Even if IPRs are deemed unconstitutional, not much will change - except for pharma sector, which will hate it

Since the US Supreme Court granted cert in Oil States Energy Services, a case which challenges the constitutionality of the IPR process, the patent community has been debating whether this might mark the end of post-issuance reviews. If that were to happen, what might it mean for the patent market? According to this guest blog from Zachary Silbersher of Kroub Silbersher & Kolmykov the impact for most sectors might be more muted than anticipated, while for branded pharmaceutical companies it could be very bad news indeed. Here’s what he has to say:   

The Supreme Court has granted certiorari in Oil States Energy Services v Greene’s Energy Group and will weigh in on the constitutionality of petitions for inter partes review (IPR). That decision surprised the patent community. After all, the Supreme Court has turned down the opportunity to address this subject in the past. Those who have come to rely upon the utility of IPRs, such as patent-litigation defendants and generic pharma, were probably spooked. The Supreme Court’s recent penchant for reversing the Federal Circuit is neither auspicious nor encouraging. Nevertheless, a chorus of patent practitioners have opined that the court granted cert in order to put to bed, once and for all, any looming doubts over the constitutionality of IPRs since their recent implementation. 

That is likely to be the case. Yet, there remains an indelibly real chance that the Supreme Court will hold IPRs to be unconstitutional.  Indeed, there is precedent in bankruptcy. Before the Bankruptcy Act of 1978 established bankruptcy courts, bankruptcies were administered by district courts. The problem was that bankruptcy judges were not Article III judges, which among other things meant they did not enjoy life tenure and protections against salary diminution.  In 1982, in Northern Pipeline Construction Co v Marathon Pipeline Co, the Supreme Court deemed the newly-established bankruptcy courts unconstitutional principally because they empowered non-Article III judges to preside over private rights (that is as opposed to public rights - a question that will similarly be at issue in the Oil States case). 

Northern Pipeline issued just four years after bankruptcy reform in 1978.  Likewise, the AIA was implemented about four years ago, and the court is now deciding the constitutionality of IPRs.  The parallel creates obvious cause for concern.

So, what if Oil States deems IPRs unconstitutional?  What will happen?

If the fallout from Northern Pipeline is any guide, even if they are deemed unconstitutional, IPRs are unlikely to go away.  Following Northern Pipeline, Congress basically created a workaround.  It amended the bankruptcy statute to allow bankruptcy courts to enter final judgments in “core” proceedings, but only to submit proposed findings of fact and conclusions of law for non-core proceedings. The constitutionality of bankruptcy courts bubbles up periodically, as it did in the 2011 case of Stern v Marshall, but the courts themselves have not gone away.

In the Oil States case, the petitioner has argued that IPRs are unconstitutional for reasons that are similar (though not entirely the same) to those in Northern Pipeline.  Namely, IPRs are presided over by non-Article III judges and patent owners can lose their patents without the opportunity to have the question decided by a jury. 

Yet, even if the Supreme Court agrees with these arguments, such a ruling is unlikely to abolish IPRs.  For one thing, the filing fees for IPRs are not cheap.  IPRs are revenue for the Patent Office, revenue which at times is also diverted to other government agencies.  In short, the Patent Office is not interested in losing that revenue stream and the PTAB will not simply close shop.

Instead, the immediate consequence will be that a final written decision invalidating a patent by the PTAB will not be final. Petitioners will have to commence a district court case (presuming a parallel proceeding has not already been commenced) asking the district court judge to basically sign-off on the PTAB’s decision. Alternatively, a district court case may have to be commenced in parallel with the filing of an IPR.

Will this extra hurdle hobble the IPR process to the point of extinction?  It will have an impact, but probably not a significant one. This process already happens frequently in district court litigation. If the parties consent to having a case heard by a magistrate judge who is not an Article III Judge, the magistrate issues a decision invalidating a patent, but that decision is technically only a recommendation. At that point, the parties move for the district court judge to adopt that recommendation. There are exceptions, but district courts typically adopt the findings of a magistrate with little fanfare or fuss. 

Some have suggested that no one will want to pay hundreds of thousands of dollars for what is basically an advisory opinion from the PTAB. That may not be true. As it is, most district courts are not terribly excited about presiding over patent cases. The IPR process allows courts to unburden their docket by farming out invalidity analysis to a proxy magistrate. This may be especially so in soon-to-be heavy patent dockets such as Delaware. District courts may also be unwilling to second-guess the judgment of the PTO, which has specialised judges who are presumably better positioned to decide which patents should be granted and which should be taken away. Even with the extra hurdles, pursuing an IPR is still likely be cheaper and faster than running the invalidity question through the normal litigation process.

But what of the jury? If an IPR petitioner goes to a district court with a final written decision of invalidity in hand, will that whole decision have to be run through a jury? Admittedly, that alone would drastically undercut the utility and efficiency of IPRs. Yet, even if the Supreme Court rules that IPRs are unconstitutional because they take away a property right without recourse to a jury trial, district courts will probably be able to rubber-stamp PTAB decisions without a jury. Petitioners will essentially move for summary judgment, and the centerpiece of evidence will be the final written decision from the PTAB. Patents are frequently invalidated on summary judgment, which is basically a finding that no reasonable juror would find the patent to be valid, so convening a jury is not necessary. And those summary judgment decisions never have the thoroughly vetted decision of the Patent Office as exhibit 1.

In sum, even if IPRs are deemed unconstitutional, the emerging trend is likely to see district courts signing off, if not rubber-stamping, decisions by the PTAB.  That will add, on average, six months to the IPR process.  That time may diminish the utility of IPRs in some circumstances, but most probably only for a minority of petitions.  In short, even if Oil States deems IPRs unconstitutional, not much may actually change.

Pharma beware

But what about pharma?  If the Supreme Court deems IPRs unconstitutional, how will that affect pharma?  The branded pharmaceutical industry has aggressively lobbied and rallied against IPRs since their implementation—for good reason, given that there is no other industry where patents are so important. Branded pharma is likely to be celebrating the Supreme Court’s decision to potentially strike down the IPR process as unconstitutional. And yet, there is an irony in Oil States’ argument that may actually backfire and give branded pharma more cause for concern.

As mentioned above, Oil States has argued that one reason IPRs are unconstitutional is because they take away patents without the opportunity to present that question to a jury. Historically, Oil States argues, patent rights have been adjudicated before a jury. Yet, while that may be true generally, it has not historically been true over the past few decades when it comes to pharmaceutical patents. 

Rather, pharmaceutical patent cases are tried before a judge, not before a jury. Small-molecule pharmaceutical patent litigation occurs under the Hatch-Waxman Act.  That act allows branded pharma to sue generics prior to their entry.  Given that no actual generic sales have yet to take place, damages are not at issue in a Hatch-Waxman case. The only question is whether the proposed generic should be enjoined if the brand’s patents are deemed infringed. Because only equitable relief is at stake, the Federal Circuit has previously held that the Seventh Amendment provides no right to a jury trial in Hatch-Waxman cases, even on the issue of the validity of the asserted patents. For this reason, pharmaceutical patents have historically been tried directly to the judge (known as bench trials), rather than to a jury.

If the Supreme Court decides - or even suggests - that a patent cannot be invalidated without the opportunity for a jury trial, that would presumably be cause for celebration by branded pharma.  Why? Because juries are typically viewed to be friendly to patents. As a matter of perhaps gross generalisation, juries generally uphold the validity of patents, especially in more technical areas.  This would theoretically be a boon for branded pharma.

Or not. The rule-of-thumb that juries favour patent holders may collapse for branded pharma. If pharmaceutical patents must be tried to a jury, branded pharma risks having to put itself on trial.  Right now, because Hatch-Waxman cases are tried to judges, the trials are more rote and technical than if a jury is involved. But if juries are involved, the whole anti-drug climate will be put front and centre by the defendants. Generics will undoubtedly make the trial about how this-or-that branded pharmaceutical company is using an obvious patent to keep generics out and keep the prices of your prescription drugs high. You are paying more for your prescription drugs because of this patent—which only changed the dosage from 10mg to 20mg. Given that everybody can practically reach out and touch someone ready to complain about the costs of a medication, that story is likely to play before a jury. Branded pharma may come to regret not watching what it wished for.