Guest post by Dr. Shubha Ghosh, Crandall Melvin Professor of Law and Director of the Technology Commercialization Law Program at Syracuse University College of Law
In Stanford v Roche, 563 U.S. 776 (2011), the Supreme Court ruled that the Bayh-Dole Act did not create special rules of patent ownership for universities and other recipients of federal research funding. Traditional rules of inventor ownership and assignment, developed for for-profit entities applied to research institutes. Nothing in the language of the Bayh-Dole changed the basic rules and created a statutory automatic assignment (one analogous to work made for hire under the Copyright Act).
But what are the traditional rules for patent assignment? One issue the majority ignored in Stanford is the future interest assignment rule created by the Federal Circuit in Filmtec Corp. v. Allied Signal, 939 F.2d 1568 (Fed. Cir. 1991). By containing the phrase “hereby assigns,” the Federal Circuit stated in Filmtec, an assignment would have priority over another that only contained the word “assigns.” An assignor stating that he “assigns” a future interest is simply conveying a promise to assign in the future. However, the magic phrase “hereby assigns” is a present assignment of a future interest. Stanford University’s failure to include the word “hereby” in its assignment agreement lost patent rights to Roche, a competing assignee that showed the wisdom to include the word “hereby” in its agreement.
Justices Breyer and Ginsburg in dissent sharply criticized the Filmtec rule of “automatic assignment” through agreement in the Stanford case. This sentiment was echoed in Justice Sotomayor’s concurrence. All three justices, however, recognized that the assignment interpretation issue was not properly before the Court. Dr. Alexander Shukh, a computer hardware engineer, signed an assignment to his former employer Seagate. The assignment contained the “hereby” language sanctioned by the Filmtec decision. Seagate, and the Federal Circuit, reads the hereby language as creating an automatic assignment of Shukh’s rights to his inventions and resulting patents. The Shukh decision does not involve priority of assignments and goes beyond the Filmtec decision criticized by Justices Breyer, Ginsburg, and Sotomayor. Under Shukh, the magic words “ hereby assigns” extinguishes all rights of employees in their inventions.
The Court should grant Shukh’s certiori petition. This post demonstrates that there is a serious error of federal law that requires Supreme Court review. It also shows how the Court might correct the misapplication of federal law.
The Federal Circuit created the rule of automatic assignment through agreement without any basis in the Patent Act or in the common law of assignment. Acting from its institutional law as patent law expert, the Federal Circuit seemingly adopted the Filmtec rule as one of patent assignment. But, as Professor Ted Hagelin pointed out in a 2013 article in the AIPLA Law Quarterly, the automatic assignment rule has no foundation in the Patent Act. Section 261 speaks to writing requirements and priority rules arising from filing. There is no mention of the magic word “hereby” as a marker between promises to assign in the future and present assignments of future interests. Professor Hagelin recommended that Congress correct the error by amending Section 261.
But the Federal Circuit’s error is deeper than one of statutory misconstruction. Its decision confuses the relationship between patent law and contract law. The error is in the same category as the controversy over the conditional sale doctrine, a court created rule from Mallinckrodt v. Medipart, 976 F.2d 700 (Fed. Cir. 1992). In Mallinckrodt, the Federal Circuit examined a patent owner’s power to impose conditions on its grant of rights to a licensee. Through announcing the conditional sale doctrine, the Federal Circuit ruled that a violation of such conditions constituted patent infringement rather than contract breach. By so ruling, the Federal Circuit expanded its own jurisdiction by transforming questions of state contract law into those of patent law. A similar move occurs in Filmtec.
The usurpation of contract law by patent law is the subject of my 2014 article in the Journal of the Patent and Trademark Office Society. My argument in that paper is grounded, in part, in Judge Pauline Newman’s criticism of Filmtec in her dissent from denial of en banc review in Abraxis v. Navinta. 672 F.2d 1239 (Fed. Cir. 2011). According to Justice Newman, patent assignments are a matter of contract law, which is in the jurisdiction of the states. Therefore, the Federal Circuit should look more closely at state law in deciding cases about patent assignments.
The judge’s point is particularly salient when one remembers that the Federal Circuit was created as an expert patent court. It was given jurisdiction to hear some non-patent matters when these matters are related to patent cases. Patent assignments are one obvious example of when the Federal Circuit has jurisdiction to consider state matters. But, as Judge Newman points out, jurisdiction to hear a case does not mean authority to create new law, as the Federal Circuit arguably did in Filmtec and in Stanford. Instead, the Federal Circuit should look to other authorities to address non-patent law matters. For contract law matters, what state courts and legislatures have said about assignments generally would be relevant. Furthermore, state law provides a stable and predictable source of authority for actors engaged in the business practice of negotiating patent assignments and other contracts.
The core problem is that the court has ignored the Erie doctrine. Under the Supreme Court’s 1937 decision in Erie v. Tompkins, a federal court ruling on a matter of state law under its diversity jurisdiction must apply the law of the state from which the dispute arose. Which state law to apply is a matter of choice of law principles. What the federal court cannot do is create its own federal common law in lieu of the state statutory or common law. As the Court affirmed in Butner v. United States, 440 U.S. 48 (1979), the Erie doctrine applies to a court’s supplemental jurisdiction over state law claims attendant to a federal question. By creating its own federal common law of contracts, the Federal Circuit reveals a fundamental error in its understanding of the federal court system.
State law offers a different analysis of patent assignments from what the Federal Circuit adopts. Justice Breyer, in his Stanford dissent, cited a treatise on patent law by George Ticknor Curtis from 1873 that discusses patent assignments. Curtis addresses how state law treats assignments and cites a Massachusetts case from 1841 dealing with patent assignments. Relevant to the issues in Stanford, the assignment involved the present assignment of an invention that had not been made yet. The court analyzed the assignment as it would any contract, identifying the terms of the document as a key to the expectations of the parties. State law precedents perhaps offer an alternative to the questionable Federal Circuit jurisprudence, at least with respect to patent assignments.
One related area in state law is that of security interests, a part of debtor-creditor law. In entering into credit agreements, creditors ask for security in the form of collateral for a loan. The collateral may be a legal interest that is not in existence at the time of the loan. An example would be the future sales or proceeds from a debtor’s business. Another example would be inventory remaining at the end of an accounting period. These future interests are analogous to the future inventions or patents that I have been discussing. Rights can be claimed in these properties that are nonexistent at the time of the contract formation between creditor and debtor.
Security interests provide the most common situation in which conflicting obligations arise. Debtors often take multiple mortgages, hypothetic future proceeds to multiple creditors, and take multiple loans out on the same collateral. As long as the value of the collateral can cover all the debts, then there is no problem in general. However, if not all creditors can be satisfied, priority rules are necessary. In the case of future interests, the law does not fall back on simple rules like first in time because there are multiple interests involved. A creditor does not want to run the risk of not receiving any return on the debt. The legal rules of priority allow the creditor to investigate the collateral and through such due diligence identify competing claimants on the collateral. Priority rules, consequently, depend not only on the timing of the contract, but also on recording and notice requirements.
The case of conflicting patent assignments bears some similarity to the law on intangible future interests in creditor-debtor law. Both entail rights in property that has yet to come into being. The main lesson from creditor-debtor law, which is largely a matter of state law, is that many interests are implicated and therefore simple rules are not satisfactory. The Federal Circuit has arguably adopted too simple and misguided a rule in the Filmtec. The Supreme Court has confounded the error in the Stanford decision by ignoring the issue of automatic assignments. One way to correct course is by granting Shukh’s petition for certiori and restore the proper balance between federal patent law and state commercial law.