On January 8, 2021, the US Supreme Court agreed to hear a case involving the assignor estoppel doctrine.1 This doctrine prohibits the assignor of a patent from challenging the patent’s validity in litigation after the transfer or sale of the patent. The doctrine is binding on those in privity with the seller. For example, if the assignor is an inventor, the doctrine can be binding on companies founded by the inventor. The Supreme Court will decide whether this doctrine will remain as is, be limited, or be entirely abolished. Depending on the decision, buyers of businesses, employers, and companies hiring contractors should consider using contractual provisions that provide them with first-party indemnification for legal costs arising from challenges by the assignor or those in privity with the assignor. Sellers of businesses, employees, and contractors should consider using contractual provisions that give them the right to challenge the sold patents in defensive litigation.
Background
Application of the assignor estoppel doctrine can arise in several scenarios. In one scenario, a seller of a business may sell its assets, including a patent portfolio, to a buyer. The seller’s founder or employee may be a lead inventor. After selling the assets to the buyer, the inventor may start or join a company that competes with the buyer. In reaction, the buyer may sue the seller, the inventor, or the company for patent infringement. In its present form, the assignor estoppel doctrine prevents the seller from invalidating the patent rights in litigation. This was the case in Hologic, Inc. v. Minerva Surgical, Inc.2 The lead inventor, Csaba Truckai, cofounded Nova-Cept, Inc. and assigned his patent rights to Nova-Cept. The patent rights relate to a medical system for treating uterine bleeding through endometrial ablation. Later, Cytyc Surgical Products, LLC acquired Nova-Cept, Inc., and Hologic, Inc. subsequently acquired Cytyc Surgical. A year later, Mr. Truckai founded Minerva Surgical, Inc. Minerva markets an endometrial ablation system that competes with, and was approved to treat the same indications as, Hologic’s system. Hologic sued Minerva in the US District Court for the District of Delaware for infringement of US Patent Nos. 6,872,183 and 9,095,348. In defense, Minerva filed motions challenging the validity of the patents in district court, and also concurrently filed petitions with the US Patent Trial and Appeal Board (PTAB). In the petitions, Minerva sought an inter partes review (IPR) of each patent, but the PTAB only instituted an IPR of the ’183 patent.
Role of Assignor Estoppel in IPR Proceedings
The PTAB’s final decision invalidated the asserted claims of the ’183 patent. The US Court of Appeals for the Federal Circuit (Federal Circuit) affirmed the PTAB’s decision. On the basis of the PTAB’s decision, the district court held that Hologic was collaterally estopped from asserting the ’183 patent regardless of whether assignor estoppel barred Minerva from challenging those claims in the district court. The Federal Circuit subsequently affirmed the district court’s holding, concluding, as in the past, that the assignor estoppel doctrine does not apply to IPRs based on the plain reading of 35 USC § 311(a) of the US Patent Act. In its cross petition to the Supreme Court, Hologic asked the Supreme Court to decide whether an assignor of a patent may circumvent the assignor estoppel doctrine by challenging the validity of the assigned patent in an IPR and then using the PTAB’s finding of invalidity to prevent the assignee from relying on the patent in infringement litigation in district court. The Supreme Court denied Hologic’s cross petition.3 Therefore, unless and until the Supreme Court decides otherwise, IPRs remain available to defendants seeking to avoid assignor estoppel.
Arguments Before the Supreme Court
In regard to the ’348 patent, the district court held that assignor estoppel barred Minerva from challenging the validity of this patent, and the Federal Circuit affirmed this holding. In its analysis, the Federal Circuit determined the equities weighed in favor of applying collateral estoppel, given that Mr. Truckai executed broad patent assignments to his employer, left his employer, found and took on a controlling role at a competing company, and was directly involved in the alleged infringement. Mr. Truckai founded Minerva, served as its president and CEO, and brought products to market in direct competition with Hologic. The Federal Circuit concluded that these relationships placed Minerva in privity with Mr. Truckai, causing assignor estoppel to extend to Minerva. In affirming the district court’s holding, the Federal Circuit declined Minerva’s invitation to abandon assignor estoppel.
Minerva’s petition to the Supreme Court set forth several reasons for abolishing or limiting the doctrine of assignor estoppel, including a split of authority, highlighting that the doctrine applies to IPRs but not to litigation. As part of this argument, Minerva referred to the Supreme Court’s Lear v. Adkins decision in which the Supreme Court eliminated licensee estoppel, a doctrine related to assignor estoppel.4 Furthermore, Minerva expressed the need to protect the public interest in eliminating bad patents.
In Hologic’s brief in opposition to Minerva’s petition, Hologic asserted there is no split of authority, the Federal Circuit carefully distinguished Lear, and there is no controlling authority rejecting the continued vitality of the assignor estoppel doctrine.
In its upcoming decision, the Supreme Court may follow the reasoning it used in Lear to abolish licensee estoppel—that the public interest in eliminating improvidently granted patents to allow full and free innovation and competition outweighs equitable considerations. If the Supreme Court decides to limit assignor estoppel instead, it may restrict its application to cases in which the assignor engages in actual misrepresentation or fraud, or where the allegedly infringing technologies were developed after the defendant hired the inventor. Alternatively, the Supreme Court may permit assignors to raise invalidity challenges in litigation based on grounds not available in IPRs, such as those for lack of enablement and lack of written description.
Assignee Considerations for Contractual Provisions
Assignees of patent rights can include buyers of businesses, employers, and companies hiring contractors. Given the potential changes to the doctrine, what can assignees do to limit the effects of assignor challenges to the acquired patents? Solely relying on a noncompete provision can have several drawbacks. The customary noncompete period, to be enforceable, will unlikely last the life of a patent. Also, prohibiting the assignor from challenging patents through IPRs and litigation is customarily beyond the scope of a competition restriction. Adding this type of prohibition would be subject to unenforceability if contrary to the Supreme Court’s upcoming decision.
An assignee can use contractual provisions that discourage the assignor’s challenges or otherwise limit the assignee’s losses from the challenges. For example, the assignee can obligate the assignor to provide first-party indemnification for all legal costs, including attorney’s fees, arising from invalidity challenges carried out by the assignor, its inventors, or others in privity with the assignor, regardless of whether the challenger prevails. In compliance with any Supreme Court decision that abolishes assignor estoppel, this would permit the assignor to conduct the challenges. However, the burden of paying the assignee’s costs and attorney’s fees would discourage the assignor from doing so.
In addition, the assignee can place part of the purchase price in escrow and incrementally release it over a period of years, as long as the assignor has not challenged the validity of the sold patents. Along these lines, the assignor can divide the purchase price between an upfront payment and one or more holdbacks, where the release of each holdback is conditioned on the absence of any assignor-initiated validity challenges.
Assignor Considerations for Contractual Provisions
Assignors of patent rights can include sellers of businesses, employee-inventors, and independent contractors. What can assignors do to limit the effects of any Supreme Court decision that broadens or extends the assignor estoppel doctrine to IPRs? Assignors should consider using contractual provisions that give them the right to challenge the assigned or sold patents under certain terms and conditions. For example, a provision may give the assignor the right to challenge the validity of the patents in IPRs and litigation if doing so in defense to a suit initiated by the assignee or its successor or assign. Depending on the assignor’s negotiation strength, the provision may extend this right to the assignor’s key employees, inventors, successors, and assigns. Practically, most employees and contractors may lack the bargaining power to obtain this type of a provision, but high-ranking employees, such as cofounders, chief technology officers, and chief science officers, may have sufficient negotiation strength.
The types of provisions described above could be included in asset purchase agreements, employee intellectual property agreements, and product development agreements with contractors. Drafters of these agreements should monitor this legal development. While awaiting the Supreme Court’s decision, drafters should consider using provisions that address the potential risks to their clients. For deals based heavily on patent rights, the scope of these provisions may impact the purchase price negotiations and other deal terms.
1 Minerva Surgical, Inc. v. Hologic, Inc., No. 20-440, 2021 U.S. LEXIS 480, at *1 (Jan. 8, 2021).
2 Hologic, Inc. v. Minerva Surgical, Inc., 957 F.3d 1256 (Fed. Cir. 2020).
3 Hologic, Inc. v. Minerva Surgical, Inc., No. 20-631, 2021 U.S. LEXIS 368, at *1 (Jan. 11, 2021).
4 Lear, Inc. v. Adkins, 395 U.S. 653 (1969).
If you have any questions regarding the content of this alert, please contact Renato Smith, partner, at rsmith@barclaydamon.com; Genevieve Halpenny, associate, at ghalpenny@barclaydamon.com; or another member of the firm’s Corporate or Patents & Prosecution Practice Areas.