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Foreclosure Under State Law May Transfer Patent Ownership Without a Writing

August 20, 2009

Decision icon Decision

Last Month at the Federal Circuit - September 2009

Judges: Michel, Bryson, Spencer (Chief District Judge sitting by designation, author)

[Appealed from: E.D. Tex., Judge Folsom]

In Sky Technologies LLC v. SAP AG, No. 08-1606 (Fed. Cir. Aug. 20, 2009), the Federal Circuit affirmed the district court’s judgment that Sky Technologies LLC (“Sky”) had standing to bring a patent infringement suit because patent ownership was properly transferred by operation of state foreclosure law.

Sky had obtained ownership of several U.S. patents from Cross Atlantic Capital Partners, Inc. (“XACP”) through a foreclosure sale without any written agreement, after Ozro, Inc. (“Ozro”), who had purchased the patent from the original owner, used the patents to secure loans from XACP but later faulted.

Upon obtaining an ownership interest, Sky later filed a patent infringement suit against SAP AG and SAP America, Inc. (collectively “SAP”). SAP moved to dismiss Sky’s complaint for lack of standing. The district court ultimately held that the patents-in-suit were transferred from Ozro to XACP through the foreclosure proceedings because XACP properly complied with the Massachusetts Uniform Commercial Code (“UCC”) foreclosure requirements by placing the patent collateral up for sale at a public auction and notifying Ozro of the sale. Thus, when XACP assigned the patents-in-suit to Sky, Sky became vested with all rights, title, and interest in the patents and the chain-of-title had not been broken from Ozro to Sky. Sky thus had standing to bring suit.

On appeal, the Federal Circuit considered whether Sky had properly obtained title to the patents-in-suit via the foreclosure process, as there had been no written transfer between Ozro and XACP, and as a result, whether Sky had standing to sue.

The Federal Circuit first considered whether state or federal law should apply. The Court observed that, while patent ownership is determined by state, not federal, law, “the question of whether a patent assignment clause creates an automatic assignment or merely an obligation to assign is intimately bound up with the question of standing in patent cases,” and is thus “treated . . . as a matter of federal law.” Slip op. at 7-8 (quoting DDB Techs., L.L.C. v. MLB Advanced Media, L.P., 517 F.3d 1284, 1290 (Fed. Cir. 2008)). Accordingly, federal law is typically used to determine the validity and terms of an assignment, but state law controls any transfer of patent ownership by operation of law not deemed an assignment. Id. at 8.

Second, the Court noted that even though an assignment must be in writing, “[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.” Id. (quoting Akazawa v. Link New Tech. Int’l, Inc., 520 F.3d 1354, 1356 (Fed. Cir. 2008)). In Akazawa, the Federal Circuit held that “passage of title through intestacy is not an assignment, and therefore did not require a writing.” Id. at 9 (citing Akazawa, 520 F.3d at 1358). Further, if the controlling state or foreign intestacy law passed title of the patent to the heirs of the inventor upon his death, then all subsequent transfers were valid. Id. Thus, while an assignment must be in writing, “assignment is not the only method by which to transfer patent ownership. . . . [F]oreclosure under state law may transfer patent ownership.” Id.

Third, the Federal Circuit concluded that title was transferred by operation of Massachusetts law. Specifically, because XACP foreclosed on the patents-in-suit in conformity with the provisions of the Massachusetts UCC, XACP obtained title to the patents through the foreclosure sale. The Court rejected SAP’s argument that 35 U.S.C. § 154 limited the ownership of patents to three categories of individuals—the patentee, his heirs, or his assigns—because § 154 does not restrict patent ownership to these three classes of individuals, and the statutory language “fails to specifically address transfers of patent ownership.” Id. at 11. The Court also rejected SAP’s argument that the Massachusetts UCC required a writing to transfer any patent collateral, whether the transfer is by assignment or operation of law, because the plain language of the UCC provision recognized that a writing is permissible but not required.

Fourth, the Court rejected SAP’s federal preemption argument because 35 U.S.C. § 261 “speaks only to assignments of patents; there exists no federal statute requiring a writing for all conveyances of patent ownership.” Id. at 12. Thus, “no federal law preempts the use of the Massachusetts UCC foreclosure provisions to transfer patent ownership by operation of law.” Id.

Finally, the Federal Circuit concluded that public policy weighed in favor of permitting transfers of patent ownership through operation of law without a writing. First, if foreclosure on security interests secured by patent collateral could not transfer ownership to the secured creditor, a large number of patent titles presently subject to security interests may be invalidated. Second, by restricting transfer of patent ownership only to assignments, the value of patents could significantly diminish because patent owners would be limited in their ability to use patents as collateral or pledged security. Third, it would be impractical to require secured parties to seek written assignments following foreclosure from businesses that may have ceased to exist. Accordingly, the Federal Circuit affirmed the district court’s finding that Sky had standing to
bring suit.

Summary authored by Bart A. Gerstenblith, Esq.