Federal Circuit Clarifies State Foreclosure Laws Can Transfer Patent Ownership

In Sky Technologies LLC v. SAP AG, 576 F.3d 1374; 91 USPQ2d 1854 (Fed. Cir. 2009), Jeffery Conklin is the inventor for U.S. Patent Nos. 6,141,653; 6,336,105; 6,338,050; 7,162,458; and 7,149,724.  Mr. Conklin assigned the patents to TradeAccess, Inc. in 1996, which was later renamed to Ozro, Inc.  Ozro subsequently entered into two security agreements in which the patents were put up as collateral: one to Silicon Valley Bank (SVB), the other to Cross Atlantic Capital Partners, Inc. (XACP).  SVB later transferred its interest in the patents to XACP.    The agreements allowed the creditors to take possession of the patents at suit in the event of a default.  The XACP agreement also permitted XACP to dispose of its interest in the patents via a public sale.  Both of these agreements were recorded in the U.S. Patent and Trademark Office. 

Ozro later defaulted on the agreements, and XACP foreclosed.  Meanwhile, the inventor formed a new company, Sky Technologies (the plaintiff), and entered into an agreement in which XACP would attempt to obtain ownership of the patents via the public sale and assign ownership of the patents to Sky Technologies.  The attempt was successful: XACP bought the patents at the public sale and executed a written assignment assigning the patents to Sky Technologies.  However, at no point during the foreclosure proceedings did Ozro (the prior assignee) execute a written document transferring ownership of the patents to XACP.

A few years after the assignment from XACP, Sky Technologies filed the instant infringement suit against SAP in the Eastern District of Texas.  SAP moved to dismiss the suit for lack of standing, arguing that since there was no written assignment between Ozro and XACP as a result of the foreclosure proceedings, the transfer was not effective, and thus the subsequent transfer to Sky was also ineffective.  The district court denied the motion, relying upon the recent decision of the Federal Circuit in Akazawa v. New Link New Tech. Int’l, Inc., 86 U.S.P.Q. 2d 1279 (Fed. Cir. 2008).  In Akazawa, the Federal Circuit ruled that not all transfers of ownership need to be in writing, and specifically that a transfer of ownership by operation of law (probate in the Akazawa case) does not require a writing. 

On appeal, the Federal Circuit noted that Federal law provides that assignments of patents must be in writing.  35 U.S.C. § 261.  In the Akazawa decision, the Federal Circuit held that not all transfers of ownership were assignments.  Akazawa, 86 U.S.P.Q.2d at 1281.  Transfers of ownership other than assignments, such as transfers by operation of law, do not require a writing.  Id. at 1281.  In the Akazawa case, the inventor (and patent owner) died intestate.  According to the agreement of the inventor’s wife and daughter, ownership of the patent was transferred to the inventor’s wife.  Id. at 1281.  The Federal Circuit held that the transfer of patent owner through intestacy was not a patent assignment and thus did not require a writing.  Id.

SAP argued that the wife of the inventor in the Akazawa case was an “heir”, or one of the enumerated classes of persons who can receive ownership of a patent through operation of law.  According to SAP, 35 U.S.C. § 154 provides that patents can be owned by one of three classes of individuals: patentees, their heirs, or assigns (assignees).  The wife of Akazawa was an “heir” and thus eligible for a transfer of ownership without an assignment.  In contrast, SAP argued that Sky Technologies was neither the patentee nor an heir, and thus must be an assignee. 

The Federal Circuit rejected this distinction.  The Federal Circuit found no restriction of the patent ownership in 35 U.S.C. § 154.  Furthermore, the Federal Circuit held that 35 U.S.C. § 261 did not pre-empt state law on the question, because the federal statute was limited only to assignments, and did not address other forms of ownership transfer.

The Federal Circuit then turned to the pertinent state law on the matter, in this case the Massachusetts Uniform Commercial Code (UCC).  Under the Massachusetts UCC §§ 9-610 & 617, once a secured party disposes of the collateral after default, the subsequent transferee takes all of the debtor’s rights in the collateral.  XACP complied with all of the requirements not only of the security agreement between Ozro and XACP, but also of the Massachusetts UCC.  Thus, XACP, being the purchaser of the patent at the public sale, obtained title to the patents by operation of law.  The Federal Circuit also found no separate requirement for a writing inMassachusettslaw.  Although the Massachusetts UCC does permit a written “Transfer of Ownership”, this document is an option, not a requirement.

The Federal Circuit found several policy justifications to support their ruling.  If a writing were required for foreclosure of security interests such as those at issue in Sky Technologies, a large number of existing patent titles subject to security interests could be invalidated.  Furthermore, patent owners would be limited in their ability to use patents as collateral, thereby reducing the value of patents overall.  Finally, in many cases a business may cease to exist following a foreclosure, making a writing difficult or impossible to obtain.  Thus, the Federal Circuit upheld the district court’s decision in finding that the transfer was valid and that Sky Technologies was the current owner of the patents.

Significance to Patent Owners

In Sky Technologies, the Federal Circuit’s loosening of the requirements for a writing represents an attempt to update patent law for the modern era of securities.  The decision thus presents greater flexibility to patent owners to make use of their patents as collateral for financing arrangements.  As noted by the Federal Circuit, this flexibility can be advantageous in the current environment, where lenders may be hesitant to finance an operation absent a significant amount of collateral, such as a patent right. 

The case also clarifies that other ownership transfers which occur through operation of law, such as those required under 35 U.S.C. § 202, should not require a written assignment.  In rejecting SAP’s contention that patent ownership was limited only to patentees, heirs, and assigns, the Federal Circuit prevented incongruous situations in which technical ownership would pass but, due to a refusal of the patent owner to execute a written agreement, the new owner would not receive the benefits of ownership including the right to enforce the patent. 

Lastly, the Federal Circuit’s interpretation is in keeping with the patent statute.  As one commentator pointed out, the patent statute at 35 U.S.C. § 100 defines a patentee as not only the person to whom the patent was issued, but also that person’s successors in title.  See Dennis Crouch, Federal Circuit Rejects Challenge to Patent Rights Obtained Through Foreclosure (available at http://www.patentlyo.com/patent/2009/08/federal-circuit-rejects-challenge-to-patent-rights-obtained-through-foreclosure.html) (Aug. 20, 2009).  Thus, the Federal Circuit’s decision is  consistent with the definitions included in the remainder of Title 35.



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