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Bona Fide Purchaser Rule Applies to Sublicensee

November 19, 2001

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Last Month at the Federal Circuit - December 2001

Judges: Dyk (author), Clevenger, and Schall

In Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., No. 00-1266 (Fed. Cir. Nov. 19, 2001), the Federal Circuit affirmed a district court’s ruling that a sublicensee who obtained a sublicense for value and without notice of any intervening equitable claim may invoke the bona fide purchaser rule.

From 1991 through 1994, Rhone-Poulenc Agro, S.A. (“RPA”) collaborated with DeKalb Genetics Corporation (“DeKalb”) on the development of a genetically engineered strain of corn. During this joint development effort, RPA obtained U.S. Patent No. 5,510,471 (“the ‘471 patent”) on an optimized transit peptide that proved useful in developing herbicide resistant corn plants. In 1994, RPA and nonparty Calgene, Inc. licensed various technologies relating to genetically engineered corn, including that of the ‘471 patent, to DeKalb. This unrestricted, worldwide license allowed DeKalb the right to grant sublicenses without further payment to RPA or Calgene. In 1996, DeKalb sublicensed its rights in the ‘471 patent to Monsanto. In return, Monsanto granted to DeKalb licenses to use certain intellectual property related to genetically engineered corn. Additionally, Monsanto acquired a forty percent equity interest in DeKalb and ten percent of DeKalb’s Class A voting stock.

In 1997, RPA filed suit against DeKalb and Monsanto seeking, among other things, rescission of the 1994 licensing agreement (“the 1994 Agreement”) between RPA/Calgene and DeKalb. RPA also alleged that DeKalb and Monsanto infringed the ‘471 patent and misappropriated RPA’s trade secrets. At trial, a jury found that DeKalb had procured the license by fraud, and the district court ordered rescission of the 1994 Agreement. Monsanto asserted that the claims against it should be dismissed because it was a bona fide purchaser for value of the sublicense to the ‘471 patent and the trade secrets. As such, Monsanto asserted that the sublicense provided a complete defense to the infringement and misappropriation claims. The district court dismissed the infringement and misappropriation claims against Monsanto because it paid value for the right to use the technology without knowledge of any wrongdoing by DeKalb.

The Federal Circuit affirmed by extending to sublicensees the bona fide purchaser rule announced in Heidelberg Harris, Inc. v. Loebach, 145 F.3d 1454, 46 USPQ2d 1948 (Fed. Cir. 1998). This rule states that one who acquires an interest in a patent for valuable consideration from the legal title holder, without notice of an outstanding equitable claim or title, is entitled to retain the purchase interest free of any equitable encumbrance. Even though the holding of Heidelberg Harris addressed the acquisition of title to a patent and the issue of its application to sublicensees was never argued, the Federal Circuit concluded that there was sufficient discussion of the bona fide purchaser rule in the licensing context to regard it as precedent. Accordingly, Monsanto’s sublicense was valid and acted as a complete defense to RPA’s patent infringement and trade-secret misappropriation claims.

Having found that the bona fide purchaser rule applies to sublicensees, the Federal Circuit further concluded that the rule was a matter of federal common law. While contractual rights in patents are generally governed by state law, the Federal Circuit concluded that federal law must be applied to questions related to the transferability of patent licenses. Because of the importance of having a uniform national rule and because of the differences among the various states’ contract laws, the Court ruled that the bona fide purchaser rule is a matter of federal law. This federal rule, however, is informed by the various common law bona fide purchaser rules as they are generally understood.