Patents, Property, and Prospectivity.

• Author: Masur, Jonathan S.

Abstract. When judges change the legal rules governing patents, those changes are always retroactive. That is, they apply equally to patents that have already been granted and patents that do not yet exist. There are benefits to making a change in the law retroactive, particularly if the new legal rule is an improvement over what preceded it. But there are costs as well. Retroactive changes in the law upset reliance interests. This can be particularly harmful when those reliance interests involve rights or entitlements that form the basis for substantial financial investment, as is often the case with patents. What is more, judges are aware that their decisions can do violence to existing reliance interests. This makes judges wary of making changes to patent law in the first place, which can lead to the law becoming stultified Reducing the rate of legal change is not an adequate solution. Neither is takings law, which is commonly applied to solve similar problems that arise in the context of real property but is a poor fit for intellectual property. Rather, to ameliorate the reliance concerns generated by legal change, federal judges should be afforded the latitude to make their rulings purely prospective. And patent judges should exercise this discretion in the many cases where forward-looking change is called for but backward-looking change would do more harm than good.

Table of Contents Introduction I. Patents and Reliance Interests II. Reliance Interests and the Preservation of the Status Quo III. Takings and Patent Retroactivity A. The Normative Case for and Against Applying Takings Law to Patents B. Are Patents Property for Purposes of the Takings Clause? C. Judicial Takings and Patent Law IV. Purely Prospective Changes to Patent Law A. The Costs and Benefits of Nonretroactive Legal Change B. Nonretroactive Changes in Patent Law C. The Mechanics of Retroactive and Prospective Lawmaking 1. From habeas to patent law 2. Forum-based prospectivity D. The Law of Nonretroactivity Conclusion Introduction

"[S]uppose that the patent has been in existence without anybody reexamining it for 10 years and, moreover, the company's invested $40 billion in developing it. And then suddenly somebody comes in and says: Oh, oh, ... we want it reexamined, not in court but by the Patent Office. Now, that seems perhaps that it would be a problem ...?"

--Justice Stephen Breyer (1)

"If I were deciding this case on a blank canvas, I might conclude that an isolated DNA sequence that includes most or all of a gene is not patentable subject matter.... But we do not decide this case on a blank canvas. Congress has, for centuries, authorized an expansive scope of patentable subject matter.... I believe we must be particularly wary of expanding the judicial exception to patentable subject matter where both settled expectations and extensive property rights are involved."

--Judge Kimberly Ann Moore (2)

Consider the following scenario. The judges of the Federal Circuit are faced with the question whether a particular type of biologic invention constitutes patentable subject matter under [section] 101 of the Patent Act. (3) The judges have become convinced, for reasons of law or policy, that the invention should not be patentable under [section] 101. (4) But holding as much would mean overturning decades-old circuit precedent, under which the U.S. Patent and Trademark Office (PTO) has granted (and the courts have upheld) tens of thousands of existing patents. Dozens of major businesses have been founded on the basis of those patents, and billions of dollars of investment capital have flowed to the businesses because of them. Changing the law would risk upending the businesses and, worse, invalidating the patents might deter future investments in research and development (R&D). Future innovators and investors might be much more reluctant to pursue patent-based research if they have reason to fear that the Federal Circuit will pull the rug out from under them.

This problem is fundamental to any area of law in which investment decisions are made on the basis of expectations regarding the stability and reliability of legal rights. But it is of particular significance and salience within the realm of patent law. (5) Patents exist for the purpose of promoting innovation, (6) and they do so by granting legal rights to innovators that allow them to capture significant financial returns by making and selling their inventions. (7) If patent rights become unreliable or unstable, the purpose and function of the patent system will be undermined. Put another way, the bargain between the government and an inventor is that the latter publicizes her invention in exchange for a legal monopoly of limited time. If courts later revoke the inventor's benefit from that bargain, how likely will she be to enter into a similar exchange the next time, particularly where trade secret protection is a practical alternative? (8)

Moreover, at least in recent years, patent law has undergone a more rapid series of legal changes than nearly any other area of law, and certainly any other area of property law. Between 2010 and 2014, the U.S. Supreme Court decided four major cases that reconfigured the boundaries defining which types of inventions may be patented and which may not. (9) And this merely scratches the surface; there are many other Supreme Court decisions and hundreds of appellate cases that have reshaped patent law in various ways. (10) An area of law that depends upon legal stability has become notably unstable.

This is the issue described by Justice Breyer and Judge Moore in this Article's epigraph. Justice Breyer's comment, made during oral argument in Oil States Energy Services, LLC v. Greene's Energy Group, LLC, addresses the perceived problem created when patents are invalidated via administrative proceedings before the PTO. (11) But the problem is more general: Whenever the PTO or a court invalidates a patent--or a major change in the law invalidates thousands of patents--it reduces firms' incentives to invest in R&D. How should courts respond in the face of this hazard? (12) One option is suggested by Judge Moore's concurring opinion in Ass'n for Molecular Pathology v. United States Patent & Trademark Office. Courts could adhere more rigidly to stare decisis and simply alter the law less often. (13) Yet this approach is often a poor fit for patent law, where the law must be frequently updated if it is to keep pace with changes in technology and markets. (14) It is also ill-suited to a system in which only one court of appeals handles patent cases, thus eliminating the possibility of circuit splits. Without a circuit split to signal the Supreme Court, long periods of time may pass before the Court addresses important questions of patent law. (15)

Another possibility would be for courts to treat changes in patent law that weaken existing patents as judicial takings that must be compensated. In Stop the Beach Renourishment, Inc. v. Florida Department of Environmental Protection, a plurality of the Supreme Court held that property can be taken for purposes of the Takings Clause by judicial decisions that overturn well-established property rules. (16) Applying takings law to patent cases would provide a type of governmental insurance for patentholders and guarantee that courts could not undermine investment-backed reliance interests by changing the law. Here too, however, the cure would be worse than the disease. If changes to patent law were classified as judicial takings, legal change would become impossible or prohibitively expensive. Takings law could also distort the path of legal change if judges favor (or disfavor) patents protected by takings law.

A different approach is called for. Instead of stasis or treating changes to patent law as takings, federal courts--or at least patent courts--should be given the authority to hand down decisions that are prospective only. That is, they should have the power to determine that a particular decision affects only patents whose owners applied for them on or after the date of that decision. Nonretroactive lawmaking is a mechanism frequently employed by both Congress and agencies to mitigate the downsides of legal transitions. (17) Presenting judges with this option would decouple a judicial decision's prospective effect--which is presumptively positive--from the backward-looking harm it might do to investment-backed expectations and reliance interests. This would provide courts with an avenue for updating legal rules without doing violence to the stable legal rights necessary to encourage ongoing investment in R&D. Patent law would become more dynamic and less hidebound. It would also become more effective.

There is even an existing model for this type of judicial flexibility: the law of habeas corpus. When the Supreme Court recognizes a constitutional criminal procedural right, that ruling generally does not apply retroactively to all prisoners who were convicted under the prior rules. Rather, under the rule announced by a plurality of the Court in Teague v. Lane (18) and subsequently codified by the Antiterrorism and Effective Death Penalty Act of 1996 (AEDPA), (19) newly announced procedural rights do not apply to convictions that are already final. (20) Thus, when the Supreme Court creates a new rule of criminal procedure, that rule applies only quasi-prospectively: to future cases and cases pending on direct appeal, not to the thousands (or tens of thousands) more in which the conviction is final and the prisoner seeks habeas relief.

Habeas is the only area of law in which quasi-prospective judicial lawmaking has become common, but it need not be. (21) Indeed, nonretroactive lawmaking is a staple of legislation and regulation, and thus it pervades most areas of federal law. (22) Patent law, by contrast, is one of the few areas of federal law governed primarily by judicial decisions rather...