SECTION 18 OF H.R. 1249 WOULD BAIL OUT BANKS AND EXPOSE THE TREASURY TO BILLION-DOLLAR LIABILITY Jonathan S.

Massey
Jonathan S. Massey is a partner at Massey & Gail LLP (www.masseygail.com), with extensive experience in constitutional litigation. He served as law clerk to Supreme Court Justice William J. Brennan, Jr., and Judge Abner J. Mikva, U.S. Court of Appeals for the D.C. Circuit.

Section 18 of H.R. 1249 establishes a special “Transitional Program for Covered Business Method Patents,” which would create a special class of patents in the financial services field subject to their own distinctive post-grant administrative review. “Covered business

method patents” are defined as patents that claim “a method or corresponding apparatus for performing data processing or other operations used in the practice, administration or management of a financial product or service, except that the term does not include patents for technological inventions.” Section 18 creates an extraordinary review procedure to would allow banks and other financial services companies to challenge the validity of patents that are the basis of infringement actions against them. This provision supplements the two re-examination options already

available to every other patent holder -- the ex parte process, in which an infringer or competitor can anonymously challenge a patent’s validity, and the inter partes process, in which the challenger actively participates in the re-examination. In effect, Section 18 bestows a unique benefit – a third bite at the apple -- on financial services companies defending infringement actions. It is special interest legislation, pure and simple. Under Section 18, a person may not file a petition for the transitional proceeding unless the real party in interest has been sued for patent infringement or has been charged with patent infringement. This transitional procedure is repealed effective 4 years from the date that the PTO issues implementing regulations. Section 18 is a special, stop-gap administrative procedure designed to invalidate a targeted group of patents that already have been confirmed through multiple examination and reexamination proceedings. It creates grave constitutional questions. Section 18 would apply retroactively to already existing patents. It would change the rules of the game, after the fact, and reduce the enforceability of constitutionally protected forms of private property. 1 The

Supreme Court has long ruled that governmental abrogation of patent rights effects a taking of property and therefore triggers the Fifth Amendment obligation to pay just compensation. 1 The Court has also held that legislation depriving a patent owner of its infringement remedy triggers an obligation on the part of the government to provide just compensation. 2 Accordingly, there is a very substantial risk that the patent holders singled out by Section 18 could bring suits for compensation against the federal government, on the ground that the special abrogation of their patents qualifies as a “taking” of private property. compensation” in such circumstances would be the fair market value of the patent. 3 Section 18, in other words, represents a Wall Street bailout that could shift the cost of patent infringement from financial services firms to the U.S. Treasury. The public would be forced to pay the reasonable value of the patents, in the form of just compensation to the patent holders. The same scenario played out only a few years ago. In 2007, the Congressional Budget Office (CBO) analyzed the Sessions Amendment to S. 1145, the Patent Reform Act of 2007, which purported to remove the infringement remedies available to the very same patent holders targeted by Section 18. The CBO concluded that the Sessions Amendment worked a taking of private property under the Fifth Amendment to the U.S. Constitution and therefore would subject The “just

Cammeyer v. Newton, 94 U.S. (4 Otto) 225, 234-35 (1876) (“an invention [secured by a valid letterpatent] is property in the holder of the patent, and *** is as much entitled to protection as any other property *** [¶] Public employment is no defense [sic] to the employee for having converted the private property of another to the public use without his consent and without just compensation.”) (citations omitted); James v. Campbell, 104 U.S. 356, 357-58 (1881) (“That the government of the United States when it grants letters-patent for a new invention or discovery in the arts, confers upon the patentee an exclusive property in the patented invention which cannot be appropriated or used by the government itself, without just compensation, any more than it can appropriate or use without compensation land which has been patented to a private purchaser, we have no doubt.”); Crozier v. Fried, Krupp Aktiengesellschaft, 224 U.S. 290, 306 (1912) (applying to the patent context “the well-established and indeed elementary requirements in favor of property rights essential to be afforded in order to justify the taking by government of private property for public use”).
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Richmond Screw Anchor Co., Inc. v. United States, 275 U.S. 331, 343-45 (1928).

United States v. 50 Acres of Land, 469 U.S. 24, 29 (1984) (just compensation is “‘market value of the property at the time of the taking’”) (quoting Olson v. United States, 292 U.S. 246, 255 (1934)); see also Kirby Forest Industries, Inc. v. United States, 467 U.S. 1, 10 (1984); Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470, 474 (1973); United States v. Commodities Trading Corp., 339 U.S. 121, 130 (1950); United States v. Petty Motor Co., 327 U.S. 372, 377 (1946).

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the government to claims for just compensation. The CBO stated that the Sessions Amendment had budgetary implications and required that the legislation be “scored” for budgetary purposes. Section 18 would have similar budgetary impacts. It is special interest legislation that would require the public to pay for patent infringements committed by financial services firms.

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