Assignor Estoppel And IPR's: Possible Impact of Arista v. Cisco On Employment Agreements and Assignment Agreements
In a November 9, 2018 decision (copy of decision linked below), the U.S. Court of Appeals for the Federal Circuit ruled that the doctrine of assignor estoppel does not apply in the inter partes review (IPR) context (see Arista Networks, Inc. v. Cisco Systems, Inc., (Fed. Cir. 2018)).
The doctrine of assignor estoppel has been around for over a century and most often applied in the U.S. International Trade Commission and U.S. District Courts to prevent a first party assigning a patent to a second party from then challenging the validity of the patent they had just assigned. (“Assignor estoppel prevents a party who assigns a patent to another from later challenging the validity of the assigned patent.” Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 150 F.3d 1374, 1377 (Fed. Cir. 1998); see also Westinghouse Elec. & Mfg. Co. v. Formica Insulation Co., 266 U.S. 342, 349 (1924) (“[A]n assignor of a patent right is estopped to attack the utility, novelty or validity of a patented invention which he has assigned or granted as against any one claiming the right under his assignment or grant.”)(Arista v. Cisco at p. 17)). The doctrine frequently arises in situations where an employee invents something during his or her employment with a company, assigns the rights to that invention to their employer, then leaves the company to join or found a competing company. See, e.g., Westinghouse, 266 U.S. at 345–46; Shamrock Techs., Inc. v. Med. Sterilization, Inc., 903 F.2d 789, 790 (Fed. Cir. 1990); Diamond Sci. Co. v. Ambico, Inc., 848 F.2d 1220, 1222 (Fed. Cir. 1988). In these situations, the employee’s new company may also be estopped because “[a]ssignor estoppel also prevents parties in privity with an estopped assignor from challenging the validity of the patent.” Mentor Graphics, 150 F.3d at 1379; see also Diamond Sci., 848 F.2d at 1224 (“The estoppel also operates to bar other parties in privity with the assignor, such as a corporation founded by the assignor.”) (see Arista v. Cisco, pp. 17-18).
In the Arista v. Cisco case, the primary inventor, Dr. David Cheriton, originally worked at Cisco, and had assigned “the entire right, title and interest throughout the world” in the invention to Cisco. Subsequently, Dr. Cheriton and others left Cisco to found a new company, Arista. Thus, the issue in the lawsuit was whether Arista (as a party in privity with the assignor Dr. Cheriton) was estopped from challenging the validity of the Cisco patent in an IPR proceeding. The Federal Circuit ruled that the doctrine of assignor estoppel does NOT apply to IPR proceedings, based on the plain language of the statute which states that any person “who is not the owner of a patent” can file an IPR (see Arista v. Cisco, pp. 21-22) (even though the doctrine would apply if the issue was before the ITC or district court).
This raises intriguing possibilities regarding how companies might be able to protect themselves in such a situation. One possibility might be to revise their employment agreements for signing by new employees to specify that not only are any inventions made by the employee during their employment to be assigned to the company, but also that the employee will not challenge the validity of any patent issuing on such inventions even after their employment with the company ends. While the employee would still have the legal right to challenge any issuing patent on the invention in an IPR context, the employee would be risking a breach of contract claim from the employer in doing so.
Another scenario where this could become an issue is in the context of sale/acquisition of patents from one company to another. A similar addition to such sale/acquisition agreements might provide the acquiring company with at least a contractual recourse against the selling company if the selling company were to challenge validity in an IPR proceeding going forward.
On the flip side of the equation, a party signing such an employment agreement or sale/acquisition agreement may want to consider reserving the right to make such a challenge without any breach of contract consequence, in the event that the patent is asserted by the assignee/acquiring company against them in a future dispute.