Joint Owners who Fight over Ownership and Use of Joint Research.

Joint development research often results in the joint creation of an invention. In the patent world, this makes the creators not just joint inventors, but also joint owners of that invention.

The provisions of 35 U.S.C. § 262 expressly state that joint patent owners can act independently absent any agreement to the contrary. Quite often, joint research parties will address such jointly created rights, with the resulting understanding constituting an “agreement to the contrary” under 262. Sloppy drafting causes problems, however, with parties encumbering freedoms they thought they had under § 262.

1. Wisconsin Alumni Research Foundation v. Xenon Pharmaceuticals Inc.1

Xenon and the University of Wisconsin jointly researched enzymes that lower cholesterol. Xenon and the University made a joint invention, and the parties filed a joint patent application. In due course, Xenon exercised an option to exclusively license Wisconsin’s joint interest.

As permitted by the exclusive license, Xenon sublicensed those rights to a third party. But, contrary to the license terms, Xenon sublicensed the third party without paying compensation to Wisconsin. Wisconsin terminated the license and sued.

Xenon argued that the agreement merely encumbered Wisconsin’s joint interest. Its own joint interest remained unaffected so that Xenon was free to sublicense without compensation to Wisconsin.

Xenon failed to persuade the Court of Appeals for the 7th Circuit, which held that Xenon’s failure to pay Wisconsin breached the license and, therefore, that Wisconsin properly terminated the license. This means that Xenon, perhaps unintentionally, encumbered its own joint interest when it secured rights under Wisconsin’s legally distinct joint interest.

The impact of the adverse decision and termination on Xenon is an open question. On the one hand, Xenon owns a joint interest and presumably could practice independently under its interest as authorized by 35 U.S.C. § 262. On the other hand, it is possible that Xenon’s own joint interest is so encumbered that Xenon no longer has any right to sublicense others without authorization of the University.

Locking up the other party’s joint interest in patent rights is a viable and common strategy in joint development relationships, but doing so has consequences under 35 U.S.C. § 262. Depending upon how your “agreement to the contrary” is drafted, you may encumber your own joint interest with obligations as a consequence of securing rights under the other joint interest.

2. Intl. Nutrition Co. v. Horphag Research Ltd.2

Sometimes, U.S. patents arise from joint development efforts that occur in other countries. What happens if a joint development agreement would constitute an “agreement to the contrary” under the law of another country but not under US law?

In International Nutrition, the Federal Circuit held that a French joint research contract could be construed under French law to restrict rights of parties to transfer developed patent rights and thus could constitute an “agreement to the contrary” under 35 U.S.C. § 262. As long as French courts acted fairly to allocate ownership rights per the contract, the Federal Circuit saw the situation as analogous to a situation where state law is used to construe IP contracts in the US. Following the French law to adjudicate ownership of a US patent did not offend 35 U.S.C. § 262.

3. Massachusetts Eye and Ear Infirmary v. QLT Phototherapeuitics Inc.3

The “agreement to the contrary” clause of § 262 applies to any agreement and is not limited only to written agreements. Indeed, an actual agreement is not even necessary if a party commits to negotiate an agreement but then never negotiates.

A hollow promise to negotiate proved problematic in Massachusetts Eye and Ear. An oral promise to negotiate in good faith to compensate a joint owner in a joint research setting constituted an “agreement to the contrary” sufficient to serve as a basis for equitable relief under a theory of unjust enrichment. In other words, a promise to negotiate can be an enforceable “agreement to the contrary” under § 262!

Massachusetts Eye and Ear also teaches that an “agreement to the contrary” only binds joint owners who are parties. Other joint owners are not restricted. For example, claims added to a patent application might cause inventorship to expand to encompass additional inventors. Those additional inventors become joint owners of the entire patent property per Massachusetts Eye and Ear. Absent any agreement to the contrary, the new owner(s) can exploit the patent rights independently of the other owners.

4. Ethicon Inc. v. United States Surgical Corp.4

The rights of a joint owner to act independently under 35 U.S.C. § 262 can undermine the ability of another joint owner to enforce a joint research patent. This is particularly a risk when the rights of all joint inventors are not properly secured, as one joint owner discovered in Ethicon.

A patent resulted from a joint research program. One of the parties to that program believed it was the only owner of a resulting patent and sued an accused infringer. However, it turned out that another individual contributed to the conception of at least one of the patent claims and, therefore, was a joint inventor who had been omitted from the asserted patent.

As a joint inventor, the omitted inventor owned an undivided joint interest in the entire patent and could independently exploit the patent without accounting to the other owner. No agreement existed to the contrary. The omitted inventor owned this joint interest in the entire patent including dozens of claims even though he was a co-inventor on a single claim. An accused infringer recognized this and took a license from that omitted inventor to avoid infringement.

Application of conception law was central to the Ethicon (1998) holding. However, because conception and reduction are at the center of priority disputes under the pre-AIA laws, and because priority disputes are now obsolete under the new AIA laws, some commentators have taken the position that conception and reduction to practice are extinct bodies of law as to newer patent rights. 5 This clearly is not the case under joint development relationships such as Ethicon where proving conception and reduction to practice can be central to proving not priority but rather how joint patent rights are owned or that an invention was made as part of a joint development effort. Ethicon shows that the laws of conceiving and reducing inventions to practice are still very relevant to resolve disputes that arise under joint development relationships.6

5. Caterpillar Inc. v. Sturman Industries Inc.7

As discussed above, § 262 expressly approves “agreements to the contrary” so that joint owners can restrict independent action under jointly owned patent rights. But a factor such as one of the following can undermine the effectiveness of these agreements:

1. one or both parties acts as if no agreement exists, such as by selling joint research rights to a third party after ostensibly having already transferred those rights exclusively to the other joint research party;
2. one or both parties secretly pursue patent applications to avoid the agreement;
3. the rights and obligations relating to patent rights resulting from joint research are horribly ambiguous; or
4. one party enforces the agreement in a seriously biased home court before jurors who are so prejudiced that the appeals court deems them to be biased as a matter of law.

Just one of these factors can spark bitter litigation. Unbelievably, all of these factors (according to allegations) were at play in Caterpillar.

Caterpillar started the litigation in federal District Court in Peoria, Illinois, where anecdotal evidence indicates that over half of the 110,000 residents are Caterpillar employees or immediate family members. Still more residents indirectly depend upon Caterpillar for their livelihoods. The District Court was ridiculously biased and saw no problem that the jury included Caterpillar spouses and favored Caterpillar on voluminous claims and defenses, even those that were untenable on appeal. The Federal Circuit, far removed from the home court spell, reversed on many grounds.

6. Lucent Technologies Inc. v. Gateway Inc.8

Section 262 is interpreted in a manner that can allow “agreements to the contrary” to govern rights developed both under and outside the agreement. A joint development agreement having a finite term is a good example of this.

The finite term raises the possibility that a patent application claiming fruits of that joint development may not be filed until after the agreement has ended. This raises the further possibility that such a patent application may claim not only fruits developed under the joint development agreement but also fruits developed after the agreement term. If the joint development agreement specifies that the parties will jointly own patents for inventions made under the agreement, how do you handle ownership of a patent where some claims were developed under the agreement but other claims were not?

Lucent makes it clear that the entire patent is subject to the ownership provisions of the joint development agreement. This follows from the principle that an inventor of some claims is an owner of the entire patent.9

The Lucent decision teaches other important principles. First, a jointly owned patent must be enforced in the names of all joint owners. If one joint owner is not present, the other lacks standing to bring an infringement action.

Further, the difference between background rights (“Existing Work”) and developed rights (“New Work”) was critical as to whether a missing party was a joint owner or not. If asserted patent rights constituted background rights, the missing party was not a joint owner of the patent at issue. The lone patentee then would have sufficient standing to bring the infringement action. If the asserted rights constituted New Work developed under the contract, the missing party was essential to standing.

A particular date was critical to resolve the issue. The asserted patent issued from a patent application filed long after the critical date. The lone patentee tried to manufacture standing by claiming priority to an early patent property existing prior to the critical date. This ploy failed to secure standing. The Federal Circuit held that merely claiming priority to an early date did not cause a later invention to become an Existing Work (i.e., a background right). Per the contract terms, the invention at issue had to have been made prior to the critical date to qualify as an Existing Work. The lone patentee provided insufficient evidence to prove that.

Similar to Ethicon, conception was a central issue in Lucent even though Lucent did not involve priority issues. Like Ethicon, Lucent shows that conception and reduction to practice will continue to be at issue in joint development disputes to prove matters such as ownership and when an invention was made.

As another interesting point, Lucent teaches that, if background rights under a joint development agreement are limited to items developed by Parties A and B prior to a critical date, then items developed by Party C prior to the critical date are not background rights.

As still another interesting point, Lucent clarifies that an assignment must convey title to an entire patent. A purported “assignment” that transfers title only to some claims is a license.

5 The AIA changed U.S. patent priority determinations from first-to-invent to first-to-file. Interferences resolved priority under the pre-AIA system, which still applies to applications/patents having priority dates prior to the crossover date. Priority battles involve proving corroborated conceptions and reductions to practice to establish who was the first to invent. Priority is irrelevant under the AIA where patents are awarded to the first-to-file.
6 Conception and reduction to practice remain relevant in other contexts, too, including (a) government contracts where subject invention rights depend upon when an invention is conceived or reduced to practice; (b) shop rights to prove that conception or reduction to practice involved using employer resources; and (c) derivation proceedings to prove that one party derived an invention from another; etc. Using conception and reduction to practice principles to prove priority may be obsolete as to patent rights subject to the AIA, but those principles are far from obsolete in contexts other than priority battles.
9 See also Israel Bio-Engineering Project v. Amgen, Inc., 81 USPQ2d 1558 (Fed. Cir. 2007) (ownership subject to agreement when some claims developed within contract and others were not).