IP Owners Challenge State Immunity from Infringement

California knows a thing or two about patent law. For 12 consecutive years its university system has been the largest public recipient of U.S. patents--receiving more patents than the three next largest recipients combined.

According to the University of California (UC) technology transfer office, in fiscal 2006 the state university system had an active portfolio of more than 7,500 patents and reaped $210 million in revenue from licensing deals.

California is also aggressive about protecting its IP rights. For instance it recently took biotech giant Monsanto Co. to court over a bovine growth hormone that infringed a UC patent and won a settlement worth more than $100 million.

When it comes to IP California behaves just like a Fortune 500 company. That is except for one major caveat: No one can sue it for patent infringement.

In October the Federal Circuit affirmed the dismissal of Biomedical Patent Management Corp. v. State of California, Department of Health Services, ruling that--despite its extensive involvement in the patent system--California and all state entities are immune from infringement lawsuits under the 11th Amendment, which gives states general immunity from federal lawsuits.

The court came to that decision with some reluctance. "The court is indeed troubled by the University of California's ability to reap the benefits of the patent system without being exposed to liability for infringement," wrote trial court Judge Marilyn Hall Patel in dismissing the case. Ultimately, Patel had little choice. Supreme Court and Federal Circuit precedents both uphold state immunity from federal patent lawsuits, and BPMC doesn't change that. But it does highlight just how difficult it is for a patent holder to recover against a state for infringement.

Unfair Advantage
Patel isn't the only one troubled by the inequity of state institutions using the patent system to their advantage while avoiding any liability for infringing activities. In 1992 Congress tried to fix the situation by passing the Patent Remedy Act, which prohibited states from asserting sovereign immunity to evade infringement suits. But in the 1999 case Florida Prepaid v. College Savings Bank, the Supreme Court found the Patent Remedy Act was unconstitutional.

Following that decision, the only way to recover against a state entity that infringes a privately owned patent is if the state waives its immunity by voluntarily appearing in court to defend the case. The holding in BPMC highlights how rarely plaintiffs are able to prove that a state waived its immunity.

In BPMC California voluntarily intervened in a 1997 lawsuit in which BPMC alleged the state's department of health services (DHS) was infringing its patent on a method of screening for birth defects. The Northern District of California dismissed that lawsuit without prejudice due to improper venue and the fact that several other cases on similar issues were pending. When BPMC refiled the case in 2006, the DHS asserted sovereign immunity as a defense.

The trial court dismissed the case, agreeing that the DHS was immune. On appeal BPMC argued the state had waived immunity by participating in a 1997 suit on the same issue. The Federal Circuit rejected that argument, ruling that under Florida Prepaid, only a valid waiver in the same lawsuit--not a related case between the same parties--would suffice to waive sovereign immunity.

"State immunity from patent suits isn't new," points out Steven Lee, a partner at Kenyon and Kenyon in New York. "The narrow holding of the case is that a waiver in one case--even a case between the same parties about the same alleged infringement--does not waive immunity in another case."

The upshot is that major patent players such as state universities can infringe on privately owned patents with impunity except in rare circumstances.

Third Party Relief
Fortunately for many patent owners in BPMC's situation, state entities accused of infringement often have contracts with private third parties that are not immune from infringement suits. For instance, Michael Fein, a patent litigator at Cozen O'Connor, says if the state of New Jersey hires a private company to run its Easy Pass system and some component of the Easy Pass technology is infringing, the patent holder can go after the private third party.

Of course, while that is good news for patent owners, it also makes it necessary for private companies that do business with state entities to ensure they are protected from liability for any infringement that arises from the work--lest they be left holding the bag for a co-defendant that is immune from suit.

"In many cases, the state agrees to indemnify the private company," Fein says. "It can easily happen that a state agrees contractually to be liable for patent infringement."

Furthermore, most patent owners have other ways to pressure a state to take a license on a patent even if it doesn't legally have to. For example, the patent owner usually has the technical know-how about how to practice the patent, which makes it practical for the state to license the patent and get that knowledge as part of the deal.

"But a patent owner on an apparatus can't do anything to stop a state university from constructing it themselves," Fein says. "Some people have said it's unfair, but that's just the way the law is."

If BPMC has anything to say about it, it won't be for long. It has announced that it intends to appeal to the Supreme Court.

Adele Nicholas

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