U.S. Court of Appeals for the Federal Circuit Chief Judge Sharon Prost. Photo: Diego Radzinschi /ALM

The U.S. Court of Appeals for the Federal Circuit has tied up one of the loose threads left hanging from the Supreme Court's 2018 Oil States decision on the constitutionality of the America Invents Act.

Chief Judge Sharon Prost of the U.S. Court of Appeals for the Federal Circuit wrote for a unanimous panel that the cancellation of a patent in an AIA proceeding known as inter partes review is not an unconstitutional taking under the Fifth Amendment, even if the patent was issued prior to the AIA's passage in 2011.

“IPRs do not differ significantly enough from preexisting PTO mechanisms for reevaluating the validity of issued patents to constitute a Fifth Amendment taking,” Prost wrote in Celgene v. Peter. Judges William Bryson and Jimmie Reyna concurred.

The Supreme Court ruled in Oil States that Congress properly authorized the Patent Trial and Appeal Board to decide challenges to patent validity, just as Article III courts have for centuries. But the high court emphasized that its holding was narrow and that it was not deciding whether owners of patents that predate the AIA might have a takings claim.

Jones Day partner Gregory Castanias had argued to the Federal Circuit last month that the Celgene inventors had applied for their patents in the late 1990s. “When Celgene received its property right, it had every reason to believe that the only adversarial litigation it would face to take away its patent would be conducted in district court under a strong presumption of validity, which would have to be [overcome] by clear and convincing evidence,” he said.

Instead they got pulled into an IPR, where administrative patent judges decide patent validity based on a preponderance of the evidence, resulting in much higher “kill rates” of patent claims than in previous PTO review procedures.

The Federal Circuit has had several opportunities to address the retroactivity issue this year. On Tuesday it finally pulled the trigger.

Prost reasoned that previous administrative review proceedings at the USPTO, such as ex parte reexamination and inter partes reexamination, are sufficiently similar to IPRs that the difference does not constitute a taking. In all three proceedings, patents are reviewed on the same substantive grounds—anticipation and obviousness, based on the same categories of prior art. They also use the same preponderance of the evidence standard of proof.

“Celgene is correct that IPRs are 'adjudicatory in nature,'” involving discovery, briefing and an oral hearing. “These differences do not disrupt the expectation that patent owners have had for nearly four decades—that patents are open to PTO reconsideration and possible cancellation if it is determined … that the patents should not have issued in the first place.”

The Federal Circuit also affirmed the PTAB on the merits, finding it properly invalidated almost all of the claims on two Celgene patents that outlined safe steps for administering drugs such as Thalidomide without risking birth defects.

Petitioner Coalition for Affordable Drugs, the entity established by hedge fund manager Kyle Bass to drive down drug prices and manipulate stock values, originally brought the IPR. The coalition dropped out and the PTO intervened to defend the PTAB judgment on appeal. PTO Director Andrei Iancu was recused, probably because of ties between Celgene and his former law firm, Irell & Manella, so Deputy Director Laura Peter appears in the case caption.

Amy Nelson of the Solicitor General's office argued the appeal for the PTO.

Ropes & Gray partner Matthew Rizzolo, who's not involved in the case, said the court's reasoning might not apply to another AIA proceeding known as covered business method review, in which the PTAB can review claims not only for anticipation and obviousness, but also for patent eligibility and indefiniteness.

“Say you got a patent in 2005 on a business method,” Rizzolo said. The patent owner might argue that, had it known about CBM review, “maybe it would have kept it as a trade secret.”

Rizzolo also suggested the Court of Federal Claims might be the more appropriate venue for determining the takings issue in the first instance, something Judge Reyna asked about during oral argument.