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

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, which implicates the property interest in a trademark), but that false and misleading advertising by a State in relation to its own activities did not impact another's "right to exclude" the State from private property.[23] More broadly, the Court in College Savings Bank indicated that a property right did not arise where the interest at stake was "the activity of doing business, or the activity of making a profit."[24]

In a companion case, Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank,[25] the Supreme Court struck down a federal law that sought to abrogate State sovereign immunity from patent infringement litigation. However, that holding was made after the Court specifically recognized that patents are a species of property[26]

Under Monsanto and the College Savings Bank decisions, patents, trademarks, copyrights and trade secrets are "property" interests subject to possible taking by a government. The rights of publicity and privacy, because they are based upon the ability to exclude others from benefiting from the persona of another, are also likely to qualify as "property." Similarly, sui generis rights included in the Patent and the Copyright Laws, such as protection for plant varieties[27], semiconductor mask works[28], boat hull designs[29] and the rights of attribution and integrity that are available to the authors of certain works of visual art,[30] all of which include the ability to exclude others from using the protected right, would appear to be property potentially subject to taking by a government.[31]

Does Sovereign Immunity Need to be Waived?

As a general rule, the United States Government may be sued only by means of a waiver of sovereign immunity.[32] Such a waiver is already in place for infringement of patents, copyrights and trademarks.[33] Likewise, specific waivers of immunity are in place for plant varieties, mask works and boat hulls.[34] Taking actions premised upon the rights of publicity, privacy, and the attribution and integrity of works of visual art could be based upon the general waiver provisions of the Tucker Act, which appear sufficient for that purpose, although unlike the specific waiver provisions applicable to patent, copyrights and trademarks, additional evidence that government action constitutes a taking may be required.[35]

Suits against States are trickier. The Eleventh Amendment to the Constitution prohibits suits in federal court against a State government by citizens of another State.[36] Supreme Court jurisprudence has both expanded and, based upon application of the 14^th Amendment, narrowed the ambit of State government immunity from suit.[37] It is now the case that a State may only be sued where: (a) a substantive violation of the 14^th Amendment is asserted; (b) Congress has authorized suit in the proper exercise of its power to enforce the Fourteenth Amendment; or (c) the State has waived its sovereign immunity by consenting to suit.[38]

Recent Supreme Court jurisprudence indicates that Congress may invoke the 14^th Amendment as a basis for the waiver of State sovereign immunity only where it has: (a) identified conduct by a State that transgresses the substantive provisions of the Fourteenth Amendment; and (b) the legislation is narrowly tailored to appropriately remedy the unconstitutional conduct by the State.[39]

It does not appear that the State of Massachusetts questioned whether the Reilly action could be brought in a federal court even though issues of State sovereign immunity were implicated in the action.

“Public” or “Private” Use?

Under the Fifth Amendment, the use to which the Government subjects the property interest at issue must be “public”, not private. Although Reilly does not directly address this issue, the Supreme Court in Monsanto, as many courts before it had done, dealt almost in passing with the question of whether the taking of trade secrets under FIFRA was for “public” or “private” use.[40]

The Supreme Court concluded that only a “conceivable public character” was required to come within the bounds of the Taking Clause and that it was “for Congress to determine” what constitutes a legitimate public purpose.[41] Like the taking power itself, the "public character" requirement is therefore quite broad and can conceivably be molded by legislative history, at least within the bounds of constraints found elsewhere in the Constitution.[42]

Permitted Regulation or Deprivation of Rights?

The Supreme Court in Monsanto concluded that deprivation of a property interest by government action may constitute a "taking" and therefore the "taking" inquiry does not end merely because the government failed to acquire title to a chattel or occupy land.[43] This finding was consistent with prior cases in which the Supreme Court had indicated that there are two branches of Taking Clause cases: (a) physical takings and (b) regulatory takings, with the latter being subject to more detailed judicial analysis as to whether a true "taking" had occurred.[44]

Physical takings, because they are more readily apparent (e.g. the government takes title to land and knocks down a house to put in a superhighway) are often more focused on valuation ("just compensation") than whether a taking has occurred or whether the taking is a permitted act of government.[45] By contrast, regulatory takings are more difficult to assess since, as the Supreme Court has noted, a taking does not always occur "when interference [with a property right] arises from some public program adjusting the benefits and burdens of economic life to promote the common good."[46]

Justice Holmes observed in the Supreme Court's 1922 decision in Mahon[47], that "[g]overnment hardly could go on if to some extent values incident to property could not be diminished without paying for every . . . change in the general law." Therefore, regulatory requirements such as land use permits and recordation of interests in land do not generally present sufficient intrusions into a property right to constitute a "taking" under the Fifth Amendment.[48]

However, the Supreme Court in Monsanto concluded that trade secrets are a species of property protected under the Fifth Amendment's Taking Clause whose use or disclosure by the government may deprive the owner of all value in the intellectual property. Therefore, where the regulation at issue would lead to a disclosure of the information submitted to the government, the courts should move on to consider additional factors determinative of the "taking" issue.[49]

The Court in Monsanto concluded that a "taking" of trade secrets would occur where the owner submitted the information under a guarantee that the government would maintain it in secrecy and the government later broke that promise through a revision of law or regulation.[50] However, Monsanto also held that if a company develops trade secret information knowing it will be provided to the government in order to obtain a government benefit and with the knowledge that the government might disclose the trade secret, a "taking" would not result since the trade secret owner did not have a reasonable expectation of confidentiality when the trade secret was created.[51]

In Reilly, Judge Torruella's lead opinion noted that the State may have a legitimate interest that falls short of a "taking" in forcing the disclosure of some trade secrets.[52] Prior courts had similarly noted that a statute or regulation that forces the relinquishment of one "strand" or "stick" in a "bundle" of property rights does not necessarily result in a "taking" as long as the property as a whole remains economically viable.[53]

Judge Torruella's lead opinion went on to state that "[a] regulatory taking transpires when some significant restriction is placed upon an owner's use of his property for which 'justice and fairness' require that compensation be given."[54] The exact type and degree of restriction on the use of property that may qualify as a "taking" is dealt with in the next section.

"Reasonable Investment Backed Expectation", Alone, Or Must Economic Impact and the Character of the Government Action Be Considered?

The wheels literally come off in Reilly when the three-member court considered what test should be applied to determine whether a "taking" has occurred and then applies their respective tests to the facts. The lead opinion and the dissent both agree that a three-part "ad hoc" factual inquiry, derived from Monsanto, is determinative, to wit: "(1) what is the economic impact of the regulation; (2) whether the government action interferes with reasonable investment-backed expectations; and (3) what is the character of the government action"[55] [which the lead opinion later appears to equate with "the public interest" in the alleged taking].[56]

The lead opinion in Reilly went on to find that "at least one per se rule" applies in the regulatory taking sphere: "[w]hen a regulation denies all economically beneficial or productive uses of land, it is a taking."[57] However, the lead opinion refused to carry that per se rule over into the realm of intangible property or any other form of personalty, finding no support for such a holding in the Supreme Court's Taking Clause jurisprudence.[58] The concurrence, by contrast, found no significant distinction between real property and intangible intellectual property, and would have applied the per se rule, finding support in Monsanto for this position.[59]

The concurring opinion found that only one factor was dispositive: that the tobacco companies had a reasonable investment-backed expectation when they created their secret combinations of ingredients that the State would protect them under existing Massachusetts trade secrecy law.[60] The lead opinion criticized this approach at length, noting that it failed to take into consideration factors such as the government's compelling need to protect the public from unreasonable risk of injury that might result from failure to disclose trade secrets in the face of dangers such as the threat posed by toxic substances being released into the environment.[61] Under such compelling circumstances, the lead opinion would not find the government's use of trade secret data to be a "taking."[62] In this regard, the lead opinion in Reilly appears more in line with recent Supreme Court precedent.[63]

Judge Torruella's lead opinion and Judge Lipez's dissent agree the three-part Monsanto ad hoc test must be applied, but diverge in the application of the test to the facts in Reilly. The lead opinion admits that a regulation may not represent a "taking" merely because it imposes a burden on an investment-backed asset.[64] The issue for Judge Torruella is whether the government action (in this case, disclosure of a trade secret) will destroy the value of a reasonable investment-back asset.[65] Judge Torruella admits that disclosure of information to the government to obtain a government benefit or comply with an existing regulation in a situation in which the government has indicated it may disclose the contents of the submission would not constitute a "taking" since under such circumstances there is no reasonable investment-backed expectation that the data would be maintained in secrecy.[66] In other words, if a company has constructive or actual notice that its trade secrets might be made public, then when it either makes a submission to the government or produces additional data or information that it is required to submit under an existing regulatory scheme, the company has no reasonable investment-backed expectation of confidentiality and cannot legitimately claim a taking has occurred when the government later discloses the submitted data or information.

Judge Torruella's lead opinion takes issue with the Disclosure Act in relation to what he characterizes as Massachusetts' effort to redefine property rights "without regard to previously existing [trade secret] protections."[67] He goes on to admit that if the Massachusetts Disclosure Act had been carefully tailored to allow for disclosure of only "fair information", which he defines as perhaps publishing "one or more ingredients of tobacco products" found to present a health risk (as opposed to publishing a list of all ingredients in a specific tobacco-based product), then it might be permissible to preserve public health and safety rather than constituting a taking.[68]

So that readers of the lead opinion in Reilly would not assume Judge Torruella was advocating a "least drastic alternative" review of regulatory taking actions, he specifically noted that "I am not requiring Massachusetts to adopt the narrowest regulation possible to address its laudable goals.[69] " Rather, his concern centered upon two features of the Disclosure Act: (a) the destruction of the property right of the tobacco companies if their trade secret ingredient lists are published[70] and the attendant destruction of the economic value of tobacco brands[71]; and (b) the low threshold that the Disclosure Act set for allowing publication of the trade secrets (i.e. "Massachusetts can publish their entire ingredient lists if doing so 'could' further public health.").[72]

The dissent of Judge Lipez focused upon the fact that the Disclosure Act had not yet gone into effect and therefore the tobacco companies were mounting a "facial challenge" to the law.[73] That is, the actual "taking" of which the plaintiffs complained had not occurred and the tobacco companies were asserting that implementation in the future would deprive them of a property interest. Of such facial challenges, Judge Lipez noted:

"A facial challenge to a legislative Act is . . . the most difficult challenge to mount successfully, since the challenger must establish that no set of circumstances exists under which the Act would be valid."[74]

Judge Lipez then noted that the Disclosure Act indicated "only that Massachusetts may disclose some of the information it receives" (emphasis in original) and that the Act did not, by its terms, mandate disclosure of all ingredient information or even that part of the ingredient information that might contain trade secrets.[75] On these facts, Judge Lipez would not find a facial taking, noting "the mere possibility of a . . . broad disclosure is not enough to render the Act facially invalid."[76]

That being said, Judge Lipez agreed with the conclusion of the lead opinion that if the Disclosure Act led to publication of the entire list of ingredients of tobacco products it would constitute a "taking" of trade secrets.[77] But if "only certain harmful ingredients" were disclosed, Judge Lipez would find that the State's interest outweighed the costs to the tobacco companies and no taking would have occurred.[78] The fact that the State might not publish sufficient information to actually disclose trade secrets of the tobacco companies, combined with the ability of the tobacco companies to challenged proposed public disclosures through "as-applied" litigation (the filing of which would stay public disclosure of the ingredients list at issue) was, in the view of Judge Lipez, sufficient to find that "the Act is not unconstitutional in every application," thereby defeating the facial challenge by the tobacco companies.[79]

When May Pre-Taking Lawsuits Be Brought?

The Reilly court addressed this issue and both the lead opinion and the dissent concluded that where an “unconstitutional taking” is threatened, a pre-emptive (pre-taking) lawsuit may be brought seeking injunctive or declaratory relief.[80]

Pre-emptive actions may also be warranted where substantive rights otherwise guaranteed by the Constitution will be violated if the government action is allowed to go forward. For example, claims of discrimination, whether based on theories of equal protection, due process or otherwise, being outside of the jurisdiction of the Court of Claims, may be candidates for pre-emptive unconstitutional "taking" actions.[81] Similarly, if government action is perpetrated in a manner where "just compensation" cannot be given or where the government action threatened a basic Constitutional guarantee (such as Freedom of Speech), a preemptive action would also be warranted.[82]

“Just Compensation” or Injunctive or Declaratory Relief?

The Fifth Amendment clearly states that the remedy for a "taking" is "just compensation."[83] Yet the courts, including the one in Reilly,[84] occasionally grant injunctive or declaratory relief against implementation of a statute or regulation that would perpetrate a "taking." This conduct by the courts begs the question of when injunctive relief may be appropriate.

The lead opinion of Judge Torruella in Reilly attempts to sweep away this issue by indicating that Massachusetts had failed to object to issuance of an injunction and had therefore waived its argument.[85] This rationale, although an approach taken by other courts, including the Supreme Court[86], seems weak since it presumes that once a government has decided to "take" private property under its police powers it can be prevented from doing so even though the constitution states that the government need only pay "just compensation" under such circumstances.

The Supreme Court's decision in Monsanto appears to teach against the "waiver" position adopted in Reilly. The Court in Monsanto noted that once it is established a taking has occurred for public use, the matter should then be referred to a lower court (there, the U.S. Court of Claims) for a determination of "just compensation"; and there is no indication in Monsanto that such a remedy was requested by the defendant (the United States).[87]

However, beyond "waiver," Reilly and other decisions give some guidance as to when injunctive or declaratory relief may be warranted. Reilly's lead opinion addresses the argument by the State that tobacco companies could avoid the adverse effects of the Disclosure Act by merely "not selling their products in Massachusetts."[88] Judge Torruella comes to the conclusion that the product at issue (tobacco) is "legal" in Massachusetts, the Disclosure Act did not make selling the product illegal, and the "taking" at issue did not result in a benefit being granted to the tobacco companies as a result of submission of their trade secrets to the government but only imposed a loss on them.[89] Based upon these findings, the lead opinion held that the Disclosure Act was "an unconstitutional taking," as opposed to a constitutional taking, which would only have required payment of "just compensation."[90]

What the lead opinion appears to be saying is that the Disclosure Act was somehow ultra vires of the State's powers to regulate and therefore was an unlawful "taking" which could not be remedied by "just compensation" under the Fifth Amendment. In other words, the lead opinion finds that the Disclosure Act was contrary to law (rather than a legally permissible regulation that effected a taking).[91] Unsaid is exactly what law the Disclosure Act violated and how another law (e.g. the right to sell a legal product) could trump the Fifth Amendment to the Constitution.

The use of injunctive relief in Reilly might better be justified as either: (a) the only available remedy for an attempt at regulatory taking in which the government had no intention or ability to pay compensation, and therefore the government could not justify its regulation by relying upon the Taking Clause (i.e. the act was ultra vires of the Taking Clause)[92]; or (b) as a remedy for denial of "substantive" rather than "procedural" due process rights of the tobacco companies (i.e. ultra vires of Constitutional guarantees other than the Taking Clause).[93]

Although the courts have not been explicit on the point, it would appear that in order to be ultra vires of the Taking Clause: (a) the legislature must have demonstrated (overtly or by implication) that it did not intend for compensation to be paid as a result of the taking; and (b) compensation must be impossible to reasonably structure without completely undermining or destroying the intent of the enactment, or, perhaps, that paying "just compensation" would be an immense burden on the government that was not within the contemplation of the legislature when the statute was enacted.[94]

For example in Eastern Enterprises, the statute at issue was intended to force coal companies to compensate miners for lifetime health benefits that were not contemplated during the period of time when the plaintiff (Eastern Enterprises) had been in the coal mining business. Based upon these facts, the Supreme Court found the statute was "improperly crafted" to place a "severe, disproportionate, and extremely retroactive burden" on the plaintiff. Since the statute could not be reasonably interpreted to mean that the federal government would compensate the coal company in order to fund the health benefit (i.e. the statute's purpose was to impose a regulatory liability on the coal company and that purpose was entirely defeated if the government was forced to fund that liability), an "unconstitutional taking" was found and injunctive relief was imposed.

The conditions that might render an enactment ultra vires of substantive due process rights present some complex Constitutional issues and for this reason, to date, the Supreme Court and appellate courts have steered away from this concept (mainly by mentioning it and then pointedly not addressing the merits of the claim).[95]

For purposes of background, procedural due process involves issues such as whether the statute or regulations were properly adopted following lawful procedures governing such enactments.[96] However, if proper procedures were followed, as was the case with the Disclosure Act in Reilly, then that law would normally represent a permitted "takings" by the government.[97]

By contrast, a violation of substantive due process rights may arise even where a statute was enacted in a manner consistent with required procedural due process. Substantive due process absolutely reserves to individuals certain property rights or the ability to engage in certain conduct, despite the government's desire to the contrary.

A violation of such substantive due process rights would be ultra vires and thus the government could not lawfully reach the property right at issue and "taking" the property right would be unconstitutional. In other words, an unconstitutional enactment by the State or federal governments cannot form the proper basis for a "taking" under the Fifth Amendment and therefore the "private property" at issue cannot be "taken for public use" and no amount of "just compensation" can save the situation. When properly invoked, therefore, substantive due process rights would cut off the government from acting and can be enforced by injunctive or declaratory relief.[98]

There are two types of substantive due process rights. The first are those clearly recognized in the Constitution (e.g. Freedom of Speech). These enumerated Constitutional rights have generally been extended to cover State action by operation of the Fourteenth Amendment. The second group of substantive due process rights is based upon certain unenumerated rights that courts have found within the context of specific Constitutional guarantees.[99]

At first, substantive due process rights included only those enumerated in the Constitution (e.g. Freedom of Speech, assembly and the press protected under the First Amendment). However, in the early years of the 20^th Century, certain unenumerated substantive due process rights were recognized under the so-called "Fundamental Rights" doctrine.[100] The decisions recognizing "Fundamental Rights" were either severely limited or overruled by later Courts, beginning in 1937.[101]

However, in the mid-1960s and thereafter, decisions such as Griswold v. Connecticut[102], Roe v. Wade[103], and, most recently, Lawrence v. Texas[104], have found that substantive due process (or a "penumbra" of substantive rights surrounding the Due Process Clauses of the 5^th and 14^th Amendments) includes rights not directly specified in the text of the Constitution.

Applying a pre-1937 "substantive due process" regime to Reilly: (a) the State had created and long recognized a property interest in trade secrets; (b) the ingredients of the tobacco products at issue were a trade secret protectable under Massachusetts's law; (c) the Disclosure Act did not outlaw the sale of tobacco products on public health grounds but instead required possible disclosure and public use of trade secrets; (d) the Disclosure Act did not confer a government benefit on the tobacco companies in exchange for disclosure of the trade secrets; and (e) forcing tobacco companies to withdraw a lawful product from the Massachusetts market in order avoid disclosure of trade secrets required by an overreaching statute (the Disclosure Act) would deny the tobacco companies the lawful right to sell their products in Massachusetts (a disproportionate harm to the tobacco companies unrelated to the objectives of the Disclosure Act, according to the lead opinion). The result could be characterized as denial of substantive due process - that is, the "taking" of a property right contrary to law rather than in accordance with a legitimate government purpose (i.e. a possible violation of the formerly-recognized substantive due process "right to contract" to sell a legal product).

Despite what might appear to be injunctive or declaratory relief granted on substantive due process grounds, neither Reilly nor the Supreme Court has invoked substantive due process as a basis for their holdings in Taking Clause actions.[105] Perhaps this is because the courts do not wish to squarely address the issue of whether recognition of "substantive due process" in economic rights such as the ability to sell a dangerous, though legal, product, (like the tobacco products in Reilly) might bring the law full-circle back to those Supreme Court decisions which struck down progressive legislation in the early 20^th Century and the New Deal of the early 1930s, and were repudiated in the 1937 Supreme Court decision in West Coast Hotel v. Parrish.[106] A dramatic expansion of such economic substantive due process rights, enforced by injunctive or declaratory relief, could reverse the course of almost 70 years of social and regulatory legislation by the federal and State governments.[107]

What is the Proper Forum?

Where a litigant is seeking "just compensation" against the federal government in a Taking Clause action, the proper forum is the U.S. Court of Claims.[108] This is true even if the matter involves "intangible property" and is for "unliquidated damages."[109]

However, where the claim is against a State under the 14^th Amendment (as in Reilly), or where as litigant seeks injunctive or declaratory relief against the United States Government, the proper forum is likely a federal district court with proper jurisdiction.[110]

Conclusion

In the final analysis, expropriation or regulatory action by the federal or State governments that destroys the private value of an intellectual property right whose normal exercise would result in "excluding" others from the use of an invention, idea, trademark, work, or related intangible property could be subject to a Taking Clause action.

Actions by a government that diminish, but do not expropriate or destroy, the value of the IPR may also constitute takings, either where the government has admitted as much (such as in those sections of the Tucker Act dealing with federal government use of patents and copyrights) or where a court otherwise finds that a taking has occurred. Where there is an issue as to whether a regulatory "taking" of IPR has occurred, as a general rule the courts are likely to rely upon the three-part ad hoc inquiry found in Monsanto and the lead and dissenting opinions in Reilly (reasonable investment backed expectation, economic impact and public interest), rather than the per se "reasonable investment-backed expectation" rule advocated by the dissent in Reilly and the D.C. Circuit in Nixon.

If only "just compensation" is sought, a Taking Clause action against the federal government will most likely arise through a waiver of sovereign immunity under the Tucker Act and the action must be brought in the U.S. Court of Claims. Taking Clause actions against States will also often arise as a result of a specific waiver of State sovereign immunity and the forum will be dictated by State law, the 11^th Amendment or more general principles of federal court jurisdiction over the actions of the States.

Where a fundamental right guaranteed by the Constitution or an enactment intended to enforce a fundamental Constitutional right is at issue, a waiver of sovereign immunity may not be required and injunctive and declaratory relief may be available.

However, the rules regarding Taking Clause actions are an ever-changing landscape. For example, some courts appear to be edging closer to recognizing certain substantive due process rights of an economic nature. It is therefore difficult to predict how long the current trends will stay in place.

The author wishes to thank Anthony R. Masiello, Senior Counsel, Holland & Knight LLP, for his editorial assistance.

[2] 28 U.S.C. §1498(a).

[3] 28 U.S.C. §1498(b); See e.g., Steve Altman Photography v. United States, 18 Ct.Cl. 267 (1989)(copyright action).

[4] 15 U.S.C. §1122(a).

[5] U.S. Const. amends. V and XIV.

[6] Id.

[7] Philip Morris, Inc. v. Reilly, 312 F.3d 24 (1st Cir. 1992).

[8] U.S. Const. amend. V.

[9] Mass. Gen. Laws ch. 94, §307B (2002).

[10] 312 F.3d at 27.

[11] The assertion of a Fifth Amendment violation was predicated on the application of that Amendment to the States by means of the Fourteenth Amendment. U.S. Const. amend. XIV, Clause 1.

[12] 312 F.3d at 29.

[13] Id.

[14] Id.

[15] 348 U.S. 26 (1954).

[16] Id, 348 U.S. at 32-36.

[17] See the section below entitled "Injunctive Relief or 'Just Compensation'."

[18] 312 F.3d at 31 - 33 and 52 - 53 (Lipez. J., dissenting).

[19] 467 U.S. 986 (1984).

[20] Citing Armstrong v. United States, 364 U.S. 40 (1960); Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935) and Lynch v. United States, 292 U.S. 571 (1934).

[21] 527 U.S. 666 (1999)(It should be noted that this was a 5-4 decision).

[22] 527 U.S. at 670 - 671.

[23] 527 U.S. at 673.

[24] 527 U.S. at 675.

[25] 527 U.S. 627 (1999).

[26] 527 U.S. at 642.

[27] 7 U.S.C. Chapter 57.

[28] 17 U.S.C. Chapter 9.

[29] 17 U.S.C. Chapter 13.

[30] 17 U.S.C. §106A.

[31] This conclusion is bolstered by the provisions of the Tucker Act which specifically waive sovereign immunity of the United States in relation to actions brought in relation to plant varieties, mask works and boat hull designs. 28 U.S.C. §1491(a).

[32] Boyle v. United States, 200 F.3d 1369, 1372-73 (Fed. Cir. 2000) and Wechsberg v. United States, 54 Fed.Cl. 158, 64 U.S.P.Q.2d 1588 (2002).

[33] 28 U.S.C. §1498(a) and (b) and 15 U.S.C.§1122(a).

[34] 28 U.S.C. §1498(d) and (e).

[35] 28 U.S.C. §1491(a). See, the general discussion of the elements necessary to prove a regulatory taking in the section entitled "'Reasonable Investment Backed Expectation', Alone, Or Must Economic Impact and the Character of the Government Action be Considered?", below.

[36] U.S. Const. amend XI, provides that "[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State."

[37] See e.g., Seminole Tribes cf. EEOC v. Wyoming, 460 U.S. 226 (1983)(Significantly curtailing the power of Congress to abrogate State sovereign immunity, especially under its Article I powers).

[38] College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board, 527 U.S. 627, (1999)(a 5-4 decision).

[39] College Savings Bank, 527 U.S. at 639 and City of Boerne v. Flores, 521 U.S. 507, 519-520 and 530-534 (1997).

[40] 467 U.S. at 1014 - 1016.

[41] 467 U.S. at 1014. See, Berman, 348 U.S. at 33 (1954)

[42] See the discussion in the section below entitled "Injunctive Relief of 'Just Compensation'."

[43] 467 U.S. at 1003 - 1005, citing United States v. General Motors Corp., 323 U.S. 373, 378 (1945).

[44] See discussion in Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg'l. Planning Agency, 535 U.S. 302 (2002) and Yee v. City of Escondido, 503 U.S. 519, 522 (1992)(discussing the difference between physical occupation and mere regulation); Goldbatt v. Hempstead, 369 U.S. 590, 594 (1962) and Penn. Coal Co. v. Mahon, 260 U.S. 393, 415 (1922)("The general rule at least is that while property may be regulated to a certain extent, if that regulation goes too far it will be recognized as a taking.").

[45] See e.g., Kaiser Aetna v. United States, 444 U.S. 164 (1979)(government grant of public access to private pond found to be a taking tantamount to "an actual physical invasion.")

[46] Penn Central Transportation Co. v. City of New York, 438 U.S. 104, 124 (1978).

[47] Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 413 (1922).

[48] United States v. Riverside Bayview Homes, 474 U.S. 121 (1985)(requiring permit to fill privately held wetlands is not a taking; but noting that denying such a permit may entitle owner to just compensation); Texaco v. Short, 454 U.S. 516 (1982)(mineral claims may lapse if owner does not comply with regulations regarding such holdings); and United States v. Locke, 471 U.S. 84 (1984)(requiring recordation of mining claims is not a taking).

[49] 467 U.S. at 1004 - 1005.

[50] 467 U.S. at 1005 - 1007.

[51] 467 U.S. at 1008 - 1010.

[52] 312 F.3d at 41 - 42, citing Corn Products Ref. Co. v. Eddy, 249 U.S. 427, 431-32 (1919), which upheld as a permitted non-taking regulation the requirement that ingredient lists be disclosed to prevent consumer fraud.

[53] Andrus v. Allard, 444 U.S. 51, 65-66 (1979).

[54] 312 3d at 34; relying upon Goldblatt v. Hempstead, 369 U.S. 590, 594 (1962) and Penn. Coal Co. v. Mahon, 260 U.S. 393 (1922).

[55] 312 F.3d at 34; relying upon Penn Central, 438 U.S. at 124.

[56] 312 F.3d at 44.

[57] 312 F.3d at 34; relying upon Lucas v. S.C. Coastal Council, 505 U.S. 1003, 1015 (1992).

[58] 312 F.3d at 51. See, Nixon v. United States, 978 F.2d 1269, 1284-85 (D.C. Circuit 1992) (finding no compelling distinction between real and personal property that would render the per se rule inapplicable).

[59] 312 F.3d at 50-51.

[60] 312 F.3d at 48 - 51.

[61] 312 3d at 34 n.5; relying upon statutes such as the Toxic Substances Control Act, 15 U.S.C. §2601-92. Under that statute, manufacturers of chemicals must submit test data to EPA and there is no exemption for trade secrets.

[62] Id.

[63] Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302, 323 – 324 (Holding that the "longstanding distinction between acquisition of property for public use, on the one hand, and regulations prohibiting private uses, on the other, makes it inappropriate to treat cases involving physical takings as controlling precedents for the evaluation of a claim that there has been a regulatory taking . . . . we do not apply our precedents from the physical taking context to regulatory taking claims.")

[64] 312 F.3d at 43.

[65] 312 F.3d at 42.

[66] 312 F.3d at 38.

[67] 312 F.3d at 39.

[68] 312 F.3d at 40, relying upon Corn Products, 249 U.S. at 431-32, which permitted a State to require a complete list of product ingredients to prevent public deception that might otherwise occur through mislabeling and did not find such a regulation to constitute a "taking." The lead opinion in Reilly indicates that disclosure of the complete contents of a product might be "fair information" in one context (such as the food labeling in Corn Products) whereas only disclosure of a partial list of ingredients might be justified in another (for example, only those ingredients of tobacco products found to be harmful in Reilly).

[69] 312 F.3d at 45.

[70] 312 F.3d at 45 - 46. The lead opinion contrasts the complete destruction of the trade secret rights of the tobacco companies with situations in which the economic value of personal property was substantially diminished, but not entirely destroyed, by government regulation. In this section of the lead opinion, primary reliance is placed upon Andrus v. Allard, 444 U.S. 51 (1979), which held that a regulation prohibiting the sale of eagle parts, although severely undermining the economic value of the personal property involved, did not completely destroy its value since, for example, the regulation did not prevent the owners of eagle parts artifacts from displaying those artifacts for a fee. This would appear to be a very slender thread of distinction since the primary worth of artifacts made from eagle parts would be their resale value. A better approach to Andrus may be to recognize it as a case in which the government - read "public" - interest at stake in preserving the national symbol of the United States from annihilation by trophy hunters was the dominant factor in the balancing of interests, especially when combined with the difficulty and burden on the government of determining which eagle artifacts had been made before and after the ban in an effort to spare the owners of existing eagle artifacts the burden of the regulation. Under this approach to the three-part test, the government (public) interest was so dominant over the pre-existing investment-backed expectations of eagle-parts-artifact owners that the ban was not a taking but instead, under the reasoning of the lead opinion in Reilly, a compelling "counterbalance to the private loss involved" such that a taking did not occur.

[71] Id. In the "Economic Impact" section of Judge Torruella's lead opinion, he has no difficulty in reaching the conclusion that disclosure of the tobacco ingredients will destroy the "millions of dollars" spent by the tobacco companies in creating their formulas and the "billions of dollars" in value represented by the brands involved.

[72] 312 F.3d at 45.

[73] 312 F.3d at 52.

[74] Id, quoting Pharm. Research & Mfrs. Of Am. v. Concannon, 249 F.3d 66,77 (1st Cir. 2001) and also relying upon Yee v. City of Escondido, 502 U.S. 519, 534 (1992).

[75] 312 F.3d at 52-53.

[76] 312 F.3d at 54

[77] 312 F.3d at 52-53.

[78] 312 F.3d at 53.

[79] 312 F.3d 55-56.

[80] 312 F.3d at 30 and 54 n. 27.

[81] See, Mullenberg v. United States, 857 F.2d 770 (Fed. Cir. 1988) (Holding that the Court of Federal Claims does not have jurisdiction over suits against the Government for discrimination), cited in Mients v. United States, 50 Fed.Cl. 665 (2001).

[82] See, Eastern Enterprises v. Apfel, 524 U.S. 498 (1998).

[83] U.S. Const. amend. V and Monsanto, 467 U.S. at 1016 ("Equitable relief is not available to enjoin an alleged taking of private property for public use, duly authorized by law, when a suit for compensation can be brought against the sovereign subsequent to the taking.")

[84] 312 F.3d at 26 and 47 n. 22.

[85] Id.

[86] See, Eastern Enterprises v. Apfel, 524 U.S. 498, 537 (1998). But see, Monsanto, 467 U.S. at 1017 - 1020, indicating that once the appropriateness of the "taking" is determined it is generally proper to refer the matter to the Court of Claims under the Tucker Act.

[87] 467 U.S. at 1020.

[88] 312 F.3d at 46 - 47.

[89] 312 F.3d at 47.

[90] Id.

[91] Id. It is interesting to note that after discussing the unconstitutional nature of the taking in Reilly the lead opinion then states that it need not address the Due Process Clause arguments of the tobacco companies. 312 F.3d at 47. However, it appears that this one-sentence section of the lead opinion is aimed at the procedural due process arguments of the tobacco companies and does not address the substantive due process rights of the companies.

[92] See, Eastern Enterprises v. Apfel, 524 U.S. 498 (1998).

[93] See, Richard H. Seamon, "An Analysis of Jurisdictional Issues Arising from Eastern Enterprises v. Apfel", 51 Alabama Law Review 3 (Spring 2000), discussing relief from ultra vires enactments which may rise to the level of violations of substantive due process rights as highlighted by the Supreme Court in Eastern Enterprises v. Apfel, 524 U.S. 498 (1998).

[94] For example, in Reilly, the lead opinion noted that the trade secret rights in the MARLBORO brand, alone, might be worth "billions of dollars." 312 F.3d at 41. However, the Reilly court does not address the substantive due process issue and it is therefore impossible to accurately ascertain whether the burden of the "taking" of the tobacco company's trade secrets would have been a factor in the issuance of injunctive relief.

[95] See e.g., Reilly, 312 F.3d at 47.

[96] 312 F.3d at 26 (characterized in Reilly as the need to provide "a meaningful opportunity to be heard.")

[97] It would appear that the taking of trade secrets in Reilly, like those in Monsanto, could be capable of remedy by "just compensation." Although there is no discussion of this issue in Reilly, the lead opinion notes that some of the brands at issue are "worth billions of dollars." 312 F.3d at 41. Thus there was a basis for assessing "just compensation" if disclosure of the trade secrets had been made. It would then be up to the State to determine if the contemplated disclosure was worth the required compensation.

[98] See, Seamon, "An Analysis of Jurisdictional Issues Arising from Eastern Enterprises v. Apfel", supra at n. 93.

[99] See e.g., Griswald v. Connecticut, 381 U.S. 479, 481-86 (1965)(Connecticut statute forbidding use of contraceptives found to violate the right of marital privacy which the Court determined to be within the penumbra of specific guarantees of the Bill of Rights); Lawrence v. Texas, 539 U.S. ___ (2003)(Case No. 02-102, Decided June 26, 2003)(striking Texas sodomy law on substantive due process grounds).

[100] See e.g., Lochner v. New York, 198 U.S. 45 (1905)(a decision widely cited by the Supreme Court in the early 1930s to strike down New Deal legislation as violating the "Right to Contract" which that Court found to be encompassed within the 14^th Amendment Due Process provisions).

[101] See, West Coast Hotel v. Parrish, 300 U.S. 379 (1937) and Ferguson v. Skrupa, 372 U.S. 726 (1963).

[102] 381 U.S. at 481-86 (Connecticut statute forbidding use of contraceptives violates the right of marital privacy which is within penumbra of rights encompassed within the Bill of Rights).

[103] 410 U.S. 113 (1973)( Finding that certain State criminal abortion laws violated the Due Process Clause of the Fourteenth Amendment, which protects the "right of privacy" against State action).

[104] Lawrence v. Texas, 539 U.S. ___ (2003)(Case No. 02-102, Decided June 26, 2003)(striking Texas sodomy law on substantive due process grounds.)

[105] In fact, Reilly's lead opinion and the Supreme Court in similar situations seem to actively avoid addressing substantive due process issues. 312 F.3d at 56 - 57, Eastern Enterprises v. Apfel, 524 U.S. 498 (1998) and Babbitt v. Youpee, 519 U.S. 234 (1997).

[106] 300 U.S. 379 (1937).

[107] Ferguson v. Skrupa, 372 U.S. 726 (1963).

[108] 28 U.S.C. §1491(a). The Court of Claims does not have jurisdiction over "tort" actions or actions involving contracts "implied in law." Leonardo v. United States, 55 Fed.Cl. 344, 65 U.S.P.Q.2d 1915 (Ct. Cls. 2003)(copyright action).

[109] Id.

[110] See e.g., Reilly, 312 F.3d at 26; Eastern Enterprises, 524 U.S. at 537; Duke Power Co. v. Carolina Environmental Study Group, Inc., 438 U.S. 59, 71, n. 15 (1978)(Holding that the Declaratory Judgment Act "allows individuals threatened with a taking to seek a declaration of the constitutionality of the disputed governmental action before potentially uncompensable damages are sustained."); Babbitt v. Youpee, 519 U.S. 234, 243-245 (1997); and Hodel v. Irving, 481 U.S. 704, 716-718 (1987); See also, Chicago B & Q. R.R. Co. v. Chicago, 166 U.S. 226 (1897) and Webb's Fabulous Pharmacies v. Beckwith, 449 U.S. 155, 159 (1980)(applying the Taking Clause to the States via the 14^th Amendment).