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Attributable ownership and family law March 27, 2014

Posted by Brian Schar in USPTO.
Tags: ,

If you’re a patent person, you’re almost certainly an engineer or scientist first.   With a background like that, it would be almost inconceivable that you’d get into something all touchy-feely like family law, where you might have to reassure someone or even figure out their feelings.  Yeah, no.  Maybe some of you would be good at that, but that’s just not me.

Well, guess what?  With the proposed attributable ownership rules, you will get to dive head first into the morass of family law.

Why?  Because spouses, kids, and heirs have property rights under the proposed rules.

An inventor or shareholder, as an individual, is not the “ultimate parent entity” of his or her ownership rights of IP.  That’s because spouses have rights to marital property, either through community property or similar doctrines in non-community-property states.  You own a patent (as a solo inventor) or shares in a privately-held startup that owns IP?  If you die, that spouse will often get the entirety of your interest in the IP – meaning that he/she is an attributable owner.

What’s that?  Your spouse gets nothing when you die, because you’re giving it all to your kids?  Well, you’re a terrible person.  And you’ve just made your kids attributable owners as well.  Does your will establish a trust or give any interest in your estate to some kind of organization, whether for-profit or not?  They are attributable owners as well.

Now imagine that ex-spouses have property rights via a divorce settlement.  You’ll need to get a copy of that too!  And people love giving a total stranger a copy of their divorce settlement – especially a patent attorney.

So imagine the fun of prying the shareholder list out of the hands of your CFO.  Then imagine the order of magnitude greater pain when you have to contact each and every individual shareholder, find out if they’re married, get their spouse’s name, find out if they’re divorced, get a copy of the divorce settlement, find out if they have a will, and get a copy of the will.

Do you think you’ll be able to do that, successfully, for each and every one of the hundreds of individual shareholders of your privately-held venture-backed startup?  Me either.  Or, do you think that every single one of the investors you call is going to tell you what to do with your request for their personal information, slam down the phone, and then call your CFO and insist he/she fires you?   This is why the proposed rules are a machine for destroying startups that depend on IP.

The further you go down this rabbit hole, the more awful it is.


1. Bryan - March 27, 2014

The proposed rules require identification of titleholders, enforcement entities, ultimate parent entities, and hidden beneficial owners. Which of these encompass spouses of minority shareholders in a startup?

Brian Schar - March 28, 2014

1.271(b) – the “ultimate parent entity” rule. Under 1.271(d), the term “entity” includes any natural person and any estate of a deceased natural person. The rules require that you go up the chain of each entity until you get to that “ultimate parent entity.” That means the complete shareholder list of a privately held company, including minority shareholders. 1.271(a)(2) makes more sense, in that it is limited to entities necessary to be joined to have standing. 1.271(b) is not so limited. That’s why it ensnares (a) all shareholders, (b) their spouses, and (c) their heirs/beneficiaries.

Bryan - March 28, 2014

Under 16 CFR 801.1(a)(3), the definition of ultimate parent entity is “an entity which is not controlled by any other entity.” In the same rule, “control” is defined as holding 50 percent or more of the outstanding shares/voting securities/profit rights.

Under that definition, I believe you only have to inquire as to whether any party has 50% or more control of an organization. Further, it doesn’t seem like natural persons would ever be “controlled.” It appears to me that shareholders, spouses, and heirs are therefore excluded.

Brian Schar - March 31, 2014


Section 1.271(a) of the new rules defines “attributable owner.” Section 1.271(b) is independent and further modifies the definition of “attributable owner” to include “ultimate parent entity.” 1.271(c) is also independent, and uses the undefined term “entity” to further modify what is an “attributable owner.” The mischief in this rule comes from (b) and (c). If the rule were written and interpreted as you suggest, I think it would be much less controversial. However, as written the “ultimate parent entity” is not limited to shareholders over 50%. Indeed, in the hearing the USPTO emphasized that the point was to be broader than identifying the real party in interest. I am wary of the way the rules are written, as (b) and (c) can be interpreted to wreak havoc with small company IP.

I suggested that if they wish to go ahead with the rules, simply deleting 1.271(b) and (c), and keeping 1.271(a) would accomplish their goal, and do so with minimal disruption to patentees and small business.

Bryan - March 28, 2014

I should perhaps clarify: shareholder under 50% would be excluded. And since no one “up the chain” from a minority shareholder could possible control an assignee, at each level it would seem only entities at at least 50% would need to be identified. This seems to significantly limit the total number of parties identified (likely to one or two).

2. Bryan - March 31, 2014

Hi Brian,

Thanks for your answer of March 31, I appreciate the clarification. I can’t seem to reply directly, so I’ll do so here.

I think the key point here is that the proposed rules (at 1.271(b)) incorporate the definition of 16 CFR 801.1(a)(3), but don’t explicitly incorporate the definition of 16 CFR 801.1(b). I could see asking the PTO to explicitly incorporate 16 CFR 801.1(b) into 1.271(b). Solely from the rules, my take was that this was the intention all along. (See, e.g., the proposed rules at p. 4111, col. 2, ¶ 2, which specifically cites the definition of “control” as requiring 50% or more holding of shares, etc.) Since some definition of “control” is necessary to interpret the rules, I would make a guess that the definition discussed in the rulemaking publication would be persuasive.

Regarding the hearing you mention, I was unable to attend either session. I’ve read the east coast transcript, but the west coast is not yet available. If there is something specific you could point me to it would be appreciated.


3. Brian Schar - March 31, 2014

Thanks, Bryan. I understand your position, but I take a different view of the failure of the new rules to incorporate 16 CFR 801.1(3)(b). By leaving out the “control” aspect of an ultimate parent entity, as set out in 16 CFR 801.1(3)(b), but incorporating other antitrust definitions expressly, the Office has shown a clear intent that the “ultimate parent entity” is not to be limited to an entity that has “control.” That is what worries me.

Courts don’t always pay much, if any, attention to the nonbinding verbiage in the rulemaking publication, so I don’t count on that as limiting the “ultimate parent entity” provisions at all.

4. Bryan - March 31, 2014

Seems like a reasonable basis for debate. Thanks for the discussion!

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