A California court ruled that a patent licensee lacked standing to sue on its own for infringement because the licensor had not transferred all substantial rights in the patents to the licensee. The license agreement between the parties and their actions in settling a related litigation demonstrated that the licensee was simply acting as the licensor's litigation agent in the U.S. The court also ruled that adding the patent owner would not cure the standing deficiency because despite being characterized as an exclusive licensee, the licensee had no proprietary interest or exclusive license in the patents and therefore did not suffer any injury in fact traceable to infringement of the patents.
Generally, only patent owners have standing to sue for infringement. One exception to this rule is that an exclusive licensee may also have standing to sue but usually the licensee will have to sue jointly with the patent owner. If, however, the patent owner has transferred "all substantial rights" in the asserted patents to the exclusive licensee, then the licensee may be able to sue on its own. To determine whether a license agreement conveys "all substantial rights," the court analyzes the rights granted under the license agreement and the intent of the parties.
When SPH America sued Huawei for infringing nine patents owned by Electronics and Telecommunications Research Institute ("ETRI") and licensed to SPH America, LLC ("SPH America"), years into the case, information came to light relating to the relationship between ETRI and SPH America. Based on that information, the court dismissed the case, finding that SPH America does not have standing to sue for infringement of the patents.
Background
ETRI, a Korean research organization, granted an exclusive patent license to SPH, a Korean-based entity. SPH then transferred to SPH America rights under the license to use the licensed patents, grant sublicenses to third parties, and to bring infringement actions.
The title to the patents remained with ETRI, and SPH America was required to receive the consent of ETRI before transferring any of its rights or obligations. The license agreement also required SPH America to use its best efforts to make licensing and litigation decisions that were in the best interest of ETRI, though SPH was responsible for all litigation costs.
Large guaranteed minimum payments were required yearly if the proceeds from royalties and litigation proceeds did not meet the minimums. And all the license rights were to revert to ETRI if SPH America breached the contract.
SPH America brought an infringement suit against Huawei as well as separate lawsuits against other large wireless technology companies, including Samsung, who entered into a settlement agreement.
Huawei requested documents regarding the settlement of the Samsung suit and the resulting license agreement. The resulting documents showed that the patent owner, ETRI, had conducted the negotiations and the licensee that brought the infringement suit, SPH America, was sent the final agreement for signature once it was finalized. Because of this behavior, as well as comments from ETRI's legal department that described SPH America as its litigation agent, Huawei challenged SPH America's standing to bring the lawsuit and the court ordered SPH America to show cause as to why it had standing to bring the lawsuit.
The SPH America Decision
To determine whether the license agreement transferred all substantial rights to SPH America such that it has standing to sue on its own, the court examined the agreement and the surrounding circumstances showing the intent of the parties.
Although the license purported to be an exclusive license, the court concluded that it did not transfer all substantial rights for three reasons.
First, the requirement that SPH America act in ETRI's best interests was a significant restriction on SPH America's rights. It could not act in its own interests if they differed from the interests of ETRI. The large annual minimum payments to ETRI forced SPH America to target any potential sublicensee, and to pursue litigation even if the cost of the litigation outweighed the benefit to SPH America. Although SPH America argued that its interests were common to ETRI's so the ability to act independently was not at issue, the court was not persuaded.
Secondly, ETRI retained the right to pursue continuing applications at the Patent Office in its own name as the patent owner. The court viewed this as inconsistent with the grant of an exclusive license to practice an invention.
Lastly, with regard to the settlement of the Samsung litigation,
the court found that ETRI's management of the negotiation
without any direction
or input from SPH America also showed that SPH America did not
actually have substantial rights in the patents.
According to the court, what the license agreement did create was a relationship where SPH America was an agent of ETRI for licensing and litigation; however this did not transfer substantial ownership of the patents to SPH America.
Typically, where an exclusive licensee has fewer than all substantial rights, standing can be fixed by adding the patent owner as a co-plaintiff along with the exclusive licensee. The court, however, found that despite the labels used in the agreement, SPH America was not an exclusive licensee, but merely ETRI's agent to enter into licenses and litigate on its behalf. This "hunting license," as the court termed it, did not grant SPH America a proprietary interest or exclusive license in the patents. Thus, infringement would not cause any harm directly to SPH America. Therefore, SPH America did not have standing even if ETRI was to join the suit. Accordingly, the court denied the request to add ETRI as a co-plaintiff and dismissed the case.
Strategy and Conclusion
While an agreement may purport to be an exclusive license agreement, standing to sue for infringement depends on the actual terms of the agreement, what rights are actually granted to the licensee, and what rights are retained by the patent owner. Even when the licensee is granted the right to sue and is described as an exclusive licensee, if the licensor retains significant control over the patents or the actions of the licensee, the licensee may still lack standing to sue, and may not be allowed to cure this deficiency by joining the patent owner in the litigation.
Further Information
The SPH America opinion can be found here.
Originally printed in LES Insights on May 2, 2017.
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