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UPDATE 1-U.S. Supreme Court divided over legality of patent reviews

(Adds background to case, details from arguments, paragraphs 5-18)

WASHINGTON, Nov 27 (Reuters) - U.S. Supreme Court justices on Monday appeared divided over whether a federal agency's in-house process for challenging patents violates the constitutional rights of patent owners, leaving the fate of a system that has led to a high rate of patent cancellations uncertain.

In one of the most important patent cases to come before the Supreme Court in years, the nine justices heard an hour of arguments in a dispute over the U.S. Patent and Trademark Office's patent review proceeding known as inter partes review (IPR). A decision to strike down the reviews could fundamentally change the way patents disputes are litigated in the United States.

While some of the court's liberal justices voiced support for the process, conservative justices raised concerns that the government might be able to revoke patents too easily.

The reviews have become a quick and cheap way for companies to try to invalidate patents owned by competitors and others, and have been especially popular with high technology companies such as such as Apple Inc and Samsung Electronics Co Ltd that are common targets of patent infringement suits.

The case arose from a dispute between two rival Houston-based oilfield services companies, Oil States International Inc and Greene's Energy Group over a patent on protecting wellhead equipment used in the hydraulic fracturing, or fracking, of oil wells.

In challenging the review process, Oil States argued that patents are private property that may be the revoked only by a federal court, and that the administrative procedures violate the U.S. Constitution's right to be heard by a federal court and jury. The standard for canceling a patent is higher in federal courts than in the review process.

Liberal Justices Ruth Bader Ginsburg, Elena Kagan and Sonia Sotomayor noted that the patent office has long had the power to grant patents and invalidate wrongly issued ones after the fact.

"There must be some means by which the patent office can correct the errors it's made," Ginsburg said.

Sotomayor added that what "saves" the system is the fact that any invalidation can be appealed to the Washington-based U.S. Court of Appeals for the Federal Circuit for full judicial review, as happened in this case.

CONSERVATIVES RAISE DOUBTS

Conservative Justice Neil Gorsuch raised doubts, countering that judicial review is available only if someone appeals a patent review proceeding's decision, which does not always happen.

Conservative Chief Justice John Roberts said Supreme Court precedents have frowned upon the government offering benefits on a conditional basis in which "you have to take the bitter with the sweet."

The court is due to rule on the case by the end of June.

An Oil States subsidiary sued in 2012 claiming Greene's infringed its patent. Greene's responded by filing an inter partes review at the patent office's Patent Trial and Appeal Board, which later canceled key parts of the patent. The Federal Circuit upheld that ruling last year.

The U.S. Congress created the reviews as part of a 2011 law called the America Invents Act to deal with the perceived high number of poor-quality patents that had been issued by the patent office in prior years, which helped fuel the business model of so-called patent trolls that make money off patents rather than products.

In about 1,800 final decisions up to October, the agency's patent board canceled all or part of a patent around 80 percent of the time.

The case attracted attention from industry heavyweights.

Backed by the President Donald Trump's administration, Greene's has the support of some large technology firms like Alphabet's Google and Intel Corp hoping to curb abusive litigation. Small business and inventors' groups supported Oil States, as did name-brand pharmaceutical companies such as AbbVie Inc, Allergan plc and Celgene Corp.

(Reporting by Andrew Chung; Editing by Will Dunham)