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Fiduciary Obligation as Shareholder May Bar Challenge to Validity of Patent

GemShares LLC filed a patent infringement action against Arthur Lipton and Secured Worldwide, LLC (SWW) on U.S. Patent No. 8,706,513 B2 (the ‘513 patent). The ‘513 patent is entitled “global investment grade for natural and synthetic gems used in financial investments and commercial trading and method of creating standardized baskets of gems to be used in financial and commercial products.”

According to the district court, Lipton became a one-fifth owner of GemShares in 2013, while the patent application was pending. Lipton executed an operating agreement that included a term requiring him (and other GemShares members) to disclose and present to the company opportunities related to or likely to be competitive with GemShares’ business.

In its complaint, GemShares alleged that in the fall of 2013, Lipton secretly started working on a business that GemShares alleged is a competing business (SWW). Lipton allegedly created SWW to commercialize products and services that infringe GemShares’ patents, including the patent-in-suit.

In defense of the patent infringement claim, Lipton and SWW argued that certain claims of the ‘513 patent are directed to patent-ineligible subject matter and should be declared invalid. In response, GemShares asserted that Lipton should be estopped by Lipton’s fiduciary duty to GemShares or is barred by the operating agreement from arguing the patent’s invalidity. As explained by the district court, GemShares argued that the 513 patent is a critical asset upon which the company’s vitality depends in significant part and that Lipton’s fiduciary and contractual duty of loyalty to GemShares preclude: Lipton from arguing that the patent is worthless

Defendants, in turn, contended that GemShares’ argument is wrong, relying upon the Supreme Court’s elimination of the doctrine of licensee estoppel, which formerly barred a licensee under a patent from arguing the patent’s invalidity. See Lear, Inc. v. Adkins, 395 U.S. 653 (1969). Defendants asserted that public policy requires enabling a party sued for patent infringement to assert the patent’s invalidity, irrespective of other legal interests and doctrines that might otherwise be claimed to give rise to an estoppel.

The district court disagreed stating that “even after Lear, 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. See Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220, 1225-26 (Fed. Cir. 1988). And more generally, the Federal Circuit noted in Diamond Scientific that “despite the public policy encouraging people to challenge potentially invalid patents, there are still circumstances in which the equities of the contractual relationships between the parties should deprive one party (as well as others in privity with it) of the right to bring that challenge.” Id. at 1225. That statement is potentially broad enough to cover the contractual and other relationships that GemShares has cited in this case as barring Lipton from arguing the invalidity of the alleged key asset of their venture.”

Under these circumstances, the district court was unpersuaded by defendants’ contention that GemShares was legally precluded from asserting an estoppel or contractual bar to Lipton’s invalidity argument arising from his fiduciary and contractual duties to GemShares. “Whether those duties actually bar Lipton (and SWW as his alleged alter ego) in the way asserted by GemShares is another matter, and one the Court cannot adjudicate at this stage of the litigation—as it may depend on factual disputes that cannot be adjudicated at this point. The upshot is that the Court does not believe that it can appropriately decide defendants’ invalidity challenge in the context of their motion to dismiss for failure to state a claim.”

Accordingly, the district court declined to grant the motion to dismiss at this stage of the litigation.

Gemshares LLC v. Arthur Joseph Lipton, Case No. 17 C 6221 (N.D. Ill. Feb. 11 2018)


The authors of are patent trial lawyers at Jeffer Mangels Butler & Mitchell LLP. For more information about this case, contact Stan Gibson at 310.201.3548 or

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