Federal Circuit Rejects Challenge to Patent Rights Obtained Through Foreclosure

Sky Technologies v. SAP AG (Fed. Cir. 2009)

In an interlocutory appeal, SAP challenged Sky’s standing to bring its patent infringement suit – arguing that ownership rights had not been properly transferred. On appeal, however, the Federal Circuit affirmed the decision by Judge Folsom (E.D.Tex.) that title had been “properly transferred by operation of state foreclosure law” even without an affirmative assignment of rights.

Background: The chain of title is somewhat long. Mr. Conkin and his co-inventors assigned rights to the asserted patent to TradeAccess (a company founded by Conkin). TradeAccess later changed its name to Orzo. Orzo, in turn, used the patents as collateral for an investment from Silicon Valley Bank (SVB). SVB assigned its security interests to Cross Atlantic Capital Partners (XACP). Orzo then defaulted and XACP foreclosed. At the foreclosure sale, XACP was the only bidder at a public auction and purchased the patent rights. Then, XACP assigned the patent rights to Sky Technology (another company founded by Conkin and the plaintiff in this case).

Missing from this chain of title is any assignment from Orzo to any other party. Of course, a transfer of rights need not be done through explicit assignment. Interestingly, patent ownership is determined by local (state or foreign) law rather than federal law.

Assignment in Writing: In Akazawa, 520 F.3d 1354 (Fed. Cir. 2008), the Federal Circuit held that patent rights could be transferred through Japanese intestate statute. In the background, however, are (1) 35 U.S.C. Section 261′s requirement that all assignments of patent interest be in writing and (2) the 1881 Supreme Court case of Ager v. Murray holding that patent rights could not be transferred to satisfy a judgment without a written assignment. 105 U.S. 126 (suggesting that a trustee be appointed to assign rights if the inventor refused). In Akazawa, the court avoided those requirements by holding that non-assignment forms of transfer (such as intestate transfer) need not be in writing. I.e., “ownership of a patent may be changed by operation of law” without an explicit assignment from the prior rights-holder.

Likewise, in the present case the appellate panel found that the rights had been properly transferred without an assignment based on Massachusetts implementation of Section Nine of the Uniform Commercial Code (UCC).

We find that Akazawa controls in the instant case, and that the district court’s reliance on its reasoning was appropriate because transfer of patent ownership by operation of law is permissible without a writing. … [A]ssignment is not the only method by which to transfer patent ownership. As noted below, foreclosure under state law may transfer patent ownership. Here, XACP’s foreclosure on its security interest was in accordance with Massachusetts law; therefore, Sky received full title and ownership of the patents from XACP providing it with standing in the underlying case.

In the instant case the controlling state law is the Massachusetts UCC. Massachusetts UCC § 9-610 permits a secured party to sell the collateral after default, in a commercially reasonable manner, and that same party may purchase the collateral at a public disposition. Section 9-617 of the UCC states that once a secured party disposes of collateral after default, the transferee for value takes all of the debtor’s rights in the collateral. Because XACP foreclosed on the patents-in-suit in conformity with these provisions, XACP obtained title to the patents on July 14, 2003.

Patentee, His Heirs or Assigns: Section 154(a) of the Patent Act adds an additional complication. That section indicates that patent rights are always granted “to the patentee, his heirs or assigns.” Here, SAP argues that Section 154(a) limits the flow of ownership to only those three categories. The precedent of Akazawa does not create a problem under that theory because that case involved intestate transfer to an heir. Without elaborating, the Federal Circuit rejected that argument – holding simply that “Section 154 does not restrict patent ownership to these three classes of individuals, and moreover, this language fails to specifically address transfers of patent ownership.” Thus, although a patent is granted only “to the patentee, his heirs or assigns,” it may be latter transferred to other parties. This decision creates a potential implication that a creditor foreclosing on a pending patent application may not be able to enforce the future patent rights. Here, the court should have laid that issue to rest by noting that the Section 154 argument fails because a “patentee” includes any successor in title to the interest in the patent application. The definitions in Section 100 suggest this result, but is written in the Act’s typical circular fashion: “The word ‘patentee’ includes not only the patentee to whom the patent was issued but also the successors in title to the patentee.”

Notes:

  • The well written opinion was authored by Judge Spencer sitting by designation from the US District Court of the Eastern District of Virginia. Chief Judge Michel and Judge Bryson joined Judge Spencer on the unanimous panel. As noted in the final paragraph, however, the courts continued semantic distinction of an “assignee” needs reconsideration in light of modern securities law.
  • Read about the Akazawa decision; See also, How not to divide patent rights during bankruptcy. Morrow v. Microsoft (Fed. Cir. 2007).
  • At issue here are U.S. Patent Nos. 6,141,653; 6,336,105; 6,338,050; 7,162,458; and 7,149,724.
  • The patents describe and claim various iterations of a “multivariate negotiations engine for iterative bargaining” that allow buyers and sellers to do a deal online.

5 thoughts on “Federal Circuit Rejects Challenge to Patent Rights Obtained Through Foreclosure

  1. In its decision, the panel considered the policy issues at stake for creditors in its holding, had it ruled otherwise. But there are other policy considerations that the panel didn’t consider (b/c it didn’t need to), that its holding doesn’t contradict.

    One of the reasons for requiring a written record of the transfer of rights is to enable potential infringers to know the identity of the party with whom they’ll need to negotiate if they need a license.

    Here, it appears there was enough information to enable potential infringers to determine who the owner of the patent was at any given time: According to the assignment history for 6141653, XACP recorded its security interest at the PTO while Orzo was still the owner of record (actually Tradeaccess; the name change to Orzo wasn’t recorded); on July 30, 2003, in a document executed on July 14, 2003, a record of the transfer of XACP’s rights to Whitelight (later Sky) was recorded. Ditto for 6336105, 6338050, 7162458 and 7149724. (Curiously, according to the panel, the foreclosure sale took place on July 14, 2003, but a written assignment was only executed a few days later.)

    If XACP’s security interest (or, obviously, the assignment of rights to Whitelight) hadn’t been recorded, the policy considerations for recording assignments would have been defeated, the statutory requirements wouldn’t have been fulfilled, and SAP would have had a case.

  2. In an unrelated story, the foreclosure rates on snarky comments from Mooney are woefully behind schedule.

  3. “The patents describe and claim various iterations of a “multivariate negotiations engine for iterative bargaining” that allow buyers and sellers to do a deal online.”

    Doing a deal online???? WOW! Nobody could ever have expected that to work when these applications were first filed back in 1968. Oops, I mean 1998. In any case, I’m sure the examination was most rigorous, a hallmark of the PTO in that particular timeframe.

    Regardless of the indisputable validity of the patents, it’s certainly a timely case in light of the ongoing foreclosure crisis and the fact that foreclosure rates are not expected to peak until next year sometime:

    link to calculatedriskblog.com

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