The Federal Circuit ruled that the doctrine of assignor estoppel does NOT apply to IPR proceedings, based on the plain language of the statute, which states that any person “who is not the owner of a patent” can file an IPR (even though the doctrine would apply if the issue was before the ITC or district court).
In a November 9, 2018 decision, the U.S. Court of Appeals for the Federal Circuit ruled that the doctrine of assignor estoppel does not apply in the inter partes review (IPR) context (see Arista Networks, Inc. v. Cisco Systems, Inc., (Fed. Cir. 2018).
Assignor Estoppel: Background
The doctrine of assignor estoppel has been around for over a century and most often applied in the U.S. International Trade Commission (ITC) and U.S. district courts to prevent a first party assigning a patent to a second party from then challenging the validity of the patent they had just assigned. (“Assignor estoppel prevents a party who assigns a patent to another from later challenging the validity of the assigned patent.” Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 150 F.3d 1374, 1377 (Fed. Cir. 1998); see also Westinghouse Elec. & Mfg. Co. v. Formica Insulation Co., 266 U.S. 342, 349 (1924) (“[A]n assignor of a patent right is estopped to attack the utility, novelty or validity of a patented invention which he has assigned or granted as against any one claiming the right under his assignment or grant.”) (Arista v. Cisco at p. 17)).
The doctrine frequently arises in situations where an employee invents something during his or her employment with a company, assigns the rights to that invention to their employer, then leaves the company to join or found a competing company. See, e.g., Westinghouse, 266 U.S. at 345–46; Shamrock Techs., Inc. v. Med. Sterilization, Inc., 903 F.2d 789, 790 (Fed. Cir. 1990); Diamond Sci. Co. v. Ambico, Inc., 848 F.2d 1220, 1222 (Fed. Cir. 1988). In these situations, the employee’s new company may also be estopped because “[a]ssignor estoppel also prevents parties in privity with an estopped assignor from challenging the validity of the patent.” Mentor Graphics, 150 F.3d at 1379; see also Diamond Sci., 848 F.2d at 1224 (“The estoppel also operates to bar other parties in privity with the assignor, such as a corporation founded by the assignor.”) (see Arista v. Cisco, pp. 17-18).
Arista v. Cisco
In the Arista v. Cisco case, the primary inventor, Dr. David Cheriton, originally worked at Cisco, and had assigned “the entire right, title and interest throughout the world” in the invention to Cisco. Subsequently, Dr. Cheriton and others left Cisco to found a new company, Arista. Thus, the issue in the lawsuit was whether Arista (as a party in privity with the assignor Dr. Cheriton) was estopped from challenging the validity of the Cisco patent in an IPR proceeding. The Federal Circuit ruled that the doctrine of assignor estoppel does NOT apply to IPR proceedings, based on the plain language of the statute, which states that any person “who is not the owner of a patent” can file an IPR (see Arista v. Cisco, pp. 21-22) (even though the doctrine would apply if the issue was before the ITC or district court).
A Contractual Solution: Possibilities and Complexities
This raises intriguing possibilities regarding how companies might be able to protect themselves in such a situation. One possibility might be to revise their employment agreements for signing by new employees to specify that not only are any inventions made by the employee during their employment to be assigned to the company, but also that the employee will not challenge the validity of any patent issuing on such inventions even after their employment with the company ends. While the employee would still have the legal right to challenge any issuing patent on the invention in an IPR context, the employee would be risking a breach of contract claim from the employer in doing so.
This solution would be more difficult with respect to existing employees, however. While it may be tempting for a company to try to require an existing employee to sign a revised employment agreement containing a new clause as noted above, the question that must be addressed in such a situation is: what consideration is the existing employee receiving in exchange for bargaining away that right to challenge patents in an IPR? While the company may want to take the position that allowing the employee to keep their job is the consideration being exchanged, most jurisdictions do not permit this. Accordingly, in order to address this with an existing employee, some form of consideration (such as remuneration) must be provided by the company to the employee. If this is to be done for each employee, this is not likely feasible for large companies, particularly since the likelihood of an employee ending up in a situation where they will be challenging a patent that they assigned to the company is very small.
Another scenario where this could become an issue is in the context of sale/acquisition of patents from one company to another. Addition of a clause to such sale/acquisition agreements, whereby the selling company agrees not to challenge the validity of any of the patents assigned in the transaction, might provide the acquiring company with at least a contractual recourse against the selling company if the selling company were to challenge validity in an IPR proceeding going forward.
On the other side of the equation, a party signing such an employment agreement or sale/acquisition agreement may want to consider reserving the right to make such an IPR challenge without any breach of contract consequence, in the event that the patent is asserted by the assignee/acquiring company against them in a future dispute.
While clauses such as the ones described above would not be sufficient legal basis for a patent owner to prevent the filing of an IPR request by the other party, nor to challenge the filing of such an IPR request before the Patent Trial and Appeal Board, they would provide the patent owner with a legal recourse against the other party for breach of contract in the courts (or through arbitration if contract disputes for the particular contract are to be settled in arbitration). Essentially, they would act as a deterrent from having the other party request an IPR, with the understanding that if they do so, they will be subject to a breach of contract claim by the patent owner. Ultimately, whether the assigning party decides to file the IPR request would then come down to a balancing of the risk vs. benefit of doing so.
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