These days, Non-Disclosure Agreement (NDA) templates are readily available on-line, often free-of-charge, making them an attractive alternative for many. The problem with these templates is they are not necessarily applicable to the contracting parties’ unique circumstances and/or do not properly anticipate dealings between the parties. A poorly drafted, one-size-fits-all NDA can make or break a patent-infringement case many years into the future. These assertions are supported by the Dec. 7, 2020 decision in Sionyx, LLC v. Hamamatsu Photonics K.K. by the Court of Appeals for the Federal Circuit (CAFC).
In Sionyx, the CAFC concluded that the district court mistakenly concluded that it lacked authority to compel the transfer of ownership of foreign patents from Hamamatsu Photonics, K.K. (Hamamatsu) to Sionyx, LLC (Sionyx). Moreover, the lower court abused its discretion in distinguishing between the U.S. and foreign patents at issue in the case. The CAFC affirmed the district court on most other issues, including that Hamamatsu breached its non-disclosure agreement (NDA) with Sionyx, and that Sionyx was entitled to co-inventorship and sole ownership of the U.S. patents, as well as damages and an injunction.
The decision is largely based on the NDA signed by the parties in 2006. This blog discusses the decision and emphasizes that an NDA can have consequences years later. As the decision demonstrates, had the NDA lacked certain wording, Sionyx may well not have prevailed.
Background
In 1998, Professor Eric Mazur and his student, James Carey, discovered a novel process for creating “black silicon.” The two inventors filed a provisional patent application on May 25, 2001, from which U.S. Patent 8,080,467 ultimately issued, among other patents. Four years later in 2005, the inventors founded Sionyx and met with Hamamatsu – a company that produces silicon-based photodetector devices – a year later. The two companies entered into an NDA to share confidential information for the purpose of “evaluating applications and joint development opportunities of pulsed laser process doped photonic devices.”
The NDA stipulated that a party receiving confidential information “shall maintain the information in strict confidence for seven years after the expiration of the agreement, after which the receiving party may use or disclose the confidential information.” Commentator’s emphasis. The NDA also said that the receiving party of confidential information acknowledged that the disclosing party claims ownership of the information and all patent rights “in, or arising from” the confidential information. Commentator’s emphasis. The NDA also required that all confidential information received must be returned within 30 days of the termination of the agreement. The term of the NDA was three years.
Hamamatsu and Sionyx worked together for about two years, at which time Hamamatsu said it wished to develop its products alone. Surprisingly, Sionyx did not request the return of any confidential information from Hamamatsu. Hamamatsu began developing its own products and emailed Sionyx in 2009 to alert the company that it would be releasing a new photodiode at an upcoming exhibition that it did not believe infringed Sionyx’s IP or breached the confidentiality obligations. Hamamatsu then filed Japanese patent applications for photodetector devices and later filed in several other countries, including the United States, claiming priority to the Japanese patents.
One of Simony’s customers alerted the company to Hamamatsu’s U.S. patents five years later, in 2014. When discussions between the two company’s failed, Sionyx sued Hamamatsu in the District of Massachusetts for (1) breach of contract; (2) unjust enrichment; (3) infringement of the ’467 patent; and (4) the equitable relief to transfer the foreign to Sionyx and name Carey as an inventor.
District Court Declines to Transfer Foreign Patents
A jury found in favor of Sionyx, awarding almost $800K for breaching the NDA in February 2009, when it first referred to Sionyx’s confidential information in an internal report, and almost $600K in damages for unjust enrichment. The jury also found that Carey should be added as a co-inventor to the U.S. patents. At the post-trial motion stage, the district court then granted Sionyx sole ownership of the disputed U.S. patents, injunctions on Hamamatsu’s accused products practicing those patents and the ’467 patent, pre- and post-judgment interest on damages for breach of contract, and pre-judgment interest on damages for unjust enrichment. The court denied Sionyx’s motions for ownership of the disputed foreign patents because it was uncertain that it had jurisdiction to grant ownership of foreign patents and because Sionyx had failed to adequately identify the foreign patents for which it was requesting ownership.
Sionyx appealed the district court’s decision to refrain from transferring the foreign patents. The CAFC agreed with Sionyx, holding that “the evidence that established Sionyx’s right to sole ownership of the Disputed (Hamamatsu) U.S. Patents also applies to the Disputed Foreign Patents.” The decision added:
As we discussed above with respect to the Disputed (Hamamatsu) U.S. Patents, we agree that the jury’s findings compel the conclusion that those patents arose from Sionyx’s confidential information and that Hamamatsu has not shown that it contributed [its own] confidential information entitling it to joint ownership. And because the Disputed U.S. Patents claim priority from Hamamatsu’s Japanese patent applications, the Japanese applications must be for the same inventions as the Disputed U.S. Patents. See 35 U.S.C. § 119(a). Thus, Hamamatsu’s Japanese patent applications and any applications claiming priority from the Japanese applications in other countries must also have arisen from Sionyx’s confidential information.
Simply put, the CAFC found that Hamamatsu’s Japanese and U.S. patents emanated from Sionyx’s confidential information which Hamamatsu became privy to under the terms of the 2005 NDA. According to the court, Hamamatsu itself never provided its own confidential information to Sionyx, which might have justified joint inventorship of the patent with Cary as the jury had concluded.
Abuse of Discretion Standard
Accordingly, Sionyx was entitled to sole ownership of the Japanese applications and any foreign applications claiming priority therefrom. The CAFC further explained that “it is well established that courts have authority to compel parties properly before them to transfer ownership of foreign patents, just as they would any other equitable remedy,” since such an order is “an exercise of the court’s authority over the party, not the foreign patent office in which the assignment is made.” As such, the district court abused its discretion in distinguishing between the two groups of patents.
The CAFC denied Sionyx’s motion for fees under 35 U.S.C. § 285 on cross-appeal, declined to address the issue of willfulness, and affirmed the following findings by the district court: a) Hamamatsu breached the NDA; b) Sionyx is entitled to the damages and pre-judgment interest awarded by the jury, as well as post-judgment interest at the statutory rate for its breach of contract and unjust enrichment claims; c) Carey is a co-inventor of Hamamtsu’s U.S. Patents; Sionyx is entitled to an injunction prohibiting Hamamatsu from practicing its U.S. Patents for breach of the NDA; and d) Sionyx is entitled to an injunction prohibiting Hamamatsu from practicing its 467 patent.
Conclusions
The outcome may well have been different had the NDA not “directed” the ownership of all future patents emanating from Sionyx’s confidential information to Sionyx. Furthermore, any resulting patent relying on confidential information emanating from both parties should have designated both Cary and an Hamamtsu inventor as joint inventors no matter where the patent applications were filed. Inventorship does not, however, mean that the inventor(s) is also the owner(s) of the patent. Generally, R&D and engineering personnel who work for companies assign any patent rights they may have over to their employer-company (e.g., Hamamtsu). Or, where inventors establish a business entity, the inventors often assign their patent-related interests over to the company as part of their capital contribution. (e.g., Sionyx).
As this case illustrates, an NDA can be a critical factor in determining patent (and other IP) ownership. An NDA should be tailor-made for the particular situation at hand with particular emphasis on protecting the disclosing party which is often an individual inventor or a small start-up company. Anticipate problems into the future since patents in particular can take several years to issue meaning that infringement lawsuits, patent ownership disputes, etc. may occur many years down the road. It is also important that the disclosing party take steps consistent with protecting its confidential information upon early termination of the NDA or expiration by time. For example, it is not clear why Sionyx did not insist on the return of all its confidential information when Hamamatsu indicated negotiations were over.
Take Home Points
1. Do not presume a generic NDA template will adequately protect your interests. An NDA should reflect the parties’ particular situation and the nature of their business relationship under which confidential information may be disclosed.
2. Know and follow the procedures required of you and your company in the NDA as the Disclosing or Receiving Party.
Contact Susan at 305-279-4740 on matters related to your NDA to ensure it addresses potential scenarios consistent with the particular circumstances involving the contracting parties. We are here to serve you and answer your questions related to intellectual property & business law in both transactional matters and litigation. Check her reviews at AVVO.com where she has received Client’s Choice Badges for both 2019 and 2020. She is a registered patent attorney.
WE THANK YOU FOR READING THIS BLOG AND HOPE YOU FOUND IT INFORMATIVE. HOWEVER, THE CONTENT IS PROVIDED FOR INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE.
©2021
Troy & Schwartz, LLC
Where Legal Meets Entrepreneurship™
(305) 279-4740
