Article contributed by: Maximilian A. Grant, Michael A. David, Zachary C. Kline, and Gregory K. Sobolski, Latham & Watkins LLP
I. INTRODUCTION Practitioners drafting settlement agreements or considering them in the context of patent litigation have new reason to scrutinize for proof of ownership. On December 7, 2009, the Federal Circuit ruled in Tyco Healthcare Group LP v. Ethicon Endo-Surgery, Inc.1 that, due to ambiguous language contained in an agreement purporting to transfer an intellectual property portfolio from one predecessor entity to another, the plaintiff failed to establish ownership of the patents-in-suit. Consequently, the court held that the patent infringement action was properly dismissed due to lack of standing. Given the frequency with which practitioners draft settlement agreements transferring title of intellectual property— including agreements using the same language the Federal Circuit expressly found ambiguous—the Tyco decision has real practical implications.
II. TYCO V. ETHICON Tyco involved three patents directed to an ultrasonic surgical scalpel. During the pendency of the patent applications, the original inventors assigned their rights to U.S. Surgical Corporation (USSC). On April 1, 1999, USSC entered into two separate agreements that would become the heart of this dispute. One was a Contribution Agreement with Kendall LLP, which later became the plaintiff, Tyco. In the Contribution Agreement, USSC assigned, transferred, and delivered all of its “assets, properties, and business,” except “Excluded Assets” existing on the date of the transfer agreement.2 Among the Excluded Assets were “[a]ny and all patents and patent applications relating to any pending litigation involving USSC.”3 The Contribution Agreement then stated that there were “no actions pending or threatened by or against, or involving USSC,” other than “as set forth on Schedule 4.21.”4 Critically, and without explanation, Schedule 4.21 was missing from the record as of the date of trial. The second agreement was an April 1, 1999 Settlement Agreement between USSC and Ethicon. It sought to resolve disputes regarding five pending patent applications between the parties and certain related interference proceedings. The Settlement Agreement similarly called for dismissal with prejudice of any pending litigations listed in it and conferred immunity against infringement liability arising from certain products Ethicon made or sold at the time.5 In October 2004, Tyco sued Ethicon for patent infringement in the U.S. District Court for the District of Connecticut.6 At the December 2008 trial, during cross-examination of Tyco’s first witness, Ethicon challenged for the first time whether Tyco owned the patents-in-suit, and, consequently, whether Tyco had standing to sue.7 Tyco responded by producing the Contribution Agreement, arguing that the Contribution Agreement effected the transfer of all “assets, properties, and business,” including the patents-in-suit, to Kendall LLP (later, Tyco).8 Tyco’s vice-president testified that the patents-in-suit were among those transferred to Tyco’s predecessor in the Contribution Agreement.9 Ethicon moved for judgment as a matter of law, contending that Tyco lacked standing because it had failed to meet its burden of establishing ownership of the patents-in-suit. Ethicon convinced the court that the patents-in-suit were relevant to then-existing litigation, and were therefore excluded from the transfer of ownership in the Contribution Agreement. The District Court granted Ethicon’s motion and dismissed the case without prejudice. Tyco appealed to the Federal Circuit.10 III. THE FEDERAL CIRCUIT APPEAL The issue on appeal was whether Tyco could demonstrate standing through “enforceable title at the inception of the lawsuit.”11 If Tyco could establish that the patents-in-suit were not “related to” (a phrase undefined by the Contribution Agreement) any then-pending litigation involving USSC, then the patents-in-suit were among those transferred to Tyco’s predecessor, making Tyco the exclusive owner of the patents-in-suit with standing to assert them against Ethicon and others. The dispositive issue on appeal was how the Federal Circuit would apply Article III (i.e., constitutionally-based) standing requirements in a suit for patent infringement. A. An Overview of the Federal Circuit’s Jurisprudence on Standing The Federal Circuit previously articulated the requirements of Article III standing for patent litigation in Paradise Creations, Inc. v. U V Sales, Inc.12 Citing the Supreme Court’s standing doctrine, Paradise Creations stated that a plaintiff must satisfy three elements to demonstrate standing at the inception of the lawsuit: First, the plaintiff must suffer an injury of a legally protected interest. Second, the injury must be causally related to the conduct at issue. Third, a favorable judicial outcome must be “likely”—as opposed to “speculative”—to redress the injury alleged.13 Paradise Creations clarified that, in the patent infringement suit context, a plaintiff must demonstrate possession of “enforceable title to the patent at the inception of the lawsuit” to have standing.14 Consequently, a lack of enforceable title at the time the complaint is filed is fatal to a lawsuit. For example, in Gaia Technologies, Inc. v. Reconversion Technologies, Inc., the court held that the patentee lacked standing because it could not prove basic ownership of the patents at the time of filing suit.15 Similarly, in Jim Arnold Corp. v. Hydrotech Systems, Inc., the court held that an assignor of a patent transfer agreement lacked standing because the assignment had not been successfully rescinded or cancelled in state court at the time the complaint was filed in federal court so that the assignor lacked ownership.16 In Enzo APA & Son, Inc. v. Geapag A.G., the court found that a licen see lacked standing where there was no written transfer of rights in the patent-in-suit at the time the action was brought.17 And in Lans v. Digital Equip. Corp., the court held that a plaintiff lacked standing to bring suit where he had assigned title to a third party prior to commencement of the action.18 B. Tyco: Plaintiff Doesn’t Have a Leg to Stand On While this Federal Circuit jurisprudence determined the basic principles to evaluate standing, it did not squarely address the precise issue Tyco presented—namely, the sort of language necessary in patent transfer agreements to establish ownership to support standing. Building on the framework of Paradise Creations, the Federal Circuit held that Tyco failed to prove ownership of the patents-in-suit. The court found that, on its face, the Contribution Agreement contained “no explicit definition of the phrase ‘related to pending litigation.'” In the absence of an express definition or other clear intent of use for the term within the four corners of the agreement, the court found it necessary to construe the phrase in accordance with the principles of contract interpretation under Delaware law.19 The court rejected Tyco’s proposed narrow construction of the phrase “related to,” which included only those patents actually asserted in then-pending litigation and patents that belong to the same family as the asserted patents.20 Instead, the court adopted a far broader definition of the term “related to,” relying on the common dictionary definition of the term, and defined it to mean “has some relationship or connection to.”21 Despite this broad construction of the phrase, the court emphasized that contracting parties could agree to a narrower definition by drafting their agreements accordingly.22
The court’s approach left Tyco with the extraordinary burden of proving that the patents-insuit could absolutely not have been “asserted in or affected by any litigation” pending as of the date of the Contribution Agreement.23 The court did not stop at the four corners of the Contribution Agreement to define “related to” along the parties’ intent. It sought extrinsic evidence of the meaning of the term within USSC’s Settlement Agreement with Ethicon. The court found, however, that the Settlement Agreement applied to claims beyond the five litigations expressly identified therein, and that without additional specific information regarding “pending litigations,” the Settlement Agreement could not help the court ascertain whether the patents-in-suit were related to litigation pending at that time.24 Ultimately, the court found that Tyco failed to establish that the patents-in-suit were not related to any litigation that involved USSC at the time of the Contribution Agreement. Accordingly, the court held that Tyco had failed to prove ownership and lacked standing to sue for infringement, and affirmed the trial court’s dismissal without prejudice.25 IV. A CAUTIONARY TALE: TYCO AND PRACTICAL IMPLICATIONS FOR DRAFTING CONTRACTS The Tyco opinion is a chilling reminder of the need for precision when drafting contract language regarding patent rights and the potential implications of loosely defined terms necessary to establishing ownership rights for intellectual property. A. Strategically Drafting Licenses and Settlement Agreements After Tyco, practitioners drafting patent licenses and settlement agreements should more carefully define and identify patents or other intellectual property “related to” litigation. The dangers of ambiguous contracting are plain, and parties to an ambiguous contract may be forced to accept an unfortunate and untimely loss of their exclusive patent rights. A settlement agreement is a contract, and its construction in the Federal Circuit is a question of law, which the court reviews de novo. 26 The court applies state contract law in interpreting settlement agreements.27 When interpreting ambiguities in a settlement agreement, the court attempts to resolve such ambiguities by implementing the parties’ intent at the time of the agreement.28 To the extent an ambiguous term does not take on customary meaning in the relevant industry, it should be construed in accordance with its ordinary dictionary meaning.29 Moreover, where latent ambiguity exists in a contract, the court may construe ambiguous language against the drafting party.30
While the Federal Circuit did not construe language in the Contribution Agreement against Tyco, its construction was no less deleterious to Tyco’s interests. Tyco encourages use of at least three straight-forward rules: First, a robust settlement agreement, as any well-drafted agreement, should function as its own lexicon. To the extent that the meaning of language in the document is not plain on its face for a layperson to understand, it must be clarified expressly. One obvious option is to include within the glossary relevant definitions or to reference attachments that plainly establish intended meanings and establish the agreement’s scope (e.g., identifying by court and docket number all pending litigation and identifying all patents “related” to such litigation). For example, had the Contribution Agreement in Tyco contained a detailed definition or listing of any litigations that the parties considered to be existing at the time of execution, or (in the alternative) their understanding that no such litigations existed, there would have been no colorable challenge to Tyco’s standing. Even an explicit definition of “related to” in the glossary might have avoided Tyco’s adverse ruling. Second, the use of terminology in such agreements should be both internally and “externally” consistent. By external consistency, we mean that, to the extent that a license or settlement agreement is substantially related to other agreements in existence at the time of execution, there should be conceptual consistency between the related agreements. In Tyco, the Contribution Agreement and Settlement Agreement were executed on the same day and dealt with common and/or related issues. Consistency between documents is a crucial protection against later ambiguity within one or the other. Third, courts consistently interpret agreements to render no portion of such agreements superfluous or meaningless. As a result, ensuring the self-contained completeness of the “contract package” is critical. B. The Necessity of Confirming Standing During Pre-Suit Analysis Tyco provides an additional lesson for plaintiffs contemplating litigation, and reinforces the critical importance of confirming standing to sue as part of the pre-suit analysis conducted before a complaint is filed. Standing is often overlooked or taken for granted by the plaintiff, but the issue is always lurking and may be raised at any time during a litigation. The panel in Tyco properly raised no concern that defendants waited until after the pleadings, after discovery, after summary judgment, after drafting the pre-trial order, and during the actual trial to raise for the first time the potential defect in plaintiff’s standing. Consequently, identifying and perfecting issues of standing must be part of a plaintiff’s comprehensive pre-suit investigation. In addition to carefully analyzing the potential defendant’s products and developing an infringement case, plaintiffs should carefully examine their own agreements purporting to grant them an ownership interest in the patent(s)-in-suit, especially where they were executed by a predecessor entity. Tyco inherited an agreement with drafting errors from Kendall LLP, but did not learn of that problem until very late in the game. After Tyco, plaintiffs suing to enforce intellectual property rights are well-warned to confirm their rights and/or assignment of the asserted IP so they are not surprised by this legal defense at the eleventh hour or, worse, in the midst of trial. Maximilian A. Grant is a partner at Latham & Watkins, LLP, in Washington, D.C., and serves as global co-chair for the firm’s Intellectual Property Litigation practice group. Michael A. David, Zachary C. Kline, and Gregory K. Sobolski are associates in Washington, D.C. 1 587 F.3d 1375 (Fed. Cir. Dec. 7, 2009). 2 Id. at 1377. 3 Id. (emphasis added). 4 Id. 5 Id. The parties agreed that the products-in-suit were not immunized from liability because they were made or sold after April 1, 1999. Id. 6 Tyco Healthcare Group LP v. Ethicon Endo-Surgery,Inc, No. 04-CV-01702 (D. Conn. 2009). 7 Tyco, 587 F.3d at 1377–78. 8 Id. at 1378. 9 Id. 10 Ethicon cross-appealed, contending that the dismissal for lack of standing should have been with prejudice. 11 Id. (quoting Paradise Creations, Inc. v. UV Sales, Inc., 315 F.3d 1304, 1309 (Fed. Cir. 2003) (stating standard for standing in patent infringement action)). 12 315 F.3d 1304 (Fed. Cir. 2003). 13 Id. at 1308 (citing the Supreme Court’s standing doctrine from Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992) (international citations omitted)). 14 Paradise Creations, 315 F.3d. at 1309 (emphasis added). 15 93 F.3d 774, 778 (Fed. Cir. 1996). 16 109 F.3d 1567, 1572 (Fed. Cir. 1997). 17 134 F.3d 1090, 1092 (Fed. Cir. 1998). 18 252 F.3d 1320, 1328 (Fed. Cir. 2001). 19 Tyco, 587 F.3d at 1378. The parties agreed that Delaware law governed interpretation of the Contribution Agreement. 20 Id. 21 Id. 22 Id. at 1379. 23 Id. (emphasis added). 24 Id. at 1380. 25 Id. In a lengthy dissent, Judge Newman criticized the majority’s “new” theory of contractual interpretation. Id. at 1383 (Newman, J., dissenting). Judge Newman doubted whether it was necessary for Tyco to prove that the patents-in-suit could not possibly have been related to litigation pending at the time of the Agreements. Id. at 1383–84. Even if such proof were required, Judge Newman believed the combination of the terms of the Settlement Agreement, documentary and testimonial evidence about the terms of the Contribution Agreement, and the “unchallenged” contractual intent of the parties to both Agreements satisfied the majority’s required showing of standing. Id. 26 See, e.g., Howmedica Osteonics Corp. v. Wright Medical Technology, 540 F.3d 1337, 1347 (Fed. Cir. 2008) (considering the language of an ambiguous settlement release provision under New Jersey law). 27 Id. 28 See Lorillard Tobacco Co. v. American Legacy Foundation, 903 A.2d 728 (Del. 2005) (applied in Tyco). 29 Id. at 740. 30 Intel Corp. v. VIA Technologies, Inc., 319 F.3d 1357, 1363 (Fed. Cir. 2003) (affirming district court’s application of the contra proferentum doctrine in construing a license agreement against the drafter).