In The Euclid Chemical Co. v. Vector Corrosion Technologies, Inc. (April 1, 2009) CAFC considered whether a particular patent had been assigned to Vector.

There were two patents and a number of patent applications at issue.  The two patents are:

• US Patent 6,033,553 (“parent”)
• US Patent 6,217,742 (which is a continuation-in-part of the ‘553 patent or “CIP”)

The ‘742 CIP issued before the assignment.  Ownership of the ‘742 patent was the focus of the case.

Here is the actual assignment language:

The District Court found that the ‘742 patent was assigned by the CIP language, even though it was not included in the specifically recited patents.

“Not so fast” said CAFC… besides the lack of a specific reference the Court noted that the language “my US, Canadian, and European applications for patents and issued US patent”. 

The fact that only a singular patent, but multiple applications, were described as being assigned was enough for CAFC to find the scope of assignment ambiguous and to remand the case.  Let’s hope it doesn’t find this to be one expensive typo…  In any case, Euclid provides another great example that every word used in an IP transaction can have a big impact.

The basic facts are as follows:

• Stanford scientists, in partnership with Cetus, developed a method of using PCR to measure HIV virus blood concentration
• Roche subsequently bought Cetus’s PCR business. 
• Stanford offered to license the rights to Roche, but the license negotiations stalled.  Stanford sued under patents it believed it owned. 

Roche, however, saw things differently, claiming that it also or alternatively was the owner of the patent rights at issue.

It turns out that this is a tale of four agreements, which related to the assignment of the invention at issue.

AGREEMENT 1

The first agreement concerning the invention in question was between an inventor and Stanford and included the following provision concerning assignment:

“I agree to assign or confirm in writing to Stanford and/or Sponsors that right, title and interest in . . . such inventions”

CAFC held that such language was merely a promise to assign rather than a present assignment (a topic that has been big at the court in recent years – – see, e.g., the Court’s 2007 IpVenture decision cited in this case).

The result is that the first agreement gave Stanford, at most, equitable rights to the invention, but did not grant it actual ownership.

AGREEMENT 2

Stanford’s applicable invention rights policy (which might have governed ownership of inventions as is commonly the case in organizations) allowed “all rights to remain with the inventor if possible”.  Strike two for Stanford

AGREEMENT 3

The same inventor subsequently signed another agreement concerning the invention with Cetus, which, by contrast, included the following provision:

 I will assign and do hereby assign to CETUS, my right, title, and interest in each of the ideas, inventions and improvements.”

Unlike the clause above, this language constituted a present assignment of the title of the invention to Cetus.

AGREEMENT 4

But wait!  Our very agreeable inventor then again assigned the invention, this time to Stanford, in association with the actual filed patent application.  However, the CAFC pointed out that there is a limit to how much a patent (like any other piece of property) can be sold – –

“[B]ecause Cetus’s legal title vested first, Holodniy [the inventor] no longer retained his rights, negating his subsequent assignment to Stanford during patent prosecution.”

RECORDATION WITH USPTO

Patent ownership can be transferred without recordation with USPTO, but recordation under U.S. law offers a key benefit, namely, where two entities claim ownership to a patent, the second assignee can actually hold title if it records first with USPTO!  Specifically, 35 USC 261 provides

A [prior] assignment . . . shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.

Note, however, that to take advantage of this quirk in the law, the subsequent assignee must be a bona fide purchaser.  Here, CAFC explained that a bona fide purchaser is “one who purchases legal title to property in good faith for valuable consideration, without notice of any other claim of interest in the property.” 

Cetus never recorded the first effective assignment with USPTO.  Uh oh…

But, not so fast!  “Notice” under § 261 can include “constructive or inquiry notice, in addition to actual notice.”  “Therefore, Stanford’s claim that it remained ignorant of the VCA until shortly before the current litigation is inconsequential.”  The inventors supervisor at Stanford directed him to work with Cetus, as part of his research at the University.  CAFC found that this was enough to put Stanford on “inquiry” notice.

STATUTE OF LIMITATIONS

So, things look good for Roche, right?  Not exactly.  Roche’s claim for ownership of the patent it turns out was barred by the statute of limitations for contract disputes under California law (which ran 4 years from the date that Roche became aware of the breach of contract at issue).  Here, Stanford had presented it’s claim of ownership to the invention more than four years before Roche brought its ownership claim.  As such, it was barred from bringing the action for ownership of the patent.

STANDING

But not all was lost for Roche.  While statute of limitations barred it’s ownership claim, it was still able to raise a standing defense against Stanford based on Stanford’s lack of ownership of the patent.  Such a defense can be raised any time and is not subject to any statute of limitations.  Since Stanford had not acquired rights in the patent it did not have standing to bring the current suit against Roche and the case was dismissed.

LESSONS?

The CAFC has had lots of opportunities in recent years to opine on present assignment language versus promised to assign.  Organizations need to take note.  The Stanford case also highlights the risk of failure to record assignments with USPTO.  On the other hand, the case similarly raises the ineffectiveness of subsequent assignments, which may be very commonly relied on in industry practice creating a hidden time bomb for organizations believing they have secure patent ownership positions.

In the words of its producers, BioNetwork east:

• brings together the key decision makers from pharmaceutical and biotech companies;
• provides real world examples of actual deals for practical application; and
• facilitates one-to-one partnering meetings to incubate meaningful conversations that lead to key partnerships 

Having been to the event a number of times I think this is a good description.  If you want access to top biopharma industry dealmakers and to learn how to make deals (and make deals well) this is the place to be in March.

Here are just some of the speakers you will see (and have a chance to meet) at BioNetwork East:

• David H. Donabedian, PhD, MBA, Vice President, Strategic Alliances, US CEEDD, GSK
• Laura Pierce, Vice President, Alliance Management, Bayer HealthCare Pharmaceuticals
• Graham Brazier, VP, Therapeutic and Commercial Transactions, BMS
• Mark A. Miller, Vice President of Corporate Business Development, Eli Lilly
• Reid Leonard, Vice President External Licensing and Business Development, Merck
• Jules Musling, VP, Johnson & Johnson
• Carlos Garrido, Finance Director , Head of Strategic Planning and Business Development South America, AstraZeneca
• Peter Verheyen, VP Business Development, Johnson & Johnson
• Michael Lytton, EVP Business Development, Biogen Idec Inc
• Mark Dennish, Vice President, Business Development, Daiichi Sankyo
• Tim Herpin, Head of US Search, BMS
• Jennifer Tegfeldt, Director Business Initiatives & Strategies, Genzyme
• Jamsheed Banaji, Sr. Director Team Leader, International Business Development, Pfizer
• Bill Bertrand, Senior Vice President, Legal Affairs, General Counsel and Corporate Compliance Officer, MedImmune
• Adelene Perkins, President and Chief Business Officer, Infinity Pharmaceuticals
• Michael Leonetti; Head, Health Care Partnerships, Boehringer Ingelheim
• David Low, Managing Director, Lazard
• Sanj Singh, CEO, Ade Therapuetics

Here is a link to the event where you can get more information http://www.wbresearch.com/bionetworkusa/.    

I hope to see you in Florida!

Indeed, the case inspires the Inventive Step blog (http://inventivestep.net/) to question whether “is there any limit left on Declaratory Judgment jurisdiction”? (http://inventivestep.net/2009/12/08/is-there-any-limit-left-on-declaratory-judgment-jurisdiction/) (concluding “in a word – – no”!).  I am not sure it’s that bad, but it may be getting close…    

Acceleron sent a letter to HP identifying a specific patent and inviting HP to meet and discuss licensing if HP would agree that no “case or controversy” existed between the parties.  After Acceleron rejected HP’s request for a mutual litigation hold period, HP filed a DJ action. 

CAFC affirmed the district court’s jurisdiction to hear that case (pre-MedImmune this would not have been sufficient, see, e.g., the now overruled decision in Gen-Probe Inc. v. Vysis).  CAFC did not see this as a simple case of a party suggesting incorporation of patented technology into a product, in view of the fact Acceleron (1) asserted the patent as relevant to a specific product; (2) gave a short deadline for response; (3) insist the other party not file suit; and (most importantly?) is a patent holding company (a point noted twice in the Court’s opinion).

Anyone concerned about (1) putting a patent at risk or (2) ending up in a certain court might wish to think twice before sending a similar letter.

The ACI Program has a great line-up with a number of my favorite speakers on IP issues (including, in no particular order, Mercedes Meyer, John Li (of Novartis), and Bruce Pokras (“Mr. Orange Book”)).  The program covers nearly every aspect of the IP diligence process, which is more important than ever in these tough economic times.  A detailed Agenda identifying other great speakers and sessions can be found here –  http://www.americanconference.com/diligence/agenda.htm.

In Imation the overall license agreement had a termination clause, except to the license itself which survived for the life of licensed patents (“the term of this Agreement shall expire on March 1, 2000, except that any patent license which has been granted under Article 2 shall continue thereafter for the term provided in Article 3” – – some of the patents-at-issue reportedly have terms lasting at least until 2020).

• The grant clause specifically included the provision that Phillips “agrees to grant and does hereby grant to [Imation] and its SUBSIDIARIES a personal, non-exclusive, indivisible, nontransferable, irrevocable, worldwide, royalty-free license” under the licensed patents.

• The agreement defined “Subsidiary” as “any . . . form of business organization as to which the party now or hereafter has more than a fifty percent (50%) ownership interest.”

GDM and Memorex became subsidiaries of Imation after March 1, 2000.

The issue – – are GDM and Memorex included in the license granted under the Agreement?

The district court said no, finding that because GDM and Memorex “did not become Imation subsidiaries until after the CLA expired, they could not have been granted a license as of the date of the expiration.”  The district court held that although the singular term “license” was used in the grant, it plainly contemplates the grant of multiple “personal” licenses.  The district court also found support in the heading “Grant of Royalty Free Licenses,” and the reference in Article 3 to “[t]he term of the licenses granted under Article 2 (consistency can matter!).  As such, the district court held that the phrase “now or hereafter” in Section 13 “refers to any time up until the expiration of the agreement”

Phillips also focused on the dual nature of the grant clause contending that “each party grants some licenses at the time of execution (‘does hereby grant’) and some in the future (‘agrees to grant’),” as new patents or Subsidiaries come into existence.

Imation took the position that the grant clause “effects” a present grant to Imation and its Subsidiaries as a group – and the term of these licenses is the life of the licensed patents.  The CAFC agreed.

Finding no NY state law precedent, the CAFC panel noted that it had previously considered similar “agrees to grant and does hereby grant” language in the context of patent assignments and found it to effect a present assignment of rights in future inventions. 

CAFC also held the unambiguous language of the “Subsidiary” definition allows class membership to grow (or shrink) over time, and so the non-existence of GDM and Memorex at the time of the license grant did not prevent either entity from receiving the benefits of the fully vested licenses.  This exemplifies a commonly overlooked trap for dealmakers – – boilerplate subsidiary and affiliates clauses will play out in future scenarios where companies acquire other entities or are acquired (e.g., by current potential competitors).

The “personal” limitation in the license grant did not save the day for Phillips, evidencing an important lesson about the meaning of “personal” in patent licensing.  “Personal”, CAFC holds, merely refers to “the absence of a property right”.  Again, this legal twist has general importance.  Consider, for example, how inclusion of “personal” in a license grant could impact the ability of the licensee to enforce a patent without the patent owner (in view of standing issues).

CAFC found “now or hereafter” connotes that Subsidiaries may come into existence at some unspecified future time.  The parties could have used “now” or a list to fix the scope of Subsidiaries.  Note for my BD readers, the lawyerly “hereafter” can in fact matter.  Read and consider such phrases carefully.

Further facts that CAFC held buffeted its holding included (1) use of a time limitation in the definition of “Licensed Patents” (“Where one provision of an agreement contains a particular reference, the omission of this reference from any similar provision ‘must be assumed to have been intentional under accepted canons of contract construction’”) and (2) the singular use of “license” (brushed off by the district court) and in the fact that license “shall commence” (rather than the agreement providing a mechanism for multiple commencement dates to multiple individual licenses).

Bankruptcy law is complicated.  IP law is complicated.  Understanding the intersection of these two fields is daunting.  That said, here are some basic concepts passed on from various bankruptcy lawyers (as always if you need specific advice, reach out to an expert rather than relying on a blog).

When an organization goes bankrupt it typically is under the control of a debtor-in-possession (DIP) which acts under (various amounts) of supervision from the government/courts.  The DIP usually is the organization itself operating in bankruptcy.  Successors could be either the reorganized DIP or organizations that acquire portions of the now bankrupt organization.

How contracts that the bankrupt organization are treated depends on their nature.  Contracts can either be “executory” (something remains to be done by one or both parties) or non-executory.  Most contracts are executory (it doesn’t take much).  A DIP (and its successor, if any) has to live with non-executory contracts, but can either reject or assume executory contracts.  That’s where things get tricky.  If the DIP rejects the executory contract, the contract essentially ceases to exist.

US law provides some protections for licensees of intellectual property in terms of Section 365(n) of the Bankruptcy Code.  Many licenses include standard provisions invoking this section as a protection.  On its face, 365(n) appears to ensure that the licensee will maintain its exclusive access to the licensed intellectual property.  If only it were that simple . . .

A license under 365(n) comes with significant limitations.  Moreover, US bankruptcy law imposes other restrictions that impact how a company can protect itself from an undesirable bankruptcy of a partner.

First, US law voids clauses that equate bankruptcy with breach.  While such clauses might be effective for a localized (single state) bankruptcy or foreign bankruptcy, they have no power under US federal law.  On top of that, US bankruptcy law voids or at least greatly undermines any claims made near the point in time the company goes bankrupt (during the so-called preference period, which usually runs 90 days from the bankruptcy).

Second, the protections of 365(n) only extend to access to the license to the intellectual property.  365(n) does not require the DIP or its successor to prosecute, maintain, or even enforce patents!  In other words, the exclusive license may not give you the kind of exclusivity you think it might.  In a collaboration, all of the performance obligations that remain outstanding similarly can be avoided after the bankruptcy. 

Note also, that “intellectual property” under 365(n) does not include trademarks.

So what can you do to protect your client/organization from such problems?

There are a number of strategies that can be employed to address these problems.  These include:

• splitting royalties into enforcement/maintenance and licensing components;
• requiring transfer of the IP with a back-license (or transferring to a joint venture, such as a “bankruptcy proof” IP holding company… but watch out for tax and enforcement issues with that kind of approach);
• using security interest agreements rather than licenses; and
• using financial triggers that arise well in advance of bankruptcy to provide an opportunity to acquire the IP of interest

There are just a sampling, but hopefully at least inspire some thinking on the issue.  Good luck!

• grant backs improvements without compensation
• restricts ability to challenge licensed IP
• restricts rights to improve technology or use improvements
• includes disclaimer of liabilities in association with licensed technology
• restricts licensee/transferee from obtaining similar/competing technology
• is a technology agreement that induces infringement of 3rd party rights

• A licensor under Chinese law reportedly must guarantee licensed technology is complete, correct, effective, and that it will reach the specified technological target!!
• If the Chinese licensee infringes on another party’s right by using the licensed technology pursuant to the license agreement, the licensor is generally required to bear responsibility for such infringement.

• Does the Chinese partner have assets in US, EU, etc.?
• Have jurisdiction objections been waived?
• Has local jurisdiction/venue been selected for disputes in China?
  • Some experts point to the China International Economic and Trade Arbitration Commission (CIETAC) as a good forum for resolving IP issues in China

• Local patent filing requirements (~ “foreign filing licenses”)
  • Chinese patent law includes a China first policy, much like the US system.  This might present a serious issue when US and Chinese organizations collaboraiton on inventions.  This makes control over patent prosecution strategy important and dealmakers may also want to deal with the potential loss of rights in one jurisdiction carefully.
• Inventor compensation
  • Chinese patent law (similar to other countries – e.g., Germany and Japan) requires inventor compensation.  Some have suggested that failure to adequately comply with such laws might cast doubts on the validity of assignments of inventions outside of China.