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March 27, 2017

Sovereign Immunity and Inter Partes Review: Protection From Post-Grant Proceedings for Universities and Affiliated Entities?

Since its inception in 2012, the Patent Trial and Appeal Board (PTAB) has invalidated a slew of patents in inter partes review (IPR), leading some to characterize the nascent body as the “patent death squad.” As such, patentees’ ability to argue that they are immune from IPR would provide a powerful shield. In a recent decision, Covidien LP v. University of Florida Research Foundation, Inc., the PTAB recognized such a defense for certain state entities, holding that sovereign immunity precluded IPR of patents owned by the University of Florida Research Foundation (UFRF) because it qualified as an “arm of the state.” As a case of first impression, Covidien addresses important new issues for state-affiliated entities and IPR proceedings and has the potential to substantially impact the post-grant proceeding landscape. Indeed, at the time of this writing, at least one case may be significantly shaped by Covidien. See Neochord, Inc. v. Univ. of Maryland et al., Case IPR2016-00208, Paper 23 (P.T.A.B. Feb. 15, 2017).

However, Covidien also leaves a number of key questions unanswered, and its ultimate impact remains to be seen.

Case Background

The dispute in Covidien began when the UFRF filed a lawsuit in Florida state court, alleging that Covidien breached a patent license agreement. In response, Covidien brought a compulsory counterclaim seeking a declaratory judgment (DJ) of non-infringement of the patent at issue in the license agreement and removed the suit to federal court. The case was then sent back to state court after UFRF successfully established that sovereign immunity under the Eleventh Amendment prevented Covidien’s DJ counterclaim.

Meanwhile, Covidien filed three petitions requesting IPR of the patent underlying UFRF’s breach of contract action. Shortly thereafter, and before filing any substantive response to the petitions, UFRF filed a motion to dismiss the petitions on the basis of sovereign immunity under the Eleventh Amendment. After determining that sovereign immunity applied to IPR proceedings and that UFRF was “an arm of the state” of Florida, the PTAB agreed that the Eleventh Amendment precluded IPR of UFRF’s patent and dismissed the petitions.

As a case of first impression, Covidien notably establishes that certain state entities are entitled to sovereign immunity from IPR. Additionally, the PTAB’s fact-intensive determination that UFRF is “an arm of the state” provides guidance for determining what types of entities the Eleventh Amendment may be able to shield from the so-called “patent death squad.” While Covidien answered several important questions on these issues, the decision leaves open a number of key questions that could affect its ultimate impact.

Whether an Entity is an Arm of the State

The PTAB’s determination that UFRF qualifies as an “arm of the state” of Florida provides insight for other such entities about what evidence the PTAB is looking for when assessing this issue. Covidien considered four factors to reach its conclusion that UFRF is an arm of the state: (1) how state law defines UFRF; (2) what degree of control the state maintains over UFRF; (3) where UFRF derives its funds; and (4) who is responsible for judgments against UFRF.

First, the PTAB found that Florida state law’s definition of UFRF weighed in favor of treating UFRF as an arm of the state. Under the 2014-15 University of Florida Annual Financial Report, UFRF is designated as one of the university’s “direct-support-organizations [DSO].” Under Florida law, a DSO is, among other things, “[o]rganized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a state university in Florida” and “[a]n organization that a state university board of trustees, after review, has certified to be operating in a manner consistent with the goals of the university and in the best interest of the state.” In view of UFRF’s statutory origin and connection to the State of Florida as a DSO of the university, the PTAB found this factor weighed in favor of finding UFRF to be an arm of the state.

Second, the PTAB found that the university’s control over UFRF weighed in favor of treating UFRF as an arm of the state, taking particular note of evidence suggesting that key UFRF decisions are made by university personnel, including:

  • The university’s board of trustees prescribed conditions with which UFRF must comply in order to use university resources.
  • The UFRF annual operating budget must be approved by the president of the university.
  • Any UFRF director could be removed for cause by the president of the university.
  • Three directors of the UFRF board must be nominated by the president of the university.
  • Any amendments of the bylaws must be reviewed and approved by the president of the university.
  • Amendments to UFRF’s articles of incorporation must be submitted for review to the president of the university.

Third, the PTAB found that UFRF’s financial setup weighed in favor of treating UFRF as an arm of the state. Evidence suggesting that UFRF’s funds were intermingled with the university’s funds was particularly persuasive to the PTAB. For example, the PTAB looked to the university’s financial report, which showed that UFRF was considered a component unit of the university and UFRF’s assets and liabilities were considered to be a component of the university’s finances. UFRF’s bylaws confirmed this, stating that UFRF’s operating budget must be approved by the president of the university and that the annual audit of UFRF’s finances must be provided to the president for ratification. Additionally, UFRF officers are compensated as employees of the university.

Fourth, the PTAB found that the record contained no evidence regarding who was responsible for judgments against UFRF. However, the PTAB did find that, as a DSO, the UFRF’s ability to issue debt was constrained by the state, which, at a minimum, was consistent with the considerable degree of control the state exercises over UFRF. Regardless, the PTAB found that this factor did not trump the significance of the other three factors.

In sum, Covidien demonstrates that determining whether an entity should be treated as an arm of the state is both fact-intensive and context-specific. Thus, while Covidien may provide a preliminary template for entities that want to assert sovereign immunity, those entities should carefully consider Covidien in view of their specific situation.

Remaining Questions

While Covidien demonstrates why UFRF’s patents are protected from IPR proceedings and provides a rough roadmap for how other entities could similarly shield their patents, significant questions remain. These questions include:

  • Does a state entity waive its sovereign immunity for IPR by initiating patent infringement litigation? In effect, Covidien shows that state entities who initiate litigation in state court do not thereby waive their sovereign immunity to an IPR that the state court defendant may subsequently file. However, Covidien left open whether state-initiated patent litigation in Mfederal court (e.g., patent infringement) would effect a waiver of sovereign immunity to a later IPR. In footnote 4 of its decision, the PTAB states: “Because there is no related federal district court patent infringement (or declaratory judgment of validity) case brought by Patent Owner, we do not decide here whether the existence of such a case would effect a waiver of sovereign immunity.”

  • Does Covidien apply to other PTAB proceedings? Covidien only addresses sovereign immunity’s applicability to IPR proceedings. There are still other PTAB proceedings available to litigants, such as post-grant review and covered business method review. Given that these proceedings share strong similarities to IPR proceedings, it seems that sovereign immunity should apply to them, as well, although Covidien does not expressly address this issue.

  • Are the PTAB’s sovereign immunity decisions appeal-proof? Lest readers think the Covidien decision—and others like it that may follow—will be protected from appellate review by the PTAB’s broad discretion afforded under 35 U.S.C. § 314(d), this decision appears to present one of the limited circumstances that a court may review a PTAB’s institution decision. Under § 314(d), “[t]he determination by the Director whether to institute an inter partes review under this section shall be final and nonappealable.” 35 U.S.C. § 314(d). The Supreme Court addressed this statutory language in Cuozzo Speed Tech., LLC v. Lee, finding that a PTAB’s decision to institute IPR is indeed nonappealable, as the plain language of § 314(d) suggests. 136 S. Ct. 2131, 2141 (U.S. 2016). The Court, however, left open the possibility of review of PTAB institution decisions that “implicate constitutional questions, that depend on other less closely related statutes, or that present other questions of interpretation that reach, in terms of scope and impact, well beyond” § 314(d). Id. PTAB institution decisions based on sovereign immunity clearly implicate a constitutional question because sovereign immunity is based on the Eleventh Amendment. As a result, decisions based on sovereign immunity at the PTAB, like Covidien, appear to present circumstances that fall within the narrow exceptions to § 314(d) described by the Supreme Court in Cuozzo.

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