Enforcing Terminal Disclaimers: A Tactical Defense against Non-practicing Entities
October 16, 2012
The recent District of Nevada decision in Email Link Corp. v. Treasure Island, LLC et. al1 should cause non-practicing entities some concern over how they distribute their patents among subsidiary entities.
United States District Judge Edward C. Reed Jr. held that a patent subject to a terminal disclaimer was unenforceable against the alleged infringers because it was not commonly owned with the related prior patent, even though both patents were owned by subsidiaries that were wholly owned by the same parent company.
Email Link Corp., a subsidiary of Acacia Global Acquisition (Acacia), sued Treasure Island and other Las Vegas hotels and casinos for patent infringement of U.S. Patent 7,840,176 (the '176 Patent), which concerns a method of information distribution using a broadcast channel and a bidirectional communication channel. During the prosecution of the '176 Patent, the patent examiner issued a nonstatutory obviousness-type double patenting rejection. To overcome the rejection, the applicant filed a terminal disclaimer that tied the '176 Patent's term to U.S. Patent 7,508,789 (the '789 Patent). After issuance, the '176 Patent eventually was assigned to Email Link.
The terminal disclaimer provided that:
The owner, Acacia Global Acquisition LLC, of 100 percent interest in the instant application hereby disclaims, except as provided below, the terminal part of the statutory term of any patent granted on the instant application which would extend beyond the expiration date of the full statutory term of prior patent No. 7,508,789 as the term of said prior patent is defined in 35 U.S.C. 154 and 173, and as the term of said prior patent is presently shortened by any terminal disclaimer. The owner hereby agrees that any patent so granted on the instant application shall be enforceable only for and during such period that it and the prior patent are commonly owned. This agreement runs with any patent granted on the instant application and is binding upon the grantee, its successors and assigns.
Another subsidiary of Acacia, Online New Link, had been assigned the prior '789 Patent. Even though Acacia was the 100 percent sole member of Online New Link and owned 100 percent of all issued shares of Email Link, the issue under consideration was whether this arrangement complied with the common ownership requirement of the '176 Patent's terminal disclaimer and under 35 U.S.C. §253 and 37 C.F.R. §1.321(c)(3).
Citing the Supreme Court,2 Judge Reed looked to the "basic tenet[s] of American corporate law" to show that a corporation and its shareholders are distinct entities and that a corporate parent owning all the shares of a subsidiary does not by itself give the parent legal title to the assets of the subsidiary, including patents.
Judge Reed also looked to the Federal Circuit to show that, in the patent context, "once a parent company assigned a patent to its subsidiary, the parent no longer had rights in the patent, even though it controlled the subsidiary."3 He concluded that Email Link, not Acacia, owned the '176 Patent. Because the '176 Patent and the '789 Patent were not owned by the same entity as required by the terminal disclaimer, he held that the '176 Patent was unenforceable as a matter of law and granted the defendants' motion to dismiss.
This holding clarifies that two subsidiaries wholly owned by the same parent do not count as "commonly owned" for terminal disclaimer purposes. The decision underscores the importance of looking to the assignment history of the asserted patents and the relationships among the assignees in a patent family that are subject to terminal disclaimers when preparing a patent litigation defense.
For more information on patent litigation strategy, please contact Nicole Stafford or another member of Wilson Sonsini Goodrich & Rosati's intellectual property litigation and counseling practice.
3 Id. at *4. citing Schreiber Foods, Inc. v. Beatrice Cheese, Inc., 402 F.3d 1198, 1200-03 (Fed. Cir. 2005) (finding that the plaintiff lost standing to sue when it assigned the patent at issue to its subsidiary); see also Quantum Corp. v. Riverbed Tech., Inc., No. C 07-04161 WHA, 2008 WL 314490, at *2 (N.D. Cal. Feb. 4, 2008) ("While Rocksoft and A.C.N. 120 were affiliates, each was created as separate corporate entities, and must be treated as such. That is, of course, the whole point of a corporation, to isolate its assets, liabilities, and operations...Contrary to plaintiff, the mere fact that Rocksoft was A.C.N. 120's wholly-owned subsidiary does not automatically mean that A.C.N. 120 and Rocksoft had an agency relationship.").