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American Intellectual Property Law Association

Someone Else’s Assignor Can Estop You:When Consultants Prevent Patent Validity Challenges

Jeffrey I. D. Lewis

Patterson Belknap Webb & Tyler, LLP

March 20146709730

© 2014

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Hypothetical

• Consultant designs a process • Process infringes a patent • invented by the same consultant • For someone else

– Involvement of this consultant-inventor = cannot challenge validity of that patent

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Consultants

• Hired to do again what he or she previously did• Hire someone who has “been there, done that” • That’s concern. • If consultant was too close, assignor estoppel bars arguing

the consultant’s prior patents are invalid

• Disclaimer: Author litigated in a recent case 

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ASSIGNOR ESTOPPEL

• Assignor estoppel “is an equitable doctrine that prevents one who has assigned the rights to a patent (or patent application) from later contending that what was assigned is a nullity.” Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220, 1224 (Fed. Cir. 1988).

• “an assignor should not be permitted to sell something and later to assert that what was sold is worthless, all to the detriment of the assignee.” Id.

• The doctrine “operates to bar other parties in privity with the assignor, such as a corporation founded by the assignor” (id.) from challenging the assigned patent

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“Typical” situations

• Highly-integrated employee, something more than a “mere employee”

“an inventor assigns his invention to his employer company A and leaves to join company B, whether company B is in privity and thus bound by the doctrine will depend on the equities dictated by the relationship between the inventor and company B in light of the act of infringement. The closer that relationship, the more the equities will favor applying the doctrine to company B.” Shamrock Technologies, Inc. v. Medical Sterilization, Inc., 903 F.2d 789, 793 (Fed. Cir. 1990).

• “[F]or a finding of privity, what is significant is whether the ultimate infringer availed itself of the inventor’s knowledge and assistance to conduct infringement.” HWB, Inc. v. Braner, Inc., 869 F. Supp. 579, 581 (N.D. Ill. 1994), citing Intel Corp. v. U.S. Int’l Trade Comm’n, 946 F.2d 821, 839 (Fed. Cir. 1991).

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Privity

• A fact-specific inquiry derived from both the “direct and indirect” contacts between the inventor and the accused infringer. Intel, 946 F.2d at 838

• “[L]ike the doctrine of assignor estoppel itself, [privity] is determined upon a balance of the equities.” Shamrock, 903 F.2d at 793

• Decisions focused on the traditional, paid employee• Can include employees that have a heightened interest in

the success of an infringing product (such as by earning royalties or profit sharing) or even have an ownership/shareholder interest in the accused infringer

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Privity - Examples

• Diamond Scientific, 848 F.2d at 1224 (inventor-assignor left plaintiff to form defendant)

• Shamrock, 903 F.2d at 794 (inventor-assignor worked for defendant at Vice President for operations, owned 50,000 shares in defendant, defendant hired him specifically for the infringement and he oversaw the building of new facilities for the infringement, and he participated in decisions to infringe)

• Intel, 946 F.2d at 837-38 (assignor-inventor was president and chief executive of defendant and owned 40% of shares making him largest single shareholder)

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Privity – Examples (2)

• Carroll Touch, Inc. v. Electro Mech. Sys., Inc., 15 F.3d 1573, 1579 (Fed. Cir. 1993) (inventor-assignor was the founder, president, principal executive officer, and owned stock in the defendant corporation)

• Mentor Graphics Corp. v. Quickturn Design Systems, Inc., 150 F.3d 1374, 1377 (Fed. Cir. 1998) (applying privity to find inventor estoppel even as to a later-acquired subsidiary where corporate assignor owns stock, shares personnel and has control over party)

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Privity – Counter Examples

• HWB, Inc., 869 F. Supp. at 582 (inventor-assignor “was not hired … to initiate the alleged infringement operations, to oversee the construction of facilities … and [defendant] did not avail itself of [his] knowledge and assistance in order to manufacture the infringing product”)

• Earth Resources Corp. v. United States, 44 Fed. Cl. 274, 52 U.S.P.Q.2d 1545 (Fed. Cir. 1999) (no financial interest in infringement nor “significant influence or control over” defendant)

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Privity Standard

• “‘If the estopped assignor enters into business [with] others, who derive from him their knowledge of the patented process or machine[, and,] availing themselves of this knowledge and assistance, enter with him upon a manufacture infringing the patent which he has assigned, they are bound by his estoppel.’” HWB, 869 F. Supp. at 581 (quoting Mellor v. Carroll, 141 F. 992, 993-994 (C.C.D. Mass. 1905))

• However, cases are extending doctrine to more informal business relationships, particularly consultants

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Consultant-Assignor With An Interest

• Designing Health, Inc. v. Erasmus, 2001 U.S. Dist. LEXIS 25951 (C.D. Cal. Apr. 24, 2001)

• Erasmus worked with plaintiffs, formulated pet food supplement, designed manufacturing process, and participated in promotional activities for product. *5.

• Erasmus entered into agreements with plaintiffs, including assignments for patent applications, and received inter alia 40,000 shares of stock. *5-7

• Erasmus also involved with designing infringing pet foods for the defendants and received an 8% royalty on the sale of those infringing products. *5, *9-10

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Designing Health analysis

• “Having received value in exchange for his inventions and for the patent applications already pending, Erasmus and those in privity cannot now challenge the validity of the patents issued on those same inventions.” *18

• Defendants alleged inequitable conduct• Normally bar patentee from relying on an equitable defense

like assignor estoppel, if proven• But accused inequitable actors include Erasmus, so

Erasmus would profit from any involvement in inequitable conduct, so still applied. *20-21

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Designing Health privity

• Erasmus’ direct involvement in making accused pet foods, royalties to Erasmus, etc. extended privity to remaining defendants as well

• “[T]he Defendants availed themselves of Erasmus’ knowledge and assistance in making those products and that Erasmus played a direct role in the creation of the allegedly infringing products.” *22-23

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The Consultant-Assignor Without An Interest

• BASF Corp. v. Aristo, Inc., 872 F. Supp. 2d 758, 775 (N.D. Ind. 2012) (argued by author)– Retired employee, who had worked in coatings– Became consultant to defendant Aristo– Designed a coating process and machine for defendant– BASF asserted patent where consultant was first named inventor– Consultant did not have an ownership or managerial interest in the

defendants

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BASF v Aristo

• Aristo asserted inventor was a “mere consultant” • Undisputed facts showed Aristo “availed itself” of inventor’s

“knowledge and assistance.” Id. at 776, 775• Consultant developed the infringing coater, developed the

specifications of the infringing machine, oversaw its fabrication, drafted the operating procedures, and taught operators how to use the coater

• Tasks “directed towards the allegedly infringing conduct,” thus Aristo fully “availed itself” to the inventor. Id. at 775

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BASF analysis

• Did not consider the lack of royalties or ownership impediment to assignor estoppel

• Court looked to inventor’s participation “in the design, manufacture, and operation” of the allegedly infringing machine and process. Id. at 776

• Consultant was instrumental to the infringement • Although Aristo “had some of the know-how” to create the

coating machine, “[i]t needed [the consultant] to fill in the gaps to build the machine.” Id. at 775

• In light of his “significant role,” id. at 776, privity was warranted since the consultant operated as more than a “mere” participant or advisor

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Developing Expansion of the Doctrine

• Brocade Communications Systems v. A10 Networks, Inc., 2012 U.S. Dist. LEXIS 84879 (N.D. Cal. June 18, 2012).

• Relied on BASF• Inventor was “initially a part-time consultant” to defendant,

but was “immaterial” • “An inventor/assignor need not be a full-time employee for

privity to apply.” Id. at *30

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Brocade Facts

• One of the co-founders of the plaintiff corporation, Foundry, secretly began a competing venture while still employed by Foundry. Id. at *10

• He eventually left Foundry to new venture, A10 Networks• Took several Foundry’s employees to A10 Networks, who

brought with them Foundry’s intellectual property. Id. • Jalan one of those who moved to A10 Networks, although

initially “a part-time, unpaid consultant.” Id. at *8, *20 • Foundry sued A10 Networks on three patents assigned by

Jalan. Id. at *10-11

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Brocade Analysis

• Court looked to the relevant factors set out in Shamrock for “useful, although not dispositive guidance”:

“(1) the assignor/inventor was a high level employee at his new employer; (2) the assignor/inventor owned shares in his new employer; (3) as soon as the assignor/inventor was hired, the new employer built facilities for performing the infringing activity; (4) the assignor/inventor oversaw the design and construction of those facilities; (5) the assignor/inventor was hired in part to start up the infringing operations; (6) the decision to begin the infringing operation was made jointly by the assignor/inventor and the president of his new employer; (7) the infringing product reached the market with reasonable speed after hiring the assignor/inventor; and (8) the assignor/inventor was in charge of his new employer’s infringing operations.” Id. at *19

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Brocade Analysis (2)

• Inventor had “leadership role” in developing the infringing product

• Overall “close relationship” between inventor and defendant. *20

• Issue was whether “‘the ultimate infringer availed itself of the inventor’s knowledge and assistance to conduct infringement.’” *30 (citing BASF)

• “[A]s a part-time consultant Jalan participated in ‘design discussions’ and ‘code reviews’ and ‘provided some input on the design framework’ of the AX series device.” *31

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Practical Take Away

• Ask questions • Be aware of potential conflicts before they develop,

including consultant’s patent history • Review the consultant’s patents when clearing commercial

developments • Have someone oversee consultant’s work

– Inventor/consultant should assist and advise– not control or make decisions (BASF)

• Maintain boundaries – consultant ≠ employee• Look out for a competitor's “rogue” employees (Brocade)

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Thanks for your attention! Questions?

Jeffrey I. D. Lewis, Esq.Patterson Belknap Webb & Tyler LLP

1133 Avenue of the Americas New York, NY 10036-6710

Tel. (212) 336-2549 Fax (212) 336-2544 jidlewis@pbwt.com

www.pbwt.com