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Licensees Not Required to Do Due Diligence Where Inventor Falsely Claimed Exclusive Ownership

Addressing the grant of summary judgment dismissing a fraud claim where the licensee failed to check the U.S. Patent and Trademark Office (PTO) website regarding rumors of the inventor’s previous dealings with another company, the U.S. Court of Appeals for the Eighth Circuit reversed in part, finding that the issue was a dispute of material fact.  Yazdianpour v. Safeblood Technologies, Inc., Case No. 13-3586 (8th Cir., Feb. 27, 2015) (Wollman, J.). 

The licensees entered into a licensing agreement with Safeblood for the exclusive rights to market certain patented technology overseas.  After learning that they could not register the patents in other countries, the licensees sued Safeblood for breach of contract and also sued Safeblood, its officers and patent inventor for fraud and violations of the Arkansas Deceptive Trade Practices Act (ADTPA).  The licensees sought to recover business expenses incurred in reliance on the contract, as well as the money paid to Safeblood under the contract.  The district court dismissed the fraud claims on summary judgment, finding that the licensees could not establish justifiable reliance because public records available on the PTO website showed that Safeblood did not own the exclusive rights to the patented technology.  A jury returned a verdict for the licensees, awarding damages for breach of contract but no damages for the ADTPA violations. The district court awarded the licensees prejudgment interest.  Safeblood appealed. 

The 8th Circuit reversed the grant of summary judgment on the fraud claim and the award of prejudgment interest, but otherwise affirmed.  The 8th Circuit noted that summary judgment was inappropriate on the fraud claim because there was a dispute of material fact as to whether the licensees justifiably relied on the inventor’s false statement. Even if the licensees could easily have checked the status of the patent on the PTO website, the 8th Circuit explained they were not required to investigate unless it was apparent that they were being deceived.  Moreover, the licensees produced sufficient evidence that, in response to licensee’s questions about rumors regarding his previous dealings with another company related to the patent, the inventor affirmatively misrepresented that he owned the exclusive rights to the patented technology. 

Also, the 8th Circuit found that the district court abused its discretion by awarding pre-judgment interest because the jury had to rely on opinion or discretion to determine the amount of damages.  Arkansas law only allows prejudgment interest if the court can determine the amount and timeframe of the damages precisely.  Here, the jury used its discretion to determine for which business expenses to reimburse the licensees, as well as the exact date giving rise to the cause of action.

Finally, the 8th Circuit determined that the district court did not abuse its discretion when it gave the jury a diminution-in-product-value instruction for the ADTPA claim because a reasonable jury could have found that the product had some remaining value for sale overseas even without patent protection.  The 8th Circuit also noted that the licensees waived their argument that the jury’s failure to award any damages on their ADTPA claim was an inconsistent verdict by failing to raise this objection before the jury was discharged, even though a magistrate judge (rather than the district court judge who presided over the trial) received the verdict.  Also, by not renewing its motion for judgment as a matter of law (JMOL) under Rule 50(b), the 8th Circuit explained that Safeblood had waived its argument that the licensees failed to offer sufficient evidence of injury.

Practice Note:  Under Arkansas law, the existence of rumors is insufficient to negate justifiable reliance on what proved to be an inventor’s false claim of exclusive ownership.  Also, counsel is well advised to act swiftly after receiving an adverse verdict in terms of raising an inconsistent-verdict argument and should do so before the jury is released.

© 2020 McDermott Will & EmeryNational Law Review, Volume V, Number 85


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