Privity: Prevailing Defendant Cannot Take Advantage of Indemnification Agreement to Attorney Fees when Offending Party Fails to Pay

by Dennis Crouch

Buckhorn and Schoeller Arca Systems v. Orbis (Fed. Cir. 2015)

As part of a license agreement, Schoeller Arca granted Buckhorn a license to its U.S. Patent No. 5,199,592 in a form termed “co-exclusive” because Schoeller retained a right to practice the invention.  The agreement gave Buckhorn the right to control any enforcement of the patent against third parties but included an indemnification provision where Buckhorn would reimburse Schoeller for its potential costs associated with an enforcement if it needed to be joined as a co-plaintiff.

Later Buckhorn sued Orbis for infringing the patent.  After a threatened dismissal for a missing necessary party, Schoeller joined Buckhorn as co-plaintiff.  It turned out, however, that Schoeller had previously licensed the patent to Orbis and failed to inform Buckhorn! The district court dismissed the case based upon the license and – after some procedural issues – levied attorney fees against Schoeller. These attorney fees resulted from the terms of the original Schoeller-Orbis license agreement that included prevision awarding fees to the prevailing party in any license dispute. The court then held Buckhorn liable to Orbis for the attorney fees based upon its indemnification agreement with Schoeller.

Unlike many other attorney-fee issues in patent litigation, the awards in this case are fully derived from the two agreements between the parties.


On appeal, the Federal Circuit first agreed that Buckhorn cannot be liable for the attorney fees under the RX Agreement (Orbis-Schoeller) applying basic contract privity law. [Buckhorn may well have been seen as successor-in-interest if patent had been sold rather than co-exclusively licensed.]  In the second step, the Federal Circuit found that, while Buckhorn may need to indemnify Schoeller, it cannot be held liable to Orbis based upon the PLA agreement to which Orbis was not a party.  For this conclusion, the Court did consider New York law – since that was the choice-of-law for the PLA agreement.  Under NY law, an incidental beneficiary of a contract does not have a right to enforce the contract. [A true third-party-beneficiary would have such a right, but only when the contract is designed for their benefit, not the case here.]

The Federal Circuit also found that the district court might have the power to award fees based upon its inherent judicial power. However, the district court had not made that judgment.

Outcome: Buckhorn is not liable to Orbis for the attorney fees.

= = = = =

This case relates somewhat directly to the ongoing legislative debate over attorney fees. The legislative proposals include veil-piercing mechanisms to allow a prevailing defendant to collect attorney fees against investors and others interested in the litigation when the losing-patentee is unable to pay a fee award.  The decision here serves as an indication that the Federal Circuit is unwilling to make this type of policy-change from the bench — thus putting more pressure on congress to make the change.  At the same time, the opinion here notes that the prevailing defendant did not take advantage of the steps available under federal and state laws to collect from Schoeller — resulting in no-sympathy from the court.


23 thoughts on “Privity: Prevailing Defendant Cannot Take Advantage of Indemnification Agreement to Attorney Fees when Offending Party Fails to Pay

  1. 6

    Feds double down on FilmTec despite Supreme Court warning that they are wrong on the law.

    link to

    “Itis well-established that when an agreement provides for
    the transfer of an interest in a patent and the transferring
    party later receives formal title, the formal title is
    automatically transferred by operation of the prior
    agreement to the transferee party. See Abraxis, 625 F.3d
    at 1364 (“If [a] “contract expressly conveys rights in
    future inventions, no further act is required once an
    invention comes into being, and the transfer of title occurs
    by operation of law.”); SiRF Tech., Inc. v. Int’l Trade
    Comm’n, 601 F.3d 1319, 1326 (Fed. Cir. 2010) (same).”

    Now, tell us, kind sirs, just how one registers an invention at the PTO? Does one have to demonstrate reduction to practice in some affidavit? What?

    These folks over at the court really do not know how to think.

    The court also held, over a dissent by Wallach, that one cannot collect lost profits based on foreign use of a patented invention when liability is premised on 271(f)(2) (sale of a non staple component intending that it be combined abroad in an “infringing” manner).

  2. 4

    Regulate interstate commerce —

    I don’t see the connection between enforcing court awards of attorneys fees and regulating interstate commerce.

    I similarly see no connection at all between regulating interstate commerce and unilateral revoking a patent.

    IMHO, more than far fetched. Do you have a case? If the commerce clause is so powerful, we don’t even need a courts system.

    1. 4.1

      I don’t see the connection between enforcing court awards of attorneys fees and regulating interstate commerce.

      You don’t see a connection between interstate commerce and the licensing/enforcement of patents? What department is the US Patent and Trademark Office in?

      1. 4.1.1

        DanH, I see. Persuasive.

        The clowns behind all this crapola legislation seem to think that Congress has to power to anything it wants.

  3. 3

    APoTU, the so called exclusive license was really an assignment. The Feds, as usual, got it wrong.

    1. 3.1

      When one grants another the exclusive right to sue for infringements past or future one has assigned all substantial rights. That is an assignment.

      Assignments can reserve licenses and often do.

      Assignments are subject to previously granted license by operation of law.

      A warranty of title does not warrant that there are no previously granted licenses.

      The lack of notice to the assignee of prior licenses is irrelevant. The assignment contained no warranty that there were no prior licenses.

      I don’t know why the the assignee here sued Orbis without prior notice or discussions, because if there were prior discussions, Orbis should have brought up the license. The fact that they did not tells me that there were not discussions prior to suit being filed. This shows basic incompetence on behalf of the assignee.

      This case is built on one misunderstanding of the law after another. Incompetence abounds in all directions.

  4. 2

    The one burning question in my mind: how exactly is that agreement “co-exclusive” when a third party already has a license? And can we expect further litigation to address that?

    1. 2.1

      Agreed. Massive screw-up here. The problem for a patent licensee is that there is no mechanism to ensure that a patent has not been previously licensed.

      1. 2.1.1

        “Massive screw-up here.”

        I cannot comprehend how such a screw up would be permitted to happen all the way through judgement.

        “The problem for a patent licensee is that there is no mechanism to ensure that a patent has not been previously licensed.”

        Couldn’t they just “consult with their own records” and then utilize their mouths?


          What I’m talking about here is a licensee (not the patentee).

          If I want to get an exclusive license of your patent, how can I be sure that you have not previously licensed it to someone else? There is no public record of such licenses and so there is no real way that I can confirm that no-such-license exists.


            As my other post (2.2) mentioned, a license can still be “exclusive” even if there are pre-existing licensees. What matters is whether those pre-existing licensees (or the licensor) have the ability to grant further licenses to third parties, in which case the “exclusive license” really does not convey exclusionary rights.

            If I were the exclusive licensee, I would be sure to include something in the “representations and warranties” section that addresses prior licenses that would derogate from any rights granted by the exclusive license agreement.



          The opinion mentions that the district court chose not exercise it’s power to award expenses partly because Orbis took an unreasonable amount of time before bringing forward the documentation of their earlier license agreement with Schoeller Arca (in addition to not behaving any better than the other party, with respect to incurring unnecessary delays and expenses).

          It appears the defendant, in their enthusiasm, might have brought some extra grief upon themselves.

    2. 2.2

      “Exclusive” license does not mean “only” license. Instead it relates to whether the licensee has “exclusionary” rights. And if there are pre-existing licensees, the license can still be “exclusive” so long as the exclusive licensee has the right to exclude others in the future. See WiAV v Motorola. Just like an assignee still has exclusionary rights even if the assignor had licensed others, an exclusive licensee can still have exclusionary rights — just not against the pre-existing licensees.

  5. 1

    Where does congress get the power to abrogate state corporation laws for the purpose of piercing the veil?

      1. 1.2.1

        I’m answering your first question, by the way.
        The answer to the second one is just as simple, though.



          In an IPR we do not even have a right to go to a district court to conduct a trial, a right that actually exists if patent office does not issue a patent. An innovator actually has less rights after patent is issued than during application state. Amazing.


            scientist, and now, the PTO is trying to stop that as well by asking for attorney fees regardless of whether they win or loss.

Comments are closed.