EDTX & NDTX Monthly Wrap-Up — March 2019

Two recent cases in the Eastern District of Texas touched on the federal patent preemption defense. One case addressed preemption in the context of an assignment of patent ownership dispute, and the other case addressed preemption in the context of civil theft, conversion, and unfair competition claims. Both cases are discussed below.

In Plastronics Socket Partners, Ltd. v. Dong Weon Hwang, Judge Payne recommended that Plastronics' Motion to Dismiss should be granted with respect to Defendant Hwang's counterclaim of patent infringement after holding that, "[b]ecause this case involves an assignment of patent ownership, preemption does not apply, and state law will apply rather than federal law." Case No. 2:18-cv-00014-JRG-RSP, 2019 WL 10009404, at *1–2 (E.D. Tex. Feb. 13, 2019). Hwang had entered into an Assignment and Agreement with Plastronics Socket Partners, Ltd., assigning equal ownership shares in the '602 Patent to Hwang and Plastronics Socket Partners, Ltd. Id. at *1. The Assignment and Agreement also prohibited transfers "without the written consent of all Assignees." Id. Plastronics contended that Plastronics Socket Partners, Ltd. transferred its rights in the '602 Patent to Plastronics H-Pin, Ltd. by operation of law through a divisive merger, which did not violate the Agreement's transfer provision. Id.

Hwang, on the other hand, asserting a counterclaim for patent infringement of the '602 Patent, argued that "the transfer of patent rights violated the provision prohibiting transfers and that Plastronics H-Pin therefore does not hold any ownership rights in the '602 Patent." Id. In support of this argument, Hwang argued that this case, involving an allegation of improper transfer of patent ownership, could be analogized to cases involving improper transfer of patent licenses. Id. Judge Payne explained that, "[t]he default rule under federal law is that a patent license is not transferable unless the license agreement explicitly allows for such a transfer." Id. (citing Unarco Indus., Inc. v. Kelley Co., Inc., 465 F.2d 1303, 1306 (7th Cir. 1972)).

Judge Payne found Hwang's analogy to cases involving licensing "unconvincing." Id. at *2. "The restrictions that are in place for patent licensing are largely present to protect the rights of patent owners and to preserve the value of patent rights." Id. "Imposing similar restrictions upon assignments of patent ownership would make that ownership less transferable, which would actually decrease the value of patent rights." Id. Judge Payne also relied upon Federal Circuit case law, which held that "state law, not federal law, typically governs patent ownership." Id. (quoting Akazawa v. Link New Tech Int'l, Inc., 520 F.3d 1354, 1357 (Fed. Cir. 2008)). Accordingly, because this case involved an assignment of patent ownership, Judge Payne held that "preemption does not apply, and state law will apply rather than federal law."

Applying state law, Judge Payne determined that no prohibited transfer occurred. Id. Under Texas law, "[w]hen a merger takes effect . . . all rights, title, and interests to all real estate and other property owned by each organization that is a party to the merger is allocated to and vested, subject to any existing liens or other encumbrances on the property, in one or more of the surviving or new organizations as provided in the plan of merger without . . . any transfer or assignment having occurred." Tex. Bus. Orgs. Code Ann. § 10.008(a)(2)(C).  Accordingly, Judge Payne determined that, under Texas law, "the division of Plastronics constitutes a divisive merger and the transfer of rights therefore occurred by operation of law, so no prohibited transfer occurred." 2019 WL 1009404 at *2. Judge Gilstrap adopted Judge Payne's recommendation on March 1, 2019. See Plastronics Socket Partners, Ltd. v. Hwang, 2019 WL 1000908 (E.D. Tex. Mar. 1, 2019).

In Performance Pulsation Control, Inc. v. Sigma Drilling Techs., LLC, Judge Mazzant denied summary judgment, determining that claims for civil theft, conversion, and unfair competition were not preempted by federal patent law. Civil Action No. 4:17-CV-00450, 2019 WL 1112344, at *3 (E.D. Tex. Mar. 11, 2019). Performance Pulsation Control ("PPC") alleged that one of its former employees, J. Manley, had formed competing companies Defendants Sigma Drilling Technologies, LLC and Intrepid Consulting, LLC, while working at PPC. Id. at *1. PPC further alleged that while employed at PPC, Manley along with two other PPC employees, "began using PPC's confidential information and alleged trade secrets to the benefit of competing businesses and personal success, as opposed to for the benefit of PPC." Id. PPC filed suit for, inter alia, civil theft, conversion, unfair competition, and breach of fiduciary duty. Id.

Certain defendants moved for partial summary judgment on the basis that some of PPC's claims were preempted by federal patent law. Id. at *3. Judge Mazzant disagreed: "The purpose of preemption by federal patent law is to ensure that state law is not giving patent protection to unpatentable objects, thereby thwarting the purpose of federal patent law. However, here PPC does not attempt patent-like protection of unpatentable products or seek to prevent competitors from copying "a product on the open market by independent study." Id. Judge Mazzant found that this case was "more akin to 'a situation in which an employer hired an employee of a competitor to take advantage of the employee's expertise in reproducing a complicated system first developed by the former employer,' which is not preempted by federal patent law." Id. Judge Mazzant also found that PPC "does not attempt to make their products totally exclusionary,'" seeking instead "to protect their trade secrets only as long as competitors fail to duplicate it by legitimate, independent research.'" Id. Accordingly, the Court denied summary judgment, finding that "PPC's claims for civil theft, conversion, and unfair competition are not preempted by the Federal Patent Act and the motion should be denied as to this ground." Id.

Certain defendants also moved for partial summary judgment on the basis that PPC's claims for civil theft, conversion, and unfair competition were preempted by either the Texas Uniform Trade Secrets Act ("TUTSA") or the Federal Copyright Act. Id. at *2. These defendants also argued that PPC's breach of fiduciary duty claim was also preempted by the TUTSA. Because the TUTSA was enacted on September 1, 2013, Judge Mazzant was not convinced that the moving defendants had "met their burden demonstrating that there is no material issue of fact as to whether the misappropriation started prior to September 1, 2013." Id. Accordingly, because there was a genuine issue of material fact, Judge Mazzant held that "the jury must determine whether the misappropriation started before September 1, 2013," and "[o]nly thereafter, if necessary, can the Court decide the preemption question." Id.

As for preemption under the Federal Copyright Act, Judge Mazzant explained that, in determining whether a state law cause of action will be preempted by the Copyright Act, courts examine the claim to see if it: (1) "falls 'within the subject matter of copyright' as defined by 17 U.S.C. § 102"; and (2) "protects rights that are 'equivalent' to any of the exclusive rights of a federal copyright, as provided in 17 U.S.C. § 106." Id. (quoting Carson v. Dynegy, Inc., 344 F.3d 446, 456 (5th Cir. 2003)). The moving defendants continued "to assert that PPC's claims do not fall into the subject matter of federal copyright law." Id. at *3. Accordingly, Judge Mazzant denied summary judgment, finding that the moving defendants had failed to meet its burden on the first element. Id.