Statement of

Chairman Leahy and Members of the Committee, it is a pleasure to join your discussion of State sovereign immunity and its impact on the enforcement of intellectual property rights. I want to thank you and Senator Hatch for the leadership you have shown on this very complex issue. Like both of you, I recognize that the Supreme Court’s decisions in 1999 on State sovereign immunity pose a critically important issue for intellectual property policy.

Intellectual property owners view the current situation as inequitable. In their view, State institutions profit from federally protected intellectual property and are permitted to bring suit to protect their own intellectual property, but are shielded from monetary damages as defendants. This inequity skews our system of intellectual property protection, because the penalties in place to discourage infringement do not apply to State entities. The Administration shares some of these concerns.

However, the subject of today’s hearing rests at a critical intersection of two fundamental Constitutional principles. On the one hand, the Eleventh Amendment recognizes that each State is a sovereign entity in our federal system. On the other hand, Article 1, Section 8 of the Constitution creates the foundation for our intellectual property system by granting Congress “the power to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

The Commerce Department supports the objective of ensuring that owners of intellectual property rights have a proper remedy when a State infringes upon those intellectual property rights. As such, we believe that a legislative answer to the questions raised by the Florida Prepaid cases is appropriate. At the same time, however, we respect the Supreme Court’s decisions on federalism. We support this committee’s efforts to strike a balance between these competing interests in carefully crafting responsive legislation.

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The Florida Prepaid Cases

In the 1980’s and 1990’s, however, the Supreme Court ruled that Congress must make explicit its intent to abrogate sovereign immunity. Under this test, the language of many statutes that had been assumed to abrogate sovereign immunity (such as the Patent Act, the Lanham Act, and the Copyright Act) failed to achieve that purpose. Intellectual property owners then feared that States might be immune to suits for damages under federal intellectual property laws.

In order to make explicit its intent to abrogate State sovereign immunity in such infringement suits, Congress enacted the Patent and Plant Variety Remedy Clarification Act (1992), the Trademark Remedy Clarification Act (1992), and the Copyright Remedy Clarification Act (1990). However, in a 1996 decision, Seminole Tribe v. Florida, 517 U.S. 44 (1996), the Supreme Court ruled that Congress may authorize suits against States in Federal court only pursuant to its authority under section 5 of the Fourteenth Amendment and not pursuant to any power under Article I of the Constitution.

In 1999, the U.S. Supreme Court applied this same reasoning in two opinions addressing the right of States to assert sovereign immunity in suits concerning federally protected intellectual property. In Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527 U.S. 627, the Court held that States could assert sovereign immunity to shield themselves from suits under the Patent Act. The Court recognized that Congress has the power to abrogate sovereign immunity under section 5 of the Fourteenth Amendment. However, the Court reasoned that Congress’ passage of the Patent and Plant Variety Protection Remedy Clarification Act in 1992 did not validly abrogate State sovereign immunity. The Court cited two reasons for this conclusion. First, Congress had failed to sufficiently identify State infringements of patents that constituted conduct transgressing the Fourteenth Amendment’s substantive provisions. Second, Congress had failed to tailor its legislative abrogation of State sovereign immunity to remedy or prevent such Constitutional violations.

In a companion case, College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board, 527 U.S. 666, the Court considered whether States can be sued for unfair competition under § 43(a) of the Lanham Act (15 U.S.C. 1125(a)) where the Trademark Remedy Clarification Act had: (1) amended § 43(a) by defining “any person” to include State and State instrumentalities; and (2) expressly abrogated State sovereign immunity for § 43(a) suits. Again, the Court held that Trademark Remedy Clarification Act had not validly abrogated the State sovereign immunity and concluded that Florida had not voluntarily waived its sovereign immunity through its activities in interstate commerce. While the Court has not directly considered whether States enjoy sovereign immunity against claims of either trademark or copyright infringement, the Florida Prepaid cases have been interpreted by both courts and commentators as leading to that conclusion.

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In my conversations with intellectual property owners, I have learned that they find the current situation post-Florida Prepaid to be unfair. States and State institutions are active participants in the federal intellectual property system, with extensive patent and trademark holdings. Yet, while they enjoy all the rights of an intellectual property plaintiff, they are shielded from significant accountability as infringers of the intellectual property of others.

In light of this potential problem, Senator Hatch asked the General Accounting Office (GAO) last year to research and prepare a report to: determine the extent to which States have been accused of intellectual property infringement; identify the alternatives or remedies available to protect intellectual property owners against State infringement after the Florida Prepaid ruling; and obtain the views of the intellectual property community on what States could and should do, if anything, to protect intellectual property owners against infringement.

The GAO discovered fifty-eight lawsuits brought against States for intellectual property infringement since 1985. Although the GAO labeled this number as “few,” this finding provides some evidence of the extent to which States have been accused of violating the intellectual property laws. Until 1999, the States were thought to be liable for damages for infringing another’s intellectual property. Because of this potential liability, State entities had every reason to avoid infringement, to negotiate settlements or to enter into licensing arrangements. Furthermore, based on self-reporting by State attorneys general and State universities, the GAO found that most State entities handle accusations of intellectual property infringement through administrative processes. If the majority of such accusations are handled through such processes, then the fifty-eight cases filed in court represent only a small number of the total accusations against States.

In reality, too little time has elapsed since the 1999 Florida Prepaid decisions for the GAO to statistically gauge whether immunity from suits for damages has led to States relaxing their standards for the use of intellectual property. Given all of these considerations, 58 cases naming States as defendants may be evidence of a much larger problem.

In addition to the fifty-eight allegations of infringement by States, the GAO report revealed an absence of any viable alternative remedy against State infringement. The GAO lists a number of legal theories under which an intellectual property owner might be able to seek monetary damages in State courts. But the potential usefulness of any of these theories is largely unknown. The intellectual property laws of the United States have been carefully crafted to provide appropriate incentives to authors and inventors. Requiring an intellectual property owner to resort to untested legal theories in State courts in order to remedy an infringement damages the integrity of the U.S. intellectual property system.

Furthermore, 28 U.S.C. section 1338 gives federal courts exclusive jurisdiction over any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights, mask works, and designs. The federal courts have original jurisdiction over trademark infringement suits and over unfair competition claims when joined with a substantial and related claim under the copyright, patent, plant variety protection or trademark laws. The Copyright Act preempts all State legal rights that are equivalent to any of the exclusive rights in the Copyright Act after January 1, 1978. Thus, it is difficult to imagine any sufficient and practical alternative State remedy for State infringement of a copyright. All actions relating to patent and trademark applications are heard either through an administrative body in the USPTO or a federal court and are appealable only to a federal court. Finally, many States will have sovereign immunity in their own courts as well as in federal courts. Consequently, the alternatives to bringing an infringement suit against a State in federal court are, at best, uncertain.

The Florida Prepaid decisions may also have implications for enforcing America's intellectual property rights abroad. As the Committee is well aware, intellectual property protection is critical for U.S. exports, with about one-half of all of our exports dependent on some form of intellectual property protection. In fact, America loses more than $11 billion a year just from international software piracy alone. To combat this problem, we are reaching out to our foreign trading partners to encourage their support for strong intellectual property laws and enforcement systems. However, as we advocate strong enforcement abroad, we must also demonstrate our respect for intellectual property rights here at home and provide robust means of enforcement against any infringer.

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Legislative Options

Because the Florida Prepaid decisions raised a critical issue of intellectual property policy, the U.S. Patent and Trademark Office (USPTO) has been closely examining this matter since the decisions were issued in 1999. This includes participating in an informal discussion group on the cases with private industry, the Copyright Office, and House and Senate staff as well as hosting an all-day conference in March 2000 in cooperation with American Intellectual Property Law Association (AIPLA) and the Intellectual Property Section of the American Bar Association (ABA). The conference studied various legislative options and constitutional issues that face the intellectual property community in the wake of the Florida Prepaid decisions. At the conference, scholars, State representatives, and intellectual property owners focused their attention on three basic routes for State liability in intellectual property cases: the abrogation approach, injunctive relief under the Ex Parte Young doctrine, and waiver of State immunity in exchange for participation in some federal program.

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The Abrogation Approach

Mr. Chairman, Section 5 of your Bill, S. 1611, would abrogate State sovereign immunity in cases where a State’s infringement rises to the level of a constitutional violation under the Due Process Clause or the Takings Clause, and where the State cannot demonstrate that its own procedures are adequate to remedy such violations. While this limited abrogation would appear to be constitutional under Florida Prepaid, it is unclear to what extent Section 5 of the bill would address the full range of State infringements of intellectual property. As Florida Prepaid indicates, however, a broader abrogation statute would raise quite serious constitutional questions: it would, at a minimum, need to be crafted as a remedy or disincentive that is proportional and congruent to those instances of State infringement that are, in fact, unconstitutional.

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The Injunctive Relief Approach

In light of the constitutional problems inherent in crafting an abrogation statute that would reach all instances of State infringement, legal scholars have suggested two other approaches to balancing State sovereign immunity against the concerns of intellectual property owners: (1) injunctive relief under the Ex Parte Young doctrine and (2) requiring a waiver of sovereign immunity as a condition of receiving some federal benefit.

Based on the GAO’s findings, it appears that members of the intellectual property community believe it is possible to go to federal court to get an injunction against a State preventing future infringement. In Ex Parte Young, the Supreme Court ruled that Eleventh Amendment immunity does not bar certain suits seeking declaratory and injunctive relief against State officers in their official capacities. 209 U.S. 123 (1908). Supreme Court decisions have clarified that the Ex Parte Young exception to State sovereign immunity must be interpreted narrowly and cannot be applied so as to allow all federal court actions against State officers in their official capacities to proceed. See e.g., Edelman v. Jordan, 415 U.S. 651 (1974). Therefore, under Ex Parte Young, it may be possible to bring suit against a State official for injunctive relief to stop continuing intellectual property infringement. It may not be possible, however, to obtain monetary damages. (Although a suit for money damages may be prosecuted against a State official in his individual capacity for unlawful conduct fairly attributable to the officer himself, such relief must come from the officer personally rather than from the State treasury, and therefore is not often an adequate or appropriate remedy for State infringement.) Based on our discussions with the intellectual property community, we believe that intellectual property owners would prefer a remedy that would allow them to collect monetary damages from the State for infringement. Intellectual property owners feel that the availability of monetary damages would provide a stronger disincentive to infringement.

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The Waiver Approach

The third possible approach is to seek a waiver of State sovereign immunity. State officials are unlikely to voluntarily waive sovereign immunity because doing so is not in the State’s interest. Therefore, much attention has been given to whether Congress can craft legislation that will, in a constitutionally sound manner, prompt States to waive their sovereign immunity in intellectual property suits. Congress may want to look carefully at the possibility of eliciting waivers of sovereign immunity in exchange for the States’ ability to benefit from the federal intellectual property system. To avoid Constitutional difficulties, we believe that there must be clear notice to the States of how participation triggers waiver. There may be other complexities and Constitutional questions that need further examination as well.

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Mr. Chairman, your bill offers one model for addressing these issues – a carefully crafted model that deserves close attention as we move forward in this discussion. As noted above, section 5 of S. 1611 would abrogate State sovereign immunity in cases where a State’s infringement constituted a constitutional violation under the Due Process Clause or the Takings Clause, and where the State cannot demonstrate that its own procedures are adequate to remedy such violations. Section 4 of the bill would clarify that actions, including Ex Parte Young suits, can be brought against State officials. And under section 3 of S. 1611, a State could not obtain damages in federal courts for infringements of its patents, trademarks or copyrights unless the State had waived its immunity in federal court in any action for "infringement of intellectual property protected under Federal law." The Commerce Department supports the objective of ensuring that owners of intellectual property rights have a proper remedy when a State infringes upon those intellectual property rights. The Administration believes that legislation to achieve that objective must (1) be consistent with the Constitution, (2) properly respect the roles of the States in our Federal system, and (3) facilitate creation of and commerce in intellectual property. While the Administration is not yet prepared to endorse a particular bill, we appreciate very much your introduction of S. 1611 as a basis for discussion of these issues. We believe that hearings involving representatives of private holders of intellectual property, States, State holders of intellectual property, the Administration, and legal experts in intellectual property and in State immunity, will enable this Committee to fashion appropriate legislation for further consideration.

Before closing, I raise one technical issue with respect to S. 1611. If S. 1611 or comparable legislation is pursued, the USPTO would recommend that plant variety protection and integrated circuit designs be added to the category of intellectual property for which States can obtain no infringement damages unless the States waive sovereign immunity. Although a State would be required to waive its sovereign immunity in infringement suits involving all types of federally protected intellectual property in order to obtain patent, trademark, or copyright damages, it is not clear under the current draft bill that a State owner of a semiconductor chip design or plant variety would be required to waive immunity in order to obtain damages for infringement of this intellectual property. Mr. Chairman, we would be happy to work with your staff to add the appropriate text ensuring that States owning integrated circuit designs or protected plant varieties be held to the same standards as States owning other forms of intellectual property.

Conclusion

The Administration believes that, as State instrumentalities become increasingly involved in commerce, particularly through the educational and research sectors, they must accept the responsibility that comes with their desire to protect and enforce their own intellectual property rights. The federal government accepts that it may be liable for money damages if it infringes intellectual property rights. Indeed, while the federal government is precluded by statute from asserting copyright domestically on works created by its employees, the federal government can be held liable for copyright infringement. 28 U.S.C. §1498 (2002). Similarly, the federal government can be held liable for patent and trademark infringement and has, in fact, been ordered to pay damages for patent infringement. See, e.g. Hughes v. U.S., 271 F.3d 1060 (CAFC 2001). In light of Florida Prepaid, the States are not subject to the same liability as the federal government. Our reading of the Supreme Court’s decisions in the Florida Prepaid cases suggests that a legislative remedy is appropriate to address this concern.

Mr. Chairman, the USPTO and the Administration look forward to continuing to work with you and the members of this distinguished Committee to ensure proper protection for intellectual property.