Lemelson v. Synergistics Research Corp.

• Decision Date: 18 September 1987
• Docket Number: No. 78 Civ. 4335 (LLS).,78 Civ. 4335 (LLS).
• Citation: 669 F. Supp. 642
• Parties: Jerome H. LEMELSON, Plaintiff, v. SYNERGISTICS RESEARCH CORP. and Allan M. Elfman, Defendants.
• Court: U.S. District Court — Southern District of New York

669 F. Supp. 642

Jerome H. LEMELSON, Plaintiff, v. SYNERGISTICS RESEARCH CORP. and Allan M. Elfman, Defendants.

No. 78 Civ. 4335 (LLS).

United States District Court, S.D. New York.

September 18, 1987.

Golenbock and Barell, New York City, Michael C. Silberberg, Peter D. Raymond, of counsel, for plaintiff.

Wigman & Cohen, P.C., Arlington, Va., Victor M. Wigman, George C. Myers, Jr., of counsel, Natter & Natter, New York City, for defendants.

STANTON, District Judge.

Plaintiff, Jerome H. Lemelson ("Lemelson"), asserts breach of contract, unjust enrichment, fraud and breach of fiduciary duty claims in this action against defendants Synergistics Research Corp. ("Synergistics") and its president, Allan M. Elfman ("Elfman"). Briefly, the claims arise out of the breakdown of a business relationship between the parties, involving three patents —U.S. Patent Nos. 3,032,345 ("345"), 3,857,566 ("566") and 3,917,271 ("271").¹ All the patents relate to a velcro dart game.

The validity of the '566 and '271 patents is the subject of the pending cross-motions for partial summary judgment. The '345 patent was held invalid in Centsable Products, Inc. v. Lemelson, 75 Civ. 3717 (N.D. Ill. June 12, 1978), aff'd, 591 F.2d 400 (7th Cir.), cert. denied, 444 U.S. 840, 100 S.Ct. 79, 62 L.Ed.2d 52 (1979).

Relevant Background

On October 5, 1973, plaintiff Lemelson and defendant Elfman entered into an agreement ("'73 Agreement") licensing Lemelson's '345 patent to defendant Synergistics, a small manufacturer of toys and games, of which Elfman is the president and sole shareholder. The '345 patent discloses a velcro target game. (Defendants' Exh. B.) Shortly after entering into the '73 Agreement, Lemelson and Elfman jointly filed additional patent applications with the U.S. Patent and Trademark Office regarding improvements on the '345 velcro target game. By agreement with Elfman, Lemelson personally prepared and prosecuted these applications,² which resulted in the issuance of the '566 and '271 patents.³ The '566 patent covers an improved target structure, (Defendants' Exh. D), while the '271 patent discloses an improved ballshaped missile. (Defendants' Exh. G.)

Before those patents issued, Lemelson and Elfman entered into a second agreement ("'74 Agreement") providing that:

I. Neither Party will license or sell any rights defined by any patent or patents which may issue from the above patent applications or divisions or continuations thereof without the written consent of the other party.

II. All royalties or other considerations which may be received as a result of licensing and/or manufacturing of the inventions defined in the above identified patent applications are to be equally divided between us.

(Defendants' Exh. F.) (There may be a dispute, immaterial for present purposes, whether the "above ... applications" referred to the '271 or the '881 (see fn. 3) as well as the '566, or all three).

In December, 1975, Lemelson entered into a third agreement ("'75 Agreement") with Elfman and Synergistics. The '75 Agreement contemplated the use of the Synergistics Licensing Corporation to own, license, receive and distribute royalties from, and enforce the '345, '566 and '271 patents. Although that corporation was formed, it has not been utilized and the '75 Agreement never went into operation.

Plaintiff claims that the '74 and '75 Agreements reflect the parties' understanding that he was to receive half the royalties realized from the exploitation of the '271 and '566 patents. Defendants contend that (1) Elfman is a co-owner of the patents and is named in them as co-inventor, (2) Elfman and Synergistics are—and have always been treated as—one and the same entity, and so both defendants are co-owners of the patents with Lemelson, and therefore (3) Synergistics has the right to make and sell products covered by the '566 and '271 patents without paying, or accounting, for royalties to Lemelson. (Defendants agree they would be liable to account to Lemelson for proceeds obtained from third parties even if the patents are invalid, but deny any are owing.)

For purposes of this motion, however, defendants assume that the '74 and '75 Agreements oblige them to pay royalties to Lemelson for Synergistics' manufacturing and selling of products covered by the '566 and '271 patents. They argue that they should be relieved of any such assumed liability, because of the invalidity of the '566 and '271 patents. Thus, the central question here is whether those patents are valid.

Before reaching that question, it is useful to decide two other issues: (1) whether defendants can assert patent invalidity as a defense to plaintiff's claim for royalties from Synergistics' manufacture and sale of products covered by the '566 and '271 patents, and if so (2) when defendants so effectively asserted this defense as to cut off liability for royalties accruing thereafter.

I.

A. Patent Invalidity as a Defense to Plaintiff's Claim for Royalties

1. Agreements Between the Parties

Plaintiff argues that the '74 and '75 Agreements are not ordinary license agreements because they are between co-owners of the patents. Defendants argue that the '75 Agreement is a license agreement, although acknowledging both agreements are between co-owners of the '566 and '271 patents.

Ordinarily a license agreement is a "written authority granted by the owner of a patent to another person empowering the latter to make or use the patented article for a limited period or in a limited territory." BLACK'S LAW DICTIONARY 829 (5th ed. 1979). Agreements between co-owners of patents do not fall in that category because it is statute law that a co-owner "may make, use or sell the patented invention without the consent of and without accounting to the other owners" unless there is an agreement to the contrary. 35 U.S.C. § 262 ("§ 262"). Accordingly, the '74 and '75 Agreements will be regarded as agreements between joint owners pursuant to § 262.

2. The Application of Lear

Plaintiff contends that where co-owners of a patent agree to share its proceeds, the agreement is enforceable regardless of the validity of the underlying patent. Defendants, relying upon Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), which overturned the doctrine of licensee estoppel, argue that if the underlying patent is invalid, a co-owner (like a licensee) is relieved of the obligation to account to his co-owner, despite an agreement to do so.

In Lear the Supreme Court held that a patent licensee may assert patent invalidity as a defense to a breach of contract action for nonpayment of royalties. Emphasizing the supremacy of federal patent policy, the Court held that licensees are not estopped (by having made license agreements, binding under state law, calling for the payment of royalties) from challenging the patent's validity and thus escaping payment of royalties. The Court stated that

The equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain. Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor's discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification. We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued.

Id. at 670-71, 89 S.Ct. at 1911.

Following the policy stated in Lear, courts have rejected a variety of estoppel arguments. See e.g., Warner-Jenkinson Co. v. Allied Chemical Corp., 567 F.2d 184 (2d Cir.1977) (rejected settlement-agreement licensee estoppel); Coastal Dynamics Corp. v. Symbolic Displays, Inc., 469 F.2d 79 (9th Cir.1972) (assignor estoppel calls for no different rule than licensee estoppel); Beckman Instruments, Inc. v. Technical Development Corp., 433 F.2d 55 (7th Cir.1970) (rejected estoppel from marking patent number on product), cert. denied, 401 U.S. 976, 91 S.Ct. 1199, 28 L.Ed.2d 326 (1971); Interconnect Planning Corp v. Feil, 543 F.Supp. 610 (S.D.N. Y.1982) (rejected assignor-inventor estoppel when assignee sues assignor for infringement); Clark Equip. Co. v. Keller, 197 U.S.P.Q. 83, 88 (D.N.D.1976) (rejected judicial estoppel based on party's prior defense of patent it now attacks), modified on other grounds, 570 F.2d 778 (8th Cir.), cert. denied, 439 U.S. 825, 99 S.Ct 96, 58 L.Ed.2d 118 (1978).

In light of these precedents, the circumstances of this case do not justify barring defendants' challenge to the '566 and '271 patents. While plaintiff claims that Lear relates only to ordinary license agreements and "has not been expanded to supercede the enforcement of § 262 joint-owner agreements under state contract law" (Plaintiff's Reply Memorandum, p. 5), Lear clearly held that removing the restraint on commerce caused by exercise of an invalid patent is more important than enforcing a promise between contracting parties. Warner-Jenkinson, 567 F.2d at 188. So, here, the doctrine of estoppel must give way to the federal policy of unencumbered challenges to patents believed to be invalid. The public interest in the validity of all outstanding patents allows scrutiny of the '566 and '271 patents, unconstrained by the contractual relationship between the parties. See Interconnect, 543 F.Supp. at 613.

Nor are defendants foreclosed from raising their invalidity defense because of either their assertions of the patents' validity in prior infringement suits, see Clark, supra,⁴ or their alleged continuous "exploitation" of the patents. See Warner-Jenkinson, 567 F.2d at 188 (licensee may retain his license although attacking validity of licensor's patent).

Accordingly, the estoppel...