Monday, August 31, 2009

Transfer of Patent Without a Writing

The Federal Circuit ruled last week in Sky Technologies LLC v. SAP AG that a patent can be transferred without breaking the chain of title even though the transfer occurred without a writing. Sect. 261 is the Patent Act’s version of the statute of frauds. It provides that a patent shall be treated as personal property and a patent, or patent application, “shall be assignable in law by an instrument in writing.” Further, Sect. 154(a)(1) of the Patent Act appears to limit patent ownership to one of three classes of entities: a patentee, a patentee’s heirs or a patentee’s assigns. “Every patent shall contain a short title of the invention and a grant to the patentee, his heirs or assigns, of the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States * * *.” Id.

Last week’s Federal Circuit case challenged the right of involuntary assignment in a foreclosure under UCC Article 9 when there was no written assignment and when the recipient of the patent is not the patentee, heir or assignee. In particular, the patent owner granted a written security interest in the patent to a lender as collateral for a loan. The loan became in default and the lender foreclosed pusuant to the UCC Article 9 foreclosure obligations under state law. While there was no writing expressly transferring the patent, the Federal Circuit held that an assignment is not the only method of transferring a patent. Rather, ownership of a patent may be transferred by operation of law; in this case, by forclosure under state procedures following a default of a security interest. The Federal Circuit went on to explain that ownership of a patent is not limited to the three classes of entites described in Sect. 154(a)(1) (patentee, heir, or assignee).

The Federal Circuit’s ruling last week is consistent with the understanding that the Patent Act does not preempt, and is not inconsistent with, UCC Article 9 methods for acquiring title through state foreclosure rules. The Federal Circuit held that the Patent Act is not in conflict with local law relating to collateralization and foreclosure of personal property. Lack of a writing does not void a transfer by foreclosure, including a transfer to someone other than the patentee, heir or assign.

The Federal Circuit explained its policy reasoning:

The policy justifications for permitting transfers of patent ownership through operation of law without a writing also support our holding. First, if foreclosure on security interests secured by patent collateral could not transfer ownership to the secured creditor, a large number of patent titles presently subject to security interests may be invalidated. Any secured creditor who maintained an interest in patent collateral would be in danger of losing its rights in such collateral. Second, by restricting transfer of patent ownership only to assignments, the value of patents could significantly diminish because patent owners would be limited in their ability to use patents as collateral or pledged security. Lastly, it would be impractical to require secured parties to seek out written assignments following foreclosure from businesses that may have ceased to exist.
Sky Technologies, at 12.

The goal of the UCC Article 9 is to work in tandem with federal law so as not to create a conflict. UCC 9-104(a) provides that Article 9 does not apply “to a security interest subject to any statute of the United States, to the extent that such statute governs the rights of parties to and third parties affected by transactions in particular types of property.”

The result of the Federal Circuit’s Sky Technologies decision permits a consistent and functional treatment of a patent as possessing all “attributes of personal property,” including the right of collateralization and involuntarily transfer by foreclosure.

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