Opinion ID: 763538
Heading Depth: 1
Heading Rank: 2

Heading: Inapplicability of Federal Patent Law

Text: 7 The district court determined Dr. Naimie owned the formulations he developed and Cytozyme's payment of royalties was evidence of that ownership. The court also found Cytozyme had no ownership interest in the formulations and had no right to use the formulations after Dr. Naimie terminated Cytozyme's license. The court specified, however, that its findings addressed the respective ownership rights of the parties and not the rights of third parties not before the court. In other words, the district court applied contract principles to determine the parties' respective rights under the licensing agreement and declined to assess the parties' ownership rights as against the rest of the world pursuant to federal patent principles. 8 Cytozyme argues inventions may be owned only through a federal patent, and because Dr. Naimie did not have a patent, he could not own the formulations at issue in this case and could not receive damages on that basis. Further, Cytozyme alleges the district court's findings regarding ownership create state patent rights--a result the Supreme Court prohibited in Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989). We review the district court's findings of fact for clear error and the court's conclusions of law de novo. Equal Employment Opportunity Comm'n v. Wiltel, Inc., 81 F.3d 1508, 1513 (10th Cir.1996). 9 The Supreme Court has taken a pragmatic approach to dealing with the relationship between federal patent law and state laws relating to intellectual property. Bonito Boats, 489 U.S. at 156, 109 S.Ct. 971. In Bonito Boats, the Court made clear state regulation of intellectual property must yield to federal patent law to the extent the state regulation clashes with the balance struck by Congress in our patent laws. Id. at 152, 109 S.Ct. 971; see also Aronson v. Quick Point Pencil Co., 440 U.S. 257, 262-63, 99 S.Ct. 1096, 59 L.Ed.2d 296 (1979) (considering whether state law interfered with the three primary purposes of the federal patent system such that federal law preempted state law). Specifically, a state law may not substantially impede public use of an otherwise unpatentable, publicly known intellectual creation. Bonito Boats, 489 U.S. at 156-57, 109 S.Ct. 971. However, the Court emphasized states retain the power to adopt rules for the promotion of intellectual creation within their own jurisdictions so long as those rules do not impermissibly interfere with the federal patent scheme. Id. at 165, 109 S.Ct. 971; see also Aronson, 440 U.S. at 262, 99 S.Ct. 1096 ([T]he states are free to regulate the use of such intellectual property in any manner not inconsistent with federal law.). 10 In this case, the district court applied state contract law to determine the parties' rights to the formulations. The Supreme Court addressed a very similar situation in Aronson. In Aronson, the parties entered into a contract whereby defendant agreed to pay plaintiff a royalty in return for the exclusive right to make and sell a keyholder plaintiff had designed. 440 U.S. at 259, 99 S.Ct. 1096. Plaintiff was unable to obtain a patent on her design; however, defendant continued to pay her royalties as provided for in the contract. Id. at 259-60, 99 S.Ct. 1096. When copies of plaintiff's design began to saturate the market, defendant filed suit, arguing the contract was unenforceable because federal patent law preempted state contract law. Id. at 260, 99 S.Ct. 1096. 11 The Supreme Court concluded federal patent law was not a barrier to enforcement of the parties' licensing agreement because enforcement was not inconsistent with purposes of the federal patent system. 2 Id. at 262-64, 99 S.Ct. 1096. Specifically, the Court noted: (1) the licensing agreement provided royalties to the inventor and therefore acted as an incentive to invention; (2) the licensing agreement promoted disclosure because it encouraged the inventor to manufacture her inventions and thereby display the novel idea which they embody wherever they are seen; and (3) the licensing agreement did not withdraw ideas from the public domain because the design was not in the public domain before defendant obtained a license. Id. at 262-63, 99 S.Ct. 1096. The Court concluded:Enforcement of these contractual obligations, freely undertaken in arm's-length negotiation and with no fixed reliance on a patent or a probable patent grant, will encourage invention in areas where patent law does not reach, and will prompt the independent innovator to proceed with the discovery and exploitation of his invention. 12 Id. at 266, 99 S.Ct. 1096 (internal quotation marks and citation omitted). 13 Applying these principles to the present case, we conclude enforcement of the licensing agreement pursuant to state law does not undermine the purposes of the federal patent scheme. First, enforcement encourages invention because the royalties provide an additional incentive to invention, or in this case, an incentive to develop formulations. See Aronson, 440 U.S. at 262, 99 S.Ct. 1096. Second, enforcement does not conflict with the federal policy of disclosure. In Aronson, the Court concluded enforcement promoted disclosure because manufacture of plaintiff's simple keyholder device inescapably disclosed its design to the public. Id. at 263-69, 99 S.Ct. 1096. Here, manufacture of Cytozyme products does not automatically lead to full disclosure of Dr. Naimie's formulations. Nonetheless, enforcement encourages the exploitation of an invention that might otherwise remain undeveloped and therefore inaccessible to the public. Moreover, others remain free to discover and exploit the formulations through reverse engineering or independent creation. See Bonito Boats, 489 U.S. at 155, 109 S.Ct. 971. Lastly, enforcement does not withdraw ideas from the public domain as the formulations were not in the public domain before Cytozyme obtained its license. See Aronson, 440 U.S. at 263, 99 S.Ct. 1096; see also Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 484, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974) (holding that state trade secret law did not withdraw ideas from the public domain because trade secrets, by definition, are not placed in the public domain). 14 Accordingly, we find no conflict with the Court's decision in Bonito Boats. Unlike the state law at issue in Bonito Boats, enforcement of the licensing agreement in this case does not substantially impede public use of an unpatentable intellectual creation. See Bonito Boats, 489 U.S. at 156-57, 109 S.Ct. 971. More important, application of state contract law does not impermissibly interfere with the federal patent scheme, see Bonito Boats, 489 U.S. at 165, 109 S.Ct. 971, but rather benefits society by encouraging invention in areas where patent law does not reach, see Aronson, 440 U.S. at 266, 99 S.Ct. 1096. We therefore conclude the district court correctly applied state contract law to determine the parties respective ownership rights. 3