The Supreme Court recently heard arguments in a patent dispute case, Oil States Energy Services, LLC v. Greene’s Energy Group, LLC.  Although the case has nothing to do with bankruptcy law, its outcome could have a substantial impact on bankruptcy practice and litigation. Oil States Energy concerns the limits of Congress’s ability to create courts pursuant to Article I of the Constitution rather than under Article III, and therefore raises separation of power issues similar to those considered by the Court in Stern v. Marshall, its 2011 decision limiting the authority of U.S. bankruptcy courts.

The facts of Oil States are straight-forward.  Oil States Energy sued Greene’s Energy Group for patent infringement.  Greene’s Energy responded by commencing a procedure known as “inter partes review”, an administrative process that permits parties to seek review by the Patent and Trademark Office (PTO) of patent grants.  Under this process, an administrative board within the PTO can invalidate the issuance of a patent, subject to appeal and review by the U.S. Court of Appeals for the Federal Circuit.  When the PTO board found for Greene’s Energy in this instance and held the patent grant to Oils States Energy to be invalid, Oil States Energy challenged its constitutionality, contending, among other things, that Congress had impermissibly vested Article III “judicial power” in an Article I forum.

The Supreme Court has been wrestling with the limits of the constitutional authority of Article I courts off and on for well over a century. A line of cases has limited the power of Congress to create courts pursuant to Article I, rather than under Article III, to territorial courts, military tribunals, and courts created to hear cases involving “public” rights (e.g., cases involving claims of citizens against the government).  Claims of citizens against one another typically are “private rights” that must be heard by an Article III judge.

With respect to bankruptcy courts, the common understanding has been that matters pertaining (in the Court’s words) to “the restructuring of debtor-creditor relations, which is at the core of federal bankruptcy power” under Article I, Section 8, constitutes a type of “public right” which can be heard and decided by an Article I bankruptcy judge. The Court has never expressly held this, however, or handed down a clear ruling as to where the line between “public rights” and “private rights” should be drawn in bankruptcy proceedings.  Although in some recent cases involving non-bankruptcy Article I tribunals the Court has taken an expansive and pragmatic view of the “public rights” doctrine, in Stern the Court adopted a more constricted approach.  It ruled that although an Article I bankruptcy judge could appropriately enter a final order regarding a creditor’s claim against a bankruptcy estate, a common law tort claim held by the bankruptcy estate against the same creditor nevertheless constituted a “private right” if it was not related to the initial claim against the estate, and that it was therefore unconstitutional for Congress to have authorized a non-Article III court to render a final determination on it.

As the Court in Stern candidly noted, “the distinction between public and private rights – at least as framed by some of our recent cases – fails to provide concrete guidance[.]” Stern did nothing to clarify this problem, and bankruptcy practitioners and judges have struggled since the opinion was handed down to understand the limits it placed on bankruptcy court authority.

The question in Oil States – whether an Article I tribunal may invalidate a previously granted patent – raises many of the same issues regarding “private rights” and “public rights.”  Oil States Energy contends that its dispute with Greene’s Energy is purely a private dispute over patent infringement, over which an Article I forum has no greater authority to adjudicate than the tort claim at issue in Stern.  Greene’s Energy argues in response that the case involves a “public right,” in that it derives from Congress’s patent power under Article I, Section 8, and is therefore completely distinguishable from Stern’s common law tort action.  Oil States Energy points to the Court’s concern in Stern regarding the encroachment by Congress on the essential protections of Article III, asserting that “[i]f a patent dispute case – a dispute over a private property right – may be swept out of the [Article III] federal courts to an [Article I] administrative agency simply by deeming it part of some amorphous ‘public right,’ then anything can be, and Article III’s protections are mere ‘wishful thinking.’”  Greene’s Energy counters by pointing to the Court’s discussion in Stern of a “public right” as deriving from “a federal regulatory scheme,” and the suggestion there that “what makes a right a ‘public right’ rather than private is that the right is integrally related to particular Federal Government action.”

Both bankruptcy and patent law fall squarely within the scope of Congress’s power under Article I, Section 8, and in both instances Congress has created specialized forums in an effort to allow parties to address issues which are not susceptible to efficient disposition in Article III courts. Accordingly, any ruling that the Court makes in Oil States on the distinction between “public rights” and “private rights,” and on the limits of the authority of courts created under Article I, is almost certain to have a significant impact on U.S. bankruptcy courts.