By Roger Parloff
June 11, 2007

A closely-watched patent case, Zoltek Corporation v. USA, ended this morning much as the Sopranos series ended last night: with no catharsis at all.

In a bit of a letdown, the Supreme Court declined to hear Zoltek, which had raised a fundamental constitutional question: Are patents a form of property that are protected by the so-called Takings Clause of the Fifth Amendment, which guarantees private citizens “just compensation” when the government seizes their property? The case also raised questions about U.S. patent-holders’ rights when their patented processes are used overseas to make components of products that are assembled in this country. The issues are of great continuing interest to defense contractors, the pharmaceutical industry, and the nanotechnology industry.

Zoltek (ZOLT) patented a process for making carbon-fiber sheets that are used in making stealth aircraft for the military. Lockheed Martin Corp. (LMT) uses that process to make the F-22 fighter plane, although the carbon-fiber sheets are manufactured in Japan before being imported to the U.S. where the planes are assembled. Under U.S. patent laws, it was clear that Lockheed itself was immune from being sued for infringement by Zoltek, because it was making the planes for the U.S. government. Accordingly, Zoltek’s legal remedy, if it had one, consisted of suing the U.S. government in the U.S. Court of Federal Claims.

Zoltek did so, claiming damages of more than $1 billion from the infringement. The court found that, as far as the patent statutes went, Zoltek fell through the cracks. If Lockheed had been importing a patented invention into the U.S. for use in a government-commissioned airplane (as opposed to materials made by means of a patented process), the statutes would’ve clearly allowed Zoltek to sue the U.S. government to recover for patent infringement. Alternatively, if Lockheed had used Zoltek’s patented process to make materials that it was importing into this country for use on a non-government-commissioned project, Zoltek would have been entitled to sue Lockheed for patent infringement. But, the federal claims court ruled, the statutes did not provide Zoltek a right to sue the government under the precise circumstances presented: Lockheed using Zoltek’s patented process to make materials that it was importing into the country for use on a U.S. government-commissioned project.

Nevertheless, the trial-level court — the Court of Federal Claims — decided that Zoltek could still bring a constitutional claim against the U.S. seeking “just compensation” for a governmental “taking” of its property under the Fifth Amendment to the federal Constitution.

On appeal, however, the U.S. Court of Appeals for the Federal Circuit — which hears appeals from the Court of Federal Claims as well as all patent appeals — reversed, finding that Zoltek was completely out of luck. While agreeing with the lower court that the existing patent statutes didn’t give Zoltek a right to sue the United States for Lockheed’s infringement of its patented process, it also ruled that patents weren’t a form of property protected by the Constitution’s Takings Clause, relying on its interpretation of an 1894 U.S. Supreme Court ruling.

The appeals court’s constitutional ruling had potentially enormous ramifications for patent holders — most obviously, perhaps, for the pharmaceutical industry. During the anthrax attacks of late 2001, for instance, President George Bush raised the prospect of breaking Bayer’s (BAY) patent over Cipro, an antibiotic useful in fighting that disease. Similarly, in current discussions of the spiraling costs of Medicaid and Medicare drug benefits, one measure legislators regularly consider is imposing price controls of some kind. Such measures — abrogating the current scope of patent rights — would likely spur pharmaceutical companies to try to get compensation from the government under the Takings Clause.

But the federal appeals court’s ruling — which the High Court let stand this morning — appears to rule out such remedies. The Federal Circuit court had reasoned that since patent rights are created and defined by the federal government, they extend only so far as Congress has said they should extend. Accordingly, the government can’t be “taking” anything away from the patent holder, since all the patent holder ever possessed to begin with was whatever specific rights the government had granted to it.

(Zoltek’s lead counsel in the case was Dean Monco of Chicago’s Wood Phillips. Anne Murphy, an appellate staff attorney with the U.S. Department of Justice, was the government’s line attorney on the case.)

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