CAFC Affirms Dismissal for Lack of Standing in Software Patent Dispute

The U.S. Court of Appeals for the Federal Circuit (CAFC) today issued a decision in Applications in Internet Time, LLC [AIT] v. Salesforce, Inc., affirming a district court’s dismissal of AIT’s patent infringement suit against Salesforce for lack of constitutional standing. The CAFC determined that the district court correctly concluded that AIT had no exclusionary patent rights at the inception of the lawsuit. It also held that the district court did not abuse its discretion in denying equitable relief to cure the constitutional standing defect.

U.S. Patent No. 7,356,482 and U.S. Patent No. 8,484,111 relate to information management software technology originally developed by Alternative Systems, Inc. (ASI), a company founded by Beverly Nelson, Douglas Sturgeon, and Anthony Sziklai. The filed patent application for the software in 1998, after entering a joint venture to develop it in 1997, which was later terminated by agreement in 2002.

In 2006, ASI, Nelson, and other entities entered into an agreement that sold the 2002 agreement to Nelson. Nelson and Sturgeon formed AIT in 2005. In 2012, Sturgeon, acting on behalf of ASI, entered into an agreement to assign the patent rights to AIT. The following year, AIT filed a suit against Salesforce, Inc. in the U.S. District Court for the District of Nevada, asserting infringement of the patents.

During the proceeding, Salesforce filed a renewed motion to dismiss for lack of standing. The district court granted the motion, finding that the 2006 agreement unambiguously transferred all patent rights to Nelson. The district court concluded that, pursuant to the 2012 assignment, ASI had no rights remaining to transfer to AIT. It also rejected the argument that Nelson effectively had transferred her patent rights to AIT and filed a motion for reconsideration and equitable relief, under Federal Rule of Civil Procedure 17(a)(3) ratification or the doctrine of contract reformation, which the district court denied.

Writing for the CAFC, Judge Lourie found that the 2006 agreement did convey all patent rights to Nelson. The Federal Circuit noted that the agreement recites that the 2002 agreement is “hereby sold to Nelson by the Parties…without reservation of any provision.” Since the 2006 agreement transferred “all right, title, interest, and liability…set forth in the…2002 Agreement” to Nelson, the Federal Circuit concluded that it therefore included the “intellectual property rights” set forth in the 2002 agreement. Thus, the court stated that “as the patents were then the property of Nelson, ASI had no patent rights to transfer to AIT in 2012.”

AIT argued that any transfer of patent rights to Nelson by the 2006 agreement was a future contingent transfer which never occurred, because the phrase “shall transfer” denotes a future act. The Federal Circuit disagreed, stating that “fatal to AIT’s argument is that it reads one sentence of the 2006 Agreement in isolation, not in the context of the entire agreement.” The court explained that the sentence immediately preceding the “shall transfer” sentence recites that the 2002 agreement is “hereby sold to Nelson.” It also noted that this “language conveys a present transfer of the 2002 Agreement to Nelson.”

AIT also argued that the 2006 agreement affecting a present transfer of patent rights is irreconcilable with Nelson having the sole and exclusive right to modify, terminate, or otherwise discard certain sections of the 2002 agreement. The Federal Circuit rejected this argument, noting that it again ignores the language that the 2002 agreement is “hereby sold to Nelson.” The court clarified that the 2006 agreement specifying that Nelson has exclusive control over the assets she is gaining “(that is, the sole right to modify or terminate certain terms of the 2002 Agreement) is not inconsistent with the 2006 Agreement affecting a present transfer to her of the patent rights.”

The Federal Circuit addressed the argument that the district court erred in declining to consider extrinsic evidence. The court noted that the district court did acknowledge Sturgeon’s testimony that the 2006 agreement sold “everything” to Nelson. To the extent that the district court properly evaluated extrinsic evidence to determine if there was a latent ambiguity in the contract terms, the Federal Circuit found that the district court correctly indicated that Sturgeon’s testimony supports the conclusion that the 2006 agreement transferred the patent rights to Nelson.

AIT further argued that, even assuming the 2006 agreement transferred all rights in the asserted patents to Nelson, the district court clearly erred in finding that Nelson did not consent to the 2012 assignment. The Federal Circuit disagreed, finding that Sturgeon’s declaration that he is in “constant communication” with Nelson, regarding the business of AIT, and that she is informed of all material decisions of the company, is not persuasive evidence showing that Nelson consented to the 2012 assignment. The court found that the district court did not clearly err in determining that Nelson did not exercise her right to modify the 2002 agreement by her consent to the 2012 assignment, thereby allowing AIT to acquire the patent rights.

Regarding the denial of equitable relief, the Federal Circuit concluded that the district court did not abuse its discretion. The court noted that “a court may exercise jurisdiction only if a plaintiff has standing to sue on the date it files suit.” It further explained that “in order to assert standing for patent infringement, the plaintiff must demonstrate that it held enforceable title to the patent at the inception of the lawsuit.” The Federal Circuit found that AIT lacked constitutional standing at the time it filed suit and noted that AIT failed to cite any precedent suggesting that a party can remedy a lack of constitutional standing through Rule 17(a)(3) ratification or contract reformation, thus affirmed the district court’s decision.

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