Substance Over Labels: Establishing Standing in Patent Infringement Suits

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The Federal Circuit’s decision last week in Lone Star Silicon Innovations LLC v. Nanya Technology Corporation, et al. (in addition to previous decisions from the court on this issue) emphasizes exactly how fact-specific the analysis of the bundle of rights conveyed in an assignment or licensing agreement is for the purposes of surviving a motion to dismiss for lack of standing to bring a patent infringement suit. 

The U.S. Patent Act gives a patent owner the right to exclude others from practicing the patent and further allows that, if another practices the patent without authorization, the patent owner may receive remedy by filing a patent infringement lawsuit. Standing to sue is also governed by the Patent Act, which grants standing to sue only to the patent owner and successors in title. In other words, parties who are not patentees do not have standing to sue for patent infringement except when the patentee has transferred its rights to another or the patentee has issued an exclusive license.  While this seems pretty straightforward, navigating through the case law on this issue and making sure your agreement results in what is intended by both sides is akin to threading a fine needle. 

The most straightforward manner to obtain substantial rights, and thus standing to sue, is by issuance of a patent or by assignment. Generally, assignment of a patent confers to an assignee (and divests from the assignor) standing to sue for infringement.  But, as explained by the court in Lone Star, an assignment from one party to another may not actually be enough to satisfy standing unless it conveys all substantial rights.  More specifically, while the patentee executed an agreement in which it purported to transfer “all right, title, and interest” in the patents to Lone Star, the agreement imposed certain limits on Lone Star, including the ability to only enforce the patents against specifically listed unlicensed third parties. New parties could be added to the list, but only if both the patentee and Lone Star agreed to do so. If Lone Star sued an unlisted party, the patentee retained the ability to license the patents to that entity. In addition, the agreement prevented Lone Star from assigning the patents or allowing them to enter the public domain. Moreover, the patentee retained the right for it and its customers to practice the patents. 

In examining the totality of the agreement to determine whether Lone Star has established all substantial rights such that it could bring a suit in its own name without the patentee, the court concluded that the rights conveyed to Lone Star with regard to enforcement were “illusory, at least in part” and Lone Star did not possess the right to sue for “all infringement.” Just because the appellees in this case were specifically listed unlicensed third parties, and thus allowed by the agreement, the court clarified that “it is the effect of the agreement on the respective rights of the patentee and the transferee that controls.” Furthermore, the restriction on alienation (i.e., the ability to transfer the asserted patents without consent from the patentee, even though consent could not be unreasonably withheld) was too limited to be considered a transfer of this right to Lone Star since the patentee maintained control of how the patents were asserted. Finally, the court found that the patentee’s share in any enforcement proceeds and ability for it and its customers to practice the patents was consistent with the patentee’s retaining ownership rights in the patents.

The Federal Circuit arrived at a similar conclusion a few years ago in Diamond Coating Techs, LLC v. Hyundai Motor America that the transfer document did not convey all substantial rights to the exclusive licensee because the patent owner retained a limited right to make, use and distribute products covered by the patents, and it also retained significant control over the licensee’s enforcement and litigation activities. Indeed, it seems that if there are even limited restrictions on the ability to enforce the patent, then a party does not have standing to sue. The Federal Circuit has explained that, when a patent owner retains significant control over the licensee’s enforcement and litigation activities, even if merely conditioned on the patent owner’s “best interests” and limiting the licensee’s discretion to sue by listing companies that the patent owner reserved the right to not assert the patent against, there is not a conveyance of all substantial rights.

In arriving at its decision that Lone Star cannot bring suit in its own name under 35 U.S.C. § 281, the court reminded us that an agreement labeled as an assignment or license does not necessarily determine whether all substantial rights are held as required for standing. Indeed, “the substance of the transaction is what matters and the substance of this transfer agreement gave [the patentee] important rights in the patents.” The court remanded to the district court the issue of whether Lone Star could join the patentee as a necessary party before the suit was dismissed. 

Obviously, no one can predict with complete assurance what the district court will decide on joinder, but the Federal Circuit’s earlier decision in Azure Networks, LLC v. CSR PLC suggests that the lower court should find that the patentee is able to be joined in the suit as a necessary party. In Azure Networks, the court found that a patent owner lacks standing to join a suit for patent infringement brought by its licensee against an accused infringer even though the patent owner retained 1) the right to royalties, 2) the right to practice the patent, 3) the right to terminate the agreement, and 4) a future reversionary interest in the patent because it completely transferred litigation control and licensing of the patent to the licensee. In other words, to have standing to sue or join in a suit, a patent owner must retain some litigation control rights to control litigation, e.g., veto power over the licensee, notice requirements, and the like. In contrast to the patent owner in Azure Networks, the patent owner in Lone Star did retain at least some control over litigation, which was discussed at length in the Federal Circuit’s opinion. Accordingly, it is likely that the suit will be allowed to proceed by joining the patentee.

So what can you do as an assignee or exclusive licensee to make sure that you are obtaining the rights that you need to enforce the patents without joining the patent owner? First, the parties need to clearly understand and define the bundle of rights that is intended to be conveyed. Second, the agreement needs to clearly articulate these rights and avoid a broad restriction of rights or grant of rights, depending on the intended conveyance, since a court will closely scrutinize this bundle of rights to determine who has effective ownership. While the court’s analysis is not always consistent from case to case, it is clear that without at least the following two rights a party does not have all substantial rights such that it can bring a suit in its own name:

  1. The receiving party must have full, unrestricted rights to practice the patent or patents being transferred. In other words, the party must be able to make, use, offer to sell, sell and import the claimed invention in all fields of use for the entirety of the life of the patent; and
  1. If the receiving party does have the full right to practice the patent, then it must also have the unfettered right to enforce the patent.

Getting this right before bringing suit is critical to avoid having to join the patent owner to maintain the suit. But, it is also important to avoid the possibility of the defendant being awarded attorneys’ fees after prevailing on a motion to dismiss. For example, in Raniere v. Microsoft Corp., after affirming the dismissal of Raniere’s patent infringement suit with prejudice for lack of standing, the Federal Circuit found that the defendants were prevailing parties for purposes of attorney fees under 35 U.S.C. § 285 because a) they were successful in challenging a jurisdictional issue, such as standing, even when the defendants did not win on the merits or, alternatively, b) the district court’s dismissal of the case with prejudice for lack of standing was considered by the court to be a decision on the merits, of which the defendants were the prevailing parties.