Federal Circuit Reminds Us: “Will Assign” isn’t an Assignment

I love this case because it has lessons for ethics, drafting, and civil procedure.

The holding is pretty simple:  an inventor who signs an employment agreement that provides (a) she “will assign” rights to inventions doesn’t then assign them; (b) that she “holds in trust” those rights doesn’t mean she assigns them; and (c) that she “quit claims” those rights doesn’t mean she assigns them.  Two judges so held (O’Malley and Reyna), and Judge Newman dissented relying on the “intent” of the contract.  The case is Advanced Video Tech. LLC v. HTC Corp. (Fed. Cir. Jan. 11, 2018), here.

So, lesson for ethics and drafting:  verbs matter and due diligence matters! (Related note: watch out for spouses of inventors — there’s an argument in community property states that spouses own inventions that I’ve blogged about somewhere and which almost worked in one CAFC case, where the accused infringer was able to get a license from an ex-spouse!)

The civil procedure issue concerns Judge O’Malley’s concurring opinion. She argues that a co-owner who refuses to join is an indispensable party under Rule 19, and that a prior panel decision holding otherwise was wrongly decided, but binding.  I very much enjoyed working with Judge O’Malley (I clerked for then-CJ Rader a couple years ago), and she’s a civ pro wiz, but I have some doubts on that interpretation of Rule 19.  The examples of when someone is an indispensable party are few, and forcing someone to be a plaintiff in a patent suit when they don’t want to be subjects them to all sorts of potential liability (285, for example) that they may not want to incur.

Moreover, even if an en banc court agrees with her, I’m not sure it will eliminate every problem of the recalcitrant co-owner. For example, in this case, suppose the court en banc decides Judge O’Malley is right and Rule 19 requires joinder, and that the co-owner can be joined (i.e., there is personal jurisdiction over her and, arguably, venue is proper (Rule 19 is very weird)). As a result, the co-owner is joined involuntarily but then pleads:  “the defendant doesn’t infringe.”  Now there is no case or controversy between that co-owner and the defendant, and so no subject matter jurisdiction.  “Claim” dismissed?

I wonder if there’s a Rule 14 way to bring in a co-owner if there is a counterclaim for, say, inequitable conduct by that co-owner/inventor?  I teach and have written a book on civil procedure and that might work, but I’m not sure Rule 19 will.  I bet we will see an effort to use it.

Patents as Collateral

In a prior post, I highlighted Professor William Mann’s recent article on patents as collateral. I asked him to provide a guest post that explains some of his research. – DC

Loan collateral typically calls to mind tangible assets like real estate that are easily valued and sold. However, companies are increasingly relying on the collateral value of their patent portfolios to raise financing. In a recent paper, I trace the growth of this activity from USPTO filings that record a creditor’s security interest in a patent. The volume of these filings has exploded in recent years. By 2012, 20% of patents held by domestic corporations during the 1990s had been pledged as collateral at some point in their lives.

To be clear, filing with the USPTO does not perfect a security interest in patents against future lien creditors – this is accomplished through UCC filings with the relevant state office. However, recording the security interest with the USPTO may still protect against bona fide purchasers, so creditors find it advisable to register the security interest in both places. The filings thus identify cases in which patents are important collateral, since the creditor went to the trouble to protect its security interest by filing with the USPTO as well as with the state.

Indeed, for the borrowers listed in these filings, patents are likely to be the most valuable assets they own, as the industries in which they are clustered feature low tangibility but high rates of patent production – for example, drugs, medical instruments and supplies, computer programming and data processing, and electronic components. And the creation of the patent security interest is associated with large financing and investment: In Compustat data, companies in these industries increase their debt issuance and R&D expense by 10% and 6% of total assets, respectively, in the year when they file with the USPTO. Secured debt seems to be a significant source of financing for many patenting companies, with the collateral value of their patent portfolios contributing heavily to their financing capacity.

In the paper, I further argue that strong creditor protections in bankruptcy increase financing and investment by patenting firms. I provide evidence by comparing patenting companies based on the creditor-friendliness of their state laws, and exploiting the development of caselaw addressing the interaction between state and federal laws governing patent property and contract rights. When creditors expect less delay and uncertainty in foreclosing against a patent portfolio during a potential bankruptcy, I find that they lend more against that portfolio in the first place, and borrowers use the funds to invest in research and produce more patents.

In general, the findings reflect the growing importance of intellectual property as an asset class in the economy, and increasing efforts by firms to monetize that asset class. Proposals to reform the patent system should take into account the effect this would have on patenting firms’ financing capacity, as patents would not be valuable collateral without effective patent protection.

William Mann is an assistant professor of finance at the Anderson School of Management, UCLA. The draft article