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Seventh Amendment Right Violated When Bench Trial on Inventorship Conducted Before Jury Trial Could Be Held on Fraud Claims with Shared Factual Issues

August 24, 2007

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Last Month at the Federal Circuit - September 2007

Judges: Newman, Friedman (dissenting), Lourie (author)

[Appealed from: N.D. Cal., Judge Jensen]

In Shum v. Intel Corp., No. 06-1249 (Fed. Cir. Aug. 24, 2007), the Federal Circuit vacated the district court’s rejection of a correction of inventorship claim and its grant of SJ on state law claims, holding that the district court violated Shum’s Seventh Amendment rights by conducting a bench trial on a correction of inventorship issue before a jury trial could be held on state law fraud claims involving shared factual issues. The Federal Circuit also reversed the district court’s dismissal of an unjust enrichment claim on the pleadings, finding that the claim was not merely duplicative of the fraudulent concealment claims, and remanded the case.

Frank Shum and Jean-Marc Verdiell formed a company called Radiance Design (“Radiance”) for the purposes of developing optoelectronic packaging technology. On behalf of Radiance, Shum filed a patent application naming himself as the sole inventor. Unbeknownst to Shum, Verdiell formed a new company called LightLogic, Inc. (“LightLogic”) several days before the application was abandoned. The relationship between Shum and Verdiell deteriorated and Radiance was dissolved, with both partners individually retaining the right to exploit the technology developed by the company. After the dissolution, Verdiell filed a patent application on behalf of LightLogic, naming himself as the sole inventor, which Shum alleged was virtually identical to Radiance’s abandoned application. This application matured into a patent and LightLogic obtained additional patents relating to similar subject matter. Intel ultimately acquired LightLogic and its developed IP rights.

Shum filed an action against numerous defendants, including Verdiell, LightLogic, and Intel (“appellees”), alleging fraud, unjust enrichment, and other state law tort claims, as well as a cause of action for correction of inventorship under 35 U.S.C. § 256. The district court ordered that the inventorship and state law claims be bifurcated, and that the inventorship cause of action be tried to the court before the state law claims were tried to a jury. After a bench trial on the correction of inventorship issue, the district court found that Shum had not proven that he was an inventor on any of the patents at issue and granted SJ on the remaining state law claims in favor of the appellees.

On appeal, the Federal Circuit agreed with Shum that under Beacon Theatres, Inc. v. Westover, 359 U.S. 500 (1959), the district court’s decision to bifurcate the claims and to conduct a bench trial on the inventorship issue prior to a jury trial of the state law claims violated his constitutional right to a jury. Relying on Supreme Court precedent, the Court noted that “when legal claims involve factual issues that are ‘common with those upon which [the] claim to equitable relief is based, the legal claims involved in the action must be determined prior to any final court determination of [the] equitable claims.’” Slip op. at 7 (alterations in original) (quoting Dairy Queen, Inc. v. Wood, 369 U.S. 469, 479 (1962)).

Applying this rule to the present case, the Federal Circuit first found that the case involved both legal and equitable claims in the form of the state law fraud claims and correction of inventorship claim under § 256, respectively. With respect to the second inquiry, the Court determined that the equitable and legal claims indeed shared common factual issues. Specifically, the critical question regarding both Shum’s fraud claim and inventorship claim centered on conception. The Court explained that in order to prove that he was an inventor of the claimed inventions, Shum was required to demonstrate that he conceived the inventions. Furthermore, Schum’s fraud-based claims focus on the allegation that Verdiell lied about being the true inventor of the subject technology. As such, “the critical question regarding the fraud claim again centers on conception.” Slip op. at 9. The Court also noted that the trial court and the appellees acknowledged the commonality between the two claims at various points in the record.

In addressing the commonality issue, the Federal Circuit rejected appellees’ reliance on Ethicon v. U.S. Surgical Corp., 135 F.3d 1456 (Fed. Cir. 1998), finding that “[w]hile a § 256 cause of action was the equitable claim at issue in Ethicon, the legal claim involved infringement,” which did not share common factual issues with a claim for inventorship. Slip op. at 10. Thus, the Court held that “[w]hile Shum would not be entitled to a jury trial on the § 256 inventorship claim standing alone, given the co-pendency of the asserted fraud claim, a jury should determine the facts regarding inventorship.” Id. at 11.

Finally, the Federal Circuit agreed that the district court erred in dismissing Shum’s unjust enrichment claim on the pleadings. The Court held that the claim was not “merely duplicative” of the fraudulent concealment claim, agreeing with Shum that “the elements of a fraudulent concealment claim and an unjust enrichment claim differ.” Id. at 12-13. Further, the Court found that unjust enrichment claims can exist as a separate cause of action under California law, when the claim is grounded in equitable principles of restitution.

In a dissenting opinion, Judge Friedman stated that the district court did not violate Shum’s Seventh Amendment right to a trial by jury. He noted that if Shum’s attempt to correct inventorship under 35 U.S.C. § 256 had been his only claim, he would not have been entitled to a jury trial and, therefore, Shum should not be entitled to a jury trial merely because he combined the inventorship claim with legal state law claims. Furthermore, Judge Friedman opined that the state law claims were related to and dependent upon, but significantly different from, Shum’s inventorship claim. In addition, Shum was responsible for the loss of a jury trial on the state law claims, because he added the inventorship claim in his first amended complaint