The Supreme Court Deals Severe Body Blows to the Secondary Market for Patents

In a period of nine days in late June 2021, the United States Supreme Court did more to undermine and call into question the secondary market for patents than it had done in any decision since its eBay decision. First, on June 21st, the Court held in United States v. Arthrex, Inc., No. 19-1434 (U.S. June 21, 2021), that “the unreviewable executive power exercised by [Administrative Patent Judges] is incompatible with their status as inferior officers.” Slip Op. at 14. The Court did not however adopt the Federal Circuit’s solution to this violation of the Appointments Clause; namely, removing the tenure protection from APJs. Id. at 6; see generally Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320 (Fed. Cir. 2019) vacated and remanded United States v. Arthrex, Inc. Instead, the Court held that despite its express statement that “only the Patent Trial and Appeal Board may grant rehearings,” Section 6(c) of the Patent Act does not apply to the Director of the USPTO. 35 U.S.C. § 6(c); Slip Op. at 21.

In an opinion, in which Justices Alito, Gorsuch, Kavanaugh, and Barrett joined as to Parts I and II, Chief Justice Roberts first held that “Congress has assigned APJs ‘significant authority’ in adjudicating the public rights of private parties, while also insulating their decisions from review and their offices from removal.” Slip Op. at 19 (citing Buckley v. Valeo, 424 U.S. 1, 126 (1976). In a remedy joined by Justices Breyer, Sotomayor, Kagan, Alito, Kavanaugh, and Barrett, Chief Justice Roberts held the “[t]he Director may review final PTAB decisions and, upon review, may issue decisions himself on behalf of the Board. Section 6(c) otherwise remains operative as to the other members of the PTAB.” Slip Op. at 21.

It is worth noting that although Justice Gorsuch joined parts I and II of the Chief Justice’s opinion, he dissented from the remedy because there were a variety of different solutions to the problem of officers of the United States who were not appointed by advice and consent of the Senate—as required by the Appointments Clause of the U.S. Constitution—cancelling patents and “all that remains is a policy choice.” Op. of Gorsuch, J. at 5. Similarly, although Justices Breyer, Sotomayor, and Kagan dissented from parts I and II of the Chief Justice’s opinion, the three of them joined part III of that opinion and thus agreed that the solution to a problem (that they did not agree existed) was to allow the Director of the USPTO to review and reverse decisions of a PTAB panel.

The only saving grace of the Court’s Arthrex decision is that it is limited to “only the Director’s ability to supervise APJs in adjudicating petitions for inter partes review. [The Court did] not address the Director’s supervision over other types of adjudications conducted by the PTAB, such as the examination process for which the Director has claimed unilateral authority to issue a patent.” Slip Op. at 22.

In a rather, ironic twist the Court remanded Arthrex’s case “to the Acting Director for him to decide whether to rehear the petition filed by Smith & Nephew.” Id. The PTO has adopted interim Director review process in light of this decision. See https://www.uspto.gov/patents/patent-trial-and-appeal-board/procedures/uspto-implementation-interim-director-review (last visited July 13, 2021). Not surprisingly, various patent holders have already challenged the PTO’s process for such review as the Acting Director was not appointed based on advice and consent of the Senate.

The fact that validity of patents challenged under in an IPR under the AIPLA will be subject to review and overruling by the Director, in direct contravention of Congress’s stated desire to have a more objective process, has been recognized by many as making U.S. patents far more subject to political decisions. See, e.g., Dennis Couch, Patents are Political (PatentlyO June 21, 2021) available at https://patentlyo.com/patent/2021/06/patents-are-political.html (last visited July 13, 2021).

Unfortunately, as far as the secondary market for patents are concerned, the Supreme Court was not quite done. On June 29th, it issued its decision on assignor estoppel in Minerva Surgical, Inc. v. Hologic, Inc., No. 20-440 (U.S. June 29, 2021).

In the Minerva decision, Justice Kagan delivered an opinion joined by Chief Justice Roberts and Justices Breyer, Sotomayor, and Kavanaugh. In the majority opinion, the Court upheld assignor estoppel, which “limits an inventor’s ability to assign a patent to another for value and later contend in litigation that the patent is invalid.” Slip Op. at 1. The Court limited severely the applicability of this doctrine. In particular, the Court held that “[a]ssignor estoppel should apply only when its underlying principle of fair dealing comes into play. That principle, as explained above, demands consistency in representations about a patent’s validity: What creates the unfairness is contradiction.” Id. at 14.

The Court recognized three common scenarios and held that in each of those scenarios the doctrine of assignor estoppel would not apply. First, the Court considered “a common employment arrangement. An employee assigns to his employer patent rights in any future inventions he develops during his employment; the employer then decides which, if any, of those inventions to patent.” Slip Op. at 15. Despite acknowledging that this was a very common employment situation, the Court held that assignor estoppel does not apply because “the assignment contains no representations that a patent is valid. How could it? The invention itself has not come into being.” Id. In other words, the Court just opened a gaping hole in how corporations deal with patenting inventions by their employees. To ensure that employees who leave the company—as was exactly the case in Minerva—corporations will have to put into place systems under which employees assign their inventions to the company after the patent application has been filed. Wait, the situation gets worse.

In another example, “another post-assignment development—a change in patent claims—can remove the rationale for applying assignor estoppel.” According to the Court, if “the new claims are materially broader than the old claims, the assignor did not warrant to the new claims’ validity. And if he made no such representations, then he can challenge the new claims in litigation: Because there is no inconsistency in his positions, there is no estoppel.” Id. at 15-16. Anyone who has found themselves lost in the morass of broadening reissues and the recapture rule knows that determining whether the scope of an amended claim is broader or narrower than the scope of the original claim is more an art than a science. Thus, if the Court is to be taken at its word, employers must obtain an assignment from their employees only after the Notice of Allowance (or perhaps even after the patent has issued). Of course, this also means that filing continuation, continuation-in-part, and divisional applications after the employee has moved on may require a separate assignment agreement (with appropriate consideration). One only hopes that continued employment will be seen as acceptable consideration in those cases that the employee is still employed by the employer.

Of course, in the secondary market for patents, it is extremely common for the purchaser to purchase pending applications. Those applications—unless they issue with claims that are substantially similar in scope (or narrower in scope)—are likely no longer insulated by the doctrine of assignor estoppel. Nor, arguably, are continuations, CIPs, or divisional applications filed off a pending applications. Additionally, the due diligence involved in the secondary market for patents is going to get a lot more complicated because not only will the purchaser have to ensure that the seller had proper title to the patents and applications being sold, the purchaser will also likely have to take steps to ensure that the inventor-employees assigned the patents to the seller only after the claim scope was well decided. Whether such due diligence is within the scope of either the seller or the purchaser is highly questionable.

Although many have criticized the very existence of a secondary market for patents, much of the literature and analysis shows that a secondary market for patents is critical for the type of innovation and invention that the Constitution embodies. The amount of damage that the Arthrex and Minerva decisions have done to that market (leaving aside the upheavals they have likely caused to most operating company’s patent assignment processes) and to the solo and small inventors that often benefit from that market is impossible to overstate. One can only hope that Congress recognizes the potential harm that these decisions may cause to innovation and invention in the United States and takes urgent steps to undo that harm.