Property, intangible

a blog about ownership of intellectual property rights and its licensing

Removing the Veil

We’re all familiar with the concept of “piercing the corporate veil.” As a general rule, the owner of a legal entity, like the parent of a subsidiary, or the shareholder of a company, is legally insulated from the wrongdoing of the owned company. In some cases though, where the owner and the company haven’t done a good job of observing the distinction between company and owner, an aggrieved is allowed to “pierce the corporate veil,” and the company’s liability flows up to the owner.

But sometimes that line also gets in the way, as it did in Total Rebuild, Inc. v. PHC Fluid Power, LLC. Terry Lavergne was the sole shareholder of plaintiff Total Rebuild, Inc., a company that produces high pressure testing systems. Lavergne obtained a patent on a system he invented. His company paid the expenses of the development, paid for the costs in obtaining the patent, and received all of the profits on the invention. About three years after the patent issued, on March 26, 2015, Lavergne assigned the patent to Total Rebuild. The Assignment Agreement provided that “Assignor [Levergne] hereby sells, assigns, and transfers to Assignee [Total Rebuild] the full and exclusive worldwide right, title and interest in and to said Invention and said Patent …”

A few months later, on June 11, 2015, Total Rebuild sued defendant PHC Fluid Power for patent infringement. PHC Fluid argued on summary judgment that Power Rebuild did not have standing for infringement occurring before the date of the assignment. You may have caught what’s missing from the assignment, which is an assignment of causes of action that arose before the assignment. “A party may sue for infringement that occurred before it acquired legal title ‘if a written assignment expressly grants the party a right to do so; that right, however, must be articulated explicitly in the assignment and will not be inferred by the court.’” The assignment didn’t explicitly state that past claims were assigned, so they weren’t. But this is where the reverse veil piercing comes to the rescue:

if the inventor is the alter ego of a company because he has a close and intertwined relationship with the company, then the company has total ownership over the invention. LeFiell v. United States, 162 Ct. Cl. 865, 869 (1963). In those circumstances, the patent rights of the inventor belong entirely to the company, even if there has been no express assignment of rights. Id.

Here, taking the facts in the light most favorable to Plaintiff, Lavergne was the alter ego of Plaintiff Total Rebuild. Like Lefiell and Gerawan [Farming v. Rehrig Pacific Co., 11-CV-01273, 2017 WL 1414637, at *4 (E.D. Cal. Apr. 8, 2013), aff’d 587 F. App’x 654 (Fed. Cir. 2014)], Lavergne had such a close and intertwined relationship with Plaintiff Total Rebuild, that the company has total ownership over the ’428 patent. Indeed, Lavergne has been the sole director, sole owner, and sole shareholder of Total Rebuild for nearly twenty years. Lavergne developed the patented safety system at Plaintiffs expense and at its facilities, Plaintiff received all the profits for the ’428 Patent, and all costs and attorney’s fees to secure the patent were paid by Plaintiff. Lavergne also always believed that the ’428 patent belonged to Plaintiff even though it was issued in his name. There is therefore a genuine dispute of material fact as to whether Lavergne is the alter ego of Plaintiff, and whether Plaintiff has standing to sue for alleged infringement before Lavergne assigned the patent to Plaintiff.

Total Rebuild, Inc. v. PHC Fluid Power, LLC, No. 15-01855-BAJ-CBW (Aug. 15, 2018).

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