Enforcing Contracts between Joint Owners: WARF v. Xenon

Wisconsin Alumni Research Foundation (WARF) v. Xenon Pharma, Appeal No. 08-1351 (7th Cir. 2010).

WARF and Xenon jointly filed for patent protection for a cholesterol lowering enzyme known as Stearoyl CoA Desaturase (SCD). Warf also granted Xenon rights as an exclusive licensee and Xenon agreed to pay royalties for sales or sublicense fees. Xenon then sublicensed its rights to Novartis but did not pay royalties to WARF. Xenon's argument is based on the law of concurrent patent ownership. Generally, a patent co-owner is not required to share licensing revenue with other co-owners. The district court rejected that argument here — finding that the contract between WARF and Xenon is controlling over the patent law default rule. At trial, a jury awarded WARF one-million-dollars in royalties. That award was reduced then by the judge to $300,000.

The Seventh Circuit has now affirmed the lower court ruling that Xenon breached its license agreement by granting a sublicense without paying WARF its share.

35 U.S.C. 262 makes clear that each Joint owner of a patent right may make use of the rights "without the consent of and without accounting to the other owners." However, §262 has a major caveat in that it only applies "in the absence of any agreement to the contrary." Picking up on that caveat, the Seventh Circuit made clear that the "statutory default rule therefore controls unless there is an agreement to the contrary." The appellate panel went on to confirm that the WARF/Xenon agreement is certainly an "agreement to the contrary" despite the fact that it does not include a specific and explicit revocation of § 262 rights.

The bargained-for exchange between the parties provided that the Foundation would forego its right to separately license the patent in exchange for receiving a share of the profits from Xenon's commercialization of the technology—either directly or via a sublicense to a third party. Xenon received a significant benefit from the agreement—the exclusive right to exploit the technology protected by the joint patent application. Xenon cannot avoid paying royalties or sublicense fees to the Foundation simply by labeling the Novartis transaction a "license" rather than a "sublicense."

Quiet Title: Xenon also filed for its own patents on PPA compounds used to suppress SCD levels. WARF claimed ownership rights in the PPA because one of its scientists had contributed to the project and sued here to quiet title and also sued for conversion. On appeal, the court sided with WARF — finding that the WARF scientist's assignment of rights to Xenon was void because the scientist has already assigned all interest in future inventions to WARF.

Seventh Circuit: WARF originally appealed its case to the Federal Circuit. However, the Federal Circuit transferred the case to the Seventh Circuit based on a lack of subject matter jurisdiction. In a non-precedential opinion, the court held that the dispute did not "arise under the patent laws." [Link] An interesting aspect of that decision was that the court's statement that the Bayh-Dole Act (35 U.S.C. §§ 200-212) is not "patent law" when considering the question of appellate jurisdiction. The Federal Circuit refused to take the jurisdiction issue en banc. Judge Rader penned the following dissent from the en banc denial:

In an extremely short per curiam opinion with far too little explanation, the panel left the impression that it was giving away this court's jurisdiction over a broad swath of claims potentially arising from the Bayh-Dole Act, 35 U.S.C. §§ 200-212. While non-precedential, the panel's opinion nonetheless unnecessarily suggests that this court's jurisdiction to review these cases is limited. I respectfully dissent from this court's denial of rehearing en banc.

The panel concluded, albeit without much analysis, that WARF's complaint did not allege that the Bayh-Dole Act creates a cause of action. Thus it was entirely unnecessary for the panel to opine as to whether the Bayh-Dole Act is a "patent law" or not. And indeed, the Bayh-Dole Act, in my view, is most certainly a patent law. While the panel dismissed the notion that the Bayh-Dole Act's "mere inclusion" in Title 35 does not make it a "patent law," it seems to me that this is actually a pretty good indicator. After all, Title 35 is itself entitled "Patents," and Chapter 18, which encompasses only §§ 200-212, is called "Patent Rights in Inventions Made with Federal Assistance." Also, the language within some of the sections of the Bayh-Dole Act suggests its provenance as a patent law. For example, 35 U.S.C. § 201(d) defines "invention" as "any invention or discovery which is or may be patentable…." Section 201(e) explains that a "subject invention" is an invention conceived of or first reduced to practice by a contractor. "Conception" and "reduction to practice" are familiar patent law terms of art. Also, § 200 states that the Act intends "to use the patent system to promote the utilization of inventions arising from federally supported research or development…." The Bayh-Dole Act is, "at its heart," a patent law, albeit a patent law that employs some government contract rules to facilitate its patent-related policy objectives.

Although this court's panel opinion did not mention it, the reason that the "improvements" clause in this case does not require an infringement analysis is that the WARF/Xenon agreement features no issued patents, just patent applications. Thus, no court need perform a true infringement analysis. See GAF Building Materials Corp. v. Elk Corp., 90 F.3d 479, 483 (Fed.Cir.1996) (no declaratory judgment jurisdiction for infringement/invalidity of a design patent that had not issued when suit was filed; without an issued patent, there can be no infringement and thus no Article III controversy). Unlike GAF, however, this case features an undeniable controversy between the parties. To resolve this dispute, some court will have to compare the claims of the pending patent applications of the WARF/Xenon agreement with the alleged "improvements," and the contract's use of patent infringement parlance to define this term will necessitate some sort of patent analysis, starting with construction of the pending claims. Thus, this is a patent dispute for still another reason.

21 thoughts on “Enforcing Contracts between Joint Owners: WARF v. Xenon

  1. “Can you distinguish the two for us?”

    Vagueandindefinite,

    The 7th Circuit didn’t get to the Bayh-Dole ownership question, having resolved that WARF was entitled to ownership of the PPA compounds by contract.

  2. Interestingly, I couldn’t see anything in the opinion that documents the distinction between this and the Stanford case. The opinion concludes/states that the assignment for WARF was immediately operative; it does not disclose the actual language of the assignment or provide any analysis of why the assignment was immediately effective. But I didn’t see any evidence that the present assignment to WARF was contested by Xenon based on contractual language.

  3. Sorry, but 7 of 9; as well as the other cuties previously known as counselor Troi and Beverly Crusher; are now part of the collective.

    As our next stop is Earth; all of you are next.

    Resistance (like trying to obtain timely and deserved patent protection for yours and your client’s inventions) is futile.

  4. Vagueandindefinite – one clear distinction is that there was no dispute over whether there was a present assignment of a future expectant interest. In the Stanford case, the university never took legal title because they did not obtain the assignment BEFORE it was transferred to a third party. Stanford’s contracts merely imposed an obligation on the inventors to assign which the inventors failed to do; whereas WARF’s contracts actually performed the assignment.

  5. Dennis (or anyone),
    The “Quiet Title” facts seem similar to the recent Stanford case, but with the opposite result. Can you distinguish the two for us?

  6. Not clear that the scope of pending claims has any bearing on a dispute about license fees received for Xenon’s “entire interest” in a pending patent application. Even if the application never issues, Novartis has been paying Xenon a premium against the eventuality that the application _might_ issue with relevant claim scope.

    Presumably a well-drafted license would include a provision requiring Best Efforts to advance prosecution of the application. Absent such a provision, in the event the application were abandoned, would the license fee not still be payable for whatever is the defined term of the license agreement?

  7. Ron Popeil,

    Make those lifesize dolls of Beverly Crusher and you’ll probably get a better response here. Smart and sexy.

  8. Besides the Worf photo (I’m definitely a Trekkie), what I find curious is the original Federal Circuit denial of jurisdiction in this case because Bayh-Dole doesn’t create patent jurisdiction. For reasons given by Judge Rader in his dissent from the denial of the rehearing en banc, saying Bayh-Dole doesn’t create patent jurisdiction is enough to raise eyebrows. But for the original Federal Circuit panel to treat as “nonprecidential” a decision on an issue of first impression (does Bayh-Dole create patent jurisdiction) is truly bizarre.

  9. Hey, this reminds me of a great idea for an invention I had some time ago – lifesize Counselor Troi sex dolls for lonely nerds like 6. I’m going to set up a kiosk outside of the USPTO and make a million dollars. If any of you want in on this highly lucrative enterprise, please contact my spirit advisor, Michael R. Thomas.

  10. First of all you all know that Worf is going to win every single time v. Xenon.

    Second of all, three 6 internets for you sir. 6 internets trade at a higher rate than those of mere anons. Treasure them.

  11. These filthy Xenons have no HONOR! They’re about as trustworthy as a Ferengi in a liquor store!

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