Markman Note: Hiding Inventions Is A Bad Idea
July 7, 2015 (Mimesis Law) — The question of who owns intellectual property rights is always an interesting one. When it comes to professors or engineers at public or private companies, most sophisticated employers will require that any inventions conceived while “on the job” are automatically assigned to the employer. Once the employer and employee part ways, or an opportunity to license the intellectual property pops up, the two parties usually negotiate some kind of arrangement to give the inventor financial upside in any transaction. This is pretty standard stuff.
Even more interesting is when something goes off the rails. In a recent decision in a case out of California, a former board member of a medical device company was found to have breached his fiduciary duties, by failing to give the company (on whose board he was serving) the opportunity to secure rights in an invention he developed while on the board. The case presented interesting questions of the true duties owed by board members to the companies they serve, and the decision sets forth a proposed compromise position towards balancing the rights of inventors and companies when a board member/inventor comes up with an actionable idea of value.
The facts of the case seem pretty straightforward. A publicly-traded medical device company, Spectranetics (SPNC), acquired a competitor called Angioscore in 2014. SPNC also inherited a lawsuit in their acquisition, as Angioscore had sued a former board member for breach of his fiduciary duties, and his company for patent infringement. Angioscore’s allegation was that the board member had surreptitiously developed a competing product, hid his invention and development of that product from the company, and went along to found a competing set of companies to commercialize his invention.
In deciding the case, the court looked at the arguments of both sides and found them untenable in some respects. The court rejected Angioscore’s argument, that they automatically “owned” the competing product, because it had been developed by a former board member while he was still in that role. At the same time, the court also rejected the board member’s argument that he was free to use his invention unfettered, even if it meant founding a competitor to do so. In a compromise finding, the court decided that it would be chilling to inventor’s rights and the goal of encouraging innovation to find that the board member had an absolute duty to assign his rights to Angioscore. The better rule, according to the court, is one where the board member would at least need to present the opportunity to the company he was serving, particularly where the invention was directed to a product or service in line with the company’s business. If the company declined to pursue the invention commercially, then the board member would be free to exploit it on their own.
Ultimately, SPNC was successful in this round of the case, and as a result of their efforts secured a $20M+ damages award, plus disgorgement from the former board member of his ill-gotten gains. It will be interesting to see what happens to this case on appeal. In the meantime, this was an interesting decision on an issue with some real public policy ramifications — particularly in the Silicon Valley ecosystem in which the case was decided. At the very least, it presents a strong reminder that trying to skirt fiduciary obligations does not pay.
Recent Patent Litigation-Influenced Moves
Another week, another negative result for a patent assertion entity. In a case against Verizon, Spherix attempted to assert a non-standard essential patent in the hopes of securing a juicy damages award. Unfortunately for the company, the Virginia court returned a negative finding on summary judgment, finding the sole asserted patent in the case invalid as indefinite and not infringed. A clean win for Verizon, pending appeal of course.
As with most companies involved in patent assertion nowadays, the key fallback position in the face of a negative result requires pointing to “diversity”: in that the company has other cases and patents at work. While investors might be heartened to know that the company is not a one-trick pony, there is no doubt that at this point the entire sector is feeling a sense of “failure fatigue” — and probably wondering what they need to do to actually turn the tide. Until that happens, investors will need to remain patient.
Marathon Patent Group (MARA)
Just a few weeks ago (and up above) we talked about the benefit of “diversity” for patent assertion entities. On the heels of a negative verdict in their Delaware Bridgestone trial, investors in Marathon received some welcome news out of Germany with respect to one of their medical device portfolios. In fact, many patent assertion entities have shifted their focus to Germany and Europe for patent litigation, as they believe the odds of success are much better than what patent owners can expect in the US nowadays.
Considering the “rule changes” that have impacted patent litigation in the US nowadays, including but not limited to IPRs, that strategy appears to be a sound one for the time being. At the same time, investors will want to see that the “Europe-first” patent litigation approach can lead to valuable “global” settlements for patent assertion entities taking on multinationals, before getting too excited about incremental wins like the one MARA just achieved.
The Week(s) Ahead — Expected Events
Parkervision and Marvell CAFC decisions, and ROVI/NFLX D.Ct. “Alice” + Markman decision – TBD
Hopefully you have had a chance to catch our “Markman Minute” videos (available at www.mimesislaw.com/intellectual-property) for a deeper look at some of the biggest current patent stories of interest to investors. Finally, we want your feedback and suggestions, so feel free to send it along to firstname.lastname@example.org or to @markmanadvisors on Twitter. You can also visit our website at www.markmanadvisors.com. Questions from the readership are always welcome as well; we will try to get you answers in future issues of the Markman Note.
Disclosures and Disclaimers:
Nothing in this material is intended to constitute legal or investment advice of any kind, nor is any of this material based on any non-public information of any kind. In addition to my work at Markman Advisors, I am also a name partner at a NYC-based intellectual property litigation boutique firm, Kroub Silbersher & Kolmykov PLLC (www.kskiplaw.com). Markman Advisors is affiliated with a Houston-based investment management firm, Perdix Capital Management, which may have existing or potential positions relating to situations discussed in this material. Markman Advisors also provides consulting services to buy-side investors, including hedge funds and family offices, that may also have or enter into positions relating to situations discussed in this material.
Main image via Flickr/David, Bergin, Emmett and Elliott.