Alert February 10, 2010

The Importance of Proper Employee Assignment of Inventions Agreements

On September 30, 2009, the U.S. Court of Appeals for the Federal Circuit decided in Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., 583 F.3d 832 (Fed. Cir. 2009), that the plaintiff (“Stanford”) lacked standing to assert an infringement cause of action against the defendant (“Roche”) as Stanford did not possess the necessary interest in the patents-in-suit.  Despite the fact that the inventor had signed an agreement purporting to assign his rights to Stanford, the inventor had in fact only agreed to assign his rights at some indeterminate time in the future.

Factual Background

The patents-in-suit claim methods which use the polymerase chain reaction (“PCR”) technique to measure nucleic acid from HIV and correlate such measurements to the therapeutic effectiveness of certain drugs.  The relevant technology was developed as a result of a collaboration between Stanford researchers and Cetus, a company specializing in PRC techniques.

One of the named inventors, Mark Holodniy, was a Stanford researcher who signed a “Copyright and Patent Agreement” (“CPA”) with Stanford in 1988, which provided that Holodniy “agree[s] to assign or confirm in writing to Stanford [Holodniy’s rights in his inventions].”  Holodniy began working with Cetus in 1989, and he signed a “Visitor’s Confidentiality Agreement” (“VCA”) with Cetus.  This agreement provided that Holodniy “will assign and do[es] hereby assign to CETUS, [Holodniy’s] right, title and interest” in those inventions that Holodniy may devise “as a consequence of” Holodniy’s work at Cetus.  Holodniy concluded his work with Cetus and began working with other researchers at Stanford in testing the new PCR assay that Holodniy had developed while at Cetus.  Their results eventually led to the filing by Stanford in 1992 of the patent application to which the patents-in-suit claim priority.  Meanwhile, Roche purchased Cetus’s PCR business in 1991.

In 2000, a Stanford licensing associate gave a presentation at Roche where Stanford asserted its ownership of the invention and offered to license its rights in the invention to Roche.  The parties negotiated terms for such a license over the next several years, but never finalized an agreement.  In 2005, Stanford filed an infringement action against Roche in the Northern District of California.

The District Court Holding

Roche asserted before the district court that the patents-in-suit were invalid, and that Roche was the actual owner of these patents.  Roche’s ownership assertion took three forms: (i) a declaratory judgment counterclaim; (ii) an affirmative defense to Stanford’s infringement claim; and (iii) a challenge to Stanford’s standing to sue for infringement of the patents-in-suit.

The district court only considered Roche’s declaratory judgment counterclaim, and found this claim to be barred by California statutes of limitation, laches and the Bayh-Dole Act.  The district court did not consider Roche’s ownership assertion as an affirmative defense or challenge to standing, stating that such assertions “are properly viewed as counterclaims subject to the applicable statute of limitations.”  However, the district court also found the patents to be invalid as all the claims were obvious.  The parties cross-appealed.

The Federal Circuit Decision

On appeal, the Federal Circuit held that the district court erred in failing to consider Roche’s affirmative defense and challenge to Stanford’s standing.  While the Federal Circuit agreed with the district court’s finding that Roche’s declaratory judgment counterclaim was foreclosed by the statutes of limitation, the court reasoned that affirmative defenses and challenges to standing are not subject to statutes of limitation, laches or equitable estoppel arguments.

The court then turned to the question of which party had proper title to the patents-in-suit.  Holodniy’s CPA with Stanford purported to assign Holodniy’s interest in his inventions to Stanford, but the court found the precise language of the CPA to be of critical importance.  Specifically, the court noted that the CPA stated that Holodniy “agree[s] to assign” his rights to Stanford.  The court followed the precedent it had established in prior cases holding that such language operates as an “agreement to assign” in the future, and does not suffice on its own to effect an actual assignment. Conversely, Holodniy’s VCA with Cetus provided that Holodniy “do[es] hereby assign” his rights in his inventions to Cetus.  In contrast to the language in the CPA, the VCA did operate as a present assignment of Holodniy’s rights – even his future rights – in his inventions to Cetus, notwithstanding Holodniy’s prior “agreement” to assign such rights to Stanford.  Therefore, legal title in Holodniy’s inventions accrued to Cetus immediately upon Holodniy’s conception of the inventions, after which point Holodniy had no interest left to assign to Stanford.

All co-owners of a patent are required to join as plaintiffs in an action alleging infringement of such patent.  Given that Stanford never possessed Holodniy’s interest in the patents-in-suit, according to the court, Stanford lacked standing to bring this infringement action against Roche.  The Federal Circuit remanded to the district court with instruction that Stanford’s claim should be dismissed for lack of standing.

Petition for Rehearing

On October 30, Stanford filed a petition for panel rehearing and rehearing en banc, specifically asserting that regardless of whether Holodniy entered into an assignment agreement with another entity, the Bayh-Dole Act provides Stanford with a right to title of the inventions.  According to Stanford, under the Bayh-Dole Act, Holodniy’s rights (and therefore, Roche’s rights) are subject to Stanford’s decision to retain title to the inventions.  Several research centers, including the Association of American Medical Colleges, the Regents of the University of California and others, filed an amicus curiae brief supporting Stanford.

Roche’s response, filed November 23, argued that the date of invention was later than the date on which Holodniy assigned his rights to Cetus.  As such, Stanford’s election of rights under the Bayh-Dole Act could not “retroactively void” Holodniy’s prior assignment to Cetus.  The Federal Circuit denied the petition on December 22, 2009.

Practice Tips

This case once again highlights the critical importance of proper assignment language in contracts which purport to transfer an inventor’s rights in his or her inventions to the entity with whom the inventor is employed or otherwise engaged.  A contract which merely provides that the inventor “agrees to assign” his rights vests the assignee with, at most, equitable title in the inventions.  A subsequent contract in which the inventor “hereby assigns” those same rights to a separate assignee will defeat the earlier assignment.

A related point is that companies should be aware that their employees or consultants may sign conflicting assignment contracts.  Employers should be diligent in monitoring their employee’s activities whenever an employee is engaged or collaborating with a third party, and should educate its employees in advance against entering into any agreements with such a third party without first discussing the matter with the employer.

A final practice point concerns the importance of bringing a timely declaratory judgment action in the event there is a dispute as to ownership.  Companies should familiarize themselves with the applicable statutes of limitation, as they will vary from state to state.  This case also provides guidance as to when a declaratory judgment cause of action begins to accrue.  Roche argued that its cause of action could not begin to accrue until a patent has actually issued.  The Federal Circuit, however, reasoned that a declaratory judgment cause of action begins to accrue when the company that wishes to assert ownership is put on notice that such ownership is in dispute.  In this case, Stanford asserted its ownership of the subject patents in a presentation given to Roche, and so Roche’s cause of action regarding its ownership accrued at this point in time.  If a company learns that a third party is asserting ownership over the company’s invention, whether or not such third party has received an issued patent covering such invention or has otherwise taken any formal legal action regarding such invention, the company should be aware that the clock has begun ticking on the company’s right to bring a declaratory judgment action.