by Dennis Crouch
Inspired Development Group and Mitchell Prine v. Inspired Products Group (dba KidsEmbrace) (Fed. Cir. 2019)
Mr. Prine is the listed inventor of U.S. Design Patent No. D524,559 and several other super-hero related car seats. Prine formed Inspired Development and assigned patent ownership to that company. Prine then formed another company, KidsEmbrace, to sell the car seats with an exclusive license from Inspired Development. KidsEmbrace was then bought-out by Boliari who later terminated the license agreement. Prine sued for the money — suing for breach and unjust enrichment under Florida law.
The district court sided with KidsEmbrace and dismissed the lawsuit on summary judgment. On appeal, the 11th Circuit did not review the merits but instead found a failure of diversity jurisdiction (the stated basis for federal jurisdiction in the case). By that time, KidsEmbrace wanted the district court decision to stick, while Prine meanwhile filed a new lawsuit in state court and was hoping the federal action was fully vacated.
On remand from the 11th Circuit, the KidsEmbrace argued that the license dispute was actually a patent law dispute and the district court agreed. That finding of federal jurisdiction allowed the prior holding to stick. Prine again appealed to the 11th Circuit who then transferred the case to the Federal Circuit to determine whether federal subject matter jurisdiction exists under 28 U.S.C. § 1338(a).
The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents. . . . No State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents. . . .
Id. On appeal, the Federal Circuit has again dismissed the case — finding that the contract dispute does not arise under the Federal Patent laws.
This case does not allege a federal claim directly, but KidsEmbrace argues that the unjust enrichment claim by Prine was effectively an infringement claim. On appeal, the Federal Circuit rejected that argument — finding “no support.”
State law claims can arise under U.S. patent law, but only if they qualify under the four-part Gunn test:
- the patent law issue is necessarily raised;
- will be actually disputed;
- is substantial; and
- is capable of resolution in federal court without disrupting the federal-state balance.
Gunn v. Minton, 568 U.S. 251, 256 (2013). These factors are tested against the complaint. On appeal, the Federal Circuit found the case lacking — in particular holding that the unjust enrichment claim could be proven in several ways that did not require patent law infringement questions.
[O]ne way Inspired Development could prove that KidsEmbrace “accepted and retained” a benefit at Inspired Development’s expense was to show that KidsEmbrace used one or more of Inspired Development’s “utility and design Patents” in the car seats it manufactured and sold. Thus, Inspired Development’s unjust enrichment claim potentially raises a question of patent law regarding infringement.
Demonstrating infringement, however, is not the only way that Inspired Development could succeed on its claim. It is often the case that a licensee, and in particular an exclusive licensee, benefits from the grant of a license regardless of whether or not an infringing product is actually created. For example, if a product is possibly but not certainly infringing, an entity may procure a license in order to avoid uncertainty and litigation. The benefit in this case is the entity’s ability to invest or have others invest in its products with greater confidence, as well as the avoidance of costs and fees associated with suit.
In addition, the court found that the patent issues raised are not “substantial” under Gunn because its resolution is not of direct interest to the Federal Government and is unlikely to impact other cases.
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Note – the Federal Circuit here appears to approve of exclusive patent licensing programs designed to ensure that potential products stay off the market. That seems problematic.
My initial thought is that is seems problematic to grant a design patent that incorporates the intellectual property of another party. As shown in the post, Mr. Prine’s designs incorporate a lot of copyrighted characters.
Dennis writes:
>Note – the Federal Circuit hear [sic; here] appears to approve of exclusive
>patent licensing programs designed to ensure that potential products stay
>off the market. That seems problematic
I am honestly a bit confused by this statement. It is a really interesting question of whether it is lawful to use a patent to ensure that no infringing products (by anyone) are ever created or sold.
But I am not sure this case really implicates that. The Federal Circuit’s remark that an exclusive licensee benefits “from the grant of a license regardless of whether or not an infringing product is actually created,” isn’t about whether or not a product is made. It’s talking about the benefit of taking a license even if you have an argument that your product doesn’t actually read on the claims, to avoid the uncertainty and risk of litigation. There was no question that KidsEmbrace (the party that terminated the license) continued to make superhero themed car seats, and they still do to this day.
KidsEmbrace terminated the license to get out from under a collusive but clever strategy by the original inventor/owner; create two entities (KidsEmbrace and Inspired Development), one owns the patent and one makes the product. Obligate KidsEmbrace to pay VERY GENEROUS patent royalties to Inspired Development, and because both entities were created/owned by the same person, no negotiation, same guy signs for both parties. No one is around to point out the obvious, that the royalty rate was ridiculous.
Later sell KidsEmbrace to a larger company, keep the patent, and demand that the generous and collusive royalty stream continue. KidsEmbrace will probably win the case again in state court, as it is almost inconceivable that they didn’t account for the patent licensing as part of the compensation for the acquisition of KidsEmbrace.
I don’t think Dennis was suggesting that the CAFC was upthumbing an unlawful activity. Blocking competitors (or non-competitors) with an unpracticed valid patent isn’t unlawful. It’s definitely not something that benefits anyone except perhaps for providing an emotionally needy patent owner with a feeling of power (“You the man, bro! Snort another line!”). But it’s not unlawful.
“It’s definitely not something that benefits anyone except perhaps for providing an emotionally needy patent owner…”
… and out comes the cognitive dissonance and lack of understanding of the “stick” aspect of the full “carrot and stick” approach to how patents promote innovation (as well as showing a lack of business understanding in providing a market buffer around any actual products one may have on the market).
But Malcolm “really is” a patent attorney interested in helping his clients obtain innovation protection….
Why term the arrangement between the two companies “collusive”? The buyer of the manufacturing company should have adjusted its offer to buy with that royalty arrangement in mind. If the buyer didn’t do its homework, that the buyer’s problem.
The only potential problem I see here for the design registration owner is if the manufacturing company hid the royalty arrangement from the buyer – and even then, that problem only stems from the fact that the design registration owner and the manufacturing company are both alter egos of the same individual, so that the buyer’s claim will be against the same individual (assuming the corporate veil is pierced). Put differently, only if there was collusion to hide the fact of the royalty arrangement does it appear that the buyer has a way out of this.
Good observation. A “due diligence” study before a corporate acquisition needs to evaluate IP control and licenses relevant to current or planned products.
Changing the design of products sufficiently for a non-infringement argument may involve significant costs in new molds and tooling. Perhaps even new safety testing for something like a child’s car seat.
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