[Ip-health] Wall Street Journal: Critics Take Aim at California's Patent Shield

[Thiru Balasubramaniam]

Critics Take Aim at California's Patent Shield
By PETER LATTMAN
November 13, 2007; Page B1

In the lucrative world of patents, the University of California is a
major player. It receives by far more patents from the U.S. government
than any school in the country. And by licensing out its intellectual
property, the university has generated about $500 million in revenue
in the past five years.

The school also aggressively uses the courts as a sword, and is
unafraid to take on big companies. As a plaintiff alleging patent
infringement, the school has settled a claim against Genentech Inc.
for $200 million, secured a payment of $185 million from Monsanto Co.,
and won a $30 million settlement from Microsoft Corp.

Yet, when it comes to getting sued for patent infringement, the
university, as well as the state of California, are Teflon. A legal
doctrine known as sovereign immunity protects states and state
institutions from legal liability. Courts have held that participating
in the federal patent system doesn't cost a state its immunity. The
upshot -- states can sue, but effectively can't be sued.
[The Smart Money]

Now a recent federal court case has reignited the debate over states'
immunity from patent lawsuits. Late last month, the U.S. Court of
Appeals for the Federal Circuit, reinforcing settled law, ruled
California can sue others for patent infringement as often as it
wishes, and still maintain immunity from patent lawsuits. In the case,
Biomedical Patent Management Corp. sued the state of California for
refusing to pay royalties on a patented method of screening birth
defects in fetuses. Owned primarily by an inventor, San Diego-based
BPMC has as its only asset the patent at issue in the case.

When trial-court judge Marilyn Hall Patel dismissed the lawsuit last
year, she expressed displeasure with the state of the law. "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 Judge Patel, who sits in federal court in San
Francisco. "Similarly situated private universities enjoy no such
advantage."

A lawyer for the state essentially says tough luck. "Sovereign
immunity came from the king not wanting to be sued by his subjects and
it ended up in our jurisprudence," said Susan King, a deputy attorney
general in California who argued the case. "It's not fair but it's the
current state of the law."

In the context of sovereign immunity, federal courts have treated
different branches of a state -- such as its university system -- as
part of a single entity, much like different divisions of the same
company.

State universities have become major players in the patent world,
acquiring vast amounts of intellectual property through on-campus
discoveries in such fields as technology and biomedicine. Since
Congress passed legislation in 1980 giving universities ownership over
their federally funded inventions, schools have collectively earned
billions of dollars in revenue by licensing their patents to private
companies.

And the University of California is a patent powerhouse. Each year for
13 years, UC has received by far the most patents among U.S.
universities, based on data from the U.S. Patent and Trademark Office.
According to its year-end 2006 report, the university maintained more
than 7,000 patents in its portfolio, up from about 4,500 at the end of
2002. Last year, the school earned a record $193.5 million in revenue
from patent royalties and fees, double that of 2005.

A UC spokeswoman says the university has a separate legal existence
from the state, and its "use of sovereign immunity is highly limited
and not a first course of defense." The university has asserted
sovereign immunity in at least six patent cases since 1987.
[Patent Portfolio]

Other state universities with patent portfolios -- including Texas and
Massachusetts -- have also invoked sovereign immunity to fight off
patent claims.

Sovereign immunity is grounded in the idea that because the states
were sovereign before the Constitution's ratification, they were
immune from lawsuits in federal court. The 11th Amendment, ratified in
1795, reflects this principle and generally bars states from suits in
federal court. And while Congress can pass laws explicitly permitting
certain lawsuits against states in federal court, the Supreme Court,
in a series of rulings in the past decade, has limited Congress's
power to pass such laws and has expanded the scope of states' immunity
from lawsuits.

Some American companies maintain that applying the doctrine in the
patent arena is unfair. "I think what people keep forgetting is that
state governments are not little agencies," said Mark Bohannon, the
general counsel of the Software & Information Industry Association, a
Washington, D.C.-based trade group. "They are real commercial players
in the marketplace competing with the private sector."

For several years, the states didn't have it both ways. In 1992,
Congress passed a statute that prohibited states from using sovereign
immunity to shield themselves from patent lawsuits. But in 1999, the
Supreme Court struck down the legislation, giving states and state-
sponsored institutions protection from patent-infringement lawsuits in
federal court.

Mark Lemley, a Stanford Law School professor specializing in patents,
thinks the Supreme Court got it wrong. "The underlying problem is that
the Supreme Court is applying an antiquated doctrine -- the 11th
Amendment -- to circumstances in which it was never intended to
apply," he says. "The Framers never contemplated states suing people
for patent infringement."

Since the Supreme Court's ruling, bills have been introduced in
Congress to get around it, but efforts to pass them have failed.

Lobbyists for California's university system appeared to play a role
in derailing the bills, according to court filings. In a 2003 email, a
UC lobbyist updated colleagues on the proposed legislation. The email
said that Congress viewed the position of states and state
universities as "particularly self serving ... since they see the
states and state universities as wanting to maintain an unfair
advantage in the intellectual property arena where they can infringe
on others IP rights, but not have to suffer the same consequences as a
private party." She added: "It's also hard to make the argument that a
school like UC should be treated any differently than a [a private
university] for purposes of IP enforcement."

Rep. Howard Berman, a California Democrat, co-sponsored the
legislation despite the potential effects on his home state. "While we
want to protect our intellectual property, we certainly don't want to
give ourselves or any other state a safe haven from infringing on
someone else's intellectual property," said Rep. Berman. "You could
make an argument that walling off and protecting some group from
infringing conduct is bad for our economy."

Andrew Dhuey, the lawyer for the biomedical patent company, says his
client will appeal its case to the Supreme Court.

Write to Peter Lattman at peter.lattman@wsj.com1
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