An Infringer May Not Challenge Patent Validity and Infringement Until Issues Relating to Patent Ownership Are Resolved

Abstract

Claims regarding patent ownership and infringement are not ripe for decision by federal courts until state law claims regarding ownership are resolved.

Infringers who patent owners threaten to sue may beat the patent owner to a court of their choosing and ask that court to rule that the asserted patent is invalid or not infringed. However, the infringer may not have the right to challenge the patent in this way if the party asserting infringement clearly lacks ownership in the asserted patents. 

In First Data Corp. v. Inselberg, the Federal Circuit found that a federal court did not have jurisdiction to hear and decide patent claims that depended on a court invalidating an assignment agreement because the assignor had no patent rights unless and until it succeeded on its state law claims.

Background

Eric Inselberg received patents on systems by which audiences interact with live events and assigned his patents to Inselberg Interactive. 

After defaulting on a loan from Frank Bisignano, Eric Inselberg entered into an agreement that purported to convey Inselberg Interactive’s patent portfolio to Bisignano. 

Eric Inselberg later asserted that the assignment was invalid, First Data infringed the patents, and Bisignano was liable for damages. 

Bisignano, as CEO of First Data, gave First Data a royalty-free license, and Eric Inselberg repeatedly threatened to sue Bisignano and First Data for patent infringement. 

First Data and Bisignano then sued Inselberg in New Jersey federal court asking the court to declare that the license agreement and Bisignano’s ownership of the patent portfolio were valid and that First Data did not infringe the patents. 

Soon after, Eric Inselberg and Isenberg Interactive sued Bisignano and First Data in New Jersey state court asking the court to declare that the assignment agreement was invalid and that Eric Inselberg and Inselberg Interactive owned the patents. 

Bisignano and First Data then transferred the New Jersey state court case to New Jersey federal court, invoking the federal court’s exclusive jurisdiction over patent cases. 

Eric Inselberg and Inselberg Interactive tried to move the state court claims back to New Jersey state court and the federal court agreed to do so. All of Eric Inselberg and Inselberg Interactive’s claims arose under state law because they involved ownership of property rights created by state statute or common law, and the state law questions on the validity of the assignment did not depend on the outcome of any federal law issue or the interpretation of a federal statute. The state law claims did not become a patent case merely because some of the damages might be based on "forgone royalties." Rather, the alleged patent law issues were "incidental and contingent," because both parties agreed that Eric Inselberg and Inselberg Interactive did not currently own the patents they had assigned under the patent assignment in dispute and neither was suing as the patent owner. 

The First Data Decision

First Data and Bisignano appealed this decision, arguing that the court should consider the patent ownership issue when addressing the invalidity and noninfringement issues, rather than making the patent ownership issue a jurisdictional prerequisite for deciding the invalidity and noninfringement claims. The court disagreed, finding that a patent infringement suit between the parties would not be ripe to be decided by a federal court unless and until Inselberg and Interactive were successful in recovering ownership of the asserted patents they had assigned. 

A federal court would not have jurisdiction over a patent infringement claim that is "immaterial and made solely for the purpose of obtaining jurisdiction" at a federal court or is "wholly insubstantial and frivolous." It was frivolous for First Data to ask a federal court to declare it did not infringe the patents because all the parties agreed that Inselberg and Interactive did not currently own the patents at issue and cannot obtain an ownership interest without relief from a court, and any potential infringement claim by Inselberg and Interactive is contingent on a court invalidating the assignment agreement and ordering the return of the patents to Inselberg and Interactive, which may never happen.

Strategy and Conclusion

When an assignor challenges the validity of a patent assignment agreement, the dispute regarding the validity of the assignment should be resolved before a federal court can consider and decide whether the patents are valid and infringed.

The First Data opinion can be found here.