Authored by D. Brian Kacedon, Matthew J. Luneack, and John C. Paul
The Federal Circuit recently analyzed whether a consulting agreement provided for an assignment of the consultant's patent rights stemming from his contributions prior to the agreement’s effective date. The agreement required the consultant to list all of his prior inventions and provided that the failure to list any such prior inventions constituted a representation that none existed. The company argued that certain work performed by the consultant prior to the effective date and not listed in the agreement was assigned to the company. Disagreeing, the Federal Circuit found that nothing in the agreement suggested the consultant’s prior inventions would be assigned to the company, and that the representation of no prior inventions failed to prevent the consultant from licensing such inventions to competitors of the company that engaged the consultant. As a result, when the company sued a competitor for patent infringement, the competitor obtained a license from the consultant on the prior relevant invention of the consultant and relied on that license as a defense to the patent infringement suit by the manufacturer. The case, however, was remanded to the district court to determine whether the consultant’s prior work continued after the effective date such that rights in the work would be assigned to the company.
Companies frequently contract with outside consultants to assist with product development. Because collaboration with consultants may lead to patent-eligible discoveries, however, it is important that consulting agreements define the rights between the parties in any patented inventions that arise out of their work. Recently, in TriReme Medical, LLC v. AngioScore, Inc.1, the Federal Circuit analyzed whether a consulting agreement provided for an assignment of the consultant's patent rights stemming from his contributions prior to the agreement’s effective date. The Federal Circuit found that nothing in the agreement suggested that the consultant’s rights in work prior to the effective date would be assigned to the hiring company. The case, however, was remanded to the district court to determine whether the consultant's prior work in question continued after the effective date such that the company owned any rights in those works.
AngioScore owns patents directed to angioplasty balloon catheters used to open arterial blockages. AngioScore’s commercial product AngioSculpt was developed with the assistance of Dr. Chaim Lotan, who served as a consultant for AngioScore. Before the effective date of the Consulting Agreement, Dr. Lotan performed work relating to AngioScore’s patents. According to Dr. Lotan, during meetings with AngioScore he made a recommendation to improve AngioScore’s product, which later became a part of AngioScore’s patented invention.
TriReme Medical, a competitor of AngioScore, sought to acquire an interest in the AngioScore patents from Dr. Lotan. Despite not being named as an inventor on the patents, Dr. Lotan granted TriReme an exclusive license to “any and all legal and equitable rights” he held in the AngioScore patents. Under this license, if Dr. Lotan was an inventor of the AngioScore patents, TriReme would have a defense to infringement that would allow it to freely practice the patented inventions.
Seeking to have Dr. Lotan named as an inventor, TriReme brought suit in the Northern District of California for correction of inventorship of the AngioScore patents. AngioScore moved to dismiss the action, arguing that under the Consulting Agreement between Dr. Lotan and AngioScore, Dr. Lotan had already assigned to AngioScore any rights he may have had stemming from his contribution to the patents, and he thus had nothing to later license to TriReme. Two provisions of the Consulting Agreement were at issue:
(a) Inventions Retained and Licensed. Consultant has attached hereto, as part of Exhibit C, a list describing all inventions, original works of authorship, developments, improvements, and trade secrets which were made by Consultant prior to the date of this Agreement (collectively referred to as “Prior Inventions”), that belong solely to Consultant or belong to Consultant jointly with another and that relate to any of the Company’s current or proposed businesses, products or research and development; or if no such list is attached, Consultant represents that there are no such Prior Inventions. If, in the course of providing the Services, Consultant incorporates into a Company product, process or machine or into any Invention (as defined below), a Prior Invention owned by Consultant or in which Consultant has an interest, the Company is hereby granted and shall have a non-exclusive license (with the right to sublicense) to make, have made, copy, modify, make derivative works of, use, sell and otherwisedistribute such Prior Inventions as part of or in connection with such product, process, machine or Invention.
(b) Assignment of Inventions. Consultant agrees to promptly disclose to the Company and hereby assigns to the Company, or its designee, all right, title and interest in and to all inventions, original works of authorship, developments, concepts, know-how, improvements or trade secrets, whether or not patentable, that Consultant may solely or jointly conceive or develop or reduce to practice during the term of this Agreement that relate to the Services (collectively referred to as “Inventions”).
Section 9(a) required Dr. Lotan to list all of his inventions made before the Agreement’s effective date that related to AngioScore’s business. AngioScore would receive a nonexclusive license to any prior invention Dr. Lotan incorporated into AngioScore’s products during the course of his consulting work. Failure to list any such prior inventions constituted a representation that none existed.
Section 9(b) called for an assignment of Dr. Lotan’s rights to AngioScore for any inventions conceived, developed, or reduced to practice during the term of the Agreement.
According to AngioScore, under either section 9(a) or 9(b), it acquired all of Dr. Lotan’s rights in certain work performed prior to the Agreement’s effective date and which Dr. Lotan failed to list as a prior invention under the Agreement. The district court agreed and dismissed TriReme’s suit. TriReme appealed to the Federal Circuit.
The Federal Circuit’s Decision
The Federal Circuit reversed the district court’s decision. Turning to the express language of section 9(a), the Court found that nothing in the terms of section 9(a) suggested that Dr. Lotan would not retain ownership of any prior invention that he failed to list under the Agreement. At most, the Court stated, section 9(a) granted AngioScore a non-exclusive license in the event that Dr. Lotan incorporated a prior invention into an AngioScore product during the term of the Agreement.
The Federal Circuit also rejected AngioScore’s contention that, under estoppel by contract, TriReme was bound to Dr. Lotan’s implicit representation that he had no prior inventions that were relevant to the development of AngioScore’s prototype. The Court found that estoppel by contract did not apply because neither Dr. Lotan nor his successor in interest, TriReme, were seeking to enforce any rights under the Consulting Agreement, and AngioScore cited no cases that applied estoppel by contract where the cause of action was not founded in the written contract itself.
Next, the Federal Circuit considered AngioScore’s alternative argument that Dr. Lotan had assigned all rights from his previous work under § 9(b), which provided for an assignment to AngioScore of Dr. Lotan’s work performed during the term of the Agreement. AngioScore’s theory was that Dr. Lotan’s work prior to the effective date continued during the term of the Agreement and qualified as conceiving, developing, or reducing to practice an invention such that it would fall within the scope of § 9(b). Because this question of fact had not been adequately developed at the district court level, the Federal Circuit remanded to the district court to consider whether Dr. Lotan’s continued work after the effective date fell within the language of § 9(b).
Strategy and Conclusion
This case illustrates the issues that arise when a background rights exist as well as the importance of having a carefully drafted ownership agreement in place before collaborating with a consultant or independent party to protect patent rights and identify any preexisting intellectual property owned by the consultant prior to entering into an agreement. In the current case, while a representation of no prior relevant inventions and a non-exclusive license protected the company engaging the consultant from being sued by the consultant for patent infringement, it failed to prevent the consultant from being estopped from licensing a prior relevant invention to a competitor of the company that engaged the consultant and creating a license defense to the patent infringement suit by the company that engaged the consultant.
1 The TriReme Medical, LLC v. AngioScore, Inc. decision may be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/TriremeMedicalvAngioscoreInc..pdf.
Patent Licensing & Assignment Agreements
Purchaser for Consideration:
Patents can be assigned or licensed just like other forms of intellectual property. In addition, the patent application can be assigned. These transfers of interest in the intellectual property are covered by 35 U.S.C. § 261 (Ownership; Assignment).
§261 provides that patents and patent applications, or any interest in these, can be assigned by writing. Although the written agreement does not need to be recorded, the failure to record the transfer of rights with the PTO within three months makes it
“void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice….”
EXAMPLE (1): Donald holds a patent on the “Ledger Lightener,” a machine which magically shrinks paper. On December 1, 2003, he assigns ownership of the patent to Scott, who pays him $1000. The assignment is put in writing but is not recorded with the PTO. On March 25, Donald agrees to sell this same patent to David, who pays $500. Because David is a purchaser for consideration and the original patent assignment was not recorded with the PTO, David actually owns the patent now; the assignment to Scott is void as against David. Of course, Scott might have a remedy available against Donald for fraud, but at best he will receive money damages…David will not be stripped of the patent.
EXAMPLE (2): Assume now that the transfer to Scott was not recorded, but David knows Scott and knows that Scott bought the patent from Donald. This means that David had notice of the prior transfer, and even if he is a subsequent purchaser for valuable consideration he is not one “without notice,” so the sale to Scott will prevail over the sale to David. Basically, if David knows that the patent has already been sold it’s hard for him to argue that it’s only fair for him to keep it anyway.
There are a great many ways in which patent licenses and sales can be structured. In any license, issues to look out for include the royalty calculation method, payment terms, quality control, and limits on production. A license should spell out what happens if the patent is found invalid or unenforceable (which means the licensee would have paid for nothing, since no license would be required to produce an unpatented product). Similarly, a licensee might want to make sure that if the patent owner makes improvements to the invention that the licensee would be entitled to incorporate those into its products.
Certain representations and warranties will be asked for by the purchaser (or licensee) of the patent, including that the patent is valid and enforceable. While in contracts for sale of other property, such promises might survive the sale (i.e., the promise would be binding beyond the date of sale), no such survival clause would be appropriate in a patent sale. That is, when selling a patent it is best simply to warranty that the patent holder has no knowledge of anything which would threaten the validity or enforceability of the patent and that it is both valid and enforceable as of the date of sale to the best of the patent holder’s knowledge (rather than warranty that the patent is valid and enforceable, period).
A recent U.S. Supreme Court holding in Bowman v. Monsanto Co., 133 S. Ct. 1761 (U.S. 2013), discussed the implication of a limiting first sale doctrine as it applied to products sold under a narrow license that prohibited certain uses of the licensed products. In this case, soybeans (a.k.a. Round-Up Ready seeds) were sold under a license that they could be planted for one growing generation, but the resulting produced seeds were for consumption and not to be replanted. The Supreme Court held that the license limitation was valid to prohibit certain uses of a patented product once it was sold.