Property, intangible

“Intellectual property” is a meaningless phrase when it comes to a description of legal rights. It it is catch-all term for at least three different types of intangible property: patent, trademark and copyright, and maybe boat hull designs, and maybe Indian tribal names, and maybe trade secrets, and maybe the right of publicity—you get the picture.

Patent and copyright arise under Article I, Section 8, Clause 8, of the Constitution, the Copyright and Patent Clause, and are solely creatures of federal law. Federal trademark rights arise under Article I, Section 8, Clause 3 of the Constitution, the Commerce Clause, but the individual states also regulate trademarks. The Copyright Office is a legislative branch, Article I, function under the Librarian of Congress but the Patent and Trademark Office is an executive branch, Article II, function. The federal laws that defines patent, copyright and trademark are codified and classified in different parts of the United States Code—Title 15 for trademark, Title 17 for copyright, and Title 35 for patents. So you see, when it comes down to brass tacks, even the three types of “intellectual property” rights that federal law defines have very little in common.

Nevertheless we loosely refer to “intellectual property” rights, which is fine for situations where a loosey-goosey term is good enough, like job titles. But—please—never, ever use the term in an agreement or you could find yourself in court for a long time.

Defendant Lief Hauge worked for plaintiff Energy Recovery, Inc. (“ERI”) and they had a falling out. They settled a lawsuit by agreement and the agreement was adopted in a 2001 Order. As related by the court, the agreement said:

ABSOLUTE TRANSFER OF ALL RIGHTS IN PATENTS, PATENT APPLICATIONS AND ALL RELATED INTELLECTUAL PROPERTY, TO ENERGY RECOVERY.

[Hauge] irrevocably and absolutely assign[s] … all right, title and interest along with any and all patent rights [which Hauge had in] (i) the patents and patent applications …; (ii) any and all patent rights …, intellectual property rights, property rights …; and (iv) all other intellectual property and other rights relating to pressure exchanger technology predating this Order.

Hauge also agreed not to compete for two years.

After the two years was up, Hauge filed a provisional patent application for a “Pressure Exchanger” and ultimately a patent issued from it. Hauge then went into business competing with ERI on pressure exchangers. ERI filed a Motion for Order to Show Cause claiming that Hauge had violated the 2001 court order, claiming that, by the terms of the agreement, it owned Hauge’s post-settlement invention under subparagraph (iv).

The district court agreed with ERI, saying that allowing Hauge “to … develop new products using the very technology he assigned to ERI solely because those new inventions post-date the Agreement would render the Settlement Agreement and its assignment of ownership rights useless.” Hauge was found in contempt of the 2001 Order and appealed.

But Hague was right; he wasn’t in contempt. The parties agreed that the contempt motion was not about patent infringement; that was the subject for another day. But that left nothing for ERI to complain about:

Mr. Hauge’s manufacture of the PR pressure exchanger is not inconsistent with the 2001 Order’s requirement that Mr. Hauge transfer all “intellectual property and other rights relating to pressure exchanger technology pre-dating this Agreement.” Civil contempt is an appropriate sanction only if the district court can point to an order of the court which “sets forth in specific detail an unequivocal command which a party has violated.” ERI cannot point to such a command. Mr. Hauge is not claiming ownership of ERI’s intellectual property. Nor did Mr. Hauge start selling pressure exchanger products before the expiration of the Agreement’s non-compete clause. Finally, if in fact Mr. Hague is using ERI’s manufacturing processes, he may be violation of the patent laws or state trade secret laws, but he is not in violation of any “unequivocal command” in the 2001 Order.

Within a few days, a Delaware state court reached the same conclusion:

Unfortunately, the references to intellectual property in the complaint, various other submissions of both Spiro and Vions, and the key underlying documents are loose and imprecise. As a result, the arguments of the parties are often vague, confusing, and unhelpful. This problem is not unique to this case as demonstrated by a recent decision by the United States Court of Appeals for the Federal Circuit, Energy Recovery, Inc. v. Hauge, in which the appellate court was called upon to resolve the question of “what is intellectual property” within the meaning of the agreement at issue in that case.6

6 Energy Recovery, Inc. v. Hauge, 2014 WL 1063442 (Fed.Cir. Mar. 20, 2014). Under the approach adopted by the Federal Circuit in the Hauge case, “intellectual property” is not treated as the technology itself, but the rights over that technology. See id. at *4. Although the decision in the Hauge case is by no means controlling in the context of this action, the approach taken there is useful here, as well, and comports with what appears to be the intent of the parties involved in this dispute.

The lesson: there are no rights in “intellectual property.” One may have patent rights, copyright rights, or trade secret rights, or claims for tortious interference, or for breach of a contractual obligation not to use “know how,” or fraud. But there’s no such thing as owning, or infringing, “intellectual property.”

Energy Recovery, Inc. v. Hauge, No. 2013-1515 (Fed. Cir. March 20, 2014).

Spiro v. Vions Technology, Inc., C.A. No. 8287-VCP (Del Ch. Mar. 24, 2014) (unpublished).

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