Stupid Patent Of The Month: Buying A Bundle Of Diamonds

from the assignor-estoppel dept

This month’s Stupid Patent shows what happens when the patent system strays outside its proper boundaries. US Patent No. 8,706,513 describes a “fungible basket of investment grade gems” for use in “financial instruments.” In other words, it’s a rating and trading system that attempts to turn diamonds into a tradeable commodity like oil, gold, or corn.

Of course, creating new types of investment vehicles isn’t really an invention. And patents on newfangled financial techniques like this were generally barred following Bilski v. Kappos, a 2008 Supreme Court case that prevents the patenting of purely financial instruments. Since then, the law has become even less favorable to abstract business method patents like this one. In our view, the ‘513 patent would not survive a challenge under Bilski or the Supreme Court’s 2014 decision in Alice v. CLS Bank.

Despite its clear problems, the ‘513 patent is being asserted in court?and one of the people best placed to testify against the patent may not be allowed to.

The public’s right to challenge a patent in court is a critical part of the US patent system, that has always balanced the exclusive power of a patent. It’s especially important since patents are often granted by overworked examiners who get an average of 18 hours to review applications. 

But there are two types of persons that, increasingly, aren’t allowed to challenge problematic patents: inventors of patents, and even partial owners of patents. Under a doctrine known as “assignor estoppel,” the Federal Circuit has barred inventors from challenging patents that they acquired for a former employer. Assignor estoppel was originally meant to cover a narrow set of circumstances?inventors who engaged in fraud or bad dealing, for instance?but the nation’s top patent court now routinely applies it to prevent inventors from challenging patents.

Patent scholar Mark Lemley flagged this problem in a 2016 paper, noting assignor estoppel could be used to control the free movement of employees or quash a legitimate competitor. “Inventors as a class are put under burdens that we apply to no other employee,” he wrote. “If they start a company, or even go to work for an existing company in the same field, they will not be able to defend a patent suit from their old employer.”

In this case, the Federal Circuit’s expansive view of assignor estoppel may prevent a person who owned just a fraction of a patent from fighting back when that patent gets used in an attempt to quash a competing business.

Despite the fact that this gemological trading system should never have been granted a patent, so far, it’s being successfully used by its owner to beat up on a competitor?and the competitor could be barred from even challenging the patent by assignor estoppel.

Competing Diamond Companies

GemShares was created in 2008 to market “diamond investment products.” The original partners were joined in business by a man named Arthur Lipton, who bought 20% of GemShares in 2013. He struck a deal not to compete with GemShares.

GemShares says [PDF] Lipton broke that deal in 2014, when he started working on his own project, a “secure diamond smart card,” and filed for patents related to it. But in addition to breach of contract, GemShares sued for patent infringement. They said Lipton’s new business violated the ‘513 patent.

The litigation also involves breach of contract claims, and allegations of fraud from Lipton’s former partner. Without getting into the weeds on all that, the defendant in this case may not even be allowed to argue that the “gem financial product” patent is invalid. Earlier this month, the judge overseeing the case issued an order [PDF] noting that “the Federal Circuit has upheld the doctrine of assignor estoppel, which precludes an inventor-assignor of a patent sued for infringement from arguing the patent’s invalidity.”

The Federal Circuit has made assignor estoppel so powerful, in fact, that Lipton’s 20% ownership contract with GemShares may be enough to stop him and his lawyers from mounting an invalidity defense.

It’s bad policy to stop the public from challenging bad patents, and assignor estoppel should only be used in narrow cases, like outright fraud. As it’s been applied by the Federal Circuit, it’s destined to be used in exactly the way that Lemley warned it would?as an anticompetitive cudgel.

We agree with the brief signed by Lemley and more than two dozen other law professors [PDF] in EVE-USA, Inc. v. Mentor Graphics Corp., arguing that the Supreme Court should take up this issue and keep assignor estoppel within the narrow limits it originally intended.

Reposted from EFF’s Stupid Patent of the Month series.

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Comments on “Stupid Patent Of The Month: Buying A Bundle Of Diamonds”

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Anonymous Anonymous Coward (profile) says:

Two wrongs do not a right make

Maybe I didn’t read closely enough, or I am too thick to comprehend the issue at hand, but if purely financial instruments are not in fact patentable, then how could there be a competing patent? Wouldn’t the ‘competing’ patent also be excluded for that same reason?

I get the part about excluding patent holders, and that is stupid, but it does not clear up my confusion with the above.

That Anonymous Coward (profile) says:

Re: Two wrongs do not a right make

Its a business that might compete so we use the patent to make ourselves seem legit. The government approved it (with the whole max 18 hour review) so its real, even if it violates policy.

2nd guy is doing some sort of smart card thingy most likely backed with gems, the other group is trying to make the gems the thing that get traded. Its a similar but different thing. (but still probably really stupid).

The system is broken & to bar people who might be most qualified for tearing apart the asserted patent can’t tear it apart helps keep it broken.

Once upon a time patents were on real things that solved a problem, physical things. Now the system allows for ideas with stupid qualifiers that mean nothing because patents are the bestest things ever!!!!!

Of course this won’t be fixed anytime soon.
People are making money, the courts can’t make law, the courts tied their own hands, the law makers are so scared of being called anti-inventors they won’t touch it. So we’ll see shit patents approved & used to inflict economic damage that harms society… which seems to run afoul of what was intended.

Anonymous Coward says:

I’m torn on this one. On one hand its rather critical for us to destroy as many stupid and invalid patents as possible but on the other hand its kind of poetic justice that an inventor gets punished like that for knowingly submitting and getting approved said invalid patent in the first place.

Letting them argue invalidity when its inconvenient for them would be like letting them have their cake and eat it too.

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