Category Archives: Due Diligence

Shop Rights: What are they and can they be assigned?

“Shop rights” arise when an employee uses an employer’s resources to create an invention, but the employer does not own the invention. A shop right permits the employer to use a patented invention for its own business as a quid pro quo when the inventor used the employer’s resources to develop the invention.

The concept of a shop right is not found in any law.  Instead, it is a judicial creation that grew out of equitable principles. Because of this, shop rights are fact-specific. When determining whether a shop right exists in a particular situation, a court will consider several factors to determine whether equity and fairness should entitle the employer to use the invention without paying a royalty.  These factors include Continue reading

Assignment of “inventions and discoveries” assigns more than just the single listed patent application

A new Federal Circuit opinion highlights the benefits of having a broadly worded assignment when acquiring a patent application from inventors.  In particular, the case confirms that an assignment of “inventions and discoveries” described in a patent application can cover claims that issue in unrelated patents if the claims are supported by the assigned application.

In MHL Tek, LLC v. Nissan Motor Co. (Fed. Cir. Aug. 10, 2011), the Court considered whether MHL Tek had standing to bring an infringement lawsuit for U.S. Patent 5,731,516, which related to a tire pressure sensor.  MHL Tek asserted that it acquired the ‘516 patent from the inventors pursuant to a 1997 assignment agreement.

The inventors were also named in several prior patent applications that were assigned to a different entity (Animatronics, Inc.)  in 1993.  The 1993 assignment document stated that the inventors Continue reading

Patent infringement suit dismissed based on two faults in patents’ chain of title

A recent court decision from the Southern District of New York dismissed a patent infringement lawsuit based on two issues with the patents’ chain of title.  In Picture Patents LLC v. Aeropostale Inc. (S.D.N.Y 4/15/11), the defendants won a motion to dismiss based on the plaintiff’s lack of standing to file suit. 

The inventor, Michelle Baker, was the founder and sole member of Picture Patents.  Baker applied for the three patents-in-suit between 1994 and 1999.  Prior to filing the patents, Baker was employed with IBM Corporation as a software analyst.  As part of her employment, Baker signed IBM’s intellectual property agreement, which stated:

I hereby assign to IBM my entire interest in any idea, invention, design . . . computer program and related documentation . . . hereafter made or conceived solely by me . . . [that] (a) relate to the actual or anticipated business  or research and development of IBM or its subsidiaries, or (b) are suggested by or result from any task assigned to me or work performed by me on for or on behalf of IBM and its subsidiaries.

Although Baker applied for the patents after she left IBM, the court found that she conceived the inventions while at IBM, and that the inventions related to IBM’s business.  Therefore, the court found that under IBM’s IP agreement she had assigned all of her rights to IBM, including rights to obtain patents in the future.

Even though this point alone would have been enough to win the day for the defendants, the court found another defect in the patents’ chain of title.  Baker also owned another company named Intellinet, and she assigned the patents to Intellinet in 2003.  In 2006, Baker signed another document assigning the patents to the plaintiff (Picture People LLC).   Baker signed both assignments naming herself as assignor; the second assignment made no mention of Intellinet.  Thus, the court found the assignment to Picture People invalid because in 2006 “Baker herself had no rights in the Patents to assign to Picture People.”

The assignment issues in this case illustrate the benefits that may arise from a strong IP assignment document (such as IBM’s), as well as the importance of thorough due diligence when acquiring patent rights.

Ninth Circuit: Licensee of off-the-shelf software may not resell used copies of the software

Attorneys and IT consultants who handle intellectual property due diligence will want to note a recent decision by the Ninth Circuit relating to the transferability of licensed software.  In  Vernor v Autodesk, the Court considered the case of Timothy Vernor, who sold used copies of Autodesk’s AutoCAD software on eBay.  Autodesk argued that the sales constituted copyright infringement.  Vernor argued that the software copies were governed by the “first sale” doctrine, which is an affirmative defense to copyright infringement that allows owners of copies of copyrighted works (e.g., books, CDs, DVDs) to resell those copies.  

The court analyzed the AutoCAD license agreement to determine whether AutoCAD users were “owners of a copy” or “licensees”, as only “owners of a copy” are eligible to assert the first sale doctrine.  Reviewing the AutoCAD license agreement, the court noted that the agreement prohibited customers from renting, leasing, or otherwise transferring the software without Autodesk’s prior written consent.  Focusing on the assignability and use restrictions of the license agreement, the court found that AutoCAD users are mere licensees and thus not permitted to resell the software:

We hold today that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions. 

The court’s decision should remind entities involved in merger and acquisition due diligence that software licenses may not automatically transfer in the transaction.  If the license “significantly restricts the user’s ability to transfer” and imposes use restrictions (each of which is the case in many software licenses), then the purchaser may need to obtain consent before the software can transfer to the new entity.

Due Diligence 101: can customers’ personally identifiable information be transferred?

When performing due diligence in connection with a merger or acquisition, one item that should not be overlooked is the target company’s privacy policies.   If the business of the target relies on account holders, subscribers, or others who provide the business with personally identifiable information, a seller who ignores the target’s privacy policies may find itself purchasing a business with no ability to access the existing customer base.

This issue was recently highlighted when the Federal Trade Commission sent a warning letter to the potential purchaser of XY Magazine in a bankruptcy proceeding.  XY Magazine was a gay male youth-oriented magazine and website that, according to the FTC letter, collected “a substantial amount of personal information from its members and subscribers, including names and street addresses.”   The magazine and website touted an “Amazing Privacy Policy” and assured subscribers and members that “we never share your information with anybody”.  The FTC’s warning letter stated that transfer of customer data in a bankruptcy proceeding would contradict the privacy statements and constitute unfair or deceptive trade practices, resulting in a possible violation of Section 5 of the FTC Act

The purchaser ultimately acquired the assets, but only after entering into a consent order in which the parties agreed to destroy all personally identifiable information before the asset transfer.

The FTC warning should serve as a reminder that purchasers should carefully review privacy policies as part of their intellectual property due diligence.  In addition, companies with a goal of being acquired should review their privacy policies to ensure that the policies will allow a successor to continue the business with the existing customer base.

Does your IP due diligence consider copyright termination?

When performing intellectual property due diligence in connection with a corporate acquisition, a frequently overlooked question is whether any of the company’s copyrights may be subject to termination at some point in the future.  UCLA School of Law Professor Doug Lichtman’s excellent Intellectual Property Colloquium podcast recently prompted me to think about copyright termination rights in the context of IP diligence. 

Ordinarily, an assignment of intellectual property is just that — irrevocable unless the agreement says otherwise.  However, an exception exists for copyrights that were not made as “works for hire.” Section 203 and Section 304 of the Copyright Act permit a copyright owner (or his or her heirs) to terminate all licenses and or transfers of rights after a certain time period. 

Because of this, if a company acquired copyrights from founders, from consultants who did not sign work for hire clauses, or from others who were not employees at the time that the work was created, then that company may be at risk of copyright recapture at some point in the future.  Continue reading

IP Due Diligence and Willful Patent Infringement: Part 2

In one of my early posts in this blog, I wrote about due diligence practices for a situation where a buyer wants to investigate the effect of a potentially-concerning patent on a seller’s business.  In the post, I noted that sellers sometimes cite a practice of not reviewing any patents in order to avoid risking liability for willful patent infringement.  However, my view is that it’s usually preferable to know about a patent — and design around it or take a license — early in the stage of a product or company, rather than risk liability for infringement after the a new product achieves market success.

I wrote my first post before last year’s Federal Circuit opinion in In re Seagate Technology, LLC , where the court stated that mere knowledge of a patent is not sufficient to find liability for willful patent infringement, but instead a showing of “objective recklesness” is required.  To establish willful patent infringement under Seagate, the patent holder must show that the infringer acted “despite an objectively high likelihood” that its actions constituted patent infringement.

In the due diligence context, a buyer will want to know whether there is an objectively high likelihood that the seller is infringing a patent.  Sellers should be prepared to address significant issues of concern to buyers, and a seller’s response of “I don’t want to see the patent” may be harder to defend after Seagate.