VIOLATION OF THE ERIE DOCTRINE: APPLICATION OF A RULE OF FEDERAL COMMON LAW TO ISSUES OF PATENT LICENSE TRANSFERABILITY

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1 1121 VIOLATION OF THE ERIE DOCTRINE: APPLICATION OF A RULE OF FEDERAL COMMON LAW TO ISSUES OF PATENT LICENSE TRANSFERABILITY I. INTRODUCTION CAROLE A. QUINNt R. ScOrr WEIDEtt A split among the courts exists as to whether the transferability of a patent license is a question to be determined by application of state law or one determined by application of federal law. A federal rule of common law has been applied by federal courts to issues of patent license transferability. In general, this rule provides that a patent license is not transferable absent express written provisions to the contrary. On the other hand, when state law is applied, the issue of the transferability of a patent license is generally determined in accordance with standard contract interpretation rules. The answer to the question of whether federal or state law should be applied is important, for application of state versus federal law may result in an entirely different finding as to whether the license is transferable. In this article the authors examine the nature of patent licenses and assignments and transfers of licenses. Next, the differences between state and federal law on the issue of the transferability of a license are reviewed. Lastly, the authors consider the propriety of applying a rule of federal common law as it relates to patent license transferability issues. II. PATENT LICENSES IN GENERAL By general definition, a license is "[tihe permission by competent authority to do an act which, without such permission, would be illet Carole A. Quinn obtained her Bachelor of Arts degree in Psychology from Ohio State University, a Masters in Science degree in Computer Science from California State University, Fullerton, and her Juris Doctor degree from Ohio State University. Ms. Quinn is an attorney in Los Angeles, California, where her practice is primarily patent prosecution. tt R. Scott Weide obtained a Bachelor of Science degree in Mechanical Engineering from the University of Nebraska and his Juris Doctor (Summa Cum Laude) from Creighton University School of Law. Mr. Weide is the founder of the intellectual property law firm Wiede & Associates in Las Vegas, Nevada.

2 1122 CREIGHTON LAW REVIEW [Vol. 32 gal, a trespass, a tort, or otherwise not allowable."' In the field of patent law, the term "license" is typically understood to mean a grant of the right to engage in one or more specified acts without liability for patent infringement. 2 The United States Patent Statutes grant the owner of a patent the exclusive right to make, use, sell and offer for sale the patented invention for a fixed period of time. 3 A patentee has the right to grant one or more third parties the right to engage in these exclusive rights. 4 Normally, this grant is in exchange for compensation, normally referred to as a royalty. 5 Each party other than the patentee who is interested in making, using, selling or offering for sale the patented invention must be concerned about liability for infringement of the patentee's exclusive rights. In particular, the Patent Statutes provide a cause of action for infringement if a party makes, uses, sells or offers for sale the patented invention "without authority." 6 Each party from whom the patentee seeks compensation for making, using, selling or offering for sale the patented invention seeks in return a grant of "authority" from the patentee to engage in those acts. This grant of authority results in otherwise infringing acts being noninfringing. This grant of authority is normally provided in a license. 7 In general, a license may be oral or written. 8 However, because most licenses cover the performance of activities which exceed a duration of more than one year, the Statute of Frauds would normally require the license to be in writing and signed by the party to be charged 1. BLAciKs LAw DICTIONARY (6th ed. 1990). 2. J. THOMAS McCARTHY, McCARTHY'S ENCYCLOPEDIA OF INTELLECTUAL PROPERTY (2d ed. 1995) U.S.C. 271(a) (1994). Section 271(a) provides: "Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent." Id. Currently, the maximum term for a design patent is 14 years. Id The maximum term for a utility patent issuing on an application filed before June 8, 1995, is the greater of seventeen years from the issue date of the patent or twenty years from the filing date. Id. 154(c)(1). The maximum term for a utility patent issuing on an application filed on or after June 8, 1995, is 20 years from the filing date thereof. Id. 154(a)(2). 4. EARL W. KINTER & JACK LAHR, AN INTELLECTUAL PROPERTY LAw PRIMER 69 (2d ed. 1982). 5. ERNEST BAINBRIDGE LIPSCOMB III, LIPSCOMB's WALKER ON PATENTS 20.2, at 4-8 (3d ed. 1987) U.S.C. 271(a), (b). 7. LIPSCOMB, supra note 5, 20.1, at Id. at

3 1999] PATENT LICENSE TRANSFERABILITY 1123 to be enforceable against that party. 9 Further, while most grants of authority are by way of written license, the grant of authority may be implied.' 0 A patent has the attributes of personal property." As such, a patent owner may transfer any interest in the patent. 12 The manner by which this transfer of rights is effected may vary. As stated by the Supreme Court in Waterman v. Mackenzie: 13 The patentee or his assigns may, by instrument in writing, assign, grant, and convey, either (1) the whole patent, comprising the exclusive right to make, use and vend the invention throughout the United States; or (2) an undivided part or share of that exclusive right; or (3) the exclusive right under the patent within and throughout a specified part of the United States. A transfer of these three kinds of interests is an assignment, properly speaking, and vests in the assignee a title in so much of the patent itself... Any assignment or transfer, short of one of these, is a mere license Patent assignments are also explicitly dealt with in the Patent Statutes. 15 An assignee may freely transfer his or her acquired rights. 16 On the other hand, no provisions exist in the Patent Statutes governing licenses or their assignability or transferability. 17 At first blush, excepting the differences in their scope, a license appears similar to an assignment. Namely, a license appears, like an assignment, to provide a grant of a right. As noted above, the Supreme Court has delineated any "transfer" short of an assignment a license.' 8 Importantly, however, the courts do not actually consider a license as a transfer. The Court of Appeals for the Federal Circuit views a license in terms of the result and not the action, having stated that a license is not a transfer of any type, 9. See, e.g., Radio Corp. of Am. v. Cable Radio Tube Corp., 66 F.2d 778, 779, 19 U.S.P.Q. 104 (2d Cir. 1933) (declaring that a parol license to sell patented articles for four years was void as within the statute of frauds). 10. LipscomB, supra note 5, 20:15, at Lipscomb noted that implied licenses may arise by conduct, acquiescence, estoppel, from employment of the inventor, or from actual recovery of a full license fee. Id. Further, an implied license has been found to exist for the right to repair or improve a patented product which one has purchased. Id U.S.C. 261 (1994). 12. Id U.S. 252 (1891). 14. Waterman v. Mackenzie, 138 U.S. 252, 255 (1891) U.S.C Section 261 provides that "[aipplications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing." Id U.S.C See LipscoMB, supra note 5, 20.2, at Mackenzie, 138 U.S. at 255.

4 1124 CREIGHTON LAW REVIEW [Vol. 32 but simply an agreement by the patent owner not to sue a party for infringement for engaging in specific acts. 19 The difference in how an assignment is viewed as compared to a license has implications, as discussed below, upon the issue of the transferability of a license. III. PATENT LICENSE TRANSFERABILITY A common problem relating to patent licenses arises from a change in the identity of the parties to the license or an attempt to transfer or assign the license. At the time the license is entered into, it is presumed that the parties thereto have entered into a bargainedfor exchange based upon each parties' knowledge about the other. However, it is not uncommon for the identity of one or both of the parties to change over the duration of the patent license. A change in identity of one or both of the parties can be unwelcomed by the other party. It could be disadvantageous to the patent owner if, for example, the licensee transfers its rights to practice the patented invention to one of the patent owner's major competitors. If effective, such a transfer could foreclose the patent owner from excluding this major competitor from making, using, selling or offering for sale the patentee's invention, perhaps destroying the value of the patentee's rights. There are various circumstances by which the identity of a party to the license may change. For example, one of the parties to the license might simply desire to make an outright transfer of the rights under the license. 20 Alternatively, the identity of one of the parties may change, such as by corporate dissolution or merger. 2 1 The attempted transfer may also be involuntary, such as a result of bankruptcy or disposition upon the death of one of the parties Spindelfabrik Suessen-Schurr, Stahlecker & Grill GmbH v. Schubert & Salzer Maschinen-Fabrik Aktiengesellschaft, 829 F.2d 1075, 1081, 4 U.S.P.Q.2d 1044, 1048 (Fed. Cir. 1987), cert. den., 484 U.S. 1063, later proceeding, 865 F.2d 268, 9 U.S.P.Q.2d 1743 (Fed. Cir. 1988). 20. See Walter A. Wood Harvester Co. v. Minneapolis-Esterly Harvester Co., 61 F. 256 (D. Minn. 1894). 21. See Farmland Irrigation Co. v. Dopplmaier, 113 U.S.P.Q. 88, 94 (Cal. Sup. Ct. 1957) (holding that a license contract made with a corporate licensee would not be extinguished when the shareholders of the corporation transferred corporate assets, including the license contract to another party); Unarco Indus., Inc. v. Kelley Co., 175 U.S.P.Q. 199 (7th Cir. 1972); PPG Indus., Inc. v. Guardian Indus. Corp., 202 U.S.P.Q. 95, 100 (6th Cir. 1979) (holding that a licensee's rights under an agreement granting non-transferable rights, personal to the licensee, were terminated upon its merger into another corporation). 22. See Everex Sys., Inc. v. Cadtrak Corp., 39 U.S.P.Q.2d 1518, 1524 (9th Cir. 1996) (declaring that non-exclusive patent licenses are personal and assignable only with the consent of the licensor and thus, not assignable under bankruptcy law).

5 1999] PATENT LICENSE TRANSFERABILITY 1125 The following cases are exemplary of some of the varied circumstances giving rise to questions regarding the transferability of a license. In some cases, the patent license includes an assignment provision that specifies the rights and obligations of each party relative to a transfer. Whether or not a patent license contains transfer provisions, courts have been asked to resolve disputes arising from the transfer or attempted transfer of patent licenses. As discussed in detail below, but previewed here, these patent license transferability disputes, which have been raised in both federal and state courts, have given rise to the application of both federal and state law to resolve the dispute. In Farmland Irrigation Co., Inc. v. Dopplmaier, 2 3 the identities of both the licensor and licensee changed over the course of the license. Except for a sublicensing provision, the patent license was silent as to transferability. 24 When the corporate licensee dissolved, the assets, including the license, passed to its shareholders - who sold the license to the plaintiff, a California Corporation. 25 The patent owner assigned his rights in the patent together with his rights under the license to the defendant, who refused to accept royalty payments from the plaintiff. 2 6 The case was brought before the California Supreme Court upon the defendant's appeal of the lower court's holding that the rights granted to the original licensee under the license were assignable to the plaintiff. 27 The defendant licensor argued that the rights under a patent license are not assignable unless express consent to assignment is contained in the patent license contract, because the rights under a patent license are personal and not otherwise transferable. 28 Applying state law to the issue, the California Supreme Court determined that the rights granted to the original licensee were not personal and were assignable to the plaintiff. 29 According to the California Supreme Court, state contract law should be applied in determining the question of assignability of a patent license. 30 Thus, in Dopplmaier, and as discussed in greater detail below, the action was brought in state court and state contract law was applied. 3 1 However, other courts have held that the question of the U.S.P.Q. 88 (Cal. Sup. Ct. 1957). 24. Farmland Irrigation Co., Inc. v. Dopplmaier, 113 U.S.P.Q. 88, 90 (Cal. Sup. Ct. 1957). 25. Dopplmaier, 113 U.S.P.Q. at Id. 27. Id. at Id. 29. Id. at 91, Id. at Id.

6 1126 CREIGHTON LAW REVIEW [Vol. 32 transferability of a patent license should be decided by applying federal law. In Unarco Industries, Inc. v. Kelley Co., Inc., 3 2 the patent owner ("Kelley") granted a patent license to Unarco Industries ("Unarco") as part of a settlement to an infringement action. 3 3 Unarco was not considered to be a serious competitor and intended to use the patent license to make the patented device incident to the sale of its principal product. 34 When Unarco entered into negotiations for the sale of its division and transfer of the patent license to one of Kelley's major competitors, Kelley objected. 3 5 Unarco brought a declaratory judgment action in the Unites States District Court for the District of Northern Illinois to determine whether the license was assignable without Kelley's consent. 3 6 The district court applied Illinois state law in deciding that the patent license was assignable as a simple contract. 37 On appeal of the district court's decision, the United States Court of Appeals for the Seventh Circuit followed federal patent law policies and determined that federal common law, and not Illinois state law, was applicable to the question of patent license assignability. 38 The court ruled that, according to federal law, patent licenses are personal, and therefore, not assignable. 39 Where a merger involving the corporation occurs, the question arises whether the rights under the patent license pass to the resultant corporation, or whether a transfer actually occurred. In PPG Industries, Inc. v. Guardian Industries Corp., 40 an infringement action was brought by the licensor, PPG Industries, against the resultant corporation, Guardian Industries. 4 1 The district court determined U.S.P.Q. 199 (7th Cir. 1972). 33. Unarco Indus., Inc. v. Kelley Co., Inc., 175 U.S.P.Q. 199, (7th Cir. 1972). 34. Unarco, 175 U.S.P.Q. at Id. at Id. 37. Id. 38. Id. at Id U.S.P.Q. 95 (6th Cir. 1979). 41. PPG Indus., Inc. v. Guardian Indus. Corp., 202 U.S.P.Q. 95, 97 (6th Cir. 1979). The patent license contract between PPG and Permaglass stated that Permaglass had a "nonexclusive, non-transferable license" which was "personal to Permaglass and nonassignable except with the consent of PPG first obtained in writing." PPG Indus., 202 U.S.P.Q. at 96. Further, section 11.2 of the contract provided: In the event that a majority of the voting stock of PERMAGLASS shall at any time become owned or controlled directly or indirectly by a manufacturer of automobiles or a manufacturer or fabricator of glass other than the present owners, the license granted to PERMAGLASS under Subsection 4.1 shall terminate forthwith.

7 1999] PATENT LICENSE TRANSFERABILITY 1127 that the patent license originally granted to the defunct corporation, Permaglass, was acquired by the resultant corporation, Guardian, by operation of law under the merger statutes of Delaware and Ohio. 4 2 Therefore, the district court determined that no transfer occurred as a result of the merger, and thus, the transfer provisions of the patent license did not apply. 43 The Sixth Circuit reversed the district court, holding that a transfer by operation of law as a result of the merger is, nonetheless, a transfer. 44 The court declared that the assignability of a patent license is a matter of federal common law. 45 The court stated that, in the absence of express provisions to the contrary, a patent license is personal and unassignable. 46 The court concluded that the transfer provisions of the patent license express an intent that the license not be transferable. 47 The issue of the transferability of a patent license may also arise as a result of a bankruptcy. 48 A trustee in bankruptcy has the authority to assume an executory contract and assign it, notwithstanding provisions in the contract or applicable law that prohibit, restrict, or condition such a transfer. 49 However, the trustee may not assume or assign an executory contract if "applicable law" excuses the nondebtor party from accepting performance from or rendering performance to anyone other than the debtor, and the non-debtor party does not consent to the assumption and/or the assignment. 50 If a patent license is found to be an executory contract, the determination of the "applicable law" becomes an intricate part of the question of transferability of a license, in accordance with 11 U.S.C. 365(c), in a bankruptcy proceeding. In Everex System Inc. v. Cadtrak Corp., 5 1 the licensee, as debtor in possession, attempted to assume and assign to the plaintiff the patent license granted by the defendant. 5 2 The patent license expressly prohibited any transfer and could be terminated by the licensor upon the licensee's bankruptcy. 53 The bankruptcy court and district court both denied the debtor's re- 42. PPG Indus., 202 U.S.P.Q. at Id. 44. Id. at Id. at Id. at The court further stated that without express provisions to the contrary, the law would treat a license to contain non-assignablility and non-transferability restrictions. Id. at PPG Indus., 202 U.S.P.Q. at See supra note 22; infra notes and accompanying text U.S.C. 365(a), () (1994). 50. Id. 365(c) U.S.P.Q.2d 1518 (9th Cir. 1996). 52. Everex Sys., Inc. v. Cadtrak Corp., 39 U.S.P.Q.2d 1518, 1519 (9th Cir. 1996). 53. Everex, 39 U.S.P.Q.2d at 1519.

8 1128 CREIGHTON LAW REVIEW [Vol. 32 quest. 54 In its review of the lower courts' decisions, the United States Court of Appeals for the Ninth Circuit stated that a patent license is an executory contract under bankruptcy law. 55 Further, the court stated that if the "applicable law" is determined to be federal law, the patent license is nonassignable. 56 However, if California state law is the "applicable law," the patent license is assignable and assumable. 57 Thereafter, the court determined that federal common law was the "applicable law." s8 The court then concluded that, according to federal common law, a patent license is personal and non-assignable unless expressly made so. 59 A patent license has been found to pass to one's heir or legal representative. In Rock-Ola Manufacturing Corp. v. Filben Manufacturing Co., 6 the patent license stated that it was non-transferable except to the licensee's corporation, heirs, or legal representative. 6 1 The court, citing federal caselaw, found that pursuant to the patent license the licensee's heirs were entitled to enjoy the benefits of a license inherited from the licensee, but the license prohibited them from dividing the rights bestowed in the license and transferring them to third parties. 62 In a similar case, Oliver v. Rumford Chemical Works, 6 3 the issue of whether a patent license could be transferred to a licensee's heirs or legal representatives was addressed. 6 4 Therein, the Supreme Court followed the general rule of federal common law that a patent license is not assignable absent express written provisions to the contrary and, finding that the license did not contain words of assignability, determined that the licensee's heirs were, therefore, not entitled to the benefits of license. 6 5 Regardless of the manner in which the patent license transfera bility issue arises, it may thus be seen that courts deciding the transferability issue have applied two distinct rules of law, either a federal rule of common law or state law. Consequently, application of these different rules often lead to disparate outcomes. 54. Id. at Id. at Id. at Id. at Id. at Id. at F.2d 919, 78 U.S.P.Q. 174 (8th Cir. 1948). 61. Rock-Ola Mfg. Corp. v. Filben Mfg. Co., 168 F.2d 919, 920, 78 U.S.P.Q. 174 (8th Cir, 1948). 62. Rock-Ola, 168 F.2d at U.S. 75 (1883). 64. Oliver v. Rumford Chem. Works, 109 U.S. 75, (1883). 65. Oliver, 109 U.S. at

9 19991 PATENT LICENSE TRANSFERABILITY 1129 IV. PATENT LICENSE TRANSFERABILITY: DIFFERENCES BETWEEN STATE AND FEDERAL LAW As set forth above, the Patent Statutes do not explicitly recognize patent licenses. Moreover, nothing is said within the Patent Statutes on the issue of the transferability of a patent license. As a result, federal courts have fashioned a rule of federal common law to apply to issues of patent license transferability. On the other hand, application of state law to issues of patent license transferability is governed primarily by rules of contract interpretation. The differences between these federal and state rules will now be examined. A. THE STATE RULE Whether the rights and liabilities under a contract may be transferred, in accordance with most states' laws, is primarily dependent upon whether the contract is personal or not. 66 While each states' specific law(s) on the issue vary somewhat, the general rule is aptly recited in Corpus Juris Secundum: "Subject to certain exceptions in the case of contracts involving relations of personal confidence or trust or being for personal services, all contracts are assignable." 6 7 As noted above, the California Supreme Court, in Farmland Irrigation Co., Inc. v. Dopplmaier, 68 applied this general rule to the issue of the assignability of a patent license. 6 9 Dispensing with the argument that the controlling rule of law is one of federal decision and not state law, for reasons discussed in more detail below, the California Supreme Court applied California law to the issue of transferability. The court noted that the general rule regarding the transfer of contract rights and duties is "adapted to facilitate the freest possible transfer of valuable contract rights, while at the same time respecting the parties' intentions." 7 0 The court went on: The statutes in this state clearly manifest a policy in favor of the free transferability of all types of property including rights under contracts. The terms and purpose of a contract may show, however, that it was intended to be nonassignable. Thus the duties imposed upon one party may be of such a 66. See, e.g., WITKIN, SUMMARY OF CALIFORNIA LAw, CONTRACTS 926 (9th ed. 1987) (declaring that ordinarily, either a bilateral or unilateral contract is assignable unless it calls for some personal quality of the promisor, or unless it expressly or impliedly negatives the right to assign) A C.J.S. Contracts 29 (1975) U.S.P.Q. 88 (Cal. Sup. Ct. 1957). 69. Farmland Irrigation Co., Inc. v. Dopplmaier, 113 U.S.P.Q. 88, (Cal. Sup. Ct. 1957). 70. Dopplmaier, 113 U.S.P.Q. at 94.

10 1130 CREIGHTON LAW REVIEW [Vol. 32 personal nature that their performance by someone else would in effect deprive the other party of that for which he bargained. The duties in such a situation cannot be delegated. Rights likewise cannot be assigned if the assignment would materially impair the nonassigning party's chance of obtaining the performance he expected. 71 Under the facts in this case, the court ruled that the rights granted under the license were assignable to the plaintiff, upholding the decision of the trial court. 72 Generally, it would thus appear that the issue of the transferability of a patent license would be permitted when applying state law, unless the license specifically provided such was not to be transferred or transferable or by its terms the contract clearly appears "personal" in nature. B. THE FEDERAL RULE Federal courts which have addressed the issue of the transferability or assignability of a patent license have fairly uniformly found that the license is not transferable or assignable absent express written provisions permitting transfer. The courts have based their conclusion on a rule of federal common law developed in a line of cases. In general, this rule is that patent licenses are not assignable unless the patent license contains express language to the contrary. Thus, whether or not the terms of the license contain an express prohibition against assignment, application of the federal rule generally results in a finding that the license is not transferable. Most courts that follow the "implied non-transferability" rule rely on Troy Iron & Nail Factory v. Corning 73 as the basis for such a rule, in which the United States Supreme Court stated: A mere license to a party, without having his assignee or equivalent words to them, showing that it was meant to be assignable, is only the grant of a personal power to the licensee, and is not transferable by him to another. 74 In Troy Iron, Corning was accused of infringing a patent on a machine for making a brad-headed spike which was assigned to the appellant, Troy Iron, by the patentee, Burden. 75 The circuit court held that Coming was given the right to use the patented spike machine based on a settlement agreement between Corning and Bur- 71. Id. 72. Id. at U.S. (14 How.) 193 (1852). 74. Troy Iron & Nail Factory v. Corning, 55 U.S. (14 How.) 193, 216 (1852). 75. Troy Iron, 55 U.S. at

11 1999] PATENT LICENSE TRANSFERABILITY 1131 den prior to Burden's assignment of the patent to Troy Iron. 76 Troy Iron appealed the circuit court's ruling. In its argument before the Supreme Court, Coming argued that the agreement should be construed to be a license granting Coming the right to use the patented device. 77 The Supreme Court overruled the circuit court, stating that the agreement cannot be construed to be a license because Corning gave no consideration for such an interest. 78 Thus, in Troy Iron, no question of assignment of a patent license was brought before the Court for consideration. The oft quoted portion of the opinion appears to have been interjected as evidence or lack thereof as to the terms and existence of such a license. 79 Thus, it can be said that the language that has since been used in support of the notion of non-transferability of a patent license in the absence of language to the contrary is mere dicta. However, many courts have relied on this language to support a finding of non-transferability. In Hapgood v. Hewitt, 8 0 the United States Supreme Court followed the "implied non-transferability" rule outlined in Troy Iron. 8 1 In Hapgood, the Court held that an implied license in favor of a dissolved corporation did not pass to Hapgood & Co., a new corporation organized by the stockholders of the dissolved corporation. The Court relied on the non-transferability language in Troy Iron and stated that the dissolved corporation did not have the right to assign the license to the new corporation. 8 2 In Oliver v. Rumford Chemical Works, 83 the Supreme Court again cited the non-transferability language of Troy Iron. 8 4 In Oliver, the Court recited examples of the personal acts to be performed by the licensee under the patent license. 8 5 The Court held that the exclusive 76. Id. at Id. at 212. The parties entered into the agreement in settlement of a previous action brought by Burden against Coming for infringement of the spike machinery patent, which stated that "[t]he said parties may each hereafter manufacture and vend spikes of such kind and character as they see fit, notwithstanding their conflicting claims to this time." Id. at Troy Iron, 55 U.S. at See Dopplmaier, 113 U.S.P.Q. at 93 (noting that the authoritative federal statement that a patent license is not assignable unless made expressly so is contained in Hapgood v. Hewitt, 119 U.S. 226 (1886), but that the court therein relied upon the earlier cases of Troy Iron & Nail Factory v. Corning, 55 U.S. (14 How.) 193 (1852), and Oliver v. Rumford Chemical Works, 109 U.S. 75 (1883), and noting that the statement in Troy Iron was not necessary to the case) U.S. 226 (1886). 81. Hapgood v. Hewitt, 119 U.S. 226, 234 (1886). 82. Hapgood, 119 U.S. at U.S. 75 (1883). 84. Oliver v. Rumford Chem. Works, 109 U.S. 75, (1883). 85. Oliver, 109 U.S. at 83. The license right is personal to the licensee, because the agreement stated that "he will enter on the manufacture of the self-rising flour and that

12 1132 CREIGHTON LAW REVIEW [Vol. 32 license granted to a licensee did not pass to his widow and administratrix of his estate. 8 6 Thus, the Court determined that the license did not give his widow the right to bring suit and recover damages for infringement of the patent occurring after the licensee's death. 8 7 In Lane Bodley Co. v. Locke, 88 the Supreme Court, again citing Troy Iron, declared that an implied license was not transferable. 8 9 However, the Court found in favor of the successor corporation, stating that the licensor waived his right to sue the successor for infringement when he chose to remain on salary with the successor corporation rather than demand a royalty. 90 Further, the Court stated that the successor corporation was organized on the same basis to do the same business on the same premises as the predecessor firm with all of the property, assets, liabilities, and obligations of the firm. 9 1 Additionally, in Bowers v. Lake Superior Contracting & Dredging Co., 92 the Eighth Circuit cited the Troy Iron language to decide a patent license transfer dispute. 93 In Bowers, the original patent license did not contain language of transferability. 94 The court recognized that if the controversy were decided on this point alone, the patent license would not be transferable based on the line of Supreme Court cases, including Troy Iron. 95 However, the court held that despite the fact that the patent license did not contain language of transferability, "after the death of [the original licensee] and until the controversy arose all parties treated the license as being assignable." 96 As may now be appreciated, an entirely different outcome may result dependent upon whether a court chooses to apply federal versus state law to the issue of the validity of a patent license transfer. For example, applying federal common law to facts like those in Dopplmaier, in many or most cases one would presume the outcome to be that the license would not be assignable. he will use all his business tact and skill to introduce and sell the flour." Id. (emphasis added). 86. Oliver, 109 U.S. at Id. at U.S. 193 (1893). 89. Lane Bodley Co. v. Locke, 150 U.S. 193, (1893). 90. Locke, 150 U.S. at Id F. 983 (8th Cir. 1906). 93. Bowers v. Lake Superior Contracting & Dredging Co., 149 F. 983, 986 (8th Cir. 1906). 94. Bowers, 149 F. at Id. at Id. at 988.

13 1999] PATENT LICENSE TRANSFERABILITY 1133 Regardless of the potential conflict between the application of federal or state law to this issue, a more fundamental question exists: Should a federal rule of common law even exist? V. FEDERAL COMMON LAW A. GENERALLY In Erie Railroad Co. v. Tompkins, 9 7 the United States Supreme Court declared that "t]here is no federal general common law." 98 The implication of this statement is that all questions which are not governed by the Federal Constitution or Acts of Congress are governed by state law (this is the so-called "Erie Doctrine"). 99 To the contrary, the Supreme Court has announced a few narrow exceptions to its pronouncement in Erie.' 0 0 Notwithstanding these exceptions, the Supreme Court has stated that a presumption exists that, in the instance where there is no federal law governing an issue, the law of the forum state should be applied. 1 1 Because the issue of patent license transferability is not dealt with by federal law, application of the rule in Erie presumptively requires that the issue be decided in accordance with the law of the forum state. As stated, however, there are instances in which the Supreme Court has found the application of a federal rule of decision proper in lieu of state law. As provided by the Court in Wheeldin v. Wheeler,' 0 2 the instances where state law should be displaced in favor of federal 0 3 common law are "few and restricted.' In fact, the Court has stated that the cases in which a federal rule of decision is warranted are "extraordinary." 10 4 In Texas Industries, Inc. v. Radcliff Materials, Inc.,105 Chief Justice Warren Burger noted that the instances where the application of a federal rule of decision is proper "fall[s] into essentially two categories: those in which a federal rule of decision is 'necessary to protect uniquely federal interests,' and those in which Congress has given the U.S. 64 (1938). 98. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). 99. Erie, 304 U.S. at Id See generally Kamen v. Kemper Fin. Svcs., Inc., 500 U.S. 90, 98 (1991) ("[F]ederal courts should incorporate state law as the federal rule of decision unless application of the particular state law in question would frustrate specific objections of the federal programs.") U.S. 647 (1963) Wheeldin v. Wheeler, 373 U.S. 647, 651 (1963) O'Melveny & Meyers v. Federal Deposit Insur. Corp., 512 U.S. 79 (1994) U.S. 630 (1981).

14 1134 CREIGHTON LAW REVIEW [Vol. 32 courts the power to develop substantive law." 10 6 It is not disputed that Congress has not expressly provided the courts with the power to develop a substantive rule with regard to the transferability of patent licenses. With respect to the first category, the Supreme Court has set forth a test for determining whether the creation and application of a federal rule of decision is necessary to protect a uniquely federal interest. As set forth in O'Melveny & Myers v. Federal Deposit Insurance Corp.,107 the Court requires that the creation of a federal rule of decision be limited to the preconditional "situations where there is some significant conflict between some federal policy or interest and the use of state law." 10 8 It is clear from Supreme Court case law that a "significant conflict" is, namely, an instance in which the application of state law would generate a result which is directly contrary to that which would occur if federal law were applied. In addition, however, application of this test requires not only a difference in the outcome, but the outcome resulting from application of the state law must in some way be violative of the result or purpose behind the application of the federal law. Thus, the mere fact that the application of state law makes the analysis more difficult or otherwise places burdens upon it does not mean that a conflict exists sufficient to justify the displacement of 106. Texas Indus., Inc. v. Radcliff Materials, Inc., 451 U.S. 630,640 (1981). Authors Wright, Miller, and Cooper in their treatise, Federal Practice and Procedure, state that W[there are three definable substantive areas in which the invocation of federal common law has been found appropriate:" First there are those situations involving significant conflict between some federal policy or interest and the use of state law... Second, there are those areas of judicial decision with which the policy of the law is so dominated by the sweep of federal statutes that legal relations which they affect must be deemed governed by federal law... [A]nd finally, there is a significant array of cases involving the employment of federal common law in substantive areas in which there is a strong national or federal concern originating from the Constitution, from tradition, or from practical necessity. 19 CHARLES WRIGHT EL AL., FEDERAL PRACTICE AND PROCEDURE 4514, at (2d ed. 1996). The first class of cases is discussed herein. With respect to the second class of cases, the fact that a statutory framework is very comprehensive may cut against the Court's willingness to create federal law to fill a gap. Id. (citing O'Melveny, 512 U.S. at 85). That the Patent Act is so detailed thus lends to a finding that filling of interstizes with federal common law is not to supplement the act, but alter it. Further, the Patent Act is dissimilar to some acts which have been viewed as impliedly delegating law-making authority, such as the Sherman Act. According to Federal Practice and Procedure, "[t]he most significant groups of cases in [the third] category involve provisions of the Constitution under which implied private rights of action have been found to exist, controversies involving two or more states, admiralty or maritime matters and disputes implicating United States' foreign relations." Id. 4514, at However, the question at hand is not of these types of cases U.S. 79 (1994) O'Melveny & Meyers v. Federal Deposit Insur. Corp., 512 U.S. 79, 87 (1994).

15 1999] PATENT LICENSE TRANSFERABILITY 1135 state law in favor of a federal rule of decision. 109 Wallis v. Pan American Petroleum Corp. 110 is a case illustrative of this point, and one which raised issues similar to that of the present subject. In this case, two parties filed suit against Wallis in federal district court, requesting that the court decide certain issues regarding a mineral lease. The federal district court found that state law governed the rights of the parties and required a written agreement to create or transfer any interest in a mineral lease, excluding the oral agreements which the plaintiffs sought to rely on as their basis for relief. 11 ' The plaintiffs appealed to the United States Court of Appeals for the Fifth Circuit, which decided that the trial court had erred in applying state law to the issue, and remanded the case to the district court for a new trial in which applicable principles of federal law were applied. 112 Wallis then appealed the Fifth Circuit's reversal to the Supreme Court, which summarized the appealed issue as whether "federal or state law should govern the dealings of private parties in an oil and gas lease validly issued under the Mineral Leasing Act of 1929." 113 The Court noted that in deciding whether federal common law should be applied, the guiding principle is that a significant conflict exists between some federal policy or interest and the use of state law. 114 The Court stated that it is not enough to assume that a federal rule should be developed simply because it may be true that Congress could enact a complete code of law governing the issue. 115 As such, "[elven where there is related federal legislation in an area.., it must be remembered that 'Congress acts.., against the background of total corpus juris of the states."" 1 6 The Court stated that when there is a federal statute dealing with the general subject, it serves as a starting point for federal common law. 1 7 Like patent licenses, in this case the Court found that the Mineral Leasing Act of 1920 contained no statements regarding the underlying issue of the case, the validity of an oral lease, even though the act very comprehensively dealt with other aspects of the mineral 109. See Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 68 (1966) (stating that normally a significant conflict between a federal interest and the use of state law must exist to warrant the fashioning of a rule of federal common law) U.S. 63 (1966) Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 66 (1966) Wallis, 384 U.S. at Id Id. at Id Id. (citing HART & WECHSLER, THE FEDERAL COURTS AND THE FEDERAL SYSTEM 435 (1953)) Id. at 69.

16 1136 CREIGHTON LAW REVIEW [Vol. 32 leasing process. 1 1 The Fifth Circuit had relied, in part, in its decision upon a section which provided that the leases "shall be assignable" to support its position that federal law should be applied. 119 The state law at issue provided that such a lease is not enforceable if the assignment is not in writing. The Court ruled that while the state law imposes conditions upon the transferability of the lease, the state rules still provide the transferor with "a quite feasible route for transferring any mineral lease or contracting to do so." 12 0 There are numerous other cases in which the Court has determined that the displacement of state law in favor of a federal rule of decision is not justified. 121 One may look to Boyle v. United Technologies Corp as another example of the level of "conflict" which must exist to justify the application of federal common law In Boyle, the plaintiff filed a wrongful death suit against a contractor who supplied a helicopter to the United States government, and the helicopter subsequently crashed. 124 The plaintiff sought recovery for injuries under state tort law and a state law that provided helicopters must be equipped with a specific type of escape hatch, which the subject helicopter did not have and which the plaintiff alleged would have prevented the death The Supreme Court again noted that a "significant conflict" must exist "between an identifiable federal policy or interest and the operation of state law, or that the application of the state law must 'frustrate specific objectives' of the federal legislation," before a rule of federal common law may be applied In this case, the Court found that "the state-imposed duty of care that is the asserted basis of the contractor's liability is precisely contrary to the duty imposed by the Government contract," and without the application of a federal rule under the Federal Tort Claims Act, the government would be insulated against liability for its direct acts (such as the manufacture of 118. Id Id Id See Kamen & Kemper Fin. Svcs., Inc., 500 U.S. 90 (1991); Point Landing, Inc. v. Omni Capital Int'l., Ltd., 795 F.2d 415 (5th Cir. 1986), affd, 484 U.S. 97 (1987); Webster v. Sun Co., Inc., 790 F.2d 157 (D.C. Cir. 1986); United States v. Kimbell Foods, Inc., 440 U.S. 713 (1979). For further cases addressing this point, see volume 53 of West's Federal Practice Digest 4th under the topic of "Federal Courts," keynote U.S. 500 (1988) Boyle v. United Technologies Corp., 487 U.S. 500, 507 (1988). According to the Court in Boyle, a displacement of state law will occur only where a "significant conflict" exists between an identifiable federal policy and that application of state law. Boyle, 487 U.S. at Boyle, 487 U.S. at Id. at Id. at 507.

17 19991 PATENT LICENSE TRANSFERABILITY 1137 the helicopters itself), but not when it contracts for the performance by another. t 27 Thus, the Court found that application of the state rule would result in liability being imposed upon the contractor, and that the costs associated with those liabilities would be passed on to the government. 128 This result conflicted directly with the FTCA, which would insulate the government from these costs if the government had simply performed the acts itself. 129 In summary, the conflict which must arise between the application of state law and a federal policy or directive must be direct in order for a federal rule of decision to displace state law. B. FEDERAL COURT DECISIONS ADDRESSING PATENT LICENSE TRANSFERABILITY AFTER ERIE As detailed above, a line of cases were decided before Erie in which the federal courts developed a federal rule of decision that unless a patent license expressly permits assignment or the licensor consents to the assignment, a patent license is not transferable. After Erie, however, a question arises as to the propriety of the existence and application of such a rule. In not all reported cases decided by a federal court after Erie has the court discussed the issue of whether it is proper for the court to apply this prior federal rule of decision regarding patent license transferability. In Rock Ola Manufacturing Co. v. Filben Manufacturing Co., z 30 the United States Court of Appeals for the Eighth Circuit was the first federal court to address the issue of patent license assignability after Erie. In Rock Ola, the court made no mention of Erie; the court simply cited and applied pre-erie law on the issue of patent license assignability In later cases, courts have applied the above-recited pre-erie rules regarding patent license assignability without consideration of the rule recited in Erie. For example, in Unarco Industries, Inc. v Id. at Id. at Id. The class of cases involving uniquely federal interests generally require the implication of the legal relations or proprietary interests of the United States and have the United States as a party. WRIGHT ET AL., supra note 106, 4515, at Boyle v. United Technologies Corp. is an exception in that it is a case involving private parties. On the other hand, Boyle can still be distinguished from cases between patent licensors and licensees regarding license transferability in that in Boyle the proprietary interests of the government would be at least indirectly affected were it not for displacement of state law F.2d 919, 78 U.S.P.Q. 174 (8th Cir. 1948) Rock-Ola Mfg. Co. v. Filben Mfg. Co., 168 F.2d 919, , 78 U.S.P.Q. 174 (8th Cir. 1948).

18 1138 CREIGHTON LAW REVIEW [Vol. 32 Kelley Co.,132 the Seventh Circuit did consider the implication of Erie As discussed above, Unarco arose from a suit for declaratory relief by Unarco seeking to determine whether a patent license belonging to Unarco was assignable without the consent of Kelley The United States District Court for the Northern District of Illinois found that the license was a simple contract to be construed under the common law of the State of Illinois The law in Illinois provided for the common law view favoring a liberal construction of the assignability of all contracts As such, the district court found the license to be assignable, and Kelley appealed the ruling. 137 On appeal, the Seventh Circuit stated that the threshold question was whether the law of the State of Illinois, where the agreement was consummated, or whether federal law within one of the exceptions to the Erie doctrine applied. 138 The court examined the Patent Statutes and policies and found that "the question of assignability of a patent license is a specific policy of federal patent law dealing with federal patent law," and therefore, held that "federal law applies to the question of the assignability of the patent license in question.' 3 9 Interestingly, as part of its reasoning for its finding, the Seventh Circuit stated, citing Rock-Ola, that "[i]n post-erie federal decisions, this rule of non-assignability has been unquestioned." 140 Of course, as provided above, the Rock-Ola court apparently did not even recognize the Erie issue and failed to address it. Subsequently, in PPG Industries, Inc. v. Guardian Industries Corp., 14 1 the United States Court of Appeals for the Sixth Circuit cited Unarco, but did not specifically address the Erie issue. 142 In PPG Industries, the Sixth Circuit stated: Questions with respect to the assignability of a patent license are controlled by federal law. It has long been held by federal courts that agreements granting patent licenses are personal and not assignable unless expressly made so. This has been the rule at least since 1852 when the Supreme Court decided Troy Iron & Nail v. Corning U.S.P.Q. 199 (7th Cir. 1972) Unarco Indus. Inc. v. Kelley Co., 175 U.S.P.Q. 199, 200 (7th Cir. 1972) Unarco, 175 U.S.P.Q. at Id Id Id Id Id. at Id U.S.P.Q. 95 (6th Cir. 1979) PPG Indus., Inc. v. Guardian Indus. Corp., 202 U.S.P.Q. 95, 97 (6th Cir. 1979) PPG Indus., 202 U.S.P.Q. at 97.

19 1999] PATENT LICENSE TRANSFERABILITY 1139 Unfortunately, PPG Industries has then been cited in later cases for the stated proposition that patent licenses are not generally assignable. 1 " Most recently, in Everex Systems, Inc. v. Cadtrak Corp.,14 5 the United States Court of Appeals for the Ninth Circuit had the opportunity to decide the issue of patent license assignability.' 46 Everex arose from a license owned by CLFC, Inc. ("CLFC") under a patent owned by Cadtrak CLFC filed bankruptcy under Chapter 11 and, during the proceedings, obtained approval to sell or transfer substantially all of its assets. 148 Everex Systems entered into a sale agreement, subject to the approval of the bankruptcy court, for these assets, one of which included the license. 149 Cadtrak objected to the assumption of the license, and the bankruptcy judge denied a motion to permit CLFC to assign to Everex the license. 150 Everex and CLFC appealed the decision to the United States District Court for the Northern District of California, which affirmed the denial. 151 Everex and CLFC then appealed the district court's decision to the Ninth Circuit Court of Appeals. 152 The Ninth Circuit first noted that the issue arises under section 365 of the Bankruptcy Act, which grants "a trustee in bankruptcy the authority either to reject or to assume executory contracts and unexpired leases. Ordinarily, a trustee may take either of these actions without the consent of the other party to the contract or lease and notwithstanding a provision in the applicable agreement that purports to restrict 53 assignment.' However, the court noted that section 365(c) contains an exception to the general rule, which states: The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if See, e.g., In re Alltech Plastics, Inc., 3 U.S.P.Q.2d 1024, 1025 (W.D. Tenn. 1987) (citing PPG Industries for the proposition that "rights conveyed under a patent license are personal to the licensee and are not assignable in the absence of words of assignability contained in the license") U.S.P.Q.2d 1518 (9th Cir. 1996) Everex Sys., Inc. v. Cadtrak Corp. 39 U.S.P.Q.2d 1518, 1519 (9th Cir. 1996) Everex, 39 U.S.P.Q.2d at Id Id Id. at Id. at Id Id.

20 1140 CREIGHTON LAW REVIEW [Vol. 32 (1)(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and (B) such party does not consent to such assumption or assignment As such, the court found the primary issue to be whether or not applicable law excused Cadtrak from accepting performance from, or rendering performance to, anyone other than CLFC. 155 Cadtrak argued that the question was one of federal law, and Everex and CLFC argued that it was one of state law In part, Everex and CLFC argued that, after Erie, federal law may not be created unless one of the Supreme Court's special exception circumstances exist. 157 In this case, the Ninth Circuit found such a circumstance. The Ninth Circuit reasoned that federal patent policy justifies the application of federal law to the issue of assignability. As stated therein: [a]llowing free assignability - or, more accurately, allowing states to allow free assignability - of nonexclusive patent licenses would undermine the reward that encourages invention because a party seeking to use the patented invention could either seek a license from the patent holder or seek an assignment of an existing patent license from a licensee. 158 The court found that due to a conflict between federal patent policy and state laws (such as California's, which freely permits transfers), federal law must govern The court then went on to analyze federal law on the issue, finding that in accordance with federal law a nonexclusive patent license is personal and nonassignable. 160 In summary, while many federal courts have addressed the issue of patent license transferability, many have not considered the impact of Erie upon their decision to apply federal law. Those federal courts which have considered the issue have determined that the question of transferability is one to be governed by a rule of federal common law Id. at Id. at Id Id. at Id. at Id Id.

21 1999] PATENT LICENSE TRANSFERABILITY 1141 VI. THE PROPRIETY OF CREATING FEDERAL COMMON LAW AS A RULE OF DECISION GOVERNING THE TRANSFERABILITY OF PATENT LICENSES It is the authors' opinion that those federal courts which have created and/or applied a "federal rule" to resolve issues of patent license transferability have violated the Erie doctrine. As stated above, in many instances courts have either not recognized the Erie issue or have failed to address it. Courts which addressed the issue, including the Unarco and Everex courts, found reason to avoid Erie's edict. While both of these courts found reason to avoid Erie, neither cited any Supreme Court caselaw supporting their reasoning for applying a federal rule of common law in lieu of state law. As detailed above, in accordance with Supreme Court directives, to justify the creation and application of a federal rule, the application of the state rule must conflict with a federal law directive The Seventh Circuit court in Unarco and the Ninth Circuit court in Everex appear to recite a justification for the application of a federal rule. The cited justification is that the application of a federal rule of common law to the issue of patent license transferability is necessary to prevent an undermining of a patent holder's rights, which would otherwise occur as a result of application of state law to the issue It is not clear that there is any basis for this cited justification as it relates to the issue of the transferability of rights under a license. The Unarco court's reason supporting application of a federal rule instead of state law rests upon an alleged federal policy originating in the 1852 case of Troy Iron. 163 The statement relied upon for supporting this rule is, as detailed above, dicta. Further, as the statement relates generally to the issue of license transferability, the statement may reflect the then-existing state, of contract law. 164 Over time, it has been the trend to more readily permit the free alienation of rights except in the narrowest of exceptions See, e.g., Robert H. Jacobs, Inc. v. Westoaks Realtors, Inc., 205 Cal. Rptr. 620, 625, 159 Cal. App. 3d 637 (1984) (noting, in a case involving the assignment of a license to use architectural plans, that California statutory law evidences a policy in favor of the free transferability of all types of property, while citing sections 954, 1044, and 1458 of the California Civil Code) See Unarco, 175 U.S.P.Q. at ; Everex, 39 U.S.P.Q.2d at See Troy Iron, 55 U.S. at See generally ROBERT S. SUMMERS & ROBERT A. HILLMAN, CONTRACT AND RE- LATED OBLIGATIONS: THEORY, DOCTRINE, AND PRACTICE (1987) ("For centuries, the common law prohibited the assignment of rights."); Arkansas Valley Smelting Co. v. Belden Mining Co., 127 U.S. 379 (1888) ("The rule upon this subject, as applicable to the case at bar, is well expressed in a recent English treatise. Rights arising out of contract cannot be transferred if they are coupled with liabilities, or if they involve a relation of personal confidence such that the party whose agreement conferred these rights must have intended them to be exercised only by him in whom he actually confided.").

22 1142 CREIGHTON LAW REVIEW [Vol. 32 Upon close scrutiny, it appears that the Ninth Circuit's justification for application of a federal rule is actually tailored to avoiding conflicts between the application of state law and federal bankruptcy law. If the Ninth Circuit had not decided the issue of patent license transferability as it did in Everex, the intent of the parties as expressed in the contract would likely have been thwarted and the license would have been assignable by the parties. This is because under section 365(c) of the Bankruptcy Code, the trustee is only prohibited from assuming or assigning the license if applicable law excuses performance, whether or not the contract prohibits or restricts assignment If the Ninth Circuit interpreted California law on the issue to be as in Dopplmaier, in which the court declared that a contract is freely assignable unless the contract provides otherwise, then the California law would not be of the type to invoke the exception of section 365(c). In that instance the license would be assumable and assignable by the trustee in bankruptcy. This would be contrary to the result if only California law were being applied, and contrary to the intent of the original parties to the license. The Ninth Circuit's choice of federal law avoids this potential "unfairness." As the Ninth Circuit also noted, the choice of federal law also avoided the need for the court to resolve an apparent conflict between other circuit courts regarding the interpretation of "applicable law" under sections 365(f)(1) and 365(c)(1)(A) An examination of the Patent Statutes does not evidence the recited policy either. As stated above, federal law grants a patentee the exclusive right to make, use, sell and offer for sale a patented invention Federal law also provides that these rights may be transferred by the patentee as the patentee sees fit.168 Federal patent law does not ensure that a patentee receives adequate compensation, whether in the form of royalties or other compensation, any more than it protects the patentee from making a bad decision involving a transfer of the patentee's rights. In effect, the law is neutral, simply permitting the patentee to dispose of his or her rights as he or she desires. The fact that the particular rights at issue are government granted "exclusive" rights does not support a finding that there must be a federal policy which serves to always protect the rights. In addition, and as noted by the court in Dopplmaier, while Congress was aware of the various decisions regarding patent license transferability U.S.C. 365(c)(1)(A) (1994) Everex, 39 U.S.P.Q.2d at U.S.C. 271(a) (1994) Id. 261.