Licensing is an integral part of today's business strategy and patent portfolio management. While the licensor and licensee can divide between them the variety of rights associated with a patent, it is important to understand that express language conferring a right is not necessarily effective. The right to sue those who infringe a patent has proven to be particularly troublesome to transfer by way of license agreement.
A recent Federal Circuit ruling, Morrow v. Microsoft (06-1512; Sept. 19, 2007), highlights one such example of a trap for the unwary. The opinion clearly implies that dividing the rights to a patent can create the situation that neither party has sufficient rights to enforce the patent.
We examine how this scenario arose and how terms of the license affect the right to enforce patents.
The Federal Circuit held in Morrow that if the party that is explicitly granted the sole right to bring suit does not also hold the exclusionary rights to the patent, then that party lacks constitutional standing and cannot cure this defect even by joining the patent owner in the suit. This decision yielded the seemingly anomalous result that the division of rights "extinguishe[d] all standing to enforce the patent."
In Morrow, a bankruptcy liquidation plan divided rights to a patent among three trusts. One trust received the rights to all causes of action aside from suits against controlling shareholders, including the right to claims for infringement. Another trust received ownership rights to the intellectual property, including legal title to and the right to license, the patent-in-suit. This trust also held the exclusive right to make, use and sell the patented invention.
Despite arguments that bankruptcy or trust law principles should apply to the standing analysis, the Federal Circuit readily concluded that patent law principles govern here—just as they do where parties have contractually divided patent rights, that is, entered licensing agreements. Thus, although Morrow arose from a bankruptcy matter, the same scenario can be created, and the same outcome obtained, with a license.
As for any suit, a plaintiff must have standing to enforce the claim, or else the court cannot hear the case. Standing includes both constitutional and prudential requirements. The minimal constitutional requirements are an injury in fact to the plaintiff, caused by acts of the defendant, that can be redressed by the court.
The Patent Act creates the statutory right to exclude other parties from practicing a claimed invention, the violation of which is an injury in fact. Courts have ruled that these exclusionary rights must be enforced through the party that holds legal title to the patent. In cases where the patentee (holder of legal title) has transferred the exclusionary rights, the patentee must be joined to the suit, but this is a prudential standing requirement. The injury in fact is suffered by the party holding the exclusionary rights, but the holder of legal title must be joined to eliminate the potential for multiple litigations.
The Morrow court has helpfully placed the types of plaintiffs in patent infringement suits into three general categories. The categories are defined according to the status a plaintiff would have in court. In the first category, a party may bring suit independently, that is, without the participation of any other party, such as the patent title owner. A category two party has standing to sue, but only as a co-plaintiff with the patentee. Finally, in the third category are parties that have no standing, either alone or as a co-plaintiff, because the rights held are inadequate to confer standing.
Category One Plaintiffs — "All Substantial Rights" Creates Independent Standing
Under the Patent Act, patent rights may be vindicated in court by the patentee, 35 U.S.C. § 281, and successors in title to the patentee, 35 U.S.C. § 100(d). In addition, courts have recognized that a transfer of "all substantial rights" of a patent to a licensee amounts to a "virtual assignment," and the licensee is deemed to have standing to bring suit for patent infringement independent of the patentee-licensor.
The Federal Circuit has defined "all substantial rights" as those rights sufficient for the licensee to be deemed the effective patentee under 35 U.S.C. § 281. Because the circumstances of each license are unique, courts must ascertain the parties' intent and the substance of the rights granted to determine if substantial rights are conveyed. Mere use of the terms "all substantial rights" or "exclusive license grant" do not legally establish standing in the licensee.
A prerequisite to finding that "all substantial rights" have been transferred is that the license must include an exclusive grant of an exclusionary right. The exclusionary rights to a patent are those rights established by statute, for example, the right to make, use or sell the invention, that the patentee may exclude others from practicing.
Exclusivity does not require the licensee to be the "sole licensee." Courts recognize that a license is "exclusive" even if it is subject to pre-existing nonexclusive licenses. Instead, courts examine whether it clearly manifests a promise not to grant anyone else a license to the exclusionary right.
If a license includes an exclusive grant of an exclusionary right, the court then focuses on whether a license confers "all substantial rights" in a patent. Courts have found that, at minimum, the rights transferred must include: (a) the exclusive right to sue for patent infringement and control over the litigation and decisions to settle, and (b) the right of the licensee to freely assign, transfer or sublicense the agreement.
Where the right of the licensee to bring suit, or the right of the licensee to transfer its rights under the agreement has been limited in any substantive manner, courts have ruled that the licensee lacked "all substantive rights."
Non-substantive limitations are permissible. For example, if the transfer of the licensee's interest requires consent of the patentee-licensor, courts have held that, so long as consent shall not be withheld unreasonably then the rights of the licensee are sufficiently substantial. Other factors have also been considered, but not applied as dispositive elements in the analysis of "all substantial rights."
Category Two Plaintiffs — "Exclusive Licensee" Has Co-Plaintiff Standing
A category two plaintiff, previously often referred to as an "exclusive licensee," is a licensee that holds exclusionary rights in a patent but fewer rights than an assignee of "all substantial rights." The category two plaintiff can file suit alone, but at some point in the proceedings the patent title holder must be joined.
The exclusionary rights of a patent include, as noted above, the right to make, use, sell or import a claimed invention. Note that a patentee-licensor may separately license the exclusionary rights to the patent and create an "exclusive licensee" as to that particular right.
The Supreme Court noted in Bauer & Cie v. O'Donnell, 229 U.S. 1, 15 (1915), that "[t]here are several substantive rights, and each is the subject of subdivision, so that one person may be permitted to make, but neither to sell nor use, the patented thing. To another may be conveyed the right to sell, but within a limited area, or for a particular use, while to another the patentee may grant only the right to make and use, or to use only for specific purposes."
A patentee's promise to refrain from granting any further licenses in any individual exclusionary right of the patent makes that promise an "exclusive license" as to that right.
Note, too, that reserving in the patentee the right to practice the invention does not transform an exclusive license into a bare license, and the licensee maintains the status of a category two plaintiff.
Category Three — "Bare Licensee" Has No Standing
A "bare licensee" merely receives a personal right to use the invention under a covenant not to be sued by the patentee. Such licensees comprise the category three plaintiff, and have no right to bring suit. Courts are clear that a bare licensee cannot cure its lack of standing by joining the patentee as a party. These plaintiffs lack standing because they do not have the right to the exclusive practice of an invention, and therefore practice of that invention by another would not cause harm. Thus, they are unable to meet the injury-in-fact requirement for standing.
Standing In Morrow v. Microsoft
The Morrow court phrased the standing inquiry as whether the interests of the trust holding the right to sue include "sufficient exclusionary rights such that [they] suffer ... an injury in fact from infringing activities."
As the discussion above indicates, category one and two plaintiffs must be assignees of exclusionary rights in a patent, whereas a category three plaintiff lacks the exclusive right to practice under a patent.
The facts in Morrow are clear that the trust granted the right to sue was not also granted any exclusionary rights. The Morrow court further considered whether the requirement that that trust consent to the transfer of patent rights by one of the other trusts amounts to an exclusionary right and concluded that it does not. Even if it did, there is no restriction on the other trust to the further transfer of exclusionary rights to other parties.
Thus, even if exclusionary rights were found, those rights would not be exclusive. Recall that the exclusive grant of at least one exclusionary right is prerequisite to the creation of a category one or two plaintiff.
The Morrow court thus places the plaintiff-trustee in category three — a plaintiff without standing because it suffers no legal injury and thus also a plaintiff that cannot join the other trusts. Note, though, that the other trusts were not granted the right to sue, thus the trusts cannot bring suit, neither individually nor in combination, to enforce the patent whose rights they share.
The dissent argues that the trust should at least be a category two plaintiff. Judge Prost would find the trust suffered an injury in fact because it has an equitable interest in the patent title and because denying standing undermines the explicitly granted right to sue. This view does not, however, account for the trust not actually possessing proprietary rights under the patent, such as the right to make, use or sell the invention.
The U.S. Supreme Court held in Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U.S. 24, 39 (1923), that grant of only the right to enforce a patent without the transfer of any "part of the title to the patent or interest in it conferred no right to sue." More recently, though, in Propat Int'l. Corp. v. Rpost Inc., the court seemingly broadened the inquiry by holding a licensee lacked standing despite an exclusive grant of the right to sue because it lacked "important indicia of a true ownership interest in the patent" and considered in its analysis more than just the right to practice the patent. 473 F.3d 1187, 1194 (Fed. Cir. 2007).
The Morrow court now appears to require "true ownership interest" to be an exclusionary right.
Despite a clear effort by parties to a license to confer the right to sue on one party to the agreement, a court may find that the rights have been divided in a manner that neither party has the requisite standing to bring an infringement suit.
The party holding the right to sue must also hold, exclusively, at least one exclusionary right under the patent. Then, depending on the disposition of other rights in the bundle, that party can either sue in their name alone or by joining the other party.
It is not just the bare licensee who lacks standing to sue, the bare holder of the right to sue is also likely left without a claim. At least in the scenario of a bare licensee, the right to enforce the patent still resides with the patentee. In the latter case, as Morrow shows, there may be no one who can enforce the patent.
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