886 F.3d 315
3rd Cir.2018Background
- Dr. Spiridon Spireas invented a drug-delivery technique called "liquisolid technology" and licensed rights under a 1998 License Agreement to Mutual Pharmaceutical; specific products were to be selected by unanimous written agreement.
- A 2000 engagement letter specifically engaged Spireas to develop a liquisolid formulation of the drug felodipine; Spireas completed the formulation after March 2000 and Mutual obtained FDA approval and commercialized it.
- Mutual paid Spireas roughly $40 million in royalties for felodipine sales (2007–2008), which Spireas reported as long-term capital gains under I.R.C. § 1235.
- IRS issued a deficiency notice treating the royalties as ordinary income; the Tax Court agreed the payments were ordinary income because § 1235 requires a transfer of "all substantial rights" in the patentable property at the time of transfer.
- On appeal, the Third Circuit majority affirmed the Tax Court but on narrower grounds: it held Spireas waived his novel claim that the 1998 Agreement effected a prospective transfer of "all substantial rights" in the felodipine formulation in 1998 (before the formulation was reduced to practice).
Issues
| Issue | Spireas' Argument | Commissioner/Mutual's Argument | Held |
|---|---|---|---|
| Whether royalties qualify for § 1235 capital-gains treatment as received "in consideration of" a transfer of "all substantial rights" to the felodipine formulation | Royalties were paid in consideration of transfer of all substantial rights in the felodipine product (via the 1998 Agreement and related engagement letter) and thus are capital gains | Royalties are ordinary income because Spireas did not transfer all substantial rights in the underlying technology at the time of the relevant transfer | Affirmed Tax Court on waiver grounds; declined to reach merits because Spireas waived his prospective-transfer theory on appeal |
| Whether Spireas preserved the argument that the 1998 Agreement prospectively transferred all substantial rights to future, not-yet-reduced-to-practice inventions | The 1998 Agreement (together with the March 2000 letter) operated as a legal transfer of rights to future Products, including felodipine; emphasis on 1998 on appeal is consistent with Tax Court briefing | The argument that rights transferred in 1998 was not squarely or specifically presented to the Tax Court; Spireas previously argued a post-invention transfer after reduction to practice | Majority: waived—Spireas clearly advanced a post-invention transfer theory below; therefore appellate court will not consider the new timing theory |
| Whether a transfer made before an invention’s actual reduction to practice can constitute a § 1235 transfer of "property" (i.e., all substantial rights) | (Implicitly) Contracts can validly assign future inventions and parties can agree that upon reduction to practice the inventor will convey the property; such arrangements can support § 1235 treatment | § 1235 requires the transferor to have a transferable property interest at the time of transfer (typically after actual reduction to practice); a transfer before reduction cannot satisfy § 1235 for capital-gains treatment | Majority: did not reach the substantive rule because of waiver, but explained § 1235 generally requires the transferor to hold the property interest at time of transfer (reduction to practice is material) |
| Whether the Tax Court’s factual findings (invention timing and reduction to practice) were contested on appeal | Spireas did not challenge the Tax Court’s finding that invention/reduction to practice occurred after May 2000 | Commissioner relied on Tax Court findings to deny § 1235 treatment | Majority accepted Tax Court’s factual findings and relied on them in waiver analysis |
Key Cases Cited
- United States v. Joseph, 730 F.3d 336 (3d Cir. 2013) (framework for determining whether an argument was raised below and when an appellate court may deem it waived)
- Burde v. Comm'r of Internal Revenue, 352 F.2d 995 (2d Cir. 1965) (discusses requirement that an inventor generally must reduce an invention to practice to possess transferable property rights)
- Solvay S.A. v. Honeywell Int'l Inc., 742 F.3d 998 (Fed. Cir. 2014) (statement that making an invention requires conception and reduction to practice)
- Sewall v. Walters, 21 F.3d 411 (Fed. Cir. 1994) (definition of conception in patent law)
- E.I. du Pont de Nemours & Co. v. United States, 432 F.2d 1052 (3d Cir. 1970) (interpretation of "all substantial rights" in patent-transfer contexts)
- Anderson v. Liberty Lobby, 477 U.S. 242 (U.S. 1986) (noting substantive law identifies which facts are material in litigation)