U.S. Patent Trademark Office. Photo: Diego M. Radzinschi/ALM

When the Patent and Trademark Office cancels patents in America Invents Act proceedings, is that an unconstitutional taking of property without compensation?

The U.S. Supreme Court described it as an open question last year, but the U.S. Court of Appeals for the Federal Circuit didn't sound eager to run with it during arguments last week.

A Justice Department lawyer faced minimal pushback as she defended a patent owner's constitutional challenge to covered business method review, one of several methods established by the AIA for attacking patent validity at the PTO.

“We agree that valid patents are property interests,” Katherine Twomey Allen told the court during IBG v. Trading Technologies. “Our point on the takings issue is merely that when the board cancels a patent,” and the Federal Circuit subsequently affirms that decision, “the patent owner never had a valid property right, and therefore there was no taking.”

The Supreme Court ruled last year in Oil States v. Greene's Energy that AIA proceedings do not violate Article III or the Seventh Amendment. But Justice Clarence Thomas' opinion emphasized the narrowness of the holding. He explicitly noted that the court was not deciding if the cancellation of a patent issued before the AIA came into law in 2011 would effect a taking.

Trading Technologies Inc. is seeking to explore that issue in a series of appeals argued Thursday. The Federal Circuit in 2017 found two patents on a graphical user interface for electronic trading eligible for patent protection, but the Patent Trial and Appeal Board subsequently found two nearly identical patents ineligible later that year.

When it obtained its patents in the early 2000s, Trading Technologies had no way of knowing the AIA would be enacted and lead to mass invalidations, Trading Technologies argues. Covered business method review “violates the takings and due process clauses of the Fifth Amendment to the United States Constitution by retroactively depriving [Trading Technologies] of its property in a non-Article III forum without a jury,” the company argued in briefs to the court.

Most of the argument on takings turned on whether Trading Technologies should even be allowed to raise the issue on appeal. Allen argued the company forfeited the issue by failing to present it to the Patent Trial and Appeal Board. Trading Technologies says doing so would have been futile because administrative agencies can't rule on constitutional challenges.

Allen pointed out that the PTAB has addressed constitutional challenges, such as in the recent sovereign immunity decisions.

Judges Kimberly Moore and Jimmie Reyna sounded skeptical. “It's been my understanding that the PTO, as part of the executive branch, isn't permitted to rule on constitutional challenges,” Moore said. “Am I just completely mistaken in my understanding of the law?”

“Well, your honor, I know that the board has addressed constitutional issues in the past,” Allen said.

“I don't care if the board's done it in the past,” Moore said. “Here we've got an argument that they're not permitted to do it. And I want to know from you, are they permitted?”

“My understanding is the same as Judge Moore,” Reyna said. “Could the PTO rule itself unconstitutional?”

Allen argued that it would not have been futile for Trading Technologies to raise the retroactivity issue, because the PTAB, without ruling directly on the constitutional question, could have exercised its discretion not to institute proceedings or terminate them if it believed the constitutional challenge had merit.

As to the merits of the takings claim, she argued that the cancellation of a patent through covered business method review does not constitute a taking, “because it rests on a determination that the patent holder never had a valid property interest in the first instance.”

Baker & Hostetler partner Michael Gannon argued for Trading Technologies. Byron Pickard of Sterne, Kessler, Goldstein & Fox argued for PTAB petitioner IBG, also known as Interactive Brokers Group.