The Software IP Report

Terminal Disclaimer: Common Ownership Necessary—or Not—for Standing

By Bryan Hart

Categories: Patent Civil Procedure, The Software IP Report

Two district courts recently came to the opposite conclusion on terminal disclaimers, an important issue in patent portfolio management. In both cases, the plaintiff asserted a patent for which a terminal disclaimer had been filed, but the plaintiff did not acquire the patent to which the asserted patent had been disclaimed until after filing suit. In Midwest Athletics and Sports Alliance v. Ricoh, the court ruled that the lack of common ownership of the disclaimed patent and disclaimer patent prevented the plaintiff from having standing. But in Fall Line Patents v. Zoe’s Kitchen, the court ruled that, though the disclaimed patent was unenforceable at the time the suit was filed, the unenforceability did not affect standing.

Taking a step back, what is terminal disclaimer? Effectively, a terminal disclaimer is an agreement that an applicant makes with the Patent Office when the Patent Office thinks two applications from that applicant are too similar. The issue arises when the Patent Office rejects an application for double patenting; in other words, the application would have been obvious over an earlier application of that applicant’s if that earlier application counted as prior art. Rather than amending the claims of the later application to avoid the earlier application, the applicant agrees to some limitations on the patent arising from the later application (the disclaimed patent). First, the disclaimed patent will expire at the same time as the patent arising from the earlier application (the disclaimer patent). This is why it’s called a “terminal disclaimer”: some of the disclaimed patent’s term has been disclaimed. Second, the disclaimed patent is only enforceable if owned by the same entity as the disclaimer patent. This second limitation is what caused problems for the plaintiffs in the two cases here.

In the first case, MASA v. Ricoh, the patents at issue were originally owned by Kodak. To get the Patent Office to issue U.S. Patent Nos. 7,502,582; 7,720,425; and 8,005,415 (the disclaimed patents), Kodak filed terminal disclaimers over U.S. Patent Nos. 7,236,734 and 7,340,208 (the disclaimer patents). Kodak later assigned the disclaimer patents to a third party, and then assigned the disclaimed patents to MASA, a youth sports organization that for some reasons has a large portfolio of printer-related patents. MASA asserted the disclaimed patents against Ricoh, a large printer manufacturer, and only acquired the disclaimer patents after filing suit.

The second case, Fall Line v. Zoe’s Kitchen, involved a similar set of facts. The original owner of the patents at issue was MacroSolve, which filed a terminal disclaimer for U.S. Patent No. 9,454,748 (the disclaimed patent) to overcome a double patent rejection over U.S. Patent No. 7,822,816 (the disclaimer patent). MacroSolve transferred the patents to a third party. The Patent Office then canceled the disclaimer patent in a reexamination. The third party transferred the disclaimed patent, but not the canceled disclaimer patent, to Fall Line, a nonpracticing entity. Fall Line filed suit against Zoe’s Kitchen, a Mediterranean restaurant chain, and again only acquired the canceled disclaimer patent after filing suit.

Despite the mostly similar fact patterns, the courts came to different conclusions. The MASA court rendered judgment on the pleadings that the disclaimed patents were unenforceable and denied MASA leave to amend; in other words, the lack of common ownership of the disclaimer and disclaimed patents when the suit was filed was fatal. In the words of the court, “The plaintiff may not cure this defect by acquiring the terminal disclaimer and amending its complaint to assert its common ownership of both patents.” For this key proposition, the court cited another district court decision, Michigan Motor Technologies v. Hyundai, but did not provide any additional reasoning. Because the assignment of the disclaimer patents did not occur until after the suit was filed, MASA did not have standing, which was incurable.

In the other case, Fall Line v. Zoe’s Kitchen, the plaintiff Fall Line came out better. The court drew a distinction between the enforceability of the patent and standing to assert the patent. The binding authority from the Federal Circuit only requires enforceable title to the asserted patent, which Fall Line had when filing suit. Lack of enforceability is therefore not a standing issue, so it can be fixed by acquiring the disclaimer patent like Fall Line had done. The Fall Line court distinguished the same Michigan Motors case that the MASA court had relied on by faulting the case for not providing reasoning for that holding. (This case was the only directly on-point precedent mentioned in either ruling.) The court therefore denied Zoe’s Kitchen’s motion for judgment on the pleadings, leaving Fall Line’s suit alive.

Lessons for Practice

The primary lessons in these cases apply to transactional practice, the buying and selling of patents. A party acquiring patents should not only ask for a representation that the patents it is acquiring are enforceable, but in the course of due diligence should also check whether the patents have terminal disclaimers. If so, the disclaimer patents must be included in the deal. This information appears on the face of the patent. Moreover, a patent owner, when keeping track of its patents, should include fields identifying disclaimer patents and disclaimed patents for each patent.

These cases, particularly MASA, also bear a basic lesson for litigation practice: be forthright with the court. MASA represented to the court—apparently multiple times—that it already owned the disclaimer patents, and then produced an agreement with the previous owner of the disclaimer patents “confirming” that MASA was the owner. This agreement was the only documentation that MASA provided, and it was dated after the representations that MASA made to the court. The court didn’t buy it. Despite this being an issue that another district court disagreed on, the MASA court assessed attorney fees to MASA.