No Seventh Circuit Rehearing in Kraft ERISA “Excessive Fees” Case

As previously described in this blog earlier this year, a divided Seventh Circuit panel reversed summary judgment in favor of Kraft Foods Global, Inc. in a class action involving allegedly excessive fees in the Kraft 401(k) plan.  Shortly thereafter, Kraft petitioned for rehearing of the case by the entire Seventh Circuit Court of Appeals en banc.  Further, a “friend of the court” brief submitted jointly by The ERISA Industry Committee (ERIC), the American Benefits Council (ABC), the Profit Sharing/401k Council of America (PSCA), and U.S. Chamber of Commerce urged the Seventh Circuit to rehear the case en banc.

However, on May 26, 2011, in a single page opinion, the Seventh Circuit denied Kraft’s motion, noting that no judge in active service for the Seventh Circuit requested a vote on the petition for rehearing en banc and that the original three judge panel voted 2-1 against rehearing the case – the same split as in the panel’s original order reversing summary judgment.

As a result, the Seventh Circuit’s original order reversing summary judgment will likely be the “go-to” cite for plaintiffs’ attorneys seeking to escape summary judgment on excessive fee claims.  However, as noted by the dissent in that order, the Seventh Circuit’s decision “will only serve to steer [fiduciaries’] attention toward avoiding litigation instead of managing employee wealth.”

Agree to Assign vs. Hereby Assign: In Stanford v. Roche, the Wording of Assignment Agreements Determines Patent Ownership

In yet another decision by the U.S. Supreme Court to impact intellectual property rights, the Court now maintains a centuries-old law that the rights to an invention belong to the inventor. In a decision issued on June 6, 2011, in Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., the Supreme Court held the rights to inventions supported by federally funded research are not vested with the institutional recipient of those federal funds.

In 1980, Congress enacted The Bayh-Dole Act to allocate the rights to federally funded inventions between the Federal Government and the recipient of the federal funds. In Stanford v. Roche, Stanford argues that one consequence of the Bayh-Dole Act is that institutional recipients of federal funds for research are automatically vested with the ownership rights to inventions made by their employees from those funds.

The issue in Standford v. Roche begins in 1988 with a research fellow at Stanford University, Dr. Holodniy, developing an assay for quantifying HIV levels in patients using PCR. Because he was unfamiliar with the technique, Holodniy went to the company that developed PCR, Cetus. Holodniy worked at Cetus developing the assay, and then returned to Stanford where he pursued the research further. Stanford eventually obtained the assignment rights for the invention from Holodniy and acquired three patents as a result. In 1991, Roche acquired Cetus, and Roche commercialized the assay developed by Holodniy while he was at Cetus.

Importantly, Holodniy signed an agreement upon joining Stanford that stated he “agree[d] to assign [his] right, title and interest in” inventions resulting from his employment to Stanford. However, in order to initially gain access to Cetus, Holodniy signed a confidentiality agreement that stated he “will assign and do[es] hereby assign [his] right, title and interest in each of the ideas, inventions and improvements [made] as a consequence of [his] access” to Cetus. Thus, it was at issue to whom Holodniy had actually assigned his rights.

In 2005, Stanford brought suit against Roche asserting that Roche’s commercial assay infringed on the patents held by Stanford. Roche argued that they were co-owners in the patents because Holodniy had assigned his rights to Cetus when he signed the confidentiality agreement. Thus, Stanford could not sue Roche for infringement of patents they co-owned. Stanford countered that they had already acquired Holodniy’s rights under the Bayh-Dole Act because the research was federally funded. Therefore, Holodniy had no rights to assign. The District Court agreed that Holodniy had assigned his rights to Roche. However, the court agreed with Stanford that Holodniy had no valid rights to assign because of the Bayh-Dole Act. On appeal, the U.S. Court of Appeals for the Federal Circuit concluded that Holodniy’s agreement with Stanford to “agree to assign” his rights was a promise to assign his rights at some point in the future. Whereas, in his agreement with Cetus to “hereby assign” his rights,he actively assigned them away right then and there. Furthermore, the Federal Circuit found Agree to Assign vs. Hereby Assign: I that under the Bayh-Dole Act, an inventor’s rights are not automatically relinquished to his employer when the invention is federally funded. Therefore, Roche was part owner of the patents in question, and Stanford lacked standing to file suit.

In a 7-2 decision, the Supreme Court agreed with the Federal Circuit that the Bayh-Dole Act did not supersede centuries of patent law and automatically assign an inventor’s ownership rights to his employer as a consequence of using federal funds. The Court found that the Bayh-Dole Act only confers to recipients of federal funding the right to retain that which they already have the rights to hold, and that the Act’s main purpose is to prevent a “Government-imposed impediment to retaining title” to federally funded inventions. Consequently, because Stanford never received Holodniy’s rights due to the wording of his employment agreement, they could not retain that which they never had the right to hold. Put another way, under Bayh-Dole, Stanford could not re-obtain that which Holodniy had already given away. The dissent stated that under the majority’s opinion, inventors working from federal funds could assign their rights to a third-party who never was a recipient of the federal money. Thus, circumventing the purpose of the Bayh-Dole Act. Furthermore, the dissent contended that since the parties had not fully argued the assignment question, the case should be remanded back to the Federal Circuit.

The decision in Stanford v. Roche will certainly have an impact in the area of technology transfer. Employers generally have policies to insure that the inventions of their employees will be assigned to the employer. However, if employers want to better protect themselves as eventual owners of the inventions of their employees, it will be necessary to draft better employment agreements that assign patent ownership rights in an active manner at the start of employment. The use of the phrase “agree to assign” will likely not protect an employer against an employee’s inadvertent assignment of their invention rights to another party.

Alabama Joins Georgia and Arizona, Among Other States, in Passing Controversial Illegal Immigration Legislation

Today Alabama’s Governor Robert Bentley signed into law immigration legislation aimed at reducing the number of illegal immigrants in Alabama.  There are similarities between Alabama’s law and its Georgia counterpart.  For example, under the new law, set to take effect September 1, law enforcement officers may inquire into the immigration status of persons suspected of having committed a crime.

Alabama’s law goes a step further, however, in also, for example, requiring that the state check the citizenship of all youngsters seeking to enroll in schools.

God bless America and the backs of the immigrants on which she was built.  It speaks volumes that at last as 11:30PM the Governor’s Press Office website said nothing about the new legislation, but instead shows the Governor signing a congressional redistricting bill.  U.S. citizens do not rest easily tonight.  You, much like the undocumented aliens in Alabama, have much about which to be concerned.  The first challenge to the law and millions in taxpayers’ dollars defending the same will hit the news wire by September 1.

Supreme Court: Bayh-Dole Act Does Not Eclipse Inventor’s Rights

On June 6, 2011, the United States Supreme Court ruled that the Small Business Patent Procedures Act of 1980 (a/k/a the Bayh-Dole Act)¹ does not displace the centuries-old maxim that “rights in an invention belong to the inventor.” Board of Trustees of the Leland Stanford Junior Univ. v. Roche Molecular Sys., 563 U.S. —, 2011 WL 2175210, at *4 (June 6, 2011). “Although much in intellectual property law has changed in the 220 years since the first Patent Act, the basic idea that inventors have the right to patent their inventions has not.” Id. at *6. “[U]nless there is an agreement to the contrary, an employer does not have rights to an invention which is the original conception of the employee alone.” Id. at *7. This rings true even when the Federal Government is footing the bill.

In 1985, scientists at Cetus Corp. developed a revolutionary method that allows billions of copies of DNA sequences to be made from a small initial blood sample. This technique became known as the polymerase chain reaction or PCR. In 1988, Dr. Mark Holodniy, a professor at Stanford University, sought to work with Cetus to use the PCR method in an effort to develop a method for quantifying HIV levels in patient blood samples. As a condition of accessing Cetus’ facilities and methodology, Holodniy signed a Visitor’s Confidentiality Agreement (“VCA”), which stated that Holodniy “will assign and do[es] hereby assign” to Cetus his “right, title and interest in each of the ideas, inventions and improvements” made “as a consequence of [his] access” to Cetus.

Upon returning to Stanford, Holodniy disclosed his new method of quantifying HIV to Stanford and Stanford filed a series of patent applications. In 1991, Roche Molecular Systems acquired Cetus’s PCR-related assets, including the rights Cetus obtained through the VCA signed by Holdoniy. Roche subsequently developed and commercialized the procedure. Standford then filed suit against Roche contending that Roche’s HIV test kits infringed Stanford’s patents. In response, Roche claimed that it was a co-owner of Holdoniy’s inventions based on Holdoniy’s assignment of rights in the VCA, while Stanford argued that it had superior rights to Holodniy’s inventions under the Bayh-Dole Act. The District Court agreed with Stanford, finding that although “the VCA effectively assigned any rights that Holodniy had in the patented invention to Cetus, . . . Holodniy had no interest to assign” because of the operation of the Bayh-Dole Act. Id. at *5 (internal quotation marks and citation omitted). The Court of Appeals for the Federal Circuit, however, disagreed. The court determined (1) that the Bayh-Dole Act “does not automatically void ab initio the inventors’ rights in the government-funded inventions and (2) that Holodniy’s assignment to Roche, with the “hereby assigns” language, trumped the one he made earlier to Stanford’s because Stanford’s assignment stated that Holodniy “agree[d] to assign” to Stanford his “right, title and interest in” inventions resulting from his employment at Stanford. Id. at *1, *6 (internal quotation marks and citation omitted). Stanford appealed, arguing that the Bayh-Dole Act gave Stanford superior rights.

In affirming the Federal Circuit, Chief Justice Roberts concluded that “[t]he Bayh-Dole Act does not confer title to federally funded inventions on contractors or authorize contractors to unilaterally take title to those inventions; it simply assures contractors that they may keep title to whatever it is they already have.” Id. at *9. That is, the Act “serves to clarify the order of priority of rights between the Federal Government and a federal contractor in a federally funded invention that already belongs to the contractor. Nothing more.” Id. Simply put, absent an express written agreement to the contrary, an inventor’s rights to an invention reign supreme over an employer’s interest, even when the invention is financed by the Federal Government.²

This holding poses particular challenges for universities and other educational institutions, which often receive federal funding leading to patentable inventions. Such institutions cannot assume that ownership rights are certain by virtue of receiving federal funding. Thus, these institutions must “enter into agreements with their employees requiring the assignment to the university of rights in inventions” to ensure their ownership stake. Id. at *11.

In addition, the Supreme Court’s decision exposes a vulnerability in the Bayh-Dole Act that enables organizations to avoid the Act’s “marching orders” by ensuring that federally funded inventions remain assigned to their individual inventors. Indeed, as Justice Roberts makes clear, inventions only fall within the scope of the Bayh-Dole Act if federally funded and effectively assigned to the contracting organization. It is now up to Congress to patch this loophole by amending the Act to expressly vest title in federally funded inventions in the contracting organizations.

For now, however, this decision acts as a guidepost and warning to all employers to ensure that those involved in the inventive process have signed written agreements specifying employer rights with respect to each invention. Moreover, it underscores the importance of a company meticulously requesting visitors to execute confidentiality agreements in which the visitor assigns all rights, title and interest to inventions made as a result of the access provided by the company. Without such agreements, organizations risk being able to ensure their own rights, which in turn threatens their future ability to license or transfer their rights to third parties. Accordingly, all organizations (but especially federal contractors) should undertake the following protective measures:

1. Inventory all inventions arising out of past and present research and development projects;
2. Identify all employees and independent contactors involved in inventive processes relating such inventions;
3. Ensure that all employees and independent contractors involved in the inventive processes have signed written agreements specifying the employer’s rights to any related inventions; and
4. Keep track of all confidentiality agreements executed by employees seeking to gain access to third party facilities.

This list may also prove beneficial when conducting due diligence of an acquisition target, a potential licensing deal, or technology transfer opportunity.

Nonanalogous Art Lives! In Re Klein

Yesterday, the CAFC decided IN RE ARNOLD G. KLEIN 2010-1411, finding error in the USPTO’s rejection of patent claims based on obviousness, using non-analogous art.  You may find the following useful in your prosecution efforts. (A link to the decision can be found at the end of this post.)

The law is …

“A reference qualifies as prior art for an obviousness determination under § 103 only when it is analogous to the claimed invention. Innovention Toys, LLC, v. MGA Entertainment, Inc., No. 2010-1290, slip op. at 12 (Fed. Cir. Mar. 21, 2011); In re Bigio, 381 F.3d 1320, 1325 (Fed. Cir. 2004); In re Clay, 966 F.2d 656, 658 (Fed. Cir. 1992). “Two separate tests define the scope of analogous prior art: (1) whether the art is from the same field of endeavor, regardless of the problem addressed and, (2) if the reference is not within the field of the inventor’s endeavor, whether the reference still is reasonably pertinent to the particular problem with which the inventor is involved.” Bigio, at 1325. Here, the Board focused exclusively on the “reasonably pertinent to the particular problem” test. “A reference is reasonably pertinent if, even though it may be in a different field from that of the inventor’s endeavor, it is one which, because of the matter with which it deals, logically would have commended itself to an inventor’s attention in considering his problem.” Clay, 966 F.2d at 659. “If a reference disclosure has the same purpose as the claimed invention, the reference relates to the same  problem, and that fact supports use of that reference in an obviousness rejection.” Id.

Mr. Klein did not challenge the Board’s factual finding of the problem he was addressing, namely “making a nectar feeder with a movable divider to prepare different ratios of sugar and water for different animals.”

The panel of judges concluded …

“We agree with Mr. Klein that the Board’s conclusory finding that Roberts, O’Connor, and Kirkman are analogous is not supported by substantial evidence. The purpose of each of Roberts, O’Connor, or Kirkman is to separate solid objects. An inventor considering the problem of “making a nectar feeder with a movable divider to prepare different ratios of sugar and water for different animals,” would not have been motivated to consider any of these references when making his invention, particularly since none of these three references shows a partitioned container that is adapted to receive water or contain it long enough to be able to prepare different ratios in the different compartments. See Clay, 966 F.2d at 659 (“If [a reference] is directed to a different purpose, the inventor would accordingly have had less motivation or occasion to consider it.”).”

and …

“Greenspan and De Santo are not analogous, Mr. Klein argues, because they do not address multiple ratios or have a ‘movable divider.’ We agree. While Greenspan and De Santo are each directed to containers that facilitate the mixing of two separated substances together, an inventor considering the problem of “making a nectar feeder with a movable divider to prepare different ratios of sugar and water for different animals,” would not have been motivated to consider either of these references since neither of the references shows a movable divider …”

In Re Arnold G Klein