The case of CMS Industries, Inc. v. L. P. S. International, Ltd. is about how to loose rights in patents by not recording ownership changes with the U.S. Patent and Trademark Office (USPTO). It involved the seller trying to tell the public it was doing one thing (selling patents to a subsidiary company) while secretly reserving ownership for itself. It failed.
SEE International, Inc. assigned, in a first assignment, its rights in six patents to SEE’s subsidiary, Shoplifter International. But on the same day SEE and Shoplifter International entered into a second agreement purporting to transfer back to SEE all of the rights transferred to shoplifter under the first assignment.
The first assignment transferring rights to shoplifter international was recorded with the patent office. The second assignment was not.
Later Shoplifter International entered bankruptcy and its assets, including the six patents, were sold to a third party, Elmer Whitaker.
Whitaker’s licensee CMS filed a lawsuit against LPS international, another subsidiary of SEE. CMS Industries, Inc. v. L. P. S. International, Ltd., 643 F.2d 289 (5th Cir. 1981). LPS and SEE claimed that the second unrecorded agreement prevented CMS from winning its lawsuit and that SEE still had rights in the six patents.
But because SEE failed to record the second agreement with the USPTO, the second agreement was unenforceable against Whitaker who had no knowledge of it at the time that Whitaker acquired rights in the patents. The court held that Whitaker was the proper owner of six patents.
Patent Ownership Recording System
SEE failed because 35 U.S.C. 261, which provides “An interest that constitutes an assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.”
That means that if an assignment is not recorded at the USPTO, it will not be superior to rights obtained by a third party for value if that third party did not have knowledge of the unrecorded assignment.
This provision is similar to many state-based systems of recording ownership of land.
Section 261 encourages patent owners to file (record) evidence of their ownership of a patent with the USTPO. This allows people who enter into transactions regarding those patents to look to the public record to determine whether the person they’re dealing with is the actual owner or not.
The recording system discourages a seller from selling rights to a first person and then selling the same rights to a second person. The first person will have an incentive to record that transfer with the USPTO because of the protections provided by section 261.
If the first person records at the USPTO, the second person, before proceeding with the transaction, can check the patent office to see that the first person is the owner. The second person then will not proceed with the transaction from the original seller who no longer has rights in the patents.
Record or Be At Risk
Therefore, when you purchase patent rights it is very important for you to record at the USPTO the assignment (or other transfer document) transferring those patent rights to you. Otherwise you could lose rights in the patents to someone who purchases rights in the patents later without knowledge of your ownership/assignment.