Limits of PTAB Sovereign Immunity Defense for IPRs Shown in Reactive Surfaces v. Toyota

On July 13, 2017, in Reactive Surfaces Ltd., LLP v. Toyota Motor Corp., the Patent and Trial Appeal Board (“PTAB” or “Board”) granted in part a motion to dismiss based on sovereign immunity in an inter partes review (“IPR”) proceeding. The order dismissed one of the patent-in-suit’s owners—the Regents of the University of Minnesota—but denied the motion to dismiss as to the patent’s co-owner Toyota Motor Corp.(“Toyota”).1 The PTAB recently considered the issue of sovereign immunity in two other decisions: Covidien LP v. University of Florida Research Foundation Inc. and Neochord, Inc. v. University of Maryland, Baltimore.2 As discussed below, these three decisions suggest3 some of the boundaries for applying an Eleventh Amendment sovereign immunity defense in an IPR when public universities are patent owners.

In this case, Reactive Surfaces filed a Petition seeking an IPR of claims 1-11 of U.S. Patent No. 8,394,618, which is co-owned by both Toyota and the Regents of the University of Minnesota (“the Regents”) (collectively, “Patent Owners”). As background, the ‘618 patent was issued listing six inventors. Three of the inventors had assigned their interests to the Regents, and the remaining inventors assigned their interests to Toyota.

The Patent Owners requested a conference call with the Board to request authorization to file a motion to dismiss the Petition on the grounds that the Regents were entitled to sovereign immunity under the Eleventh Amendment, and that this proceeding could not continue without the Regents. After the Board authorized briefing, the Patent Owners filed their motion, arguing that sovereign immunity applied, the Regents were entitled to assert this immunity, and the merits of the IPR could not be adjudicated without the Regents as a party so the IPR should be dismissed in its entirety. After considering the papers submitted by the parties, the Board cited Neochord and Covidien to decide that while “neither of those decisions is binding on us . . . their reasoning [is] persuasive” and, accordingly, Eleventh Amendment sovereign immunity may be invoked as a defense. The Board then concluded “that the Regents cannot be compelled to join this proceeding against their will,” but decided that the proceeding could continue without the Regents and, thus, denied the motion to dismiss as to Toyota.

First, the Board addressed the issue of whether a state may assert Eleventh Amendment immunity in an IPR proceedings. Like the panels in Neochord and Covidien, the Board took note of the Supreme Court’s decision in Federal Maritime Commission v. South Carolina State Ports Authority (“FMC”), which decided in a different context that “the Eleventh Amendment extends to agency proceedings that ‘walk[], talk[], and squawk[] very much like a lawsuit.'”4 The Board also noted the analysis from FMC had been applied to interference proceedings at the PTAB’s predecessor, the Board of Patent Appeals and Interferences.5 Similar to Neochord, the Board noted that the procedures for IPRs resemble those used in interferences, explaining that “[a]s with interferences, [IPRs] generally involve adverse parties; provide for examination and cross-examination of witnesses; and result in findings by an impartial federal adjudicator and decisions that the agency has the power to implement” (internal citations omitted). However, the Board stated that IPRs are not the same as lawsuits—”the test for Eleventh Amendment applicability does not require identity with civil litigation in all respects . . . [and] [i]nstead . . . requires similarity in ‘Rules of Practice and Procedure,’ ‘discovery,’ and ‘the role of the . . . impartial officer designated to hear a case.'” Since these similarities were present in IPR proceedings, the Board found that the Eleventh Amendment immunity extended to the proceedings.

Reactive Surfaces also argued that sovereign immunity did not apply since the language of 35 U.S.C. § 311 suggests that an IPR is a challenge to the patent, not the patent owner, and therefore is a proceeding in rem and not a proceeding in personam. In rejecting the argument, the Board found that characteristics of IPRs that “give them some features of in rem actions” in civil litigation were not enough to “transform” IPR proceedings “into purely administrative proceedings in rem.” Because the presence of some “adjudicatory characteristics” made agency proceedings similar to civil litigation, the Board concluded that it was more likely that IPRs “have sufficient in personam character” to apply the Eleventh Amendment and determined sovereign immunity could be asserted in IPR proceedings. The Board further stated that while Congress could revoke sovereign immunity or this immunity could be waived by a state, neither party had raised such an argument.

The Board also considered whether the Regents were capable of asserting a sovereign immunity defense as a state agent or instrumentality of the State of Minnesota. The Board noted that the Eleventh Amendment includes not only actions where a state is named as a defendant but also can include certain actions against state instrumentalities and state agents. Here, the Board recognized that federal and Minnesota state courts “treat the Regents and the University of Minnesota as interchangeable for purposes of the Eleventh Amendment analysis,” which “strongly suggests that [the PTAB] should treat the Regents as an arm of the State of Minnesota.” Thus, the Board found that the Regents were an arm of the State of Minnesota for purposes of Eleventh Amendment immunity and dismissed the Regents from the proceeding.

Lastly, the Board addressed whether the IPR proceeding could continue if the Regents were no longer a part of the proceeding. The Patent Owners argued that there should be a rule requiring automatic termination of a proceeding when the dismissal of a party is on the basis of sovereign immunity. However, the Board noted that federal courts that considered this issue had not “applied a bright-line rule that requires dismissal of any action after a finding that one defendant has sovereign immunity”; “[i]nstead, when the absent sovereign party and a remaining party have identical ‘interests in the asserted patents,’ the remaining party adequately represents the interests of the absent sovereign party under Rule 19(b)(1).” Here, the Board noted that even with the Regents dismissed from the proceeding, the other patent owner was present and found that both “[t]he present patent owner[, Toyota,] and the absent patent owner[, the Regents,] both hold identical interests” in the asserted patent. For this reason, the Board held that Toyota would adequately represent the interests of the Regents and the IPR could proceed in their absence. As a result of these findings, the Board dismissed the Regents but did not dismiss co-owner Toyota.

This is the third decision recently in which the PTAB considered the defense of sovereign immunity in IPR proceedings. The first decision addressing whether sovereign immunity was applicable in an IPR was Covidien, which granted the University of Florida Research Foundation’s motion to dismiss several IPR petitions. In that case, the university was the only party.

In the second decision, Neochord, patent-owner University of Maryland, Baltimore, and its exclusive licensee filed a motion to dismiss after the IPR was instituted and shortly before oral argument was to be heard on the merits. In that case, the PTAB determined that sovereign immunity applied to the university and that “the University retained rights under the license agreement, and transferred less than ‘substantially all’ of its rights to [the licensee].” Thus, the Neochord panel found that the IPR could not proceed without the university because it “remained a necessary and indispensable party to [the] proceeding.” Accordingly, both the university and the exclusive licensee were dismissed.

In summary, Covidien, Neochord, and Reactive Surfaces all involved public universities who, directly or indirectly, were patent owners that asserted sovereign immunity under the Eleventh Amendment in IPR proceedings. In each case, the PTAB dismissed the universities based on sovereign immunity. However, when other parties also had rights to the patent-in-suit-i.e., the exclusive licensee in Neochord and co-owner Toyota in Reactive Surfaces—the PTAB arrived at different conclusions about whether the IPR could be dismissed in its entirety. The distinction that the PTAB seems to have drawn is based on whether the parties’ interests to the patent are “identical.” In this case, because the co-owners held “identical” interests, the PTAB decided that the IPR could proceed against Toyota even after dismissing the university—which, as a co-owner, still bore the risk of having its rights extinguished in the proceeding despite having sovereign immunity. But in Neochord, the university’s retention of rights to an exclusively licensed patent was the basis to dismiss both the licensee and the university because their interests were not identical.

As of this writing, the Federal Circuit has not weighed in on the merits of any of these dismissals. Consequently, the PTAB’s panel decisions are the only guidance available. Licensees and co-owners of patents owned by universities, as well as petitioners filing IPRs against such patents, should take note of the PTAB’s disparate treatment of these different factual situations.

1 Reactive Surfaces Ltd. v. Toyota Motor Corp., No. IPR2016-1914 (P.T.A.B. July 13, 2017) (Paper 36).
2 Covidien LP v. Univ. of Fla. Research Found. Inc., No. IPR2016-1274 (P.T.A.B. Jan. 25, 2017) (Paper 21); Neochord, Inc. v. Univ. of Md., Baltimore, No. IPR2016-208 (P.T.A.B. May 23, 2017) (Paper 28).
3 As of this writing, the PTAB has not designated any of these decisions as Precedential or even Informative, thus none of the decisions is binding and it is instead left to a PTAB panel to "find their reasoning persuasive." See Reactive Surfaces, No. IPR2016-1914, slip op. at 4; United States Patent and Trademark Office, List of Precedential Opinions, (last visited July 24, 2017); United States Patent and Trademark Office, List of Informative Opinions, (last visited July 24, 2017);.
4 Fed. Maritime Comm'n v. S.C. State Ports Auth., 535 U.S. 743, 756-59 (2002).
5 See Vas-Cath, Inc. v. Univ. of Mo., 473 F.3d 1376, 1382 (Fed. Cir. 2007).