By Kevin E. Noonan –

One of the most important (if not the most important) inquiries in performing due diligence involving acquisition of a patent portfolio is ensuring that the entity asserting ownership of the patents actually has proper title (in what can be a complex chain, starting with the inventors).  This is particularly true in view of the position taken by the Federal Circuit that even one inventor, who has not assigned her rights, can prevent the other inventors or their assignee from bringing suit as being an indispensible party, and that the Federal Rules of Civil Procedure do not permit that recalcitrant inventor from being involuntarily joined.  The failure to make sure that the chain of title was intact led a district court to grant defendants' motion to dismiss, in Advanced Video Technologies LLC v HTC Corp., a decision the Federal Circuit affirmed last week.

The dispute arose over U.S. Patent No. 5,781,788, which claimed a "full duplex single chip video codex."  As the opinion notes, "the technology of the patent is not at issue" — indeed the opinion says nothing more about the subject matter of the '788 patent.  Instead, the Federal Circuit's opinion (as with the District Court's opinion below) revolved around whether the plaintiff had standing to sue, in light of evidence that one of the inventors had not assigned away her rights to the claimed invention.

The facts are, as could be expected, complicated.  The patent lists three inventors:  Beng-Yu "Benny" Woo, Xiaoming Li, and Vivian Hsiun, and the opinion states that these three co-inventors worked for Infochips Systems, Inc. at the time the invention was made.  Mr. Woo and Ms. Li duly assigned their rights to the invention to Infochips; Ms. Hsiun did not, despite the existence of a contractual obligation to assign, according to plaintiff AVT here.

AVT's ownership in the patent in suit stems from a series of transfers having to do with business arrangements made by Infochips.  These include pledging Infochips' rights to the patent as security to a financing arrangement between Infochips and Leased Management Services (LMS), which seized the patent assets when Infochips went out of business in 1993.  (Whether this "seizure" was part of a bankruptcy or settlement of what Infochips owed LMS is unclear from the opinion.)  LMS then sold the patent asset to inventor Woo, who then assigned his ownership interest to AVC Technology, Inc.

It was AVC that filed the "parent" application to the '788 patent, in 1995, and Mr. Woo and Ms. Li again executed assignments, this time to AVC.  (Of course, if the chain of title transfers is correct, these inventors had no rights left to assign by this point.  The title transfers also illustrate the bygone world of a patent having a term of 17 years from grant:  under present law, the patents would have expired in 2016 at the latest.)  Regarding Ms. Hsiun, this time she affirmatively refused to assign her rights.  The U.S. Patent and Trademark Office permitted AVC to prosecute the parent patent that ultimately issued (as a continuation) as the '788 patent, based on AVC's petition supported by the Infochips Employment agreement and documents showing the chain of title culminating in AVC's purported ownership.  Ownership in the patent was further transferred until it finally came to rest with the AVT plaintiff here.

The case at bar first arose in a lawsuit between the parties named in this case, filed in 2011 but dismissed due to failure to comply with Delaware law relating to how assets of dissolved corporations are distributed, wherein the patent ownership rights were not transferred to AVT (the error being sufficiently egregious that the District Court awarded attorneys' fees to defendants under 35 U.S.C. § 285).  AVT corrected this error in title before the Delaware Chancery Court, and then refiled its lawsuit against the HTC defendants.  The District Court's decision and this appeal followed.

The basis for Defendant HTC's motion to dismiss being failure of inventor Hsiun to assign her rights, AVT asserted three portions of the employment between Ms. Hsiun and Infochips:  "a 'will assign' provision, a trust provision, and a quitclaim provision," as follows:

I agree that I will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and will assign to the Company all my right, title, and interest in and to any and all inventions, original works of authorship, developments, improvements or trade secrets which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company.

(the "will assign" and "trust" provisions; emphasis in opinion); and

I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have infringement [sic] of any patents, copyrights, or mask work rights resulting from any such application assigned hereunder to the Company.

(the "quitclaim" provision; emphasis in opinion).

The District Court was unconvinced that these provisions "effect[ed] a transfer" of inventor Hsiun's ownership rights in the patent, and accordingly dismissed the complaint.  Specifically, Judge McMahon on the bench in the Southern District of New York dismissed AVT's complaint for lack of standing, finding that Ms. Hsiun was a co-owner of the patent in suit and that she had not assigned her rights to plaintiff's predecessor in interest.

The Federal Circuit affirmed, in an opinion by Judge Reyna, joined by Judge O'Malley who wrote a concurring opinion.  Judge Newman dissented.  The Court reviewed the District Court's analysis of each of the asserted terms of the Infochips Employment agreement and came to the same conclusion regarding their ineffectiveness in transferring inventor Hsiun's ownership rights to Infochips (and hence, to plaintiff AVT).

With regard to the "will assign" provision, the panel agreed with the District Court that this provision merely "invoked a promise to do something in the future and did not effect a present assignment," relying on Arachnid, Inc. v. Merit Industries, Inc., 939 F.2d 1574, 1576 (Fed. Cir. 1991) (also consistent with the Supreme Court's opinion in another context, in Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc. (2011)).  And the purported "trust" provision supported this interpretation, according to both the District Court and Federal Circuit, because Ms. Hsiun could not simultaneously assign her rights and hold them in trust for her employer.

The District Court further analyzed the trust provision in light of California law, which AVT argued created an "immediate trust" in favor of Infochips.  Even if this is the case, the District Court concluded (and the Federal Circuit agreed) that there was no evidence that Ms. Hsiun ever transferred her interest from any such trust to Infochips, thus not providing any basis to find in AVT's favor.  And the opinion cites precedent (Jim Arnold Corp. v. Hydrotech Sys., 109 F.3d 1567, 1578 (Fed. Cir. 1997)) that the proper order of asserting AVT's claim was to first bring an action against inventor Hsiun (in state court) to enforce the employment agreement, and only then (if successful) suing defendant HTC.  Which of course AVT never did.  In addition (and a point upon which the majority differs with Judge Newman), under California law a trust beneficiary "'generally is not the real party in interest,' 'may not sue in the name of the trust,' and 'has no legal title or ownership interest in the trust assets,'" citing relevant California decisions.

Finally, with regard to the quitclaim assignment argument, AVT advanced the interpretation that the language "assigned hereunder" should be taken to mean "assignable hereunder"; not surprisingly, neither the District Court nor the Federal Circuit was convinced.  Both courts understood the provision to apply to Ms. Hsiun's ownership rights to any patents she had actually assigned, but that did not occur and thus this provision does not apply to the claims at issue before the court.

The majority opinion responded to Judge Newman's dissent, that the Employment Agreement language "intended" to have Ms. Hsiun's ownership interest in any patents be assigned to and owned by Infochips by stating that the agreement by its terms does not so provide, and that California courts have held that they "should not deviate from unambiguous provisions unless they lead to 'absurd results.'"

Judge O'Malley's concurrence sets forth her view that, while binding Federal Circuit precedent mandates the majority's result, she believes that precedent is wrongly decided.  In particular, she takes issue with the standard that "a non-consenting co-owner or co-inventor can never be involuntarily joined in an infringement action pursuant to Rule 19 of the Federal Rules of Civil Procedure."  In this she hales back to her dissent in STC.UNM v. Intel Corp., 767 F.3d 1351 (Fed. Cir. 2014), with regard to Rule 19.  Specifically,  she believes that Rule 19(a) mandates that anyone who is a mandatory party must be joined in order for a case to proceed.  Further, she believes it settled law that the Federal Rules are "as binding as any Federal statute," citing Stone Container Corp. v. United States, 229 F.3d 1345, 1354 (Fed. Cir. 2000), and that they apply to patent cases as to all other cases brought in Federal Court, citing somewhat mischievously eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 393–94 (2006).  And she sets forth her belief that it is the Federal Rules, rather than "substantive judge-made laws governing joinder" that govern the question before the Court.

With that as prelude, she sets forth her opinion that Rule 19(a) provides for involuntary joinder of a necessary party, setting forth the Rule in the text of her opinion and in particular Rule 19(a)(2):

(2) Joinder by Court Order.  If a person has not been joined as required, the court must order that the person be made a party.  A person who refuses to join as a plaintiff may be made either a defendant or, in a proper case, an involuntary plaintiff.

In Judge O'Malley's view:

There is no dispute over whether co-owners are necessary parties to infringement actions; the question we must address is whether a co-owner's mere recalcitrance can prevent enforcement of another co-owner's rights.  Rule 19(a) is designed to address circumstances just like those at issue here.

And in her opinion, the Rule certainly is so designed.  She expressly rejects what she characterizes as dicta from Ethicon, Inc. v. U.S. Surgical Corp., 135 F.3d 1456 (Fed. Cir. 1998), the idea that Federal Circuit precedent precludes using Rule 19 to effect involuntary joinder in patent cases, setting forth an "[e]xamination of the pertinent case law" that includes Ethicon as well as Schering Corp. v. Roussel-UCLAF SA, 104 F.3d 341, 345 (Fed. Cir. 1997), and an earlier case relied upon by the Schering panel, Willingham v. Lawton, 555 F.2d 1340 (6th Cir. 1977).  As explicated by Judge O'Malley, none of these cases support the view apparently held by her brethren (as evidenced by DDB Techs., L.L.C. v. MLB Advanced Media, L.P., 517 F.3d 1284, 1289 n.2 (Fed. Cir. 2008)) that a recalcitrant inventor can preclude an assignee or co-inventors from bringing suit.  Moreover, Judge O'Malley perceives that, prior to its STC.UNM v. Intel Corp. decision, the Federal Circuit had "never explicitly held that one patent co-owner cannot involuntarily join the other."

Finally, Judge O'Malley cites § 281 of the Patent Act, to the effect that "[a] patentee shall have remedy by civil action for infringement of his patent," as being inconsistent with the Court's opinions in STC.UNM v. Intel Corp. and here, that one inventor can preclude co-inventors or their assignee(s) from enforcing a patent without the inventor's permission.

In her dissent, Judge Newman sets forth a detailed analysis of the Employment Agreement, which in her view taken in toto supports AVT's position that the agreement operates to vest title of Ms. Hsiun's interest in the patent in her employer Infochips (and through the series of transfers set forth above and in the opinion now rest with AVT).  She also characterizes HTC's argument as a litigation stratagem developed by defendants and supported by no assertion by Ms. Hsiun that she has refused to assign her rights (other than by her refusal to execute a standard assignment document).  And to the extent prior Federal Circuit case law applies, she distinguishes both Ethicon Inc. v. U.S. Surgical Corp. and Arachnid, Inc. v. Merit Industries, Inc. on their facts and disagrees with both Judges Reyna and O'Malley that the majority's decision is mandated by the Court's ruling in either of those cases.

Advanced Video Technologies LLC v. HTC Corp. (Fed. Cir. 2018)
Panel: Circuit Judges Newman, O'Malley, and Reyna
Opinion by Circuit Judge Reyna; concurring opinion by Circuit Judge O'Malley; dissenting opinion by Circuit Judge Newman