Property, intangible

a blog about ownership of intellectual property rights and its licensing

The Role of a Board of Directors

I don’t write much about patent ownership because there just isn’t a lot of interesting stuff going on. There are two major ways it goes wrong for a plaintiff: there is a missing patent owner uncovered or the conveyance assigned less that all rights to the plaintiff. These two situations are litigated so commonly I generally don’t write about a district court opinion on patent standing, Judge Posner sitting by designation notwithstanding.

In Patriot Universal Holdings, LLC v. Formax, Inc. though we have a different theme, which is corporate authority and formalities. There are three patents in suit with different chains of title, but I’ll only write about one, the ‘650 patent.

First the players: non-party Progressive Technology of Wisconsin, Inc. (“PTI”) originally owned the three patents in suit. Non-party Paul Gehl was an investor in PTI and later became the sole shareholder of the company in settlement of a dispute with PTI’s then-president.

The first challenge was to the formalities of an assignment from PTI to plaintiff Patriot. The defendants challenged the assignment on the theory that Gehl hadn’t executed the agreement on behalf of PTI. The defendant’s argument was that the assignment document said that if the assigning party was a legal entity, the person executing the document should “type or print the name of the above person authorized to sign on behalf of ASSIGNOR,” and Gehl hadn’t done that.

The court didn’t care:

This is an overly technical argument…. Because the assignor is the only party entering into obligations, it is clear that Gehl was signing on behalf of the assignor, since that is the only party whose clear consent would need to be obtained in order to make all the representations, etc., found in the assignment. The fact that he did not fill in part of the form does not undermine the assignment’s legitimacy.

In addition, it must be remembered that Gehl controlled both PTI (the assignor) and Patriot (the assignee). Thus, he conceivably could have been signing on behalf of both entities. The point is that there can be no suggestion that the actual consent of the parties is somehow at issue here, because Gehl was on both sides of the transaction.

Next the defendants challenged the assignment on the theory that under state law Gehl couldn’t act without the approval of his board of directors, which he didn’t have. The court wasn’t buying this either:

Again, however, this is a highly technical argument. Although it is true that corporations act under the direction of their boards of directors, PTI in 2008 was an entity solely owned by Gehl. As a general principle, owners of companies are entitled to take action on behalf of their companies….

It is true that companies are generally run under the power of their boards of directors, but the Defendants take this too far. Even if the Defendants were right that board approval was technically required, their argument is premised on corporate law rather than contract law, which is what governs assignments. At best, Defendants have shown that there is some question about whether PTI had a board of directors and whether (if it did) corporate formalities were followed. Although we may not be able to unearth whether there were technically other members of the board of directors, or whether a board even existed, or whether such board held a meeting to approve the assignment of the patent from one Gehl-owned entity to another, that does not mean Patriot, the assignee, lacks standing to enforce the assignment. An assignment is an agreement like any other, and if there is a meeting of the minds then the agreement may be enforced notwithstanding any corporate formalities. Here, there is no question that there was a meeting of the mind, not minds, because Gehl was transferring a patent from one of his companies to another.

Ultimately, when the company in question is wholly owned by a single man, it will take more than speculative questions about the board’s role to undermine an ostensibly legitimate patent assignment….

Corporate formalities aside, the only parties potentially injured by an unapproved, ultra vires act would be the shareholders themselves. If the individual performing the act is the shareholder, and the only one, it would make no sense to conclude that his actions should be undone because he failed to seek approval of a board of directors, a board whose role is to represent his own interests.

There were some ugly facts involving fundamental misunderstandings about which of Gehl’s companies owned what rights—a company that didn’t own the patents had originally granted the license to co-defendant Tomahawk, but “one company cannot wrest legitimate patent rights from another simply by saying it has them.” The plaintiff successfully sorted it all out in a new license agreement executed shortly before suit was filed: “There is little doubt that the 2010 agreement is an ex post facto effort to solve the problems identified above, and as such it is not the most elegant of instruments. But what’s clear is that as of April 2010 there is a meeting of the minds between Patriot, the patent owner, and Tomahawk, the licensee, and that is enough to grant standing.”

The court concludes thus:

The Defendants are understandably frustrated by what they view as Gehl’s disregard for corporate form and recordkeeping, which led to the unfortunate yet substantial questions about standing that have been addressed herein. However, I am satisfied that the Plaintiffs have established standing to pursue the claims in this action.

Patriot Universal Holdings, LLC v. Formax, Inc., No. 10-C-355 (E.D. Wis. June 4,2014).

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