monsanto also agreed to pay the university 15 cents for every dose it sells, which could bring in at least $5 million a year in royalties through 2023.
 
Previously, Genentech agreed to pay $200 million to the University of California in order to settle its long-running patent battle over its Protropin hormone, a genetically engineered human growth hormone. At trial, a jury unanimously rejected Genentech's argument that the university's patents were invalid and came within one vote of deciding Protropin had infringed it. It could have been much worse for Genentech.  Had a new jury decided the company was guilty of willful infringement, the university could have been awarded as much as $2.8 billion.
 
In another patent suit, the University of California won a $30 million settlement from Microsoft Corp. after finding that Microsoft infringed a university patent for enabling Internet Explorer to use plug-ins and applets in the software.
 
Not a bad haul even by today's patent award standards.  Every state institute will be anxiously watching how the Supreme Court moves on the issue.
 
 
Stephen Albainy-Jenei is a patent attorney at Frost Brown Todd LLC, serving up chat at PatentBaristas.com Feel free to write him with comments or questions at stephen@patentbaristas.com.  Stephen doesn't own shares of any company mentioned in this article.

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