United States: Recent Decisions In The United States: A Recurring Feature

Originally published in Les Nouvelles, March 2006

Generally, only the owner of a patent may bring a suit for patent infringement. A licensee may bring suit, however, if the rights they have been granted are tantamount to an assignment of the patent. In order to determine whether a license agreement should be treated as an assignment, the courts look to whether the licensee has been granted "all substantial rights" in the patent. In Sicom Systems Ltd. v. AgiIent Technologies., Inc., No. 05-1066 (Oct. 18, 2005), the Court of Appeals for the Federal Circuit held that a licensee who had been granted the exclusive right to sue for commercial infringement was not granted "all substantial rights" because the patent owner had retained the right to permit infringement in certain cases, because the agreement required either the patent owner's consent to litigation or that the patent owner be consulted on the litigation, depending on the circumstances, and because the agreement could not be assigned.

The patent at issue in this case was owned by the Canadian government ("Canada") and licensed by Sicom Systems Ltd. ("Sicom"). Under the initial license agreement, Canada retained ownership of the patent and reserved the rights t (1) continue operating under the patented technology; (2) veto proposed sublicenses; (3) grant contracts to further develop the patent; (4) sublicense improvements or corrections developed by Sicom; and (5) sue for infringement of the patent except for "commercial infringement actions." Sicom also could not assign its rights without Canada's approval and could not bring suit without first notifying Canada.

On January 15, 2003, Sicom filed suit for infringement against the defendants. The defendants moved to dismiss this action on the ground that Canada had retained substantial rights in the patent. The district court granted the defendants' motion. After dismissal of its case, Sicom and Canada executed an amendment to the license agreement. The amendment granted Sicom the exclusive right to sue for commercial infringement of the patent. Following execution of the amendment, Sicom again sued the defendants, and the defendants moved to dismiss the second suit, alleging that Sicom still did not have all substantial rights in the patent. The district court held that the amendment did not grant Sicom all substantial rights, and, therefore, the district court dismissed the case with prejudice. Sicom appealed this holding to the Federal Circuit.

On appeal, the Federal Circuit affirmed that the key inquiry in determining whether a licensee may bring suit for infringement is whether that licensee has received "all substantial rights." In determining whether "all substantial rights" have been granted, the Federal Circuit instructed that a court must ascertain the intention of the parties and examine the substance of what was granted.

In examining the agreement, the Federal Circuit noted that Sicom was granted the right to be the only licensee of the patent, but that Canada had also reserved many other rights. The Court noted that an important right is the exclusive right to sue for infringement, and that while Sicom had been granted an exclusive right to sue for commercial infringement, Canada could sue for noncommercial infringement. Therefore, a single infringer could be subject to suit from both Canada and Sicom for noncommercial infringement. Moreover, Sicom could not indulge infringement outside of the commercial sphere. In addition, Sicom could not settle litigation without the prior consent of Canada, and could not sublicense or assign its rights. Finally, Canada reserved the right to grant contracts to develop the patent further, to offer sublicenses under any improvements, to veto any sublicense, and to levy additional royalties or other consideration. In light of the rights retained by Canada, the Federal Circuit held that the agreement transferred fewer than all substantial rights to Sicom. Thus, Sicom could not bring suit for infringement.

The Federal Circuit also reviewed whether it was appropriate for the district court to dismiss the case with prejudice, meaning that Sicom would not be able to sue the defendants for patent infringement again. The Federal Circuit noted that the action was Sicom's second suit that was dismissed for lack of standing. The Court also noted that while a dismissal with prejudice is generally inappropriate when a standing defect can he cured, in the present case, Sicom had an opportunity to cure the defect and failed. Therefore, the Court also affirmed the dismissal with prejudice.

Companies afraid of being sued for patent infringement often wish to bring a "declaratory judgment" action to have the patent declared invalid or not infringed in order to remove any potential cloud over their business. U.S. law provides that a company may only bring such an action if it can show that it has a reasonable apprehension of being sued. In U.S. Synthetic Corp. v. ReedHycalog, Ltd., No. 2:05cv247 (Dec. 9, 2005), the District Court for the District of Utah held that a potential infringer did not have a reasonable apprehension of suit from oral statements made by the patent owner to the infringer during an unsolicited phone call.

ReedHycalog, Ltd. ("ReedHycalog") owned several patents relating to inserts for drill bits made from a process including leaching. U.S. Synthetic Corporation ("USS") manufactured inserts for competitors of ReedHycalog. In September 2004, the presidents of ReedHycalog and USS had a telephone conference in which the president of ReedHycalog expressed concern that USS was not honoring ReedHycalog's patents. The president of USS indicated that they did not believe the patents were valid, but that USS had decided not to violate any of the patents. In December 2004, ReedHycalog sent letters to several companies, including USS, notifying those companies of certain allowed claims of its patents.

In March 2005, an employee of USS heard that ReedHycalog was planning on suing USS for patent infringement. Shortly afterwards, the president of USS called the president of ReedHycalog to ask whether ReedHycalog was planning on suing USS. The president of ReedHycalog refused to confirm or deny the rumors of a lawsuit. He did state that the patents were the "crown jewels" of ReedHycalog and that they would defend them vigorously. In addition, he also stated that he believed USS was using leaching to make its inserts and that it would be difficult to leach and not violate the patents. Finally, he asked whether USS indemnified its customers because ReedHycalog planned on sending letters to several of USS's customers concerning its patents. Two weeks after this conversation, USS sued ReedHycalog seeking a declaratory judgment that the patents were invalid. ReedHycalog moved to dismiss the case, asserting that USS did not have a reasonable apprehension of suit.

The District Court for the District of Utah noted that neither party claimed that a direct threat of litigation had been made. Therefore, the court would examine the totality of the circumstances to determine whether a reasonable apprehension of suit existed. First, the court noted that the statements were made by an individual "being called fairly 'out of the blue.'" They were not statements that the president of ReedHycalog was allowed to contemplate and consider beforehand. Moreover, the court found significant the fact that ReedHycalog never contacted USS outside of its initial letters. Under this background, the court analyzed the statements made by the president of ReedHycalog.

The court held that the statement that it would be difficult to leach without infringing the patents fell short of claiming infringement. The court found this akin to the opening of a dialogue on the issue and did not imply that a lawsuit is the next step. The court also held that the fact that ReedHycalog indicated it would vigorously enforce its patents did not mean it intended to pursue litigation. In particular, the court noted that there are several means of enforcing patents, such as licenses. Further, ReedHycalog's refusal to deny that it was planning to sue did not give rise to an objectively reasonable apprehension of suit. While this refusal would be relevant, the fact that ReedHycalog did not instigate the call and that the statement was not part of a tactical letter weighed against finding that a reasonable apprehension of suit existed. Therefore, in view of these circumstances, the court held that USS did not have a reasonable apprehension of suit.

Generally, if a patent owner assigns a patent to another, it will no longer have standing, i.e., the ability, to bring a suit for patent infringement. Similarly, if the patent owner grants a license to another that is essentially an assignment, only the licensee will have standing to sue for infringement. In determining whether a license is effectively an assignment, the courts look to whether all substantial rights in a patent have been granted. In Aspex Eyewear; Inc. v. Miracle Optics, Inc., No. 04-1265 Jan. 10, 2006), the Court of Appeals for the Federal Circuit held that where the rights granted by the patent owner would necessarily expire prior to the expiration of the patent, the patent owner did not transfer all substantial rights and, thus, the patent owner could sue for infringement.

The patent at issue in this case was owned by Contour Optik, Inc. ("Contour"). In 2001, Contour granted Chic Optic, Inc. ("Chic") the exclusive right to make, use, and sell products covered by the patent, the first right to commence legal action for infringement, and a virtually unfettered right to sublicense. Contour retained the right to commence legal action for infringement if Chic refused to do so within thirty days of receiving notice of infringement. The agreement also provided that it would expire on March 6, 2003, and in no event later than March 16, 2006, if Chic exercised an option to extend. In April 2001, Chic entered into a sublicense agreement with Aspex Eyewear, Inc. ("Aspex") that may be pertinent to the issue of whether Chic should be a party to the lawsuit, but not to the issue of whether Contour had standing to sue. Just prior to the grant of the sublicense, however, Aspex and Contour filed a patent-infringement suit against Miracle Optics, Inc. ("Miraclen). During the litigation, Miracle moved to dismiss the case, arguing that neither Contour nor Aspex had standing to sue for infringement. The district court granted Miracle's motion, and Aspex and Contour appealed.

The Federal Circuit began by examining whether Contour had standing to sue at the time it filed suit. The Federal Circuit noted that if Contour had transferred all substantial rights in the patent to Chic, it would not be able to bring suit. In order to determine whether "all substantial rights" had been granted, a court must ascertain the intention of the parties and examine the substance of what was granted.

The Federal Circuit noted that the agreement did grant many rights that are often associated with ownership of the patent. Specifically, the transfer of the exclusive right to make, use, and sell; the right to sue; and the unrestricted authority to sublicense strongly favored finding that the agreement was effectively an assignment. Moreover, the fact that Contour had the right to participate in lawsuits initiated by Chic was unimportant, because the participation was limited to monetary contributions. Contour could not control the litigation decisions. Further, the fact that Contour had the right to sue if Chic did not was unimportant because Chic had an unfettered right to sublicense.

Despite the fact that this grant of rights favored finding that the agreement was an assignment, the Federal Circuit held that the dominant factor was that the agreement was for a limited term. The Court found that because all rights under the agreement would necessarily go back to Contour, the agreement did not transfer all substantial rights. The Court stated that by "having rights for only a limited portion of the patent term, [Chic] simply did not own the patent." The Federal Circuit also cited the fact that a potential infringer could be subject to suit by both Contour and Chic for infringement as a factor weighing in favor of finding that the agreement was not an effective assignment. Therefore, the Court found that Contour was the owner of the patent and had standing to sue for infringement.

The Federal Circuit also examined whether, even though Contour had standing, it was necessary to join Chic in the litigation as an exclusive licensee. Generally, an exclusive licensee is a necessary party in a suit brought by a patent owner. Aspex, however, argued that it had been granted an oral or implied sublicense from Chic that was subsequently confirmed by the written sublicense agreement. Therefore, according to Aspex, it was the exclusive licensee when the case was filed, and Chic need not be joined. The Federal Circuit refused to decide this question for the first time on appeal and directed the district court to determine whether, in fact, an oral or implied license existed at that time.

Increasingly, corporations are concerned about the issues presented by so-called "patent trolls"—a term applied in some instances to companies that do not practice the technology in patents they own, but seek only to obtain revenue from licensing those patents. Typically, a patent troll will send cease and desist letters to companies it believes are infringing its patents and request patent royalties. Generally, such letters alone are not sufficient to provide personal jurisdiction over the sender in the state to which the letters are sent. In such instances, a court will usually require the accused infringer to have the case heard in the sender's home state or another jurisdiction where the sender has more contacts. In Overstock.com, Inc. v. Furnace Brook, LLC, No. 2:05cv00679 (Oct. 31, 2005), the District Court for the District of Utah held that the same jurisdictional standards that applied to other companies also applied to patent trolls, and that a patent troll could not be subject to jurisdiction based solely on such letters. The court also noted that while certain policy consideration might weigh in favor of finding jurisdiction over such an entity, it was up to the Federal Circuit or the Supreme Court to change the law, not the district courts.

This case involved a patent on Internet purchasing owned by Furnace Brook, LLC ("Furnace Brook"). Furnace Brook purchased the patent at a bankruptcy auction and did not practice the patented technology, preferring only to license the patent. The district court noted that Furnace Brook fell squarely in the description of a "patent troll." Furnace Brook sent several letters to Overstock.com, Inc. ("Overstock") in Utah accusing Overstock of infringing its patent and offering a license. Overstock filed suit against Furnace Brook seeking a declaratory judgment that the patent was invalid and not infringed. Furnace Brook moved to dismiss the case for lack of personal jurisdiction.

The court noted that the proper test for determining whether the court should exercise personal jurisdiction over Furnace Brook was whether Furnace Brook purposefully directed its activities at residents of the forum; whether the claim arises out of or relates to Furnace Brook's activities in the forum, and whether the assertion of personal jurisdiction is reasonable and fair. Under this background, the court analyzed Furnace Brook's contacts with Utah.

The court noted that Furnace Brook is a New York entity with only one employee and he has never entered the state of Utah. Furnace Brook has no agent or facilities in Utah and does not do business with Utah. Its only contacts with Utah were the letters it sent to Overstock and one other company. The district court found that this case was indistinguishable from Federal Circuit precedent, which required something more than just sending infringement letters for the assertion of jurisdiction. This something more can include a license agreement with a company in the state, the receipt of royalties from the state, or extensive negotiations in the state, all of which were absent from this case. Therefore, the court would not assert personal jurisdiction over Furnace Brook.

The court also examined Overstock's arguments that Furnace Brook's status as a "patent troll" merited finding that jurisdiction should exist over it in Utah. The court noted that Furnace Brook's business model seemed to be based on intimidating companies with the threat of litigation in order to force them to sign a license agreement. According to the court, Furnace Brook made no effort to practice the patent or enhance the technology. The court also noted that its strategy seemed to be based, in part, on the knowledge that Federal Circuit precedent protected it from being sued outside of New York. Thus, they could threaten an infringer with suit in another state without fear of being sued in that state. Therefore, the court noted that it might be reasonable to hold that patent trolls are subject to personal jurisdiction in a state based solely on cease and desist letters. The court stated that such a "change in precedent might well help stem the tide of coercive patent litigation."

The district court also indicated that the Federal Circuit's existing framework did not appear to consider patent trolls. The court felt that patent trolls receive some benefit in the "currently risk-free proposition" of purchasing a patent and sending demand letters throughout the country "while hiding from preemptive declaratory judgment actions behind the personal jurisdiction shield the Federal Circuit has created." Despite these policy considerations, however, the court indicated that it was up to Congress to either change the statutory framework or to the Federal Circuit to change its law in this area. Under the current state of the law, the district court had no choice but to dismiss the case.

When businesses file for bankruptcy, oftentimes, those businesses have contracts that are still in force at the time of filing. When a party to an agreement enters bankruptcy, the other party often wishes to terminate the agreement. Under federal bankruptcy law, however, the bankrupt entity generally has the right to maintain the agreement unless applicable law excuses the nonbankrupt party from accepting performance of the agreement by another. In re N.C.P. (Marketing Group, Inc., No. CV-N-04-0750 (Nov. 21, 2005), the District Court for the District of Nevada, in a case of first impression, held that a trademark licensee in bankruptcy is prohibited from maintaining its trademark license without the consent of the trademark licensor.

This case involved the trademark Tae Bo^®, which was owned by the Blanks. In August 1999, the Blanks granted N.C.P. Marketing Group, Inc. ("NCP") the right to advertise and sell products having the Tae Bo^® mark. Subsequently, a dispute arose regarding the agreement and in October 2001, the Blanks and NCP signed a settlement agreement confirming the Blanks' ownership of the Tae Bo^® mark. The parties also signed a license agreement that detailed how NCP was to use the trademark in marketing and selling products. Not long after execution of these agreements, NCP breached the agreements by not paying the required amount of royalties. The Blanks instituted arbitration and the arbitrator ruled in their favor, ordering NCP to pay several million dollars to the Blanks. Shortly thereafter, NCP filed for bankruptcy under Chapter 11.

In the bankruptcy proceedings, NCP claimed to be the owner of the Tae Bo^® trademark. The Blanks disputed the ownership of the trademark and filed a motion for an order compelling rejection of the trademark license agreement. The bankruptcy court granted the motion, and NCP appealed to the district court.

Under the applicable bankruptcy laws, the court noted that NCP would be allowed to maintain the trademark license unless applicable law excused the Blanks from accepting performance of the agreement by another. The district court noted that the courts of appeals are divided in interpreting this provision of the bankruptcy code. Some courts apply what is called the "hypothetical test" and look at whether, without looking to the individual facts of the case, any agreements of the type at issue could be maintained under federal law. Other courts apply the "actual test," which looks at whether the actual contract at issue can be assumed when applying the applicable federal law. The district court indicated that the Ninth Circuit applies the "hypothetical test," and, therefore, it would do so as well.

The district court indicated that the issue of whether a trademark licensor would have the power to reject performance by another is an issue of first impression. The court did note, however, that the Ninth Circuit had previously held that copyright and patent licenses were personal and assignable only with the consent of the licensor. Therefore, the court examined whether this same ruling should be extended to trademarks.

The district court noted that the owner of a trademark has a right and a duty to maintain the quality of goods sold under the mark. Therefore, when it licenses its trademarks, the owner has a significant interest in controlling to whom it is transferred to make sure that the level of quality is maintained. Therefore, the court found that a trademark license is personal to the licensee and is not freely assignable to a third party. Thus, the court held that NCP could not maintain the trademark license in bankruptcy without the permission of the Blanks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.