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. (NYSE: DNA) for $200 million, secured a payment of $185 million from Monsanto Co. (NYSE: MON), and won a $30 million settlement from Microsoft Corp. (Nasdaq: MSFT).
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.
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.
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.