IP Law Daily Defective assignment of patent can be cured after suit is filed
Wednesday, May 13, 2020

Defective assignment of patent can be cured after suit is filed

By Cheryl Beise, J.D.

The fact that the reformation occurred after suit was filed was of no consequence because the assignment was effective when made, not as of the date of the reformation.

The U.S. Court of Appeals for the Federal Circuit has determined that the federal district court in Minneapolis did not err in concluding that an assignment of a patent application and subsequent patent filed with the USPTO after the plaintiff’s infringement suit was filed in 2011 merely reaffirmed an earlier assignment agreement. The fact that the reformation of the original assignment agreement occurred after suit was filed was of no consequence because the agreement was effective when made, not as of the date of the reformation. Therefore, the plaintiff was a "patentee" with "all substantial rights" in the patent under 35 U.S.C. § 281 at the time her complaint was filed. In a dissenting opinion, Circuit Judge Reyna emphasized that a plaintiff must have Article III standing at the inception of the lawsuit and that post-suit activities cannot cure a constitutional standing defect (Schwendimann v. Arkwright Advanced Coating, Inc., May 13, 2020, Wallach, E.).

From 1992 to 2001, Schwendimann worked at American Coating Technologies, Inc. ("ACT"), which was owned by Nabil Nasser. ACT manufactured paper coating products. From 1998 through 2000, Schwendimann and Nasser filed two patent applications, U.S. Patent Application Nos. 09/150,983 (the ’983 application) and 09/541,845 (the ’845 application). In 1999, Schwendimann alone filed U.S. Patent Application No. 09/391,910 (the ’910 application). Schwendimann and Nasser conveyed assignment of all three applications to ACT in 1998 to 2000. When ACT ceased operations in 2001, it owed significant debt to various lenders, as well as to Schwendimann for her wages and sales commissions. To settle its outstanding debts, ACT reached an agreement with Schwendimann, in which ACT transferred assignment of its patent applications—including the ’983, ’845, and ’910 applications—to Schwendimann to satisfy its outstanding debt to her ("2001 Security Agreement"). Schwendimann in turn agreed not sue ACT for her unpaid wages and further agreed to satisfy ACT’s debt to the law firm that prosecuted the patent applications, Schwegman, Lundberg & Woessner, P.A. ("SLW").

In December 2003, SLW filed the following documents with the USPTO: (1) a fax filing cover sheet notifying and instructing the USPTO to record and attach an assignment for the ’845 application; (2) a Recordation Form Cover Sheet notifying the USPTO that ACT had conveyed by assignment the ’845 application to Ms. Schwendimann; and (3) a copy of the ’983 application assignment with an alteration ("Hand-Altered Copy"). The Hand-Altered Copy contained the ’983 patent’s title, application number, the execution date of the ’983 application assignment, and Nasser’s signature. The USPTO accepted the filing and altered the record owner of the ’845 application in its database to Schwendimann.

In April 2011, Schwendimann sued Arkwright Advanced Coating, Inc. ("Arkwright") for infringement of five related patents—U.S. Patent Nos. RE41,623, 7,749,581, 7,754,042, 7,766,475, 7,771,554, and 7,824,748—directed to image-transfer sheets with a substrate surface containing a pigment or a release coating, and another layer configured to receive the pigment, ink, or transfer material. After filing suit, Schwendimann claimed she became aware for the first time that the incorrect assignment was filed with the USPTO for the transfer of the ’845 application. Subsequently, ACT assigned the patents-in-suit to Schwendimann (the "2011 Assignment") and the assignment was recorded with the USPTO.

The district court rejected Arkwright’s argument that Schwendimann lacked standing because she did not own the patents-in-suit at the time of filing suit. Following trial, a jury awarded Schwendimann damages in the amount of $2,624,228 for Arkwright’s willful infringement. In February 2018, the district court rejected Arkwright’s motions for judgment as a matter of law and in July 2013, the court awarded prejudgment interest on the damages of $1,915,328, but rejected Schwendimann’s request for enhanced damages. Arkwright appealed, arguing that the district court erred in finding that Schwendimann had standing to pursue infringement of the ’845 patent, and in its award of prejudgment interest.

Standing. The Federal Circuit began by noting that when the district court entered the judgment at issue, it did not have the benefit of the court’s intervening precedential decision in Lone Star Silicon Innovations LLC v. Nanya Tech. Corp., 925 F.3d 1225 (Fed. Cir. 2019). The court explained that Lone Star made clear that whether one qualifies as a patentee under 35 U.S.C. § 281 is a statutory prerequisite to the right to relief in a patent infringement action, but does not implicate standing or subject matter jurisdiction. "As long as a plaintiff alleges facts that support an arguable case or controversy under the Patent Act, the court has both the statutory and constitutional authority to adjudicate the matter," the court said.

Under Title 35, a patent infringement suit can be brought by the original patentee or an assignee. To confer patentee status to the assignee, an assignment must be documented in an "instrument in writing[,]" 35 U.S.C. § 261, but there are no form or content requirements for the written instrument specified in the statute, the court noted. In addition to the § 261 written instrument requirement of assignment, the plaintiff must have the legal title to the patent or patent application, which is determined by state law. Under Minnesota law, relevant in this case, contracts are construed consistent with the parties’ intent and, where a written contract does not accurately reflect the parties’ intentions, a court may reform the contract to reflect the parties’ intentions.

Ownership of ’845 patent. The district court concluded that at the time she filed her complaint, Schwendimann was the assignee of the ’845 application and held legal title to both that application and the subsequent patent under Minnesota law. Arkwright maintained that ACT, not Ms. Schwendimann, was the assignee of ’845 application at the time the infringement action was filed.

The Federal Circuit said that the only questions it needed to decide were whether Schwendimann was a patentee at the time her action was filed and, if that status was conferred upon her by assignment, whether that assignment was reflected in a written instrument within the meaning of 35 U.S.C. § 261. The court answered both questions in the affirmative.

Arkwright did not dispute the district court’s finding that ACT intended to assign the ’845 application to Schwendimann at the time the application was filed. Both ACT and Schwendimann confirmed that in 2002, ACT offered to assign the ’845 application to Schwendimann and she accepted that offer for valid consideration. Moreover, the Hand-Altered Copy of the ’983 application showed that the parties informed counsel that an assignment was to be made, even if counsel did not accurately reflect the parties’ precise intentions. Finally, the patents-in-suit all listed Schwendimann as the assignee, without challenge by ACT for almost a decade before the suit was filed.

The Federal Circuit determined that the district court did not clearly err in concluding that the 2011 Assignment, taken in context with the testimony of Schwendimann and Nasser, reaffirmed the 2002 agreement. Nor did the district court err in finding that the Hand-Altered Copy constituted an "instrument in writing" in satisfaction of 35 U.S.C. § 261. The fact that the reformation occurred after suit was filed (but before judgment was entered) was of no consequence because the agreement was effective when made, not as of the date of the reformation. Accordingly, the appeals court held that the district court did not err in concluding that (1) Schwendimann was a patentee at the time of her complaint; and (2) as of that same time there was a valid agreement between ACT and Schwendimann in 2002 to assign the ’845 application to Schwendimann and make her the patentee within the meaning of 35 U.S.C. § 281.

Prejudgment interest. The district court awarded Schwendimann prejudgment interest at a rate of 10 percent per year, pursuant to the rate set by § 549.09 of the Minnesota Statutes. Arkwright argued that the district court abused its discretion in awarding prejudgment interest on the entire damages from the first infringement date. The Federal Circuit disagreed. The court noted that typically, prejudgment interest should be awarded from the date of the infringement to the date of the judgment. Where a jury awards a lump-sum amount as compensation for infringement, the prejudgment interest is properly applied to the entire amount beginning on the first date of the infringement.

The Federal Circuit upheld the judgment of the district court in its entirety.

Dissenting opinion. Circuit Judge Jimmie Reyna filed a dissenting opinion to express disagreement with the majority’s "blessing of the district court’s post-suit cure of Ms. Schwendimann’s lack of constitutional standing at the time she filed her complaint." Judge Reyna opined that the crux of the jurisdictional issue in this case was not whether Schwendimann could be classified as a "patentee" with "all substantial rights" in the patent under 35 U.S.C. § 281, but whether Schwendimann had any requisite "exclusionary rights" in the patents-in-suit at the time of filing her infringement suit to establish Article III standing.

When Schwendimann filed her infringement suit, it was undisputed that she held no enforceable, exclusionary rights in the patents-in-suit. Judge Reyna emphasized that a plaintiff must have Article III standing at the inception of the lawsuit and that post-suit activities cannot confer Article III standing that was otherwise lacking when the suit was filed. "Whether post-suit reformation can be an exception to the fundamental Article III requirement that standing be present at the time of filing is a question of constitutional standing and is an issue of first impression," Judge Reyna said. "Thus, contrary to the majority’s reasoning, we cannot bypass this constitutional standing issue."

Judge Reyna took issue with the majority’s interpretation of Lone Star. According toJudge Reyna, Lone Star clarified that a party that fails to satisfy the statutory standing requirements under the Patent Act—i.e., "all substantial rights" in the patent—may nonetheless meet the baseline constitutional standing threshold, so long as the party holds some exclusionary rights in the patent.

Judge Reyna predicted that the majority’s precedential decision will create uncertainty for litigants and courts. "Even more, the newly created exception for the retroactive state law remedy of reformation opens the door for similar exceptions for other retroactive state law doctrines," he said.

The case is Nos. 2018-2416 and 2019-1012.

Attorneys: Devan V. Padmanabhan (Padmanabhan & Dawson, PLLC) for Jodi A. Schwendimann, f/k/a Jodi A. Dalvey and Cooler Concepts, Inc. Michael Hawes (Baker Botts, LLP) for Arkwright Advanced Coating, Inc.

Companies: Cooler Concepts, Inc.; Arkwright Advanced Coating, Inc.

MainStory: TopStory Patent FedCirNews GCNNews

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