Assignee of patent not bound by previous assignee’s agreement to arbitrateApril 17, 2008

In a decision yesterday, the Federal Circuit affirmed a finding by a district court that a party may not be compelled to arbitrate as provided in a patent license agreement when the party was not a signatory party to the agreement but merely an assignee of the patent covered by the agreement. As a result, the infringement case continues before the district court.More detail of Datatreasury Corp. v. Wells Fargo & Co. after the jump.Plaintiff Datatreasury Corp. brought suit against Wells Fargo (and many other financial institutions) alleging infringement of four of Datatreasury's patents, including a patent regarding a central check-clearing system. These patents had been assigned to Datatreasury from e-Banc LLC and WMR e-Pin LLC (WMR). Before the assignment, WMR entered into a patent license agreement with Wells Fargo Service Corp, a subsidiary of Wells Fargo, regarding the central check-clearing system patent. The patent license agreement included a covenant not to sue clause, a mandatory arbitration clause, and a choice of law provision designating Minnesota law as the governing law. After Datatreasury filed suit, Wells Fargo moved to dismiss on the grounds that, as assignees of the patent, Datatreasury was bound by license agreement's mandatory arbitration and covenant not to sue clauses. In addition to finding that the patent license agreement only covered one of the four patents in suit, the district court also found that Datatreasury was not a party to the license agreement and therefore could not be bound by the arbitration clause. On review, the Federal Circuit looked to the law of the Fifth Circuit to determine the scope of the arbitration clause. The Fifth Circuit considers "(1) whether a valid agreement between the parties exists and (2) whether the dispute in question falls within the scope of that arbitration agreement" in order to determine whether arbitration has been agreed to. To determine the first prong, the Fifth Circuit would apply the law of the state that governed the agreement. The court then reviewed Minnesota case law to find that, in general, "a party is not bound by an arbitration clause unless it is a signatory to the underlying contract." Wells Fargo pointed to cases which held that a non-signatory may be compelled to arbitrate anyway under special circumstances. It argued that, because a patent owner cannot transfer an interest greater that it possesses, the license agreement and the arbitration clause "ran with the patent" when WMR assigned it to Datatreasury. The Federal Circuit disagreed, finding that the only encumbrances that ran with the patent are those involving the use of the patented product, "not a duty to arbitrate." To substantiate its position, the Federal Circuit noted that arbitration under the Federal Arbitration Act is "a matter of consent, not coercion," and therefore it must be signed by the party invoking it, either WMR or Wells Fargo Service Corp. Since neither Wells Fargo nor Datatreasury signed the agreement, they were not bound by the arbitration clause. This case highlights the potential dangers involved when assignments of licensed patents take place. In order to avoid these issues, licensees should consider protecting their patent license rights upfront by provisions in the license agreement that prevent problems like those faced by Wells Fargo in this case, such as by requiring the licensor to make transfer of the rights and obligations of the patent license agreement contingent on any assignment the patent.To read the full decision in Datatreasury Corp. v. Wells Fargo & Co., click here.