Preventing Loss of Standing to Sue When Corporate Status Changes

Authored by D. Brian Kacedon, David K. Mroz, and John C. Paul

When corporations undergo changes in corporate form, structure, or state of incorporation, enforcement problems may occur if the chain of title of patents owned by the original corporation is overlooked. Specifically, if the chain of title is broken, a successor company intended to be the patent owner may be unable establish that it is the proper owner of the patent, and a court may find that that it does not have standing to sue and enforce that patent. In Tri-Star Electronics Int'l, Inc. v. Preci-Dip Durtal SA, No. 2009-1337 (Fed. Cir. Sept. 9, 2010), the United States Court of Appeals for the Federal Circuit addressed the issue of a plaintiff with potential chain of title problems due to a corporate reorganization.

The Tri-Star Decision

In Tri-Star, the asserted patent was initially assigned by the inventor through an employment contract to his employer, Tri-Star Electronics International, Inc., and its "successors, legal representatives, and assigns." This assignment document, executed in 1999, stated that Tri-Star Electronics International, Inc. was an Ohio corporation. Four years before the execution of this assignment, however, Tri-Star Electronics International, Inc. ("Tri-Star Ohio"), merged into a newly created California corporation with the same name ("Tri-Star California"). This meant that Tri-Star Ohio technically did not exist when the inventor assigned the asserted patent to it. In 2005, after both the assignment and the merger, Tri-Star California merged into a newly created Delaware corporation with the same name ("Tri-Star Delaware"). This new entity initiated the lawsuit mentioned above, asserting the patent assigned by the inventor to Tri-Star Ohio in 1999.

During the lawsuit, the defendant argued that Tri-Star Delaware lacked sufficient ownership in the patent to have standing to sue. Specifically, the defendant argued that the chain of ownership in the asserted patent broke when the inventor assigned it to Tri-Star Ohio, which did not exist at the time of the assignment. The plaintiff responded by asserting that the initial assignment document not only assigned the invention to Tri-Star Ohio, but also to that entity's successors and assigns. And since Tri-Star California was a successor to Tri-Star Ohio, the asserted patent was properly transferred to Tri-Star California before ultimately transferring to Tri-Star Delaware via merger.

The Federal Circuit ruled for the plaintiff, holding that Tri-Star Delaware obtained ownership in the patent and had standing to sue. In reaching this conclusion, the court provided the following reasoning:

1. An assignment of a patent is interpreted in accordance with state contract law. The laws of Ohio endeavor to give effect to every provision of the contract, if possible. In this case, upholding the assignment from the inventor to Tri-Star Ohio would result in maintaining the validity of every contract provision in the document.
2. Under Ohio state contract law, the intent of the contracting parties is critical in determining whether an assignment occurred. The inventor and Tri-Star Delaware agreed during litigation that Tri-Star California, as a successor to Tri-Star Ohio, was the intended recipient of the ownership rights at the time the parties executed the agreement.
3. The language of the assignment allowed for Tri-Star California to obtain ownership rights, since the grant was to Tri-Star Ohio, its successors, legal representatives, and assigns. As mentioned, Tri-Star California was a successor to Tri-Star Ohio. 
4. The assignment complied with Ohio statutory law, which permits an entity eliminated during a merger to survive for purposes of transferring its property rights in the newly formed entity. 
              

Strategy and Conclusion

Companies undergoing changes in corporate structure (such as mergers, spin-offs, buyouts, etc.) should take steps to ensure that their intellectual property assignments track the proper corporate chain of ownership.

1. For assignments already existing at the time of the change in structure, companies should draft new assignment documents transferring ownership of its patents to the new entity. 
2. The new entity should then file assignment documents at the United States Patent and Trademark Office to serve as evidence that a change in ownership has occurred. 
3. The filing should occur within three months of the assignment's execution to provide the patent owner with additional protections from a federal statute. See 35 U.S.C. § 261. This statute protects the patent owner in the event that, after the assignment, another entity claims it obtained ownership of the patent.  
4. So future assignments proceed to the new entity, companies should amend any form documents governing employer-employee patent assignments to list the name of the new entity. These documents, often primarily boilerplate, are easily overlooked and can become outdated quickly. 
5. Assignment documents should contain language stating that the assignment applies not only to the assignee, but to any of its "successors, legal representatives, and assigns." In Tri-Star, the Federal Circuit relied on this language in upholding the assignment.
6. While the Federal Circuit in Tri-Star focused on the intent of the parties in confirming that an assignment occurred, companies should not leave it to a district court or the Federal Circuit to discern the intent of the parties and conclude that this intent supports an assignment. Such a situation is unpredictable and costly to litigate, and the law on the issue can vary from state to state. Further, section 261 of Title 35 of the United States Code (mentioned above) requires that a patent assignment be "in writing." This may limit the extent to which a court can rely on the intent of the parties that is not expressed in writing.
   In conclusion, companies undergoing changes in corporate structure can use these suggestions to limit the risk of breaks in chain-of-ownership and standing challenges in future patent litigation that would limit the ability to enforce their patents.

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