Are the State Proposals Constitutional?

The Supreme Court has long held that issues relating to licensing agreements for patents or other forms of federally protected IP ‘arise as a question of contract, and not as one under the inherent meaning and effect of the [federal IP] laws’ ( Keeler v Standard Folding Bed Co ., 1895). Accordingly, the Federal Circuit repeatedly has held that ‘[s]tate law . . . controls in matters of contract interpretation’ ( Ethicon, Inc. v United States Surgical Corp ., 1998; Monsanto Co. v McFarling , 2004; Magnivision, Inc. v The Bonneau Co ., 2000). Technology use agreements and bag tag licences, therefore, are subject to state laws regarding contract formation and interpretation. States must exercise their power over contractual relations so as not to impinge on the federal government’s authority. The seed-saving bills circulated to date potentially conflict with three constitutional provisions: the Supremacy Clause, the Due Process Clause and the dormant Commerce Clause. The balance of this chapter examines these potential impediments to state-imposed seed- saving regimes.

‘The laws of the United States shall be the supreme law of the land’

Article VI, s. 2 of the Constitution provides, in general terms, that the laws of the USA shall be the supreme law of the land, the laws of any state to the contrary notwithstanding. Moreover, art. I, s. 8, cl. 8 authorizes Congress to establish a system of IPRs to promote the progress of science and the useful arts. There is little doubt, therefore, that federal patent laws occupy a position of supremacy over state IP regimes. On the other hand, the Supreme Court, in Patterson v Kentucky (1878), held that the power to grant inventors exclusive right to their inventions ‘is not granted or secured, without reference to the general powers which the several States of the Union unquestionably possess over their purely domestic affairs, whether of internal commerce or of police’.

Three years later, in Weber v Virginia (1881), the Court reiterated its holding that ‘Congress never intended that the patent laws should displace the police powers of the States’. ‘Whatever rights are secured to inventors must be enjoyed in subordination to this general authority of the State over all property within its limits.’ As in Patterson , the Court distinguished between the right of property in its physical condition and the inventor’s right in the discovery of the property itself. ‘The use of tangible property which comes into existence by the application of the discovery is not beyond the control of State legislation, simply because the patentee acquires a monopoly in his discovery’ ( Weber ). The state cannot interfere with the patent-holder’s ‘incorporeal right’ to the ‘invention or discovery’. For example, the Virginia statute at issue in Weber required persons to obtain a licence in order to sell patented sewing machines. Because the licence requirement did not interfere with the patentee’s ‘enjoyment of the right in the discovery’, but rather the use (in this case, sale) of the tangible property, the Virginia statute was a proper exercise of the state’s power.

In applying state law with respect to assignability of patent licences, the California Supreme Court in Farmland Irrigation Co. v Dopplmaier (1957) stated: ‘So long as state law does not destroy the advantages of the monopoly, it respects the federal purpose and there is no reason why it should not govern, as with any other property, the incidents attached to the ownership of the patent’. United States Fidelity & Guaranty Co. v Smith (1924), upholding a state’s right to prevent the sale of insurance issued as part of a patented process, and Decker v Federal Trade Commission (1949), upholding advertising regulations concerning the sale of patented devices, are also in accord with Weber . Finally, the Federal Circuit in Juicy Whip, Inc. v Orange Bang, Inc . (1998) adopted the Weber Court’s holding that patent-holder’s rights are enjoyed in subordination to the state’s general powers over property within its jurisdiction.

Although the balance between regulation of property and regulation of the patentee’s IPR to the discovery of the property is, to say the least, difficult, a ‘contract-modification’ statute that regulates seed purchase and licence agreements probably does not ‘destroy the advantages of the patent monopoly’. As in Patterson , Weber , United States Fidelity & Guaranty and Decker , a ‘contract-modification’ statute regulates the terms of the sale of a licence to practise the invention, and therefore the marketing of a patented seed, not the IPR to exclude others from using the invention.

The Federal Circuit, in Monsanto Co. v McFarling (2002), briefly addressed the role price plays in licence agreements. The court, in holding that exhaustion did not apply because of the restrictive licence, noted that ‘[t]he price paid by the purchaser reflects only the values of the use rights conferred by the patentee’. By implication, a higher price charged by the patent-holder could compensate the patentee for the release of additional patent rights without destroying the patentee’s right to restrict use of the invention.

A patentee’s unwillingness to charge a higher price is a marketing issue, not one related to the ‘incorporeal right’ to the invention. Although the owner of the patented article is free to charge any price he or she may choose, there is no requirement in the patent laws that a patent must be marketable or even profitable ( Motion Picture Patents Co. v Universal Film Manufacturing Co ., 1917). Some case law even supports the refusal to enjoin infringing conduct by parties whose actions benefit the public when the patentee refuses to sell the technology ( Vitamin Technologists, Inc. v Wisconsin Alumni Research Foundation , 1945). A state regulation, like the ‘contract-modification’ statute, that has the effect of merely altering the pricing structure of a patented device does not necessarily violate

patent laws.

In contrast to marketing or profitability, the right to exclude others from practising the invention is one of the essential advantages of the patent monopoly. Technology use agreements restricting seed saving are no exception ( Monsanto Co. v McFarling , 2004). The proposed ‘seed-registration’ statutes allow seed saving regardless of valid licence arrangements to the contrary. Accordingly, a licensee could save seed under the protective umbrella of state law despite contracting not to do so. In this scenario, the right to save seed was never released by the patent-holder and the purchase price for the seed did not reflect the value of the use rights made available via operation of the statute. In sum, ‘seed-registration’ statutes authorize use of patented products beyond that which is authorized by the monopoly-holder and attempt to preclude federal court actions for patent infringement. These proposed statutes ‘destroy the advantages of the patent monopoly’ and, in their current form, are most likely preempted.

A ‘seed-registration’ statute that also incorporates a requirement that technology use agreements allow seed saving, such as proposed in ‘contract- modification’ statutes, could rectify this constitutional infirmity. The patentee, in this case, would have the opportunity to charge an initial price for the seed to reflect the value of the monopoly rights relinquished. With this minor revision, the state would not destroy the IPRs, but rather establish a system of additional compensation to the patentee (on top of the presumably increased initial seed purchase fee) for the voluntary relinquishment of the patent rights. Relinquishment is voluntary, because the patentee had an initial choice – sell the seeds along with a licence that includes the right to save seed or refrain from entering the market.

A third potential argument for federal preemption of state seed-saving statutes arises from the Supreme Court’s 1989 decision in Bonito Boats, Inc. v Thunder Craft Boats, Inc . In that case, the Court considered a Florida statute conferring patent-like protection for manufactured boat hulls. Under the Florida statute, protection was available for vessel hulls otherwise not eligible for utility patent protection. In offering protection to unpatentable boat hull designs, the Florida statute removed ideas from the public domain without a corresponding increase in the public knowledge (Schaffner, 1995, p. 1086). Because removal from the public domain upset Congress’ ‘carefully crafted bargain for encouraging the creation and disclosure of new, useful and nonobvious advances in technology and design in return for the exclusive right to practice the invention for a period of years’, the Court found the statute preempted by the federal patent laws.

Unlike the Florida statute, state ‘seed-registration’ statutes do not upset the bargain of disclosure of public knowledge in return for a limited monopoly. The proposed statutes do not remove any idea or discovery from the public domain. The seeds (and other patent claims) are already disclosed and secured by a patent. Moreover, the state is not offering additional protection beyond that contemplated by the patent laws. The proposed statutes, therefore, avoid preemption to the extent that the holding in Bonito Boats establishes a doctrine of preemption for state statutes that remove ideas from the public domain.

‘Nor shall any State deprive any person of property without due process of law’

A patent for an invention is as much property as a patent for land. The right rests on the same foundation, and is surrounded and protected by the same actions. There is a like larger domain held in ownership by the public. Neither an individual nor the public can entrench upon or appropriate what belongs to the other.

( Consolidated Fruit Jar Co. v Wright , 1877)

Although protected by the Eleventh Amendment from suit in federal court for patent infringement ( Florida Prepaid Postsecondary Education Expense Board v College Savings Bank , 1999), a state may not deprive the patentee of his IP ‘without due process of law’. In Florida Prepaid , the Court noted its previous holdings that deprivation of property (including IP) by state action is not in itself unconstitutional. ‘What is unconstitutional is the deprivation of such an interest without due process of law.’ Accordingly, a state’s unilateral appropriation of the patentee’s right to exclude others from practising the invention (in this case, authorizing seed saving despite licence restrictions to the contrary) is not a per se violation of the Fourteenth Amendment. Rather, ‘only where the State provides no remedy, or only inadequate remedies, to injured patent owners for its infringement of their patent could a deprivation of property without due process result’ ( Florida Prepaid , 1999). Analysis of the proposed seed-saving statutes, therefore, should initially examine whether the state provides an adequate remedy to the patentee as redress for a deprivation of the patentee’s IPRs ( Parratt v Taylor , 1981).

‘Contract-modification’ statutes would not deprive the patent-holder of a property right. Rather, such statutes define the terms of engaging in commerce with the state. ‘When no life, liberty or property interest is at stake, a state is free to deny privileges to individuals without any hearing and, therefore, on an arbitrary basis’ (Rotunda and Nowak, 1999, §17.2). Accordingly, ‘contract-modification’ statutes should survive Fourteenth Amendment challenges.

In contrast, ‘seed-registration’ statutes potentially appropriate a constitutionally recognized property right by authorizing use of a good within state borders despite contractual terms to the contrary. Although procedural due process ‘mandates that some form of hearing is required at some time before a State finally deprives a person of his property interests’ ( Parratt ; Armstrong v Manzo , 1965), the proposed ‘seed-registration’ statutes fail to provide the patentee any opportunity to contest administratively or otherwise the deprivation of the patentee’s IPRs. As noted by Professors Rotunda and Nowak (1999, §17.8), the legislative process provides those affected by the law all required procedural due process. Therefore, an individualized hearing to authorize the deprivation of property rights or to determine the amount of royalty remitted by the state to each patent-holder is probably not required ( Logan v Zimmerman Brush Co ., 1982; Bi-Metalic Investment Co. v State Board of Equalization , 1915).

Even if ‘seed-registration’ statutes survive procedural due process challenges, substantive due process presents further problems. ‘Seed-registration’ statutes generally would require farmers to pay US$7 per bushel of saved seed (approximately 60 lb of soybeans) to the state registration agency. The state would remit US$6 per bushel to the patent-holder as a royalty. A substantive due process question arises as to whether the proposed US$6 per bushel royalty is adequate compensation for the state’s deprivation of the patentee’s right to preclude seed saving.

In the patent context, damages assessed against the federal government are limited to ‘reasonable compensation’, which ‘is equivalent to the just compensation which the Fifth Amendment mandates for every governmental taking’ ( Decca Ltd. v United States , 1980). Accordingly, infringement actions against the federal government present an accurate model of ‘just compensation’ for a substantive due process analysis of state seed-saving statutes. Because established royalty rates are ‘the best measure of reasonable and entire compensation’ (Chisum, 2002, §20.03[6][a]), remuneration under proposed statutes must, at a minimum, equal the current market royalty rate.

Recent technology use fees for Roundup Ready soybeans was US$6.50 per a 50 lb (23 kg) bag of seed. The proposed US$6 remittance to patent-holders provided for in proposed statutes, therefore, may not satisfy substantive due process challenges. Moreover, existing royalty rates are for a single use of the purchased seed, not the right to ‘save’ seed. The right to save seed would probably garner

an additional royalty because the patent-holder, in releasing the right to save seed, would forgo the profits it otherwise would expect to receive from the sale of new seed each year. In addition, it is an open question as to whether the state would have to reimburse the patent-holder at the time of its initial appropriation of patent rights for the use of the saved seeds in perpetuity (the right the patentee

is releasing) or on an ongoing, per-use basis (the right that is actually being used by the farmer), i.e. US$6/year versus the present value of the royalty stream over the remaining life of the patent. Accordingly, ‘seed-reservation’ statutes, without a corresponding mandatory modification of technology use agreements to permit seed saving, probably violate the patentee’s substantive due process rights.