Taken by the Fifth: The Fifth Amendment 'Taking Clause' and Intellectual Property

by Paul F. Kilmer

Some patent attorneys are familiar with the remedies available under the Tucker Act for unauthorized use of an invention by the United States Government or one of its contractors.[2] A few practitioners may even know of the parallel remedies for copyright infringement by the United States Government also available under the Tucker Act.[3] And a handful of trademark lawyers may have had experience with infringements by federal agencies and the waiver of sovereign immunity in the Lanham Act that permits private rights of action against such government conduct.[4]

But what about situations in which something other than a patent, trademark or copyright is involved, such as a trade secret, semiconductor chip mask work or the right of publicity? And what about situations in which the government involved is a State, not the United States?

What if the government is not the beneficiary of the taking of an intellectual property right ("IPR") - for example, where a statute intended to protect public health has the effect of disclosing trade secrets to competitors? Are such cases actionable under the Fifth Amendment Taking Clause?[5] If so, what circumstances need be present for a private litigant to challenge the authority of the government?

When does a cause of action under the Taking Clause actually arise? Is the threat of a taking enough or must the property already be in the hands of the government, its agent or a third party before the owner may seek a remedy?

And what about situations in which a party might wish to seek injunctive or declaratory relief rather than money damages? Are such remedies ever available under the Taking Clause, which specifically provides only for "just compensation"?[6]

These questions will not be definitively answered by the recent decision of the U.S. Court of Appeals for the First Circuit in Philip Morris, Inc. v. Reilly.[7] However, Reilly provides some of the contours and complexities of the issues with which the courts must grapple in Taking Clause actions.

In Reilly, a three judge panel, split three ways, issued injunctive, not monetary relief, against the prospective taking of a trade secret that might result from a Massachusetts' statute that could have allowed the ingredients of tobacco products to be made public, with the dissent (per Judge Lipez) and so-called "lead opinion" (per Judge Torruella) agreeing upon a three-part test for assessing IPR Taking Clause actions and the third judge (Judge Selya), joining the lead opinion in the result only, relying upon a different analysis to find that only a single factor need be present to establish a taking. In the magnitude of its disarray, Reilly brings into focus for IPR practitioners those 12 words in the Fifth Amendment to the Constitution ". . . nor shall private property be taken for public use, without just compensation."[8]

The Life of Reilly

In Reilly, a 1996 Massachusetts statute[9] (the Disclosure Act) had been enacted that might have required tobacco companies to submit to a State agency ingredient lists for their products setting forth the relative amount of each substance besides tobacco and water. The tobacco companies claimed this information as trade secrets and presented evidence indicating that their formulas could not be "reverse engineered" with available technology.[10]

The tobacco companies filed a pre-emptive action to prevent the implementation of the Disclosure Act. The tobacco companies argued, inter alia, that the statute would violate the Taking Clause and their Constitutional rights under the Due Process clause of the Fifth Amendment[11] by effecting a taking without providing a meaningful opportunity to be heard.[12]

The State argued that public health considerations justified the Disclosure Act and its proposed regulations as a proper exercise of traditional "police powers" that fell short of a "taking." The State's case included submissions demonstrating that current publicly available ingredient lists did not identify additives by brand or manufacturer and therefore Massachusetts could not effectively study the interaction of additives used in tobacco products. None of the litigants argued that the proposed studies, alone, were outside of the health and safety realm of the State's police powers.

The State statute and the regulations implementing it also left open the possibility that once various tobacco brands had been tested in relation to the health risks posed by the interaction of their ingredients, the State might publicize the ingredient lists so that consumers would better know which tobacco products were potentially more dangerous than others. However, before any such public disclosure could take place, it was required that: (a) the Massachusetts Department of Public Health (DPH) find that publication of the ingredients "could reduce risks to public health"; (b) the Massachusetts Attorney General determine that disclosure would not be an unconstitutional taking; (c) the DPH provide sixty days' notice to the affected tobacco manufacturer before its ingredients list was publicly disclosed; and (d) during the sixty day notice period, the tobacco manufacturer could withdraw its product from the Massachusetts' market and thereby avoid disclosure of its ingredients list.[13] Until all statutory and regulatory requirements for allowing disclosure had been met, the tobacco companies' ingredient lists were to be kept confidential by the State.[14]

The court in Reilly was faced with a number of discrete issues which are instructive on virtually every facet of Fifth Amendment "taking" practice. The Reilly court also avoided a few issues that may arise in Taking Clause actions, which will also be explored in the following sections.

How Broad Is the "Taking" Power?

Although this issue is at the heart of Reilly and all other Taking Clause actions, the breadth of the power of all levels of government to take private property for public use was perhaps best enunciated by Justice Douglas in Berman v. Parker[15], a 1954 Supreme Court ruling on a statute passed by Congress for the redevelopment of substantial areas of the District of Columbia aimed at stemming urban blight in the nation's capital:

"Subject to specific constitutional limitations, when the legislature has spoken, the public interest has been declared in terms well nigh conclusive. In such cases, the legislature, not the judiciary, is the main guardian of the public needs to be served by social legislation . . . . The role of the judiciary in determining whether that power is being exercised for a public purpose is an extremely narrow one. See Old Dominion Co. v. United States, 269 U.S. 55, 66; United States ex rel. TVA v. Welch, 327 U.S. 546, 552.

"Public safety, public health, morality, peace and quiet, law and order -- these are some of the more conspicuous examples of the traditional application of the police power to municipal affairs. Yet they merely illustrate the scope of the power, and do not delimit it. See Noble State Bank v. Haskell, 219 U.S. 104, 111. . . * * * Once the object is within the authority of Congress, the right to realize it through the exercise of eminent domain is clear. For the power of eminent domain is merely the means to the end. See Luxton v. North River Bridge Co., 153 U.S. 525, 529-530; United States v. Gettysburg Electric R. Co., 160 U.S. 668, 679 . . . . * * * The rights of . . . property owners are satisfied when they receive that just compensation which the Fifth Amendment exacts as the price of the taking."[16]

Although this statement of the breadth of legislative power over private property appears all-encompassing, there are constraints which arise from certain rights guaranteed by the Constitution (such as those contained in certain of the Bill of Rights set forth in the first ten amendments to the Constitution).[17]

What Is "Property" Subject to the Taking Clause?

The Reilly majority and dissent had no difficulty agreeing that almost any type of IPR, including trade secrets, is a property right protected by the Fifth Amendment.[18] This is consistent with the view of the Supreme Court in Ruckelshaus v. Monsanto.[19] The Monsanto Court was faced with the issue of whether a "taking" occurred under the Federal Insecticide, Fungicide, and Rodentcide Act (FIFRA), which authorized the EPA to use certain data submitted by one applicant for registration of a pesticide in evaluating subsequent applications by other companies and also allowed EPA to publicly disclose some of the submitted data.

The Supreme Court in Monsanto began by evaluating whether the trade secret rights at issue were "property" within the meaning of Fifth Amendment. In that its past decisions had recognized rights in various types of intangibles, such as liens and contracts,[20] the Court found trade secrets within the ambit of protected property.

However, not every cause of action recognized as part of the law of intellectual property may be pursued against a State under the Taking Clause. Recently, the Supreme Court in College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board,[21] which struck down the portion of the Trademark Remedy Clarification Act that sought to subject States to suits under Section 43(a) for false and misleading advertising, noted that not all rights arising under the broad umbrella of "unfair competition" constitute "property" that may be "taken" by government action. In College Savings, the defendant was an arm of the State of Florida that had allegedly made false statements about its own college tuition savings plan to the detriment of the plaintiff, a private bank which competed with State instrumentalities in offering consumers certificates of deposit to finance the cost of college education.[22] The Supreme Court noted that the Lanham Act may have provisions that protect property interests (e.g. creating a cause of action for trademark infringement...