Bad Client Review on Avvo or Whatever? Think Twice Before Responding

Ethics

Here in Georgia they just affirmed disciplinary action against a lawyer who, among other things, revealed client confidences in responding to a client’s negative review on an Internet site.  The case is here.  There are quite a few of those.

I may have mentioned this before, but one thing that some lawyers are doing is:  having clients, on intake, assign copyright to any reviews to the lawyer; then, if a negative review is posted, they send a take-down notice to the site.  Voila.

Welcome to the 21st Century.

Update:  Professor Eric Goldman responded to an email I’d sent out to a bunch of IP Professors with the following, which he allowed me to share:

 

The SF Bar Association also issued an ethics opinion on lawyers responding to client reviews. http://www.sfbar.org/ethics/opinion_2014-1.aspx

Building on my work with Jason and the Berkeley students, I wrote a short article on how doctors should respond to patient reviews: http://www.forbes.com/sites/ericgoldman/2013/11/21/how-doctors-should-respond-to-negative-online-reviews/ Much of that discussion is extensible to client reviews of lawyers.
It would be highly inadvisable for lawyers to try the Medical Justice copyright-assignment-in-unwritten-reviews hack. The request basically sets up a conflict between the lawyer and the client at the relationship’s outset. After all, almost any independent lawyer would not advise the client to sign such an assignment.
There are also likely to be statutes limiting businesses’ ability to contractually restrict their customers’ reviews. California is currently considering AB2365 requiring any such restriction to be “knowing, voluntary and intelligent.” See my discussion about the bill (and its limitations) http://www.forbes.com/sites/ericgoldman/2014/04/30/california-moving-to-protect-consumer-reviews/ It would not surprise me if there’s a federal bill on this topic as well.
Eric.

Eric Goldman
Professor, Santa Clara University School of Law
Director, High Tech Law Institute
Email: egoldman@gmail.com
Personal website: http://www.ericgoldman.org
Blogs: http://blog.ericgoldman.org ** http://blogs.forbes.com/ericgoldman/ ** http://blog.ericgoldman.org/personal/
Twitter: http://twitter.com/ericgoldman

 

What Issues Involving Money do “Your Friends” Confront?

Ethics

All,

I try to do the same speech for a year or so (I speak probably 20 times a year, and having one “in the can” is good).  This year’s topic is money.  I have a lot of things I know happen and will talk about, including:

  • commingling lawyer and client funds;
  • reasonable fees;
  • taking an interest in an application in lieu of a fee;
  • general issues about contingent fees in litigation;
  • in contingent fees, efforts to narrow the ability of the client to fire the lawyer without paying full fee, and also efforts to expand the ability of the lawyer to withdraw but still be paid a fee.

What I am hoping is you can tell me issues “your friends” have encountered about fees and clients, or examples of those listed above, or… Fire away.  Thank you for those who are emailing me privately about this, too!

Thanks in advance.

Friday Afternoon Rant

Ethics,

Hey, it’s my blog.

I just spent some time reading the PTO 101 guidelines and the arguments made about them earlier this month at the PTO.

Sixty years ago, Judge Rich wrote:  “The drafters of the present statute did their best to take out of the law the undefinable concept of ‘invention.’ Whether lawyers will now take advantage of the terminology . . . and stop talking nonsense is up to them.”  Principles of Patentability, 28 Geo. Wash. L. Rev. at 407.

This from Chief Judge Rader’s opinion in CLS Bank:

Defining one of those expansive categories, Section 100(b) confirms the statute’s intended breadth. At first examination, the Act’s definition of “process” to include a new use of a known machine seems superfluous. After all, if “any” process may be patented under Section 101, Section 100(b) seems wholly unnecessary. An examina- tion of the context for adding Section 100(b) informs the analysis of Section 101. Specifically, the 1952 amend- ments added Section 100(b) to ensure that doubts about the scope of a “process” under the pre-1952 version of the patent statute would not be read into the new Act. P.J. Federico,2 Commentary on the New Patent Act, reprinted in 75 J. Pat. & Trademark Off. Soc’y 161, 177 (1993) (Federico’s Commentary) (“Remarks have appeared in a few decisions and elsewhere that new uses are not pa- tentable. . . . [I]f such remarks are interpreted to mean that a new use or application of an old machine, manufac- ture or composition cannot result in anything patentable then such statements are not and have never been an accurate statement of the law.”); Hearing Before Subcomm. No. 3 of the Comm. on the Judiciary, at 37 (1951) (1951 Hearings) (Federico testifying that the “definition of ‘process’ has been added . . . to clarify the present law as to certain types of methods as to which some doubts have been expressed . . . .”). The 1952 Act shows that the “primary significance” of adding Section 100(b) was to make clear that a method was not “vulnerable to attack, on the ground of not being within the field of patentable subject matter, merely because it may recite steps con- ventional from a procedural standpoint and the novelty resides in the recitation of a particular substance, which is old as such, used in the process.” Federico’s Commen- tary at 177; see S. Rep. No. 82-1979, at 17 (“The . . . defini- tion clarifies the status of processes or methods which involve merely the new use of a known process, machine, manufacture, composition of matter, or material; they are processes or methods under the statute and may be patented provided the conditions of patentability are satisfied.”).

In addition, in testimony requested by the Committee, P.J. Federico, a chief patent examiner at the United States Patent & Trademark Office (Patent Office), ex- plained that under the proposed amendment a machine or manufacture may include “anything that is under the sun that is made by man.” 1951 Hearings at 37; see S. Rep. No. 82-1979, at 5 (stating the same principle: so long as the conditions of patentability are met, anything made by man is patentable). The Supreme Court summarized the intent and meaning of these changes when it quoted and approved this famous statement. See Diehr, 450 U.S. at 182.

Indeed, to achieve these ends, the 1952 Act did not merely rely on the breadth of Section 101 and the expand- ed definition of “process” in Section 100(b), but also added the words “or discovered” to the definition of “invention” in Section 100(a). By definition, Congress made it irrelevant whether a new process, machine, and so on was “discovered” rather than “invented.” Both inventions and discoveries are eligible for patenting. This addition confirmed the principle articulated again in Section 103 that an invention “shall not be negated by the manner in which [it] . . . was made.” 35 U.S.C. § 103. The language of the Act shows that the authors of the 1952 Act wanted that principle incorporated into the eligibility section of the Act as well as the patentability sections.

One final point confirming the breadth of Section 101 is the 1952 Act’s deliberate decision to place the substan- tive requirement for “invention” in Section 103. Before 1952, the courts had used phrases including “creative work,” “inventive faculty,” and “flash of creative genius” which compared the existing invention to some subjective notion of sufficient “inventiveness” as the test for patent- ability—by definition a hindsight analysis. See Giles S. Rich, Principles of Patentability, 28 Geo. Wash. L. Rev. 393, 404 (1960). These standardless terms and tests created wildly disparate approaches to determine suffi- ciency for “invention.” Id. at 403–04. Judge Rich ob- served that with “invention” as the test, “judges did whatever they felt like doing according to whatever it was that gave the judge his feelings—out of the evidence coupled with his past mental conditioning—and then selected those precedents which supported his conclu- sions.” Sirilla, 32 J. Marshall L. Rev. at 501 (internal quotation marks omitted).

The 1952 Act focused its central purpose on correcting this systemic problem. “One of the great technical weak- nesses of the patent system” prior to 1952 was “the lack of a definitive yardstick as to what is invention.” Victor L. Edwards, Cong. Research Serv., Efforts to Establish a Statutory Standard for Invention, at 2 (1958) (Study on Standard for Invention). As Judge Rich testified at the beginning of this legislative effort in 1948, “the matter of defining invention” was “what we are trying to get away from.” Id. at 4. As Federico put it, “invention” was “an unmeasurable quantity having different meanings for different persons.” Federico’s Commentary at 183 (mak- ing the statements in the context of explaining why Congress added Section 103)…

After deliberate effort, the 1952 Act replaced any need for an “invention” or “inventiveness” measure with an objective test for “obviousness” in Section 103. See Dann v. Johnston, 425 U.S. 219, 225-26 (1976) (explaining that although “an exercise of the inventive faculty” had been used as a judicial test, “it was only in 1952 that Congress, in the interest of uniformity and definiteness, articulated the requirement in a statute, framing it as a requirement of ‘nonobviousness.’” (internal quotation marks and footnote omitted)). The official “Revision Notes” explain that Section 103 became an “explicit statement” of the “holding of patents invalid by the courts[] on the ground of lack of invention.” S. Rep. No. 82-1979, at 18; see Federi- co’s Commentary at 180 (explaining that one of the two major changes made by the 1952 amendments was “incorporating a requirement for invention in section 103.” (internal quotation marks omitted)); Study for Statutory Standard of Invention (extensively reviewing Congres- sional efforts to redefine “invention,” which culminated in adoption of Section 103). Thus, the central thrust of the 1952 Act removed “unmeasurable” inquiries into “inven- tiveness” and instead supplied the nonobviousness requirement of Section 103.

After enactment of the 1952 Act, both of its principal architects recognized the significance of the elimination of a subjective test for “invention.” Judge Rich, a House Committee architect of the 1952 Act and later an es- teemed jurist, applauded the fact that the Patent Act of 1952 makes no “reference to ‘invention’ as a legal re- quirement.” Principles of Patentability, 28 Geo. Wash. L. Rev. at 405 (emphasis omitted). Judge Rich emphasized that using “the past tense in referring to” what “used to be called the requirement of ‘invention’” could not be over- emphasized. Id. (emphasis in original). Federico expressed the same sentiments. See Federico’s Commentary at 182-83 (explaining that while perhaps the word “in- vented” in the prior patent act may have been the source of judicial demand for more than just novelty, Section 103 replaced any requirement for “invention”).

Contemporaneous commentators also recognized that any need for “invention” had been rejected in favor of nonobviousness. See generally, Karl B. Lutz, The New 1952 Patent Statute, 35 J. Pat. Off. Soc’y 155, 157-58 (1953) (explaining that courts had long ago decided that novelty was not enough and had disagreed on how to determine how much more was necessary, but that that issue was now addressed solely by Section 103); Dean O.S. Colclough, A New Patent Act—But the Same Basic Prob- lem, 35 J. Pat. Off. Soc’y 501, 510 (1953) (explaining that the “condition of inventiveness has been expressed in a variety of ways by the courts,” but the “new provision on inventiveness” in Section 103 was intended to replace and codify prior law). And indeed the courts, including this court, implemented the new statute carefully and reli- giously. See Graham v. John Deere Co., 383 U.S. 1, 14 (1966) (“Section 103, for the first time in our statute, provides a condition which exists in the law and has existed for more than 100 years, but only by reason of decisions of the courts.” (internal quotation marks omitted)); W.L. Gore & Assocs., Inc v. Garlock, Inc., 721 F.2d 1540, 1548 (Fed. Cir. 1983) (Markey, C.J.) (recognizing the district court improperly relied upon one step of a multi-step process to determine nonobviousness); Gardner v. TEC Sys., Inc., 725 F.2d 1338, 1349–50 (Fed. Cir. 1984) (recognizing that Section 103 sets forth the standard, and so “synergism” of a known combination is not required). Thus, any requirement for “inventiveness” beyond sec- tions 102 and 103 is inconsistent with the language and intent of the Patent Act.

With an eye to the statutory language and its back- ground, the Supreme Court recognized Section 101 as “a ‘dynamic provision designed to encompass new and un-foreseen inventions.’” Bilski, 130 S. Ct. at 3227 (quoting J.E.M. Ag Supply, Inc. v. Pioneer Hi-Bred Int’l, Inc., 534 U.S. 124, 135 (2001)). Indeed, the broad interpretation of Section 101 has constitutional underpinnings. “The subject-matter provisions of the patent law have been cast in broad terms to fulfill the constitutional and statutory goal of promoting ‘the Progress of . . . the useful Arts . . . .’” Chakrabarty, 447 U.S. at 315.

In sum, any analysis of subject matter eligibility for patenting must begin by acknowledging that any new and useful process, machine, composition of matter, or manu- facture, or an improvement thereof, is eligible for patent protection. While a claim may not later meet the rigorous conditions for patentability, Section 101 makes these broad categories of claimed subject matter eligible for that consideration.

 

McKool Smith, Client Agree Firm Can Withdraw: Judge Says No.

Ethics

McKool and its client, Golden Bridge Technology (GBT), were on the eve of trial against Apple when, due to unpaid bills, McKool and GBT moved to allow McKool to withdraw and be replaced by another firm that had agreed to represent GBT… so long as trial was continued.  Apple was fine with it, so long as the trial date was maintained.

Result: motion denied.  The order is here (I hope): apple mckool order

The judiciary has its own interest in withdrawing lawyers — delay in resolving disputes and docket management being two — and so this result, from afar, seems correct. (It’s also discretionary, so….)

Evergreen retainers are always a good idea is the obvious lesson in this case.

Kelley Drye Misses First Step in Collecting $14 Million Fee from Client

Ethics, Patent

By Dennis Crouch and David Hricik

Kelley Drye & Warren, LLP v. Orbusneich Med. Co. Ltd., BVI, 2014 WL 1814204 (Conn. Super. Ct. Apr. 4, 2014). KDW Decision

In this case, the law firm of Kelley Drye (KDW) has sued Orbus to collect the $14,000,000 that it claims to be owed as part of its alternative fee arrangement for handling litigation on behalf of its then-client, Orbus, against Boston Scientific.

The basics: Orbus hired KDW to litigate its patent infringement and related common law claims against Boston Scientific. Orbus was advised that the suit would go quickly on the rocket docket of the Eastern District of Virginia. The fee-setup was a hybrid-contingency-fee arrangement with a guaranteed payout of $375,000 for pre-trial work and another $325,000 for the trial, if necessary. In the event of a settlement, the agreement called for KDW to then receive the full hourly rate for their work plus a “success fee” based on the settlement amount.

The case was filed in the Eastern District, but then was transferred to Massachusetts. Then, Boston Scientific moved for reexam and the suit was stayed. Thus, things were in a ditch:

At this point the exchange of correspondence between the parties (Defendants’ Exhibits B, C & D) make clear that: (1) the U.S. litigation begun by KDW on behalf of Orbus was stayed for possibly several more years; (2) no leverage whatsoever of the kind envisioned in Attorney Moore’s engagement letter (Plaintiff’s Ex. 2) had been brought to bear on Boston Scientific; (3) the settlement value of the U.S. litigation had minimal or no cash value at all; and (4) Orbus’ patents had possibly been placed in jeopardy by the continuing reexaminations. In reviewing the results obtained by counsel when determining the reasonableness of fees charged, the court cannot find on these facts that KDW added substantial value to Orbus’ legal interests as of July of 2012, after three years of litigation and millions of dollars of time expended.

Orbus then turned to replacement counsel. Their strategy had Orbus file a number of European actions, including ones in Germany, UK, Ireland, and the Netherlands. KDW was not much involved.

In 2013, Orbus and Boston Scientific came to a settlement resulting in a one-time payment to Orbus and a worldwide patent license for Boston Scientific. KDW then added-up its fees thus far in the litigation ($2.8 million) and added on its success fee bonus before sending its $14 million bill to Orbus.

When the (now former) client balked, KDW filed suit. In this decision, the trial court rejected KDW’s argument that it was entitled to pre-judgment relief, apparently in the form of some sort of state law attachment of Orbus’ assets. The question the court had to decide was whether KDW was likely to prevail on the merits.

Attorney fee arrangements are treated somewhat differently from ordinary commercial contracts – here the court indicated in can only enforce attorney fee arrangements to the extent that they are reasonable. All state professional responsibility rules prohibit the collection of unreasonable fees. Regarding reasonableness, a major question is whether the attorney exerted substantial effort and/or added substantial value.

Here, the European cases began after the US case was stayed. That fact aided Orbus’s argument that KDW added no value to the European cases. In addition, Orbus argued that the terms of the fee arrangement do not extend to those cases. And, if it had to pay KDW for the European monies then Orbus would effectively be paying “twice for the same legal service” since its European attorneys must also be paid.

Based upon these facts, the trial court stated:

[T]he court is unable to find even a reasonable suspicion that KDW would prevail on the merits at trial, and that the trier of fact would find the superseding contingent fee agreement enforceable in the full amount of $14,560,000.00.

At this point, the court has denied preliminary relief, but KDW still has the opportunity to prove its case at the trial.

Fee Shifting in the Future

Attorney Fees, Ethics, Fee Shifting

Over on the main page Dennis has a nice announcement about an upcoming webinar on the future of fee shifting post-Octane.  Two thoughts.

One, in the op-ed I wrote many months before Octane with Chief Judge Rader and Professor Colleen Chien (who is now at a post at the White House, I believe), we wrote:

To make sure Section 285 is implemented with appropriate vigor, judges must look more closely for signs that a patent lawsuit was pursued primarily to take improper advantage of a defendant — that is, using the threat of litigation cost, rather than the merits of a claim, to bully a defendant into settling.

One sign of potential abuse is when a single patent holder sues hundreds or thousands of users of a technology (who know little about the patent) rather than those who make it — or when a patent holder sues a slew of companies with a demand for a quick settlement at a fraction of the cost of defense, or refuses to stop pursuing settlements from product users even after a court has ruled against the patentee.

Other indications of potential bullying include litigants who assert a patent claim when the rights to it have already been granted through license, or distort a patent claim far beyond its plain meaning and precedent for the apparent purpose of raising the legal costs of the defense.

Second, I wrote about NPEs and ethics a long, long, long time ago in an article here, which also talks about how defense counsel can get in cahoots, so to speak, with NPEs to drive up defense costs for their own benefit.  (All my articles are named after songs by Wesley Stace, f/k/a John Wesley Harding.  It’s a long fun story.)

Baker Botts responsible for $40m damages to client, but claim barred by limitations

Ethics

I just read a story off law.com (subscription required) that that was the verdict in the conflict-of-interest claim brought against my old firm by a former client.  From what I’ve read, a central issue in the appeal will be whether the breach of fiduciary duty claim was properly tossed out by the trial judge under an arcane rule called the “anti-fracturing rule,” that I won’t bore you with. If that was wrong, then the claim was timely.  Stay tuned…

Interesting New York Case on Interplay between Statutory Fee Awards and Contingent Fee Agreements

Ethics

This is not a patent case, but fee agreements are state law contracts, and so the lessons learned would seem to transfer to patent litigators.

Lawyer wins a contingent fee case for his client where he’s supposed to get 33% of the award.  There’s a statute that awards attorney fees.  Does the lawyer add the fee award and the damages award, and take 33% of that, or the greater of the two, or the lesser, or…?

In Albunio v. City of New York, (N.Y. Ct. App. Apr. 3, 2014), the court adopted this approach:

“absent a contractual provision to the contrary, the trend is to calculate the contingency fee based on the amount of the judgment exclusive of the fee award, and then credit the fee award to the client as an offset against the contingency fee owed. Under this approach, the attorney should be entitled to receive either the contingent fee calculated on the amount of the damage recovery exclusive of any court-awarded fees, or the amount of the court-awarded fee, whichever is greater”

It could be that some of you need to take a look at your contingent fee agreements, especially given Octane’s new interpretation of 285…

Why You Should Give Only the Best Legal Services But Not Promise to Do So.

Ethics

Lawyers ought to use engagement letters to memorialize the scope of representation and other things.  (A future installment will talk about some peculiar patent prosecution issues you may want to address.)  But engagement letters aren’t places for thoughtless promises.

I’ve seen engagement letters say all sorts of things.  In the Abramson case, cite below, the letter said  “we give sensitive and professionally responsive service.” The court held that that statement transformed the tort claim of legal malpractice which might be barred by limitations, into a contract claim, which are usually subject to longer periods of limitation.

The classic case where a warranty was found is Abramson v. Wildman, 964 A.2d 703 (Md. Ct. Spec. App. 2009).  A recent case where no warranty was found is Meyers v. Livingston, Adler, Pulda, Meiklejohn & Kelly (Conn. Apr. 1, 2014).

Seeking Reexam for a Third Party of a Patent You Obtained for a Former Client

Ethics

Lawyer A gets a patent for Client A.  Client A then sells the patent to Third Party (closely related to Client A, but still a third party).  On behalf of Client B, Lawyer A seeks reexam based on art he didn’t know about during prosecution.

This is based roughly on what allegedly happened in litigation involving Patriot Universal Holdings.  The case was remanded  by this order from federal to state court a year ago, and I can’t find much else about it.

I’m just curious if anyone would do this…

Monday Morning Rant

Ethics

Okay, so I open up my Texas Bar Journal and there’s a short piece called “A guide to securing a patent (part one).”  Here is the first sentence:  “A patent is a grant by the U.S. Patent and Trademark Office for a limited time right to allow only the inventor or owner of the patent to practice the invention.”

First person to spot the error gets their name published along with their observation in the comments section!

Seriously….  this is obviously a fundamental misconception about patents, and so why start with it in a column for generalists?

35 USC 282

Ethics

I was reading an article that suggested that the AIA was unclear  whether a patent could be held unenforceable due to inequitable conduct based upon the failure to disclose the best mode.  To me, the AIA amendment to 282 answers that question pretty clearly: no.  See the language below.

But that directly implicates a pet issue of mine:  that inequitable conduct is not based in the statute.  I think it is.  35 USC 282 provides:

Defenses.— The following shall be defenses in any action involving the validity or infringement of a patent and shall be pleaded:

(1) Noninfringement, absence of liability for infringement or unenforceability.
(2) Invalidity of the patent or any claim in suit on any ground specified in part II as a condition for patentability.
(3) Invalidity of the patent or any claim in suit for failure to comply with—

(A) any requirement of section 112, except that the failure to disclose the best mode shall not be a basis on which any claim of a patent may be canceled or held invalid or otherwise unenforceable; or
(B) any requirement of section 251.
(4) Any other fact or act made a defense by this title.
 My own view, based on reading Federico’s Commentary and the legislative history of the 1952 Act is that “inequitable conduct” is authorized as a defense by the phrase “or unenforceability” in subsection (1).
The reason this is significant is that a court’s job in determining what a statute means is very (very, very, very) different than when it’s making up common law.  Octane is a good example of that.  Courts look at ordinary meaning, purpose, legislative history (in varying degrees, depending on judicial philosophy), not their own personal policy perspectives.
This has other repercussions.  Foremost, the substance of the inequitable conduct defense is not something that any court should “change” (as the Federal Circuit has, most recently in Therasense).  That’s not a court’s job: it’s for Congress.  Further, if it’s going to “change” its interpretation, various doctrines like congressional acquiescence come into play. (I.e., Congress didn’t mess with the interpretation of the CAFC for decades; doesn’t that (remotely) suggest that the court was right, and so any change, improper? (Don’t misunderstand me, that’s a narrow, narrow doctrine.))  Further, as a general principle when in the rare case courts have acknowledged that they are changing an interpretation, their interpretation is (often) only prospective:  thus, for pre-Therasense inequitable conduct, pre-Therasense standards should apply.
So, is inequitable conduct a statutory defense, or is it just made up?  If it’s statutory… there are repercussions… only a few of which are listed here.

Spouses of Inventors as Co-Owners

Ethics, , , , , ,

I’ve written about this issue:  in a community property state, does the spouse of an inventor own the patent?  The answer every “family law” expert I know of says yes; every patent lawyer says “no.”  It’s come up in at least one CAFC opinion, and now came up tangentially in a non-prec opinion that did not decide the issue.  That case, Taylor v. Taylor Made Plastics, Inc., is here. (Why does the opinion call James Taylor “James T.” and his wife “Mary T.”?)

Here’s my article on this, which I think I posted a few months ago somewhere. Someday this is going to matter, big time, or not!

DRAFT

A Fifty-Fifty Split:  What if the Spouse of Every Inventor in a Community Property State has an Undivided Interest in an Invention?

By David Hricik*

I. Introduction

If you think the title raises a wild possibility, consider what happened in a recent case appealed to the Federal Circuit.  After being sued for infringement, the defendant had the ex-wife of the inventor effectively grant to it any interest she had in the patent-in-suit.  As a result, the defendant argued that there could be no infringement, both because lack of standing and because it had acquired an undivided interest in the patent.

It almost worked.

The Federal Circuit recognized that under California law the patent was “presumptively community property in which [the wife] had an undivided half interest.”  Fortunately for the accused infringer, the wife had not listed the patent as community property when she was divorcing, and so the court held that res judicata precluded her from arguing that she in fact had an interest in the patent.

But, the odd facts of that case should not give great comfort.  It is important to recognize that if something is community property, it means it belongs to both spouses.  If the spouse of every inventor in a community property state has an undivided equal interest in every patent granted during marriage to the other spouse, then employers of inventors may need to obtain assignment of both spouse’s interests for the employer to have full title. If that is the law, then many patent infringement suits can proceed only if the spouse of the inventor is joined as a party.  If that is the law, many companies do not own, outright, the patents that they believe they do.

This article shows, first, that every court that has addressed the issue has held that a patent issued during marriage to one spouse is community property.  Second, many states hold that property rights can arise prior to issuance, and sometimes even at the time of conception.  Third, it shows that the general rule appears to allow just one spouse to alienate personal community property, but with some exceptions.  Finally, it describes the implications for this body of law on patent practitioners.

2. Basic Community Property Law

No federal statute addresses ownership of a patent application, let alone an “idea” that has simply been conceived: state law would apply. Likewise, the question of who has title to even an issued patent is a question of state law.

Eleven states currently follow community property law:  Alaska, Arizona, California, Hawaii, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin. Obviously, the laws of these states likely vary significantly on some issues, but a few basic points seem true among them all:

The statutes of several community property states provide that each spouse has a present, vested, one-half ownership interest in community property with equal management…. The equal management statutes give each spouse managerial rights over community property.  A spouse may prevent the disposition of certain community assets by the other spouse. Further, either spouse may contract debts during the marriage that may be satisfied with community property.

The concept expressed in the first sentence is worth repeating, since those unfamiliar with community property law often think of it as mattering only upon divorce. This is dangerously incorrect: when something is community property, each spouse owns it – then and there, not just in divorce court.  Also, it is important to emphasize that the community presumptively owns all property acquired during marriage, each spouse holding an undivided equal interest.[6]

With these basic principles in mind, the first question is what is “property” under these statutes, and does it include intellectual property and, most particularly, inventions, patent applications, and patents?

2. “Property” Includes Patents, and Sometimes Applications and Even Intangible Intellectual Property. 

As one would expect, “property” is construed very broadly.[7]  As one court stated:

The word “property” is in law a generic term of extensive application. It is not confined to tangible or corporeal objects, but is a word of unusually broad meaning. It is a general term to designate the right of ownership and includes every subject of whatever nature, upon which such a right can legally attach. It includes choses in action and is employed to signify any valuable right or interest protected by law and the subject matter or things in which rights or interests exists.[8]

An issued patent is, of course, by federal statute to be treated as personal property under state law.[9]  Thus, presumptively a patent acquired by one spouse during marriage belongs to the community, not separately to the inventor.[10]

Numerous divorce courts have divided patents issued during marriage as “property” under community property statutes[11]  Typically these courts assume a patent issued during marriage is community property and do not analyze whether that assumption is correct.[12]   Occasionally a court engages in at least a minor amount of analysis.  For example, a Florida appellate court stated that “[c]ourts outside Florida have reached the same logical conclusion — a patent is personal property that may be the subject of equitable distribution when the inventor and his or her spouse dissolve their marriage.”[13] The Kansas Supreme Court is the only court to have engaged in a lengthy analysis of the question, stating in part:

Vincent believes that the interest in the patents does not have the qualities listed [in the definition of property.] This is not self-evident….

[I]ntellectual property, once it has been created, is less inextricably related to its creditor than other assets now characterized as marital property, such as pensions and professional goodwill. Unlike pensions and professional goodwill, rights in intellectual property are highly transferable, and title may be placed in the name of one who did not originally produce them.[14]

The point here is that state courts either assume or readily conclude that patents issued during marriage are community property.

In some states, a spouse has interests even before the patent issues, depending on which approach to the “inception of title” doctrine the jurisdiction takes:

Arguably, inception [of title] may occur at any of three times:  (1) when the concept is sufficiently developed to generate a plan to build the invention [i.e., conception]; (2) when the invention is actually built [i.e., actual reduction to practice]; or (3) on the effective date of the patent [i.e., constructive reduction to practice].[15]

Courts have applied each view, though often not using the bracketed terms of art that patent practitioners would find comforting.

As an example of the first view, a California court divided patents that had been “perfected” during marriage but issued afterward.[16]  In addition, in a rare case that provided somewhat extended discussion, a Florida appellate court reasoned that a patent application was property that was subject to equitable division because it had been “deemed sufficiently well developed to submit to the federal patent authorities on a non-provisional basis.”[17]

As an example of the third view, a Washington appellate court held that a patent issued during the marriage was community property even though the invention had been conceived prior to marriage.[18]

Some courts adopt a muddled view that seems to reflect both the third and first views.  For example, the Supreme Court of Hawaii stated that “a patent does not exist until it is granted,” and so there was no property right “unless and until the patent issues.”[19] Nonetheless, it recognized that in making equitable division trial courts should determine “whether there was value in the pre-patent intangible intellectual property and the patent itself.”[20]

This shows that patents, and in some states applications and even merely conceived inventions, are “property.” All property acquired during marriage is presumptively community property, belonging to both spouses, not just the inventor.

The approach of state courts and state divorce lawyers to this question stands in stark contrast to common patent practice, at least as I know it.  In my experience patent practitioners do not obtain assignments from an inventor’s spouse.  Similarly, a key treatise on acquisitions makes no mention of spousal rights even as a part of due diligence during acquisition of patents.  I have never seen litigated the question of whether an inventor’s spouse must be joined as an indispensable party to a patent infringement brought by the inventor’s assignee.

The incongruity between how patent lawyers and divorce lawyers look at spousal rights is significant:  if the state courts are right, then spouses may have rights in patents that assignees may think they own outright.  If the spouse has an undivided equal interest in the patent, then they have the unfettered right to do exactly what the assignee can: sue, license, or otherwise enforce the patent.  Either state divorce courts or patent lawyers have it wrong.

Whether those rights exist means turns on the myriad facts that can arise, as well as application of particular state law. This article cannot examine all the permutations, but instead next includes several scenarios that may commonly arise where state courts have found that the spouse holds an ownership interest.  It concludes by describing potential avenues to reduce the uncertainty that may face assignees, attorneys, inventors, and spouses.

II. Federal Statutes Governing Ownership of Patents and Common Practice

The Constitution of the United States rejects the proposition that inventions should at least initially belong to anyone other than their creator.  In light of this, federal statutes provide that a patent must be applied for in the name of the inventor.  If nothing further is done, the patent will issue in the inventor’s name.  At that point, state law determines ownership.  “It is important to note that only inventorship, the question of who actually invented the subject matter claimed in a patent,’ is a question of federal patent law.  ‘Ownership, however, is a question of who owns legal title to the subject matter claimed in the patent, patents having attributes of personal property.’”  Consequently, for example, absent written assignment, an inventor’s employer will not own any patent naming the employee as the inventor.  This is true even if the employee uses only the employer’s equipment to make the invention and is paid a general salary while conceiving of or reducing to practice the patented invention.

State law determines whether there is an obligation of assignment and its scope.  By federal statute, assignments are to be construed under state law.  Thus, the Supreme Court has held that state courts “may try questions of title, and may construe an enforce contracts relating to patents.”  Similarly, state intestacy laws govern ownership of patents of deceased inventors, and foreign intestacy laws govern patents owned by foreign individuals.

There are other circumstances where state law determines ownership of an invention.  The point here is that nothing in the Patent Act, at least,  indicates that state marital property law should not also apply.  Thus, absent operation of state law to the contrary, the inventor owns the patent.

As a result, it is routine for corporations and other entities that employ those likely to invent patents to require that employees assign any ownership rights to the entity. The assumption is that because the inventor has assigned his invention to the entity, the entity holds full legal title, and thus is the not just the only party with standing to enforce the patent, but also the only party necessary to enforce the patent. All rights, lawyers and assignees believe, belong to the assignee.

Consistent with this practice and beliefs, in my experience no patent lawyer seeks assignment of any right from any inventor’s spouse.  The form assignment used by patent practitioners that originated with the USPTO does not do so. Thus, if the spouse has an interest, then on its face the typical form and practice do not accomplish assignment of the spouse’s interest, especially – for reasons that will become clear —  if the assignment is obtained after the patent has issued.  The next question is: does the spouse have an interest?

III. State Court Application of Community Property Laws to Patent Ownership

The precise contours of each particular community property state are beyond the scope of this article.  No doubt in particular circumstances those facts will matter greatly.  However, three basic principles seem to apply across the jurisdictions, with no doubt differences at their margins but not at their core.

First, the community presumptively owns all property acquired during marriage, each spouse holding an undivided equal interest in the whole.   While it is just that – a presumption – nonetheless it is the starting point.

Second, with narrow exceptions addressed below, one spouse cannot alienate community property; only both spouses can.  For example, a Louisiana statute provides:

A spouse may not alienate, encumber, or lease to a third person his undivided interest in the community or in particular things of the community prior to the termination of the regime.

Under this statute, any contract not signed by both spouses to alienate community property is void.

Again, the statutes and case law do vary.  Washington has a similar statute, but requires that both parties sign any agreement conveying community property only if it is real property.  Thus, it may be that in some community property states patents may be alienable by only the inventor.

Third, with respect to personalty, “property” is construed very broadly.  As one court stated:

The word “property” is in law a generic term of extensive application. It is not confined to tangible or corporeal objects, but is a word of unusually broad meaning. It is a general term to designate the right of ownership and includes every subject of whatever nature, upon which such a right can legally attach. It includes choses in action and is employed to signify any valuable right or interest protected by law and the subject matter or things in which rights or interests exists.

Patents are, of course, by federal statute to be treated as personal property under state law.  Thus, presumptively a patent acquired by one spouse during marriage belongs to the community, not separately to the inventor.  As next shown, that is in fact the result that the courts have uniformly reached in the family law context, when addressing divorce, alimony, or child support.

While patents are personal property and treated as such by state courts, there is less agreement on whether intangible intellectual property that leads to or could lead to a patent is community property.  The “inception of title” doctrine is a critical concept in community property states, and perhaps should be to patent lawyers, because if title is obtained prior to marriage, that property is separately owned. Thus, for example, if a husband conceives of an invention during marriage, and then gets divorced, the spouse may have an interest in any resulting patent.  Conversely, if title only arises when the patent issues, then the spouse would have no interest in patents issued after divorce from an employed inventor.

The state courts have recognized that inception of title to patent rights can occur before a patent issues:

 Arguably, inception [of title] may occur at any of three times:  (1) when the concept is sufficiently developed to generate a plan to build the invention [i.e., conception]; (2) when the invention is actually built [i.e., actual reduction to practice]; or (3) on the effective date of the patent [i.e., constructive reduction to practice].

Courts have adopted the second view.  For example, a Washington appellate court held that a patent issued during the marriage was community property even though the invention had been conceived prior to marriage.  A California court likewise divided patents which had been “perfected” during marriage.  In a rare case that provided somewhat extended discussion, a Florida appellate court reasoned that a patent application was subject to equitable division because it had been “deemed sufficiently well developed to submit to the federal patent authorities on a non-provisional basis.”  Thus, a spouse can have an interest in patent applications filed during marriage, not just patents issued during marriage.

Some courts adopt a muddled view that seems to reflect both the third and first views.  For example, the Supreme Court of Hawaii stated that “a patent does not exist until it is granted,” and so there was no right protected “unless and until the patent issues.” Nonetheless, it recognized that in making equitable division trial courts should determine “whether there was value in the pre-patent intangible intellectual property and the patent itself.”  Further, it held that a trade secret became community property when the trade secret had presently existing value.  “[O]ne ‘owns’ a trade secret when one knows of it….”  This holding could, of course, create a conflict between the spouses over whether to file for a patent application or to maintain protection of the invention only as a trade secret. The employer’s interests may conflict with the spouse’s.

Numerous courts have divided patents issued during marriage as “property” under community property without needing to address whether inception of title could have occurred earlier.  Several cases have simply assumed that patents are community property subject to division by just dividing them.

Typically these courts assume a patent issued during marriage is community property and do not analyze whether that assumption is correct.   Occasionally a court engages in at least a minor amount of analysis.  For example, a Florida appellate court stated that “[c]ourts outside Florida have reached the same logical conclusion — a patent is personal property that may be the subject of equitable distribution when the inventor and his or her spouse dissolve their marriage.”  The point here is that frequently state courts either assume or readily conclude that patents issued during marriage are community property.

The Kansas Supreme Court is the only court to have engaged in a lengthy analysis of the question, stating:

Vincent believes that the interest in the patents does not have the qualities listed [in the definition of property.] This is not self-evident. The business plan, which is built on the patented concept, undoubtedly will be used in an effort to raise capital for the enterprise. Thus, there is a sense in which the patents may be said to have loan value. Another, perhaps more typical, arrangement is for a patent holder to enter into a licensing agreement with a manufacturer/distributor for use of a patent. Consideration under the licensing agreement might be a lump sum. An initial fee and royalties is another likely form for consideration to take.

The court went on to state that:

  [I]ntellectual property, once it has been created, is less inextricably related to its creditor than other assets now characterized as marital property, such as pensions and professional goodwill. Unlike pensions and professional goodwill, rights in intellectual property are highly transferable, and title may be placed in the name of one who did not originally produce them.

Thus, state courts either assume, conclude, or have held that patents issued during marriage are community property.  The most-cited treatise by these courts as indicating that patents are community property does not aggressively take that position, instead discussing the cases and stating among other things that “a spouse would expect to share as fully in intellectual property acquired during marriage as in any other variety of property.”

Finally, while obviously income from patents that are community property belongs to the community, the majority of courts that have addressed the issue have also held that income received during a marriage from even separately owned patents is community property.

III. Federal Law Allowing for Prosecution by Persons With a Proprietary Interest in the Application May Permit Spouses to Control or Interfere with Prosecution.

While it is clear that an assignee of the entire interest in application may prosecute it, federal law sometimes permits even those with merely a “proprietary interest” to continue and even undertake prosecution, at least where the inventor refuses to do so. Specifically, Section 118 of the Patent Act states:

Whenever an inventor refuses to execute an application for patent, or cannot be found or reached after diligent effort, [1] a person to whom the inventor has assigned or agreed in writing to assign the invention or [2] who otherwise shows sufficient proprietary interest in the matter justifying such action, may make application for patent on behalf of and as agent for the inventor on proof of the pertinent facts and a showing that such action is necessary to preserve the rights of the parties or to prevent irreparable damage; and the Director may grant a patent to such inventor upon such notice to him as the Director deems sufficient, and on compliance with such regulations as he prescribes.

The PTO has interpreted this statute to permit heirs, for example, to not only continue prosecution upon the death of an inventor, but to file an application for an inventor who dies prior to filing the application.  The heirs thus must have a proprietary interest in the application or patent.

Does a spouse in a community property state?  The meaning of “proprietary interest” would seem to encompass rights of a spouse in a community property state.  “A ‘proprietary’ interest at the very least suggests some element of ownership or dominion….”  Given, as shown above, that a spouse in a community property state may have an undivided equal interest in the patent, that interest would clearly qualify as “ownership or dominion.”  Thus, federal law would seem to permit spouse to control prosecution if the inventor dies.

IV. Possible Ways to Defeat a Spouse’s Interest

A. Federal Preemption of State Community Property Law

Courts have uniformly held that state law determines ownership of patents – in every context in which the issue has arisen.  Federal law thus is held to apply, and so there is no conflict, and nothing to preempt state law.

In fact, the few courts that have analyzed whether federal law preempts state law have each rejected preemption, though without rigorous analysis.   Divorce lawyers believe there is no conflict between state and federal law.  As a leading commentator wrote:

The federal statute on the transfer of patents, 35 U.S.C. § 261, states generally that patents constitute property and that they are subject to assignment. Courts considering the issue have held that an inventor’s creditors can reach the inventor’s patents, although with somewhat more difficulty than other types of assets. 60 Am. Jur. 2d Patents § 1168 (1987). Given these points, there is general agreement that federal law does not prevent a court from treating a patent as divisible property in a divorce case.

Significantly, state courts have not analyzed this question at length, but instead seem to accept the proposition that patent law does not preempt state community property law.  State courts regularly divide patents among divorcing spouses — despite federal statutes and the Constitution and the obvious federal source of patent rights.

There is a distinction between the cases that apply state law relied upon by these courts and applying state law in this context:  in the other instances, the state law determines who owns a patent or application from the inventor, while application of community property law divests sole ownership from the inventor.

B. The Exception for Sole Management Community Property

Some states allow one spouse to alienate certain property, even if community property.  The Washington Statute quoted above, for example, requires both spouses to consent to alienation of real, but not personal, property.

Other states recognize similar doctrines, including recognizing that some community property is, nonetheless, subject to the “sole management” of one spouse.  Under this doctrine, it may be that an invention qualifies as “sole management” community property, and so assignment by the spouse is not required

C. Estoppel

Estoppel likely would not be a useful tool at least in those states that require that both spouses engage in the conduct that gives rise to the estoppel.  So, for example, in an Arizona case the fact that the husband engaged in conduct that might have estopped him from denying an agreement to sell property did not mean that the wife, or the community was estopped.  While facts could of course give rise to an estoppel against both, in routine transactions that seems unlikely.

IV. Application of State Law to Common Fact Patterns

As explained in the introduction, accused infringers have raised ownership interests in spouses as a defense to standing in a few cases, but have lost due to procedural issues.  The case law suggests that there may be more opportunities for this defense, and some thorny issues concerning ownership of existing patents that lawyers and owners of intellectual property need to consider.

Suppose, for example, that an inventor acquires a patent while married.  If the buyer fails to obtain assignment from the spouse, then the buyer may acquire merely an undivided equal interest with the inventor’s spouse.

Or, suppose that the employee is subject to an obligation to assign any patent issued during assignment.  The spouse may have an interest in a patent application filed on that invention before the obligation to assign the patent arises.  Again, the purported assignor may own only an equal undivided interest in the patent.

There are myriad fact patterns that could arise.  State law may provide the answer to some of them, indicating that the spouse has no interest, or that the inventor alone can alienate the property.  But where state law indicates that the spouse has an interest, then only if state law is preempted or the spouse assigns its interest can the assignee feel comfortable in believing it owns full and clear title.

V. Conclusion: What to Do?

As noted at the outset, this article was intended to raise the issues arising from the conflicting approaches of divorce lawyers and patent lawyers to patent ownership.  It may be that state laws will need to be reformed to exclude patents from community property, or to allow for the inventor to alienate all rights without its spouse’s consent.  It may be that a condition of employment must be that the spouse either relinquish any community property rights or to permit the inventor to alienate any intellectual property rights without permission.

In pending cases, there may be standing defenses that can be raised, since the plaintiff may not have full title.  Further, particularly thorny issues may face corporations that have acquired intellectual property from inventors or from small companies in bulk without due diligence on these issues.

 

Sanctions in Monsanto Case Against DuPont for Factual Misrepresentations Upheld

Ethics

I was an expert, on some reissue ethical issues in this case, and watched most of the trial.  Throughout, there were a lot of discussions that I half understood (since they weren’t my issues) between counsel and the judge about this contract issue.  Now the Federal Circuit has affirmed sanctions that the district judge entered against DuPont, and I understand what was going on.

Over simplified, DuPont lost its argument that an agreement with Monsanto allowed it to engage in certain conduct, called “stacking.”  When that didn’t succeed it sought reformation of the agreement, contending that all along (from the agreement’s adoption in 2002 onward, until 2011 or so) that the parties’ intent was to allow stacking, and that it had subjectively believed so.

The district judge sanctioned DuPont because documents in 2007 showed that some high-level DuPont employees and attorneys did not think stacking was permitted.  It imposed attorneys’ fees and other sanctions.

On appeal, the panel (Lourie (auth), Reyna, Wallach) found no abuse of discretion in the district court’s finding of bad faith.  The opinion is here.

Kalo on the main page, and some thoughts learned from Jonathan Turley

Ethics

If you read the discussion on the main page, you’ll miss the key point:  when Funk Bros. was decided, there was no section 102 or 103.  There was (what is now only) 101.  For a long time, however, the courts construed the word “invention” to require more than just novelty, even though “new” and “useful” were the only words in (what was then) 101.

In 1952, Congress did its level best to destroy the word “invention” and replace it with 102/103.  Read Chief Judge Rader’s opinion in CLS Bank.

So, Kalo was deciding the substantive meaning of a word that, after 1952, should have   none.

I hate this mess the supremes have made by not reading the statute!

Which brings me to the next point, quite related.  I had the great pleasure of listening to Professor Turley speak on the Supreme Court the other night at our IP Inn here in Atlanta.  He made several wonderful points in describing why we should expand to 19 Justices (he persuaded me, but that’s beside the point).  Among them, he said that wherever he goes lawyers complain that they cannot implement the Court’s decisions.  That statement, of course, reverberated greatly with 101 “jurisprudence,” where we get silly things like the Court saying the rate at which the body metabolizes a man-made drug is a “law of nature,” or that the phrase “whoever invents or discovers” a new method using an old product doesn’t mean what it says.

So, there you go.  I’m looking forward to CLS Bank.  Maybe then Congress will say “we really did mean what we did in 1952.”