Property, intangible

a blog about ownership of intellectual property rights and its licensing

Sketchy Standing Decision

The only good thing about the latest Federal Circuit standing decision is that it’s nonprecedential.  This is the sequence of events, taken from both the majority’s and dissent’s statement of them: 
In 2002, The Dow Chemical Company (“Dow”) assigned patents to a holding company, Dow Global Technologies, Inc. (“DGTI”). The dissent described the assignment as of “essentially [Dow’s] entire patent portfolio” as part of a tax strategy.  This was the grant:
2.01 Transfer of Patent Rights and Technology. Effective on the Transfer date, [Dow] hereby conveys, transfers, assigns and delivers to DGTI, and DGTI hereby accepts from [Dow] as an additional contribution to DGTI’s capital, all of [Dow’s] right and title to and interest in the Patent Rights, Technology and Work Processes, which rights are owned or controlled by [Dow] on the Transfer Date or thereafter.

The language defining “Patent Rights” is the crux of the problem:

1.07 “Patent Rights” means any and all patents and applications for patents of any kind, filed with and/or granted by a governmental body of the United States or any other country … which are owned solely or controlled by [Dow] on the Transfer Date or thereafter, that [Dow] is able to assign to DGTI without the consent of or accounting to a Third Patty or Affiliated Company, without diminishing the royalties paid or payable by or otherwise materially affecting the obligations of such Third Party or Affiliated Company with respect to such Patent Rights, and without resulting in a loss of rights. The parties shall provide a schedule of Patent Rights as Schedule A to this Agreement, within ninety (90) days of the Effective Date, and shall provide subsequent supplements thereto from time to time during the Term.

The agreement also said this about the schedules to the agreement:

9.07 Schedules.  Each of the schedules referenced within this Agreement, prospectively including any updates or amendments thereto, is deemed incorporated herein by reference. While care shall be taken in the provision of the schedules, it is recognized that inadvertent errors may occur. Accordingly, inclusion of an item on one or more schedules shall not give rise to rights or an implication that DGTI has rights greater than those expressly provided for in this Agreement. Likewise, omission of an item from one or more schedules shall not give rise to an implication that DGTI has rights less than those otherwise provided for in this Agreement. Upon their mutual recognition of an error in one or more schedules, the parties will amend the erroneous item(s) on the affected schedule(s).

In 2005, Dow sued defendant Nova Chemicals Corp. for patent infringement.

Five months after discovery closed Dow first produced a Schedule A that said “this Schedule includes all Patent Rights of [Dow] … excluding Excluded Patent Rights set forth in Schedule ‘D’” and a Schedule D that indeed listed the patents-in-suit, although the patents had been added to Schedule D years after suit was filed and right before it was produced.  Dow also produced a “Quitclaim Deed,” dated four days before it was produced, assigning “all of DGTI’s right, title, and interest to the Patents[-in-suit], if any.”

Defendant Nova pressed for further disclosure. Dow then produced a 2002 version of Exhibit D that did not list the patents-in-suit and a Schedule A dated September 15, 2005 that, unlike the broad language in the earlier-produced Schedule A, listed a number of patents by number but not the patents-in-suit. 

To recap, the definition of assigned patents had three exclusions: (1) the transfer would require “the consent of or accounting to a Third Party or Affiliated Company”; (2) the transfer would “diminish[ ] the royalties paid or payable by or otherwise materially affecting the obligations of such Third Party or Affiliated Company with respect to such Patent Rights”; or (3) the transfer would result in “a loss of rights.”

Everyone agreed that the first two exclusions didn’t apply, leaving the question whether transferring the patents-in-suit would have resulted in a “loss of rights.” Nova argued that the language was intended only for those patents in litigation pending at the time of transfer, designed so that there would be no loss of standing in those cases. At the time the assignment was being drafted, Dow’s Managing Patent Counsel sent a question by email:

“Did transfer of all patents into this new company have any provisions on how to handle pending litigations under Dow patents…. It is a question of who had standing and who is the real party in interest in these litigations.” 

The response was:

“Thank you for the feedback. I’ve addressed this issue in the contribution agreement by excluding patents that can’t be transferred to DGTI without a loss of rights (previously, it excluded patents that can’t be transferred to DGTI without a loss of patent protection). As an overall safety net, there is a schedule of excluded intangible assets, just in case there may be other instances in which we determine that there would be some disadvantage in transferring the assets to DGTI.”

Dow’s argument was that, in addition to patents in pending litigation, the language was meant to preserve the ability to recoup lost profits in future litigation.

(I don’t follow Dow’s theory. Does it mean that Dow somehow was prescient in knowing that these patents would be litigated in the future and therefore didn’t assign them? Or that the patents flow back and forth without any further action by Dow or DGTI as litigation comes and goes?  Was it the Schrödinger’s cat of assignments, any given patent was both assigned and not assigned depending on whether it was a tax situation or a patent infringement situation?)

But the majority punted on the language. It held that, while it didn’t know what the “loss of rights” language was supposed to mean, it didn’t matter because Schedule A was the definitive list of what was assigned, the patents-in-suit weren’t on it, ergo, they weren’t assigned and Dow had standing to bring suit.

The dissent disagreed with the majority’s conclusion about Schedule A’s role:

Section 1.07 defines the transferred Patent Rights as “any and all patents” owned by Dow that Dow can assign without implicating one of three exceptions, none of which reference Schedule A. Nowhere in the Contribution Agreement is the transfer predicated or dependent upon whether patents are listed on Schedule A. Indeed, Section 9.07 makes clear that the contents of the schedules are not controlling. Moreover, Section 2.01 provides that Dow “hereby” transfers the patents, which strongly indicates an immediately effective transfer, while Schedule A was not even required to be completed until after the Contribution Agreement was executed.

To find that no patents were transferred unless and until listed on the Schedule A ignores Section 9.07, nullifies the transfer set forth in Section 2.01, renders superfluous the detailed and specific definition of Patent Rights in Section 1.07, and rearranges the fundamental purpose of the tax and business scheme intended under the agreement as a whole. Such a reading would cause most of the Contribution Agreement to be “meaningless or illusory.” The reference to Schedule A in the Contribution Agreement shows that the parties desired to make and maintain a listing of the patents that were transferred to DGTI as a matter of convenience, not as a prerequisite to a valid transfer.

The dissent also didn’t buy Dow’s argument that somehow these patents fit into the “loss of rights” exclusion, reciting all the extrinsic evidence (which, under Delaware law, should have been considered because the language was ambiguous) that the intention was only to exclude those patents in litigation at the time of the assignment. As well as the language of the agreement and the emails described above, the dissent also described all the ways that the company treated the patents as assigned for tax purposes.

I agree with the dissent; I don’t see how you would draft an agreement intending to assign only scheduled properties but also have an extensive, but apparently non-binding, description of what should be on the list – you don’t need both.  But I will be taking a closer look at the language of grant clauses and schedules in the future after having read this case.

Perhaps the whole thing was just a matter of bad timing. The district court sat on the motion on standing for nine months and heard it the day after the jury returned a verdict for Dow on the infringement trial. Maybe the majority just didn’t have the stomach for a do-over with the right party-in-interest.

Dow Chem. Co. v. Nova Chems. Corp. (Canada), No. 2010–1526 (Fed. Cir. Jan. 24, 2012) (nonprecedential).

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