14 October 2008

What Happens if the IP Asset You've Licensed is Transferred to a Third Party?

It is not uncommon for a company licensing in technology to spend much time and legal resources on ensuring that the licensor of that technology cannot assign or transfer the operative license agreement to a third party without the licensee's knowledge and consent. However, less common is attention to the risk of a licensor transferring the actual intellectual property that is the subject of the license in question. This situation arose in a recent US Court of Appeals decision within the US Federal Circuit, the courts responsible for patent appeals. The decision is Datatreasury Corp. v. Wells Fargo & Co., et al.

In that case, Wells Fargo Services Corp. entered into a 2004 patent license agreement with WMR e-Pin LLC related to net banking settlement services. The agreement was expressly binding on successors and assignees, and prohibited assignment of the agreement without the prior written consent of the non-assigning party. The license agreement also contained a mandatory binding arbitration clause.

In 2006, WMR assigned the patents at issue to Datatreasury Corp. Soon afterwards, Datatreasury filed suit against Wells Fargo, accusing the bank of infringing the patents previously licensed to Wells Fargo. Wells Fargo moved to compel arbitration, based on the binding arbitration clause in the license agreement covering the transferred patents. Wells Fargo argued that Datatreasury is bound by the arbitration clause, notwithstanding that it was not a party to that license agreement and never contractually agreed to be bound to arbitrate disputes with Wells Fargo, because, the argument went, the arbitration obligation "runs with the patent" at issue. The bank relied on cases standing for the proposition that because the owner of a patent cannot transfer an interest greater than that which it possesses, an assignee takes a patent subject to the legal encumbrances associated with it.

The Federal Circuit affirmed the district court's denial of the motion. The court distinguished the cases upon which Wells Fargo relied, concluding that "the legal encumbrances deemed to 'run with the patent' in these cases involved the right to use the patented product, not a duty to arbitrate." The court made a distinction between terms of an agreement relating to use of the patented product, and other ancillary terms of an agreement. "[P]rocedural terms of a licensing agreement unrelated to the actual use of the patent" are not binding on a subsequent owner of the patent.

The question that arises now is what exactly is meant by "procedural" terms. Would infringement indemnification and warranties run with the intellectual property in question, such that transferees would be bound to honor those commitments, or would these be held to be non-binding on subsequent transferees of that intellectual property? The Datatreasury case instructs that licensees should, to the extent possible, attempt to deal with the risks engendered by the intellectual property owner transferring the intellectual property at issue to a stranger to the license agreement, by ensuring that the transferee is bound by the obligations of the license agreement.

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