ST. JOHN'S UNIVERSITY, NEW YORK v. BOLTON (E.D.N.Y. 12-10-2010)

ged that a special relationship of trust and confidence existed between it and Bolton and Spireas, such that Bolton and Spireas owed St. John's a fiduciary duty to disclose to St. John's material facts relating to their research. By failing to disclose their assessment of the value of their research at St. John's or the Liquisolid Patents that resulted from that research, Plaintiff alleges that Bolton and Spireas prevented St. John's from learning of and asserting its contractual rights to the Liquisolid Patents and licensing revenues, and that they have been harmed because they have not received the benefit of their contractual rights. Moreover, Plaintiff alleges Bolton's and Spireas's failure to disclose was fraudulent because they intentionally remained silent, in spite of their duty to disclose, to prevent Plaintiff from learning of its rights to the Liquisolid Patents and royalties. Plaintiff's allegations are sufficient to invoke the court's power to toll the statutes of limitations applicable to Plaintiff's claims.

However, "equitable estoppel does not apply where the misrepresentation or act of concealment underlying the estoppel claim is the same act which forms the basis of plaintiff's underlying cause of action." Kaufman, 307 A.D.2d at 122. Therefore, equitable tolling does not apply to toll the limitations periods applicable to Plaintiff's claims premised on fraud (including Plaintiff's breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, and fraudulent conveyance claims) because those claims are based on the same acts of fraudulent concealment that entitle Plaintiff to invoke equitable tolling. See id. (reasoning that this limitation must apply to fraud claims because "the mere assertion of an underlying fraudulent act would always trigger equitable estoppel and render the discovery accrual rule for fraud actions superfluous"). However, Bolton's and Spireas's acts underlying the breach of contract, conversion, unjust enrichment, and tortious interference claims are their failures to assign the Liquisolid Patents and share licensing royalties with Plaintiff. Proof of Bolton's and Spireas's fraud is not necessary to establish Plaintiff's entitlement to relief on those causes of action. Bolton's and Spireas's fraud is relevant to those claims only insofar as it tolls the limitations periods that apply to them. Thus Bolton's and Spireas's fraudulent concealment is not "the same act which forms the basis of plaintiff's underlying cause of action." Plaintiff has stated facts sufficient to invoke the doctrine of equitable tolling with respect to its breach of contract, conversion, unjust enrichment, and tortious interference claims.

3. Notice

"Equitable estoppel will not toll a limitations statute . . . where a plaintiff possesses timely knowledge sufficient to place him or her under a duty to make inquiry and ascertain all the relevant facts prior to the expiration of the applicable Statute of Limitations." Gleason v. Spota, 194 A.D.2d at 765 (quotations omitted). Similarly, for the discovery accrual rule applicable to fraud claims "[a]ll that is needed to commence the running of the statute is `knowledge of facts sufficient to suggest to a person of ordinary intelligence the probability that he has been defrauded.'" Renz v. Beeman, 589 F.2d 735, 751 (2d Cir. 1978) (quoting Sielcken-Schwarz v. American Factors, Ltd., 265 N.Y. 239, 246 (1934)). "The test as to when fraud should with reasonable diligence have been discovered is an objective one."Armstrong v. McAlpin, 699 F.2d 79, 88 (2d Cir. 1983). Thus, where the allegations in the complaint clearly show that a plaintiff possessed knowledge of facts imposing a duty to conduct an inquiry which would have led him to discover the fraud, courts have decided inquiry notice as a matter of law. In re Integrated Resources Real Estate Ltd. Partnerships Secs. Litig., 815 F. Supp. 620, 637-39 (S.D.N.Y. 1993).

Bolton and Spireas contend that issuance of the Liquisolid Patents by the PTO gave St. John's constructive notice that their research at St. John's had produced patentable discoveries, and that in the exercise of reasonable diligence Plaintiff should have learned of both the fraud and the facts underlying its claims on the dates the Liquisolid Patents issued. (Bolton Mem. at 6-10; Spireas Mem. at 10-11.)

Bolton's and Spireas's arguments raise three questions: (1) Whether a rule of federal law requires the court to impute knowledge of the Liquisolid Patents' existence and contents to Plaintiff on their dates of issuance in this case; (2) If not, whether New York law requires the court to impute knowledge of the Liquisolid Patents to Plaintiff on their dates of issuance; and (3) Whether Spireas's disclosure of his dissertation was sufficient to put St. John's on inquiry notice.

a. Constructive Notice of Patent Issuance under Federal Law

In some of its older patent law jurisprudence, the Supreme Court has, on occasion, stated the principle that "issuance of a patent and recordation in the Patent Office constitutes notice to the world of its existence." Wine Ry. Appliance Co. v. Enterprise Ry. Equipment Co., 297 U.S. 387, 393 (1936) ("Wine Railway"); see also Sontag Chain Stores Co. v. National Nut Co., 310 U.S. 281, 295 (1940) ("Sontag Chain Stores"); Sessions v. Romadka, 145 U.S. 29, 51 (1892); Boyden v. Burke, 55 U.S. 575, 584 (1852). Bolton and Spireas invoke the literal meaning of this language to argue that Plaintiff must be charged with knowledge of the Liquisolid Patents as a matter of law on the dates they issued, whether or not Plaintiff actually did have such knowledge.

The cases relating to the constructive notice of a patent's existence do not bear the weight Defendants place on them. The Federal Circuit has confronted what significance, if any, to accord this language in the context of suits brought by purported co-inventors to correct the inventorship of a patent under 35 U.S.C. § 256. The questions presented in inventorship cases are analogous to those presented here. An inventorship action may be brought at any time during the life of the patent, but a purported inventor may be estopped under the doctrine of laches from contesting inventorship for his unreasonable delay in doing so.See Advanced Cardiovascular Sys., Inc. v. SciMed Life Sys., Inc., 988 F.2d 1157, 1161-62 (Fed. Cir. 1993). The Federal Circuit has held that under the equitable doctrine of laches, the period of a purported inventor's "delay is measured from when the claimant had actual notice of the claim or would have reasonably been expected to inquire about the subject matter."Id. at 1161.

In Advanced Cardiovascular the lower court granted a motion to dismiss on the basis of laches after calculating the period of delay running from the date the patent issued. Id. The district court explicitly relied on Sontag Chain Stores, 310 U.S. at 295, and its statement that because "[a]ll patents must be recorded, together with the specifications, in the Patent Office in books to be kept for that purpose[,] [c]onstructive notice of their existence goes thus to all the world." Advanced Cardiovascular, 988 F.2d at 1161-62 (quotation omitted). The district court inAdvanced Cardiovascular took the view, advanced by Defendants in this case, that the claimant had notice of the patents, as a matter of law, and thus the facts underlying his inventorship claim, on the date the patents issued. Id.

On appeal, the Federal Circuit explicitly repudiated this argument, holding that "Sontag Chain Stores harbors no principles applicable to laches. Constructive notice is not an appropriate substitute for the determination of reasonableness or excuse for delay." Id. at 1162 (emphasis added). Analogizing the application of laches in an inventorship suit to the application of laches to a patentee's suit for infringement, the court explained that while certain provisions of patent law involve constructive notice, where equitable considerations come into play, actual knowledge of the existence of a plaintiff's claim, or of facts supporting a duty of inquiry, is required. Id. In stating that the period of delay cannot "start while the potential claimant remains ignorant that a cause of action has arisen," the court rejected the argument advanced by Defendants here, and held that mere issuance of a patent does not give a potential claimant notice of the patent's existence for purposes of determining whether the potential claimant exercised diligence in protecting his rights. Id.

Though Defendants cite cases in which federal district courts have read Wine Railway and Sontag Chain Stores in the literal manner they suggest, the court is unpersuaded by their reasoning and declines to adopt it. InM T Chemicals, Inc. v. International Business Machines Corp., 403 F. Supp. 1145, 1148 n. 4 (S.D.N.Y. 1975), the court properly applied New York law in rejecting plaintiff's argument that its conversion claim should run from the date it discovered the conversion, instead of the date the conversion was completed. However, in dicta the court went on to cite Sontag Chain Stores and stated, in the alternative, that the plaintiff had imputed knowledge of the patent and thus discovered the conversion on the date it was issued. Id. In Rodgard Corp. v. Miner Enterprises, Inc., 914 F. Supp. 907, 925 (W.D.N.Y. 1995), aff'd in part, rev'd in part, 108 F.3d 1394 (Fed. Cir. 1997) (unpublished table decision), the plaintiffs alleged that the defendants fraudulently induced them to agree to a contract intended to preserve plaintiffs' trade secrets while defendants simultaneously filed a patent application relying on those same trade secrets; and defendants asserted the statute of limitations as a defense. The court reasoned that when the patent containing the same trade secrets issued, "the world had constructive notice of its existence and contents. There is no evidence that the plaintiffs could not have obtained actual notice of the fraud with due diligence, and this Court does not find that

This court is not the first to react with skepticism to the argument that the Sontag Chain Stores/Wine Railway dicta should be applied literally in the statute of limitations context. See Applera Corporation-Applied Biosystems Group v. Illumina, Inc., No. C 07-02845 WHA, 2008 WL 927963, at *1-2 (N.D. Cal. Apr. 4, 2008) (collecting cases) ("[Wine Railway] had no occasion to calibrate when publication of a patent would or would not serve as constructive notice for statute of limitations purposes or any other purpose beyond the immediate holding of the case. For our purposes, it was a dictum."); Univ. of Colorado Foundation, Inc. v. American Cyanamid, 880 F. Supp. 1387, 1405-06 n. 4 (D. Colo. 1995) ("The Supreme Court's dicta in [Sontag Chain Stores] and other cases cited by Cyanamid to the effect that the issuance of a patent is notice to the world for certain purposes, do not support the conclusion that such issuance is notice for all purposes, including the statute of limitations."), rev'd on other grounds, 196 F.3d 1366 (Fed. Cir. 1999).

the plaintiffs reasonably investigated such. They are charged with such knowledge." Id. Accordingly the court held that plaintiffs could reasonably have "discovered" the fraud on the date the patent issued. Id.

In M T and Rodgard the courts reflexively accepted the Sontag Chain Stores language as a literally correct statement of the law, without considering whether doing so was an appropriate extension of the language from the substantive context in which it appears in Sontag Chain Stores and Wine Railway. In Advanced Cardiovascular the court carefully considered whether the underlying substantive law to which laches would apply in that case, 35 U.S.C. § 256, would be advanced by imputing knowledge of the patents to the plaintiff, or whether a different standard was more appropriate. See, e.g., 988 F.2d at 1161-62 ("This knew-or-should-have-known criterion is appropriate to actions to correct inventorship. It is in harmony with the patent statute. . . ."). The Federal Circuit determined that imputing notice of patent existence would not advance the substantive policies embodied in the underlying substantive patent law to which the doctrine would have applied. Id. Moreover, the court found that imputing notice was particularly inappropriate in determining equity where the doctrine would disadvantage an otherwise innocent party "wholly ignorant [of claims] whose existence he had no reason to apprehend." Id. (quoting Halstead v. Grinnan, 152 U.S. 412, 417 (1894)).

As Wine Railway, Sontag Chain Stores, and Advanced Cardiovascular demonstrate, the applicability of the principle of constructive notice of a patent, if it exists at all, is inextricably intertwined with the specific policy objectives fundamental to the underlying substantive federal patent law. The federal policy concerns implicit in the Supreme Court's application of constructive notice to the underlying substantive federal law at issue in the cases cited by Defendants — i.e., the defense of intervening rights to patent infringement (Sontag Chain Stores, 310 U.S. at 294-95), and the patent marking statute (Wine Railway, 297 U.S. at 393; Sessions, 145 U.S. at 50) — are simply not implicated in cases like this one, where the court must apply state law. Accordingly, no principle of federal law applicable to this action requires the court to impute notice of the Liquisolid Patents to Plaintiff simply by virtue of their issuance by the PTO.

b. Constructive Notice of Patent Issuance under New York State Law

Because patents have the attributes of personal property,see 35 U.S.C. § 261, the transfer of patents and property rights of individuals in patents are governed by state law. Stanford, 583 F.3d 832, 841 (Fed. Cir. 2009). Accordingly, actions to vindicate property rights in patents are subject to state statutes of limitations, and state law doctrines determining when a limitations period may be tolled. See Stanford, 583 F.3d 832, 846-48 (Fed. Cir. 2009) (applying California statute of limitations and discovery rule to patent ownership claims); Stark v. Advanced Magnetics, Inc., 29 F.3d 1570, 1577-78 (Fed. Cir. 1994) (applying Massachusetts law governing equitable tolling of statute of limitations in considering effect of patent issuance on Plaintiff's knowledge); Applera Corporation-Applied Biosystems Group v. Illumina, Inc., No. C 07-02845 WHA, 2008 WL 927963, at *1-2 (N.D. Cal. Apr. 4, 2008) (applying California law in considering effect of patent issuance on Plaintiff's knowledge for purposes of discovery under state statute of limitations); Univ. of Colorado Foundation, Inc. v. American Cyanamid, 974 F. Supp. 1339, 1353-56 (D. Colo. 1997) (applying Colorado fraudulent nondisclosure and equitable tolling law), rev'd on other grounds, 196 F.3d 1366 (Fed. Cir. 1999); K-Tek Corp. v. Lovett, 924 F. Supp. 57, 59 (M.D. La. 1996) (applying Louisiana law in considering application of Louisiana prescription statute, and explicitly rejecting Wine Railway and Sontag Chain Stores as inapplicable to question of state law). Because Defendants invoke constructive notice of the Liquisolid Patents to defeat Plaintiff's claim to equitable tolling of New York statutes of

limitations and trigger the fraud discovery accrual rule on the date of the Liquisolid Patents' issuance, the issue is controlled by New York State law, and the court must determine whether a New York court would impute knowledge of the Liquisolid Patents' existence to Plaintiff.

The standard adopted in Advanced Cardiovascular for determining whether a potential claimant knew or should have known of his cause of action or that he has been defrauded is, for all intents, identical to that employed by New York courts in determining whether a plaintiff had notice of his claim sufficient to defeat equitable tolling or would, through reasonable diligence, have discovered that he was being defrauded. For much the same reasons Advanced Cardiovascular rejected the Sontag Chain Stores dictum's applicability to the equitable doctrine of laches in an inventorship suit, the court finds that a doctrine imputing notice of the Liquisolid Patents on the date of issuance would be similarly inconsistent with the doctrine of equitable tolling or the application of the fraud discovery accrual rule under New York law.

In articulating the principle underlying the doctrine of equitable tolling, the New York Court of Appeals has looked to Supreme Court precedent and the "`the maxim that no man may take advantage of his own wrong.'" General Stencils, Inc. v. Chiappa, 18 N.Y.2d 125, 127-28 (1966) (quoting Glus v. Brooklyn Eastern District Terminal, 359 U.S. 231, 232-233 (1959)). A defendant who intentionally conceals facts forming the basis of a plaintiff's claims is no less wrong for having done so, and a plaintiff is no less diligent in protecting his rights, if the plaintiff remains wholly ignorant of evidence of wrongdoing he had no reason to detect — even where that evidence exists in a public record open to all. See Advanced Cardiovascular, 988 F.2d at 1161-62 (quotingHalstead, 152 U.S. at 417 (1894) ("`[T]here can be no laches in failing to assert rights of which a party is wholly ignorant, and whose existence he had no reason to apprehend.")).

The Supreme Court has stated that "the law imputes knowledge when opportunity and interest, combined with reasonable care, would necessarily impart it. Not to improve such opportunity, under the stimulus of self-interest, with reasonable diligence, constitutes laches which in equity disables the party who seeks to revive a right which he has allowed to lie unclaimed from enforcing it, to the detriment of those who have, in consequence, been led to act as though it were abandoned." Wanlass v. General Elec. Co., 148 F.3d 1334, 1338 (Fed. Cir. 1998) (quoting Wollensak v. Reiher, 115 U.S. 96, 99 (1885)). This principle is also an accurate statement of New York law governing constructive notice of the contents of public records. New York courts impute knowledge of the contents of a public record to a party when the party has actual knowledge of facts giving it reason to believe that it has an interest in the contents of the records, and a reasonably prudent person with such an interest would investigate those records if given an opportunity to do so.See Citicorp Trust Bank, FSB v. Makkas, 67 A.D.3d 950, 953 (2d Dep't 2009) ("The failure to ascertain that an allegedly fraudulent conveyance has occurred through the inspection of public records is not a basis for imputing knowledge of the fraud in the absence of circumstances that would require the plaintiff to investigate."); Gudej v. Dana, 11 A.D.3d 368, 368 (1st Dep't 2004) ("The mere fact that deeds had earlier been recorded was insufficient to constitute constructive notice of the [fraudulent] conveyances in the absence of some knowledge that would have required plaintiffs to investigate the public records."); Azoy v. Fowler, 57 A.D.2d 541, 542 (2d Dep't 1977) (holding plaintiff's failure to investigate public record did not constitute failure to exercise reasonable diligence in discovering alleged fraud where circumstances would not lead a person of ordinary suspicion to investigate public record).

Plaintiff has repeatedly alleged that it had no knowledge of the Liquisolid Patents or their relationship to the Defendants' research at St. John's until November 2008, at which time it promptly demanded performance of Defendants' obligations under the Agreements. For the most part, Defendants do not argue that Plaintiff was aware of circumstances that should have caused it to investigate the public records of the PTO to determine whether Defendants had obtained patents related to research performed at St. John's. Defendants argue instead, that Plaintiff should be charged with knowledge of the Liquisolid Patents simply by virtue of their existence. New York courts impute knowledge of the contents of a public record only where a reasonable person would have investigated it. Therefore, it is appropriate to frame Defendants' argument in terms of the duty they assert a reasonable person in Plaintiff's position would be under if this court were to accept their argument. Defendants would have this court hold that a "reasonably diligent" or "ordinarily suspicious" university has a duty to review all patents issued by the PTO to all former students, faculty, and staff, in the absence of any information suggesting it has an interest in the contents of the patents issued, or that such patents will reveal evidence it is being defrauded.

This degree of watchfulness is not required by New York law. Defendants have not directed the court to a reasoned opinion in which a court has found that a "reasonable person" or a "person of ordinary suspicion" has a continuing duty to monitor a public record in the absence of any information which should trigger the person's interest in the record, on the off-chance that it might reveal evidence that he has been defrauded. Therefore, the court finds that New York law does not require the imputation of knowledge of the Liquisolid Patents to Plaintiff in this case.

c. Inquiry Notice

In the alternative, Defendants, point to one fact that might have put St. John's on inquiry notice of its claims to the inventions or of Bolton's and Spireas's intended fraud. Defendants argue that Spireas's submission of his dissertation and oral defense put St. John's on inquiry notice of its rights to the research disclosed in the dissertation. (Bolton Mem. at 7 n. 5; Spireas Mem. at 8 n. 4, n. 5; Spireas Reply at 8 n. 20.)

The determination whether a plaintiff was "possessed of knowledge of facts from which it could [] reasonably have inferred . . . the alleged fraud" is "[o]rdinarily . . . a mixed question of law and fact." Erbe v. Lincoln Rochester Trust Co., 3 N.Y.2d 321, 326 (1957). And "[w]here it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts." Citicorp Trust Bank, 67 A.D.3d at 953 (quotation omitted); In re Integrated Resources, 815 F. Supp. at 638 (holding that summary judgment on question of inquiry notice is warranted only in the "extreme circumstances" that the undisputed facts in the record allow the court to "readily impute knowledge of a probable fraud . . . without having to assume the role of the jury and undertake a detailed deductive analysis of the factual record"); see also General Bedding Corp. v. Echevarria, 947 F.2d 1395, 1397-98 (9th Cir. 1991) (where parties did not dispute patent issuance was notice to the world of patent existence, court could not "conclude, as a matter of law, that a reasonable person would necessarily investigate when confronted with [defendant's] patent").

Even if the court accepts as true the proposition that Spireas's dissertation fully disclosed to St. John's the nature and findings of the research he conducted, it is not necessarily clear that this alone was sufficient to satisfy Bolton's and Spireas's fiduciary duties to disclose material facts relating to the inventions. Not all research disclosed in dissertations is valuable or patentable, and the court cannot conclude from the mere fact of the submission of the dissertation to the St. John's faculty review panel that a reasonable person on the faculty panel reviewing it would have known that the research was valuable and should have acted accordingly. It is even more difficult for Defendants to argue that the dissertation and oral defense put St. John's on notice of Bolton's and Spieras's fraud. There is nothing inherently fraudulent about submitting and defending a dissertation, and in the absence of evidence that the dissertation demonstrated Defendants' wrongful intent to appropriate the research for their own ends, the court cannot conclude that an ordinarily suspicious person on the faculty review panel would have been placed on notice of Defendants' fraud. But the import of Spireas's purported disclosure is a question of fact the court cannot resolve on a motion to dismiss. Because the parties contest the nature and significance of the facts disclosed in the dissertation and oral defense, the court cannot conclude on a motion to dismiss that the dissertation and oral defense should have placed St. John's on inquiry notice of its claims, or that it was being defrauded.

The parties have not briefed the question whether disclosure to the members of the faculty panel reviewing the dissertation and hearing the oral defense would be sufficient to constitute notice to St. John's, and the court does not reach this issue.

Taking Plaintiff's factual allegations as true, the court finds that the first day on which Plaintiff could with reasonable diligence have discovered it was being defrauded and the facts forming the basis of its claims, was the day on which it was alerted of the similarities between Spireas's doctoral dissertation and the Liquisolid Patents. That date was in or around November 2008. For those claims that do not sound in fraud, including the contract, tortious interference with contract, conversion, and unjust enrichment claims, Plaintiff has alleged facts sufficient to invoke equitable tolling of the applicable statutes of limitations until November 2008, and Defendant's motions to dismiss these claims as untimely must be denied. Plaintiff's claims subject to the fraud discovery accrual rule, including Plaintiff's fraudulent concealment, fraudulent conveyance, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty claims, are also timely because Plaintiff originally filed this action within two years of November 2008.

III. CONCLUSION

Nearly every defense raised by Defendants implicates a question of fact that cannot be resolved by the court on a motion to dismiss. While it is entirely possible that Defendants will be able to establish their entitlement to summary judgment on some or all of these defenses following discovery, the court cannot say that Plaintiff's sixty-one page Complaint is legally insufficient. The court advises the parties that it will permit each only one motion for summary judgment at the close of discovery. If upon reviewing the motions for summary judgment the court concludes that there are genuine issues of material fact in dispute, the court will move expeditiously to trial and will expect the parties to be prepared accordingly.

For the foregoing reasons, Defendants' motions to dismiss are DENIED. Defendants shall answer the Complaint by January 10, 2011, and the parties shall proceed with discovery forthwith.

SO ORDERED.