Transfer of Patent Ownership by Operation of State Law
On Monday, the Supreme Court denied certiorari in the case of SAP AG v. Sky Technologies LLC. Supreme Court Docket No. 09-819. The Supreme Court thus let stand the holding of the Federal Circuit in Sky Technologies LLC v. SAP AG and SAP America, Inc. [PDF] that ownership of a patent can be transferred without a writing under operation of state law (e.g. a state law transferring title to a patent to a secured creditor).
At issue was whether state law can operate to create classes of patent owners not specifically called out in 35 USC Sec. 154. From the Question Presented to the Supreme Court by petitioner SAP:
The Patent Act identifies only three classes of patent owners with standing to sue for infringement: “patentee[s],” “heirs,” and “assigns.” This Court has repeatedly held that these three classes—unchanged since 1870—comprise the exclusive set of patent owners and that the transfer of legal title in and to a patent requires an assignment in writing. Respondent is not the original patentee, is not an heir, and has no written assignment from the original patent owner. The United States Court of Appeals for the Federal Circuit nevertheless held that Respondent had standing to sue for infringement because a non-judicial state law foreclosure “transferred” legal title to the patents-in-suit by operation of law.
Did the Federal Circuit err when it held that the Patent Act allows the states to create additional, non-statutory classes of patent owners—including “transfer[ee]s” who may take title without any writing at all?
In 1996, Jeffrey Conklin (Conklin) founded TradeAccess, Inc. (TradeAccess). Conklin and his co-inventors obtained a portfolio of patents which were assigned, along with all of their “right[s], title[s], and interest together with the benefits and privileges in and to said inventions and discoveries” to TradeAccess. TradeAccess later changed its name to Ozro.
In 2001, Ozro wanted to obtain a number of commercial loans, so it provided the Conklin patents as collateral. Ozro began by executing an Intellectual Property Security Agreement with Silicon Valley Bank (SVB), granting SVB a “security interest in all of [Ozro’s] right, title, and interest, whether presently existing or hereafter acquired in, to and under all of the Collateral.” Because the Collateral included the patents originally assigned by Conklin, the SVB Agreement was filed with the U.S. Patent and Trademark Office. To get another loan, Ozro executed a similar security agreement with a second company, Cross Atlantic Capital (XACP).
The agreements gave both SVB and XACP “the right to exercise all the remedies of a secured party upon default under the Massachusetts Uniform Commercial Code,” including the right:
(i) to take possession of all or any portion of the Intellectual Property Collateral, (ii) to sell, lease, or otherwise dispose of any or all of the Intellectual Property Collateral . . . and (iii) to exercise all or any of the rights, remedies, powers, privileges and discretions under all or any of the documents relating to the Secured Obligations.
In December 2002, SVB assigned its security interest to XACP through a Non-Recourse Assignment, giving XACP all of the “right, title, and interest” formerly held by SVB. This Assignment, too, was recorded with the PTO; at that point, XACP held the security interest in all of Conklin’s patents.
As you would guess from the set up, Ozro defaulted on its loan obligations and XACP foreclosed on the patents.
In the meantime, Conklin started a new company, Whitelight Technology, later known as Sky Technologies LLC (Sky). After the XACP foreclosure, Conklin entered into negotiations with XACP to transfer ownership of his patents to Sky. The final negotiated agreement said that XACP would use its best efforts to obtain title to the Conklin patents, for purposes of a transfer from XACP to Sky, by selling all of its rights in and to the patents by public auction within 60 days. The nifty trick is that XACP would foreclose on its own security interests, sell those interests at auction, and buy them back. It would thus convert its security interest in the patents to full ownership.
Once it obtained title to the Conklin patents, XACP assigned all of its “right[s], title, and interest in” those patents to Sky by a written assignment. At no point after foreclosure did Ozro execute a written agreement assigning all of its rights, title, or interests in the patents to XACP (meaning that there was a gap in the chain of written assignments).
In 2006, Sky used the Conklin patents to file a patent infringement suit against SAP in the United States District Court for the Eastern District of Texas. Sky Tech. LLC v. SAP AG & SAP America, Inc., Case No. 2:06-CV-440-DF. On January 4, 2008, SAP moved to dismiss Sky’s Complaint for lack of standing.
The district court, relying on the Federal Circuit’s decision in Akazawa v. Link New Tech. Int’l, Inc., 520 F.3d 1354 (Fed. Cir. 2008), found that Sky had standing to bring a patent infringement suit. In Akazawa, the defendant challenged the plaintiff’s standing to sue for infringement based on an alleged defect in the plaintiff’s claim of ownership in the patent. Id. at 1355. Akazawa, the inventor of a patent, died intestate (without a will), after which his wife and daughters agreed that all of Akazawa’s rights would be transferred to his wife, who then transferred her rights to the plaintiff. Id. at 1355. The district court in Akazawa held that the plaintiff lacked standing to enforce the patent because no writing had been issued from the inventor to his wife granting her all of his rights to the patent. Id. The Federal Circuit reversed, holding that passage of title through intestacy is not an assignment, and therefore did not require a writing. Id. at 1358. In addition, the Federal Circuit stated that if the controlling intestacy law passed title of the patent upon the inventor’s death, then all subsequent transfers were valid. Id.
On this basis, the district court in Sky Tech. held that the patents-in-suit were transferred from Ozro to XACP through XACP’s foreclosure proceedings and auction. Because XACP properly complied with the foreclosure requirements of the Massachusetts Uniform Commercial Code, by placing the patent collateral up for sale at a public auction and notifying Ozro of the sale, the district court held title was transferred on July 14, 2003, the date of the foreclosure. For this reason, when XACP assigned the patents-in-suit, in writing, to Sky on July 22, 2003, Sky became vested with all rights, title, and interest in the patents. Thus, the chain-of-title had not been broken from Ozro to Sky, and Sky was declared the proper title holder of the patents-in-suit, giving Sky standing to bring the patent infringement suit.
SAP filed an interlocutory appeal to the Federal Circuit from that judgment. The central question was framed as “whether XACP had legal right, title, and interest in the patents-in-suit to transfer all of those rights to Sky, thereby providing Sky with standing to bring the underlying infringement claim.” SAP contended that because no writing existed transferring the patents-in-suit from Ozro to XACP, Sky did not obtain legal title from XACP, and therefore did not have standing in the matter. Sky (of course) disagreed, arguing that Akazawa permitted transfers of patent ownership by operation of law without a writing, and, since the patents-in-suit were foreclosed upon in accordance with Massachusetts law, XACP became the owner of the patents on July 14, 2003, after the foreclosure proceedings. Thus, Sky contended that XACP’s assignment to Sky vested Sky with full legal title and standing in the underlying case.
The Federal Circuit affirmed, relying primarily on its opinion in Akazawa. The Federal Circuit noted that, usually, federal law is used to determine the validity and terms of an assignment, and the Patent Act requires that all assignments of patent interest be in writing. 35 U.S.C. § 261 (2006). However, the court noted that Akazawa says nothing about permitting assignments without a writing; rather, Akazawa made it clear that if assignment is the method of transfer of patent ownership, then it must be done in writing, pursuant to the federal law established in § 261. See Akazawa, 520 F.3d at 1356. Thus, even though a transfer of patent ownership, if through an assignment, must be in writing, the Federal Circuit held that “[T]here is nothing that limits assignment as the only means for transferring patent ownership…. [O]wnership of a patent may be changed by operation of law.” (citing Akazawa, 520 F.3d at 1356). Here, state law provided for transfer of property ownership by operation of law in foreclosure proceedings, without a writing. Thus, since XACP’s foreclosure on its security interest was performed in accordance with Massachusetts law under the Uniform Commercial Code, it did not need a separate writing to receive full title and ownership of the patents, which it then transferred to Sky, providing Sky with standing in the underlying case.
SAP tried to argue at the Federal Circuit that 35 U.S.C. § 154, which controls the content and term of a patent, limits the classes of holders of a patent to only three: “the patentee, his heirs or assigns.” 35 U.S.C. Sec. 154(a)(1) (2006). Alternatively, SAP argued that if Massachusetts law was found to allow transfers of patent ownership without a writing, then federal preemption must occur pursuant to 35 U.S.C. § 261, and the transfer must be in writing. The Federal Circuit disagreed on both counts. First, the court noted that Section 154 does not address ownership classes; it merely defines the rights granted in the patent and fails to specifically address transfers of patent ownership. The court also held that Section 261 “speaks only to assignments of patents; there exists no federal statute requiring a writing for all conveyances of patent ownership. Therefore, no federal law preempts the use of the Massachusetts UCC foreclosure provisions to transfer patent ownership by operation of law.”
After this comprehensive defeat, SAP appealed to the Supreme Court, asking the Court to set aside the holding “that the Patent Act allows the states to create additional, non-statutory classes of patent owners—including ‘transfer[ee]s’ who may take title without any writing at all[.]” SAP relied primarily on historical arguments regarding the statutory text, as well as some Supreme Court precedent, in arguing that Congress and the Supreme Court have always required a “writing” to transfer patent title to a person other than a patentee and his or her heirs. For its part, Sky chose not to respond to the petition for certiorari until ordered to do so by the Court. In the end, the Supreme Court considered SAP’s appeal at its conference of April 2, 2010, and ordered the petition denied on April 5, 2010.
Thus, as it stands today, the rules for transfer of an ownership interest in a patent appear to be as follows:
- If patent ownership is transferred by assignment, the assignment must be in writing, under 35 USC Sec 261.
- If patent ownership is transferred by operation of state law, the requirements of the state law ownership-transfer provisions control. No writing is required for transfer of an ownership interest in a patent unless it is specifically called out.