Convinced that the federal government has way too much power, five of the nine justices on the U.S. Supreme Court are on a crusade to hand authority back to the states. While such a constitutional battle may seem far removed from the world of business, one of the court's latest states' rights rulings could end up stinging many companies.
Released on June 23, the final day of the Supreme Court's term, Florida Prepaid Postsecondary Education Expense Board vs. College Savings Bank is a scary example of what can happen when the Supreme Court puts ideology before practicality. The case centers around a patent that the bank won after devising a special certificate of deposit paying out interest pegged to the rate of increase in college expenses. When a State of Florida agency began selling the same product, the bank sued for patent infringement. In response to the suit, Florida made a bold claim: that states are constitutionally immune from federal intellectual-property laws under the doctrine of sovereign immunity.
GREEN LIGHT. To the shock of many intellectual-property experts, the high court bought Florida's arguments. The mind-boggling upshot: States now have virtually a free pass to ignore U.S. intellectual-property law. Given the massive amount of commerce between businesses and states, the case has the potential to hurt Corporate America in a wide variety of ways. "Watch out if you publish software that someone at a state university wants to copy for free," warns Bill Scanlon, an intellectual-property attorney in Madison, Wis. "Watch out if you own a patent on a medical procedure that some doctor in a state medical school wants to use. Watch out if you've invested heavily in a great trademark, like Nike's Swoosh, and a bureaucrat decides his state program would be wildly promoted if it used the same mark."
For many corporations, one of the most frightening implications of College Savings Bank is that the ruling could give state universities a big advantage in the race to patent new technologies. Over the past few years, state and private schools alike have started to recognize that they produce a treasure trove of valuable research and have begun to move aggressively into the business of selling it (chart). That often puts the universities in direct competition with some companies. Over the past year, for example, Florida State University has taken in $51 million from patents on the manufacture of the anticancer drug Taxol.
The fact that state schools are beginning to milk serious money out of their patent portfolios is a healthy trend. However, as the profit flow increases, schools are inevitably going to clash more frequently with companies. A fierce battle is now raging, for example, between Genentech Inc. and the University of California, which claims the biotech firm infringed on its growth-hormone patents. While there's nothing wrong with state universities suing companies to protect their commercial rights, the College Savings Bank decision unfairly prevents companies from fighting back. It also, for no good reason, treats state schools differently from private institutions such as Stanford and Columbia--which are still fully subject to intellectual-property laws.
"MAKES NO SENSE." That lack of logic outrages many patent specialists. "The decision makes no sense," says University of Michigan Law School Professor Rebecca S. Eisenberg. She asserts that it springs from "a bizarre states' rights agenda that really has nothing to do with intellectual property."
Unfathomable as College Savings Bank may be, however, it is no mere lower-court decision that a sensible appeals court can overturn. Because of the Supreme Court's role as the final arbiter in America's political balance of power, the decision is now a bedrock precedent that even Congress can't entirely undo. In a dramatic oral dissent delivered immediately after the majority on the court announced the decision, Justice John Paul Stevens likened the court's new ideology on state sovereignty to a "mindless dragon" chewing holes in existing law. That dragon just took a big bite out of the property rights of Corporate America.