November 16, 2008
Co-owned Patent Fools Mammoth Mart
I'm a little late in writing about an interesting decision from my home court, In re Diomed, Inc., 394 B.R. 260 (Bankr. D. Mass. 2008), which shows how a debtor's clever use of co-owned patent rights helped it get past Mammoth Mart.
The Diomed case deals with a rather unusual fact pattern - one that Judge Rosenthal described as "a scenario caused by the intersection of bankruptcy and patent law not addressed in any published decision." While you are not likely to see this particular pattern again, the decision illuminates an important patent law rule and, for this reason alone, is worth reading.
The debtor, Diomed, had an exclusive patent license from Endolaser Associates, LLC related to the manufacture of a medical laser. The license was exclusive, allowed sublicenses, and gave Diomed the right to bring actions to enforce the patent against infringers. The license required Diomed to pay Endolaser periodic royalties, including a percentage of any recovery from enforcement actions. The twist, however, was that Endolaser apparently did not own the entire patent. It had co-owned the patent with an inventor, Dr. Robert Min. Diomed had purchased this co-owner interest from the inventor.
So, at the time of its bankruptcy filing, Diomed held an exclusive license from Endolaser, but also owned a partial interest in the patent by virtue of the assignment from Dr. Min. The decision does not say how Endolaser was able to grant an exclusive licence when it did not own the entire patent. It also doesn't talk about how Diomed acquired its ownership interest from Dr. Min. I suspect Diomed may have purchased Dr. Min's interest in order to resolve an ownership dispute of some kind. But, that is purely speculation.
Diomed had also brought two infringement lawsuits against two companies, AngioDynamics and Vascular Solutions, Inc., and obtained large multi-million dollar judgments against them.
In March 2008, Diomed filed its chapter 11 petition. I'll leave out some of the procedural history - you can read the decision yourself. Just say that in the end Diomed settled the two infringement actions for multi-million dollar sums and, as part of the settlement, granted a non-exclusive patent license to AngioDynamics. But, first, it rejected its license with Endolaser under 11 USC 365.
Endolaser filed a motion for allowance of an administrative expense. It asked for payment of (a) royalties for the pre-rejection period, (b) royalties payments due as a result of Diomed's sale of equipment during the case, (c) the 25% of patent infringement settlement proceeds due it under the license terms, and (d) some other item not really relevant to this blog.
How, you might ask, could Diomed both reject the up-stream license and still grant a down-stream license? How could it avoid payment of royalties as an administrave expense? It relied on the interest in the patent it had purchased from Dr. Min.
Judge Rosenthal allowed the administrative expense claim for the royalties due pre-rejection. But, he declined to allow as an administrative expense claim the royalty claims arising from the equipment sale and the patent infringement settlement. Why? Because the exclusive license had been rejected by the debtor prior to those events. Thus, the particular benefit to the estate did not arise from the license agreement.
Judge Rosenthal's decision was based on the relatively unknown rules governing the rights of parties who co-own a patent. When parties co-own a patent, either party can make use of the patent without the consent of and without accounting to the other owners. 11 USC 262. This allows a co-owner to grant a non-exclusive license of the entire patent regardless of the co-owner's rights. Thus, once Diomed rejected its license agreement with Endolaser, it became just a co-owner of the patent. Its ability to use, license, and enforce the patent remained - because of its co-ownership position. And, as Judge Rosenthal noted, its generation of proceeds arose not because of the rejected license, but because of its rights as a co-owner of the patent. As a result, the elements of Mammoth Mart were not met and Endolaser was not entitled to payment of an administrative expense claim.
The parties subsequently settled the case. Diomed agreed to pay Endolaser about $700,000 and transfer to Endolaser the patent rights held by Diomed.
The Diomed case deals with a rather unusual fact pattern - one that Judge Rosenthal described as "a scenario caused by the intersection of bankruptcy and patent law not addressed in any published decision." While you are not likely to see this particular pattern again, the decision illuminates an important patent law rule and, for this reason alone, is worth reading.
The debtor, Diomed, had an exclusive patent license from Endolaser Associates, LLC related to the manufacture of a medical laser. The license was exclusive, allowed sublicenses, and gave Diomed the right to bring actions to enforce the patent against infringers. The license required Diomed to pay Endolaser periodic royalties, including a percentage of any recovery from enforcement actions. The twist, however, was that Endolaser apparently did not own the entire patent. It had co-owned the patent with an inventor, Dr. Robert Min. Diomed had purchased this co-owner interest from the inventor.
So, at the time of its bankruptcy filing, Diomed held an exclusive license from Endolaser, but also owned a partial interest in the patent by virtue of the assignment from Dr. Min. The decision does not say how Endolaser was able to grant an exclusive licence when it did not own the entire patent. It also doesn't talk about how Diomed acquired its ownership interest from Dr. Min. I suspect Diomed may have purchased Dr. Min's interest in order to resolve an ownership dispute of some kind. But, that is purely speculation.
Diomed had also brought two infringement lawsuits against two companies, AngioDynamics and Vascular Solutions, Inc., and obtained large multi-million dollar judgments against them.
In March 2008, Diomed filed its chapter 11 petition. I'll leave out some of the procedural history - you can read the decision yourself. Just say that in the end Diomed settled the two infringement actions for multi-million dollar sums and, as part of the settlement, granted a non-exclusive patent license to AngioDynamics. But, first, it rejected its license with Endolaser under 11 USC 365.
Endolaser filed a motion for allowance of an administrative expense. It asked for payment of (a) royalties for the pre-rejection period, (b) royalties payments due as a result of Diomed's sale of equipment during the case, (c) the 25% of patent infringement settlement proceeds due it under the license terms, and (d) some other item not really relevant to this blog.
How, you might ask, could Diomed both reject the up-stream license and still grant a down-stream license? How could it avoid payment of royalties as an administrave expense? It relied on the interest in the patent it had purchased from Dr. Min.
Judge Rosenthal allowed the administrative expense claim for the royalties due pre-rejection. But, he declined to allow as an administrative expense claim the royalty claims arising from the equipment sale and the patent infringement settlement. Why? Because the exclusive license had been rejected by the debtor prior to those events. Thus, the particular benefit to the estate did not arise from the license agreement.
Judge Rosenthal's decision was based on the relatively unknown rules governing the rights of parties who co-own a patent. When parties co-own a patent, either party can make use of the patent without the consent of and without accounting to the other owners. 11 USC 262. This allows a co-owner to grant a non-exclusive license of the entire patent regardless of the co-owner's rights. Thus, once Diomed rejected its license agreement with Endolaser, it became just a co-owner of the patent. Its ability to use, license, and enforce the patent remained - because of its co-ownership position. And, as Judge Rosenthal noted, its generation of proceeds arose not because of the rejected license, but because of its rights as a co-owner of the patent. As a result, the elements of Mammoth Mart were not met and Endolaser was not entitled to payment of an administrative expense claim.
The parties subsequently settled the case. Diomed agreed to pay Endolaser about $700,000 and transfer to Endolaser the patent rights held by Diomed.
Labels: diomed, patent license, patents
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