Do You Own What You Think You Own? Part I: Patent Assets, Sales, and Good Faith Purchaser

By: Aron T. Griffith

One aspect of managing a global patent portfolio is understanding what patents you have.  Likewise, when acquiring a patent portfolio, it is important to understand what patents you are buying.

Asset purchase agreements often simply refer to an attached schedule of patents, and may or may not list all family members.  Oversimplified, “Company A conveys to Company B all of the rights Company A has in the patents listed in the attached schedule.”  A seller will generally prepare the schedule of patents they own and want to sell, the list is reviewed by the buyer, and after conclusion of the sale, the patent attorneys must use the schedule to complete assignment recordations and ownership changes worldwide.

While it is hopeful that this process is 100% accurate, mistakes can happen along the way.  Company A may not own what it thinks it owns, and Company B may not be acquiring what they think they are acquiring.  Although listed on the schedule of patents, if Company A does not actually have rights in the patent, Company B may end up with less than they were expecting.

As an example, rights to an invention may have been conveyed from an inventor to their Employer using a country specific assignment agreement, such as one listing only the United States, instead of conveying worldwide rights.  Such an instance may result in Company A not having rights in other jurisdictions where corresponding applications were filed.  As another example, an assignment may lack language including rights to divisional, continuation, and continuation-in-part applications.  Due diligence efforts should be rigorous enough to root out these and other “problem” assets, and each link in the chain of title should be properly investigated to make sure you indeed own what you think you own, or that you will be acquiring what you are trying to acquire.

While not suggested, for a small acquisition or divestiture, less rigorous due diligence efforts are often used to save time and/or costs.  Poor recordkeeping or review may result in patents that are not owned, or which were previously divested, being listed in the schedule of assets.  After the sale is completed, and upon reviewing a patent schedule for assignment recordation purposes, for example, it may be discovered that a patent listed was previously assigned to Company C.

In such an instance, who owns the patent, Company B or Company C?  The answer is, as with all legal questions, “it depends.”  As set forth in 35 U.S.C. § 261 (and MPEP 301), “an interest that constitutes an assignment, grant, or conveyance shall be void as against any subsequent purchaser or mortgagee for valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.”  The “subsequent purchaser” is often referred to as a “good faith purchaser for value,” a party that purchases a patent, for value, and without any notice of another party’s claim to the patent.

So, what does this mean?  In the above scenario, if Company C did not record their assignment with the USPTO prior to the sale from Company A to Company B, the subsequent purchaser, the prior conveyance to Company C may be void, and Company B may be considered the proper owner of the patent.  For this reason, it is highly suggested to promptly record any assignment.  If, on the other hand, Company C properly and timely recorded with the USPTO, Company B’s subsequent “purchase” would be to no effect, and Company B would have no rights in the patent.  The recordation of the assignment is considered legal notice to the public, and thus Company B should have known that Company A did not actually have any rights in the patent to sell.

Situations like the above can happen for numerous reasons.  The nefarious ones are obvious.  However, “innocent” mistakes happen, such as a small sale of a couple patents from a business unit during a transition between patent counsel, poor communication, poor recordkeeping, accidental use of the wrong assignment form, and the like.

Whether you involve patent counsel before, during, or after a sale or acquisition, it is suggested to routinely review your assignment recordations, so that you maintain a good grasp of what you own, rather than having a vague idea of what you think you own.  As a patent owner, a review may reveal erroneous recordations that need to be corrected, such as where an error was made by an unrelated party recording an assignment against your patent, although the title, companies listed, and/or inventors have no relation to your patent – recordation at the USPTO is largely ministerial, and the information is not checked for accuracy, but simply recorded.  Similarly, an error made during recordation may have associated the assignment with a different patent, and the review may flag instances where an assignment should be re-recorded against the correct patent.  These will help keep things “clean” in the event of a future sale or enforcement action.  For the instances where poor communications or recordkeeping are involved, such as the example above where a sale was made during transition of patent counsel, policing of the records may put the new patent counsel on notice of the prior sale (which upon investigation, could prevent the accidental payment of maintenance fees for a patent your company no longer owns).  Review of the USPTO website may be undertaken, for example, shortly before the maintenance fees are due, at 3.5, 7.5, and 11.5 years from issuance.

Whether you are an owner, seller, or purchaser of a patent, it is a good idea to review assignments and other links in the chain of title to make sure they convey the rights desired, as well as to review patent office recordations to keep tabs on what you own or to ensure the seller owns what they are trying to sell.  While understanding what you own involves a bit more, such as reviewing claim scope, these simple steps can put you on the right path to knowing what you own.

Keep an eye out for “Part II – Exclusive Rights” of Osha Liang’s “Do You Own What You Think You Own” due diligence series in a future newsletter.