Property, intangible

a blog about ownership of intellectual property rights and its licensing

Patent Infringement Is a Frivolous Claim (If You Don’t Own the Patent)

There is a chicken-and-egg problem with patent ownership and a patent infringement claim. I’d guess that most patents are assigned, that is, since under US law it is the natural person who is the inventor, patents will generally be assigned to a business for exploitation. That underlying assignment, a contract, is therefore a creature of state law, not patent law, and jurisdiction in the contract dispute is with the state court. Of course, patent infringement is exclusively within the jurisdiction of the federal courts. So what happens if the ownership issue is predicate to an infringement claim?

The Federal Circuit in First Data Corp. v. Inselberg to the rescue. Inselberg had been the original patent owner but he assigned the patents to Bisignano, who then became the CEO of First Data. (I’ll use “Bisignano” to refer to both of them.) This case caption is for a declaratory judgment case, meaning that the parties’ respective positions are flipped.

Inselberg later claimed that the assignment to Bisignano was invalid and thus First Data an infringer, at one point sending Bisignano a draft state court complaint with a claim for patent infringement. Bisignano thereafter filed an action in federal court seeking a declaratory judgment that he was the owner of the patents and First Data not an infringer. Inselberg filed a complaint in state court on various tort theories and asking for a declaration that he was the true owner of the patents. Bisignano counterclaimed in Inselberg’s state law case for a declaratory judgment of non-infringement and invalidity of one patent, and also removed the case to federal court. Now with both suits in federal court, Inselberg filed a motion to dismiss Bisignano’s complaint, filed a motion to dismiss First Data’s counterclaims in the removed state court lawsuit, and filed a motion to remand the state law claims back to state court. The federal district court concluded that Inselberg’s claims were all state law claims and did not require any interpretation of federal (i.e., patent) law. The federal district court also held that because Inselberg sought to invalidate the assignment agreement, he had conceded Bisignano was the current owner of the patents. If at some point Inselberg regained ownership of the patents he might be able to ultimately bring a patent infringement claim, but since it was conditional there was no current federal jurisdiction. Bisignano appealed.

The district court relied on Jim Arnold Corp. v. Hydrotech Systems, Inc., 109 F.3d 1567 (Fed. Cir. 1997), in reaching its conclusion. Jim Arnold states:

Until ownership is restored in the assignor, there can be no act of infringement by the assignee. Federal question jurisdiction must exist at the time the complaint is filed for a federal court to exercise authority over the case, and without first receiving equitable relief that restores to the assignor title to the patent, any claim of ownership by the assignor will be unfounded. Further, because an action to rescind or cancel an assignment is a state-law based claim, absent diversity jurisdiction it is to a state court that plaintiffs must look in seeking a forfeiture of the license.

Bisignano claimed that more recent Supreme Court jurisprudence, Arbaugh v. Y&H Corp., 546 U.S. 500 (2006), and Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154 (2010), clarified the difference between jurisdictional questions and merits questions, and under current jurisprudence the ownership question was one on the merits and should not have been dismissed.

But the district court had it right:

First Data and Bisignano are correct that in recent years the Supreme Court has clarified the difference between merits issues and jurisdictional issues arising from federal statutory requirements. For example, in Arbaugh, the Court explained that courts should determine whether Congress “clearly states” that a threshold limitation on a statute’s scope is jurisdictional; if Congress does not frame a statutory limitation as jurisdictional, “courts should treat the restriction as nonjurisdictional in character.” Arbaugh, 546 U.S. at 515-16. But the Supreme Court also acknowledged an exception: if a claim invoking federal question jurisdiction under 28 U.S.C. § 1331 is “immaterial and made solely for the purpose of obtaining jurisdiction” or is “wholly insubstantial and frivolous,” then the court can dismiss the claim for lack of jurisdiction.

The holding in Jim Arnold “fit squarely within” the exceptions the Supreme Court described in Airbaugh. Quoting Jim Arnold:

To invoke the jurisdiction of a federal court under § 1338, it is necessary that plaintiff allege facts that demonstrate that he, and not the defendant, owns the patent rights on which the infringement suit is premised. Furthermore, this allegation of ownership must have a plausible foundation. Federal jurisdiction cannot lie based on allegations that are frivolous or insubstantial. Thus, if plaintiff cannot in good faith allege such facts because, absent judicial intervention to change the situation, under the terms of a contract or deed of assignment the rights at issue are held by the defendant, federal court is not the place to seek that initial judicial intervention.

(Emphasis in original.) The standard applied in Jim Arnold therefore continues to apply in assignment cases and was correctly applied here. And even without applying Jim Arnold per se, there was no non-frivolous theory of federal jurisdiction at this point in time, given Inselberg’s concession that he did not currently own the patents. Back to state court.

First Data Corp. v. Inselberg, No. 2016-2677, 2016-2696 (Fed. Cir. Sept. 15, 2017).

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