Broken Symmetry

Federal Circuit Upholds District Court Interpretation of Contract Assigning Non-exclusive Licenses

The Rembrandt Techs. opinion includes the following diagrams of chain of title and licensing of the asserted patents:

At issue was the question of whether the assignment of the licenses from Old Rockwell to New Rockwell were valid, such the sublicense from New Rockwell to Conexant was sufficient to exhaust the patent rights.

Transferability of licenses presents thorny choice of law issues in many cases because different states have different presumptions when it comes to the validity or enforceability of any kind of restrictions (encumbrances, covenants, or licenses) on personal property. Compare Cadtrak Corp. with Superbrace.

There is nothing in the Opinion to indicate what law was applied in interpreting the relevant contracts.

Split within Federal Circuit on Federal Preemption of State Law in Ownership Disputes

[Below is the text of a case note submitted by me to the MWE IP Update Newsletter, which is recommended reading for anybody interested in keeping up with new developments in patent, trademark, copyright, and trade secret law. Eventually, they should have it up in blog format. In the meantime, I'll "crosspost." -MFM]

Last November, a split panel of judges on the U.S. Court of Appeals for the Federal Circuit vacated a district court finding of infringement by generic drug maker Navinta on the grounds that the plaintiff Abraxis had not properly transferred ownership of the asserted patents prior to the filing of the complaint. Abraxis Bioscience v. Navinta LLC, Case No. 09-1539 (Fed. Cir., Nov. 9, 2010) (Gajarsa, Linn for the Court) (Gajarsa, opinion) (Newman, dissenting). The recent per curiam denial of petition for rehearing by the Court en banc was occasion for the delivery of spirited opinions concurring (Gajarsa, Linn, and Dyk) (Gajarsa, opinion) and dissenting (O'Malley, Newman) (O'Malley opinion). Abraxis Bioscience v. Navinta LLC, Case No. 09-1539 (Fed. Cir., Mar. 14, 2011). Although without consequence to the original panel decision, the concurrence and dissent from rehearing en banc expose a subtle, but potentially momentous difference in opinion on the choice of law for interpretation of patent assignments.

The problem with title arose from a series of mergers and asset acquisitions carried out in relatively quick succession. In chronological order, the inventors assigned ownership to Astra Lakemedel Aktieboag ("Astra L") and AB Astra. AB Astra then merged into AstraZeneca AB ("AZ-AB"). Astra L and AZ-AB later (in late 2007) assigned ownership to their parent, AstraZeneca ("AZ-UK"), but not before plaintiff Abraxis had entered (on April 26, 2006) into an Asset Purchase Agreement ("APA") with AZ-UK. Thus, even at closing on June 28, 2006, when AZ-UK made a present assignment of its ownership to Abraxis in an IP Assignment Agreement included in the closing documents, AZ-UK did not have legal title to the patents, which had not yet been assigned to AZ-UK by its subsidiaries Astra L and AZ-AB. When the oversight was corrected in late 2007, Abraxis had already filed its complaint against Navinta.

Although patent law is often thought to be exclusively federal, in fact many disputes over patent ownership turn on common law rules of contract and property that, at least since Erie v. Tompkins, have been considered state rather than federal. Notwithstanding that history, the panel majority at least have recognized limited federal preemption of state law in interpreting contracts of assignment. Unfortunately for Abraxis, the APA provided only that AZ-UK "shall cause" the assignment of ownership to Abraxis. In accordance with the precedent of DDB v. Techs. (Fed. Cir. 2008), Federal Circuit law applies to the interpretation of such an assignment, and Federal Circuit law holds that such an assignment does not operate as a present assignment of rights, but rather as a promise to assign in the future. The dissent from the panel opinion by Judge Newman, and the dissent from rehearing en banc by Judge O'Malley (joined by Judge Newman), argue that the application of New York state law by the district court (which upheld Abraxis's claim to ownership) was correct, and that the majority was overextending the reach of federal jurisdiction.

Interestingly, the precise rule of law invoked by the panel majority is now under consideration by the Supreme Court in Stanford v. Roche. In that case, the Federal Circuit vacated a judgment against Roche because the inventor had made only a promise to assign to Stanford. The Supreme Court agreed to review the decision because of the questions it raised about whether the Bayh-Dole Act (which permits transfer of title of federally funded inventions to universities) trumped common law rules of property. The Federal Circuit decision applied the rule of DDB without comment on the preemption of state by federal law. The Supreme Court decision in Stanford v. Roche could, therefore, have a substantial impact on the advice given clients in transactions requiring assignment of ownership, even in non-Bayh-Dole settings.

Practice Note: In advising buyers in a merger, lawyers should make closing contingent upon clear documentation of chain of title from any subsidiaries to the seller, so that a present assignment at closing includes all the bargained-for rights. Stay tuned for the Supreme Court opinion in Stanford v. Roche.

A $900 Million Question of Federal Common Law?

Google today announced that it was selected to serve as the stalking horse in the bankruptcy auction of Nortel's patent portfolio. Its stated purpose:

we hope this portfolio will not only create a disincentive for others to sue Google, but also help us, our partners and the open source community—which is integrally involved in projects like Android and Chrome—continue to innovate. In the absence of meaningful reform, we believe it's the best long-term solution for Google, our users and our partners

Not insignificant to this logic, and hence to Google's $900 million bid, is the question of whether any patent licenses to Nortel would be assignable to Google if Google is successful in its bid. (Note: the value of such licenses would be considered separately from the value of any patents owned by Nortel.) Does Google's $900 million expressly include the assignment of licenses to Nortel?

Even if the parties' agreement says yes, the answer is non-trivial. The authority on the question of whether and when non-exclusive licenses should be assignable is split, and even the authority on what authority should apply to the question of whether and when non-exclusive licenses should be assignable is split!

To wit, the Ninth Circuit has ruled that federal common law applies to the question of whether licenses are assignable. See in re CFLC, Inc. v. Everex Sys., Inc.. By contrast, California state courts have applied California law. See Superbrace v. Tidwell and Dopplmaier.

What law applies is kind of, um, important. The Ninth Circuit avoided the transfer of patent licenses to a buyer in bankruptcy after ruling that federal common law applied. If California law had applied, the transfer would have been completed.

Nortel filed for bankruptcy in federal court in Delaware. Have Delaware courts or the Third Circuit ruled on this question? Not yet.

I guess we'll have to see how Nortel's licensors feel about having Google as a licensee before we find out whether the Delaware Bankruptcy Court agrees with the Ninth Circuit on this point of law.

In a pure accident of fate, the Supreme Court is right now in Stanford v. Roche considering how the Federal Circuit's application of federal common law to a question of contract interpretation should be decided. Interestingly, not every Judge on the Federal Circuit agrees that there should be federal common law, or at least that state law should be preempted, on these issues. I wonder whether those judges would change their minds if they took also the federal system of bankruptcy law into consideration.