United States: Patent Owner Who Retains Rights To Practice Need Not Be Joined In Enforcement Actions By Its Licensee

Abstract

The Federal Circuit Court of Appeals recently held that a licensor did not need to be joined in its exclusive licensee's patent infringement case despite the fact that the licensor retained the right to practice the patent, concluding that the licensor's right to practice the licensed patent was not a "substantial" right.


In a recent case, Luminara Worldwide, LLC v. Liown Electronics Co. Ltd.1, the U.S. Court of Appeals for the Federal Circuit affirmed a district court's holding that a licensor did not need to be joined in its exclusive licensee's patent infringement case despite the fact that the licensor retained the right to practice the patent. On separate grounds, the Federal Circuit vacated the district court's claim construction of a claim term and vacated the grant of a preliminary injunction.

Background

Candella licensed patents from Disney relating to artificial candles in 2008. In 2014, Candella merged with Luminara Worldwide LLC, (both parties are referred to as Luminara in this article). Disney renewed its patent license agreement with Luminara in 2012, and revised the terms of the agreement four more times over the course of the next three years to grant Luminara additional rights in the licensed patents, including the ability to assign its rights as a licensee and to control litigation of the licensed patents without Disney's consent.

Luminara twice entered into failed negotiations with Liown to manufacture Luminara's artificial candles. Following those negotiations, Liown began selling its own competing artificial candles, and Luminara ultimately brought suit for patent infringement, tortious interference, and trademark infringement in the U.S. District Court for the District of Minnesota. Liown moved to dismiss the lawsuit, arguing that Luminara lacked standing to sue without Disney because Disney retained the right to freely license the technology by creating new "Affiliates" under the license. Liown argued because Disney retained the right to license its new affiliates, Luminara did not have exclusionary rights to the asserted patents and couldn't assert the patents without Disney.

The district court denied Liown's motion, finding that Luminara had both Constitutional and prudential standing to sue. The district court also granted a motion for a preliminary injunction filed by Luminara, essentially holding that Luminara's case was strong enough (and the risk of harm without an injunction was great enough) to justify blocking further sales of Liown's product while the litigation progressed. Liown appealed both the denial of its motion to dismiss and the grant of Luminara's motion for preliminary injunction.

Liown's Motion to Dismiss for Lack of Standing

The Federal Circuit first addressed whether Luminara had standing to sue. The court noted that the initial patent license between Disney and Luminara restricted Luminara's rights in several ways, including restrictions on assigning, sublicensing, and transferring ownership of rights under the license, as well as restrictions on enforcing the patents without Disney's express consent. The initial license was later amended four times to extend the term of the patent license and to transfer additional rights to Luminara, including the right to transfer/assign Luminara's rights under the license and to sue to enforce the patents without Disney's consent.

In assessing whether Luminara had standing to sue, the Federal Circuit focused on whether Luminara held "exclusionary rights" to the asserted patents such that it could sue competitors for infringement. Liown argued that Luminara did not hold exclusionary rights to the patents because Disney retained the right to "freely license the technology to any entity by creating new Affiliates," thus retaining the ability to license the patents to entities other than Luminara. The court observed that the issue of standing hinged on the interpretation of the term "Affiliate" in the license agreement—if Disney could indeed license any entity to manufacture and sell its artificial candles, Luminara did not have exclusionary rights to the asserted patents. On the other hand, if Disney did not retain the effective right to license the patents through the "Affiliate" provision, Luminara did hold exclusionary rights to the patents.

Liown argued that the definition of "Affiliate" in the license encompassed any entity "operated by or under license from" Disney, meaning that any entity "under license" from Disney (but not operated by Disney) could practice the patents as an "Affiliate," effectively allowing Disney to freely license the patents. The Federal Circuit disagreed concluding that Liown's proposed interpretation of the license was incorrect since the license agreement repeatedly stated that Luminara did have exclusive rights to the artificial candle technology claimed in the licensed patents, and that such a statement "would be a fiction" under Liown's proposed reading of the contract. The court further determined that the amendments to the license were intended by the parties to confer standing to sue upon Luminara.

The court also rejected Liown's argument that, because Disney retained substantial rights under the license, Luminara could not bring suit in its own name without joining Disney as a co-plaintiff in the litigation. The court explained that an exclusive licensee holding all substantial rights to a patent may sue without joining the patent owner, but that otherwise, the owner of the patent must be joined to the suit. The court noted that the joinder requirement exists for two reasons: to protect the alleged infringer from facing multiple lawsuits on the same patent; and to protect the patent owner from losing substantial rights if its patent claims are invalidated or rendered unenforceable in an action in which it did not participate.

The court explained that whether the right to sue for infringement was conveyed under the license is a "critical" consideration. While Liown argued that Disney retained a number of rights under the license, including the right for Disney and its affiliates to practice the patents, title to the patents, the responsibility to pay maintenance fees to keep the patents in force, a financial interest in litigation and licensing, and a right to notice of litigation and licensing activities, the court concluded that none of those retained rights, individually or cumulatively, were substantial enough to preclude Luminara from bringing suit in its name alone.

The court specifically explained that the retained right to practice the patent is not a "substantial" right requiring joinder, because Disney would not lose this right if the claims were invalidated or the patent held unenforceable. Rather, if the claims were invalidated or the patent were held unenforceable, "everyone, including Disney Enterprises and its affiliates, could freely practice the patent." The court further explained that a "patentee that merely retains the right to practice the patent does not risk losing a substantial right if the claims are invalidated or the patent held unenforceable. The retained right to practice a patent is not the same as a retained right to exclude others from doing so."

The court thus determined that Luminara held all "substantial" rights to the patents, including the sole and exclusive right to sue for infringement, and that Disney was not in danger of losing substantial rights by not being joined. The court concluded that Disney did not need to be joined as a co-plaintiff with Luminara.

Luminara's Motion for a Preliminary Injunction

After determining that Luminara had standing to sue, the Federal Circuit turned to Liown's argument that the preliminary injunction was improper since there was a substantial question of validity regarding the sole claim upon which the injunction was based. The parties agreed that a prior art reference disclosed every limitation of the sole claim forming the basis of the preliminary injunction except for one disputed claim term.

The Federal Circuit determined that the district court's construction of the disputed term did not comport with its "plain meaning," which a court is bound to adopt unless the patentee defines the claim term in a particular way or disavows the normal scope of a term. The Federal Circuit vacated the district court's construction in favor of a new construction. The court concluded that, because the prior art patent appeared to disclose the disputed claim term under the Federal Circuit's new construction, a substantial question of validity existed with respect to the asserted patent claim that warranted vacating the district court's preliminary injunction.

The court noted that the vacated preliminary injunction was based on just one claim of one of the asserted patents, and that an injunction based on other grounds might still warrant entry of a preliminary injunction.

Strategy and Conclusion

This case illustrates that the right to practice a patent is not a "substantial right" retained by a licensor, and that a licensor who retains the right to practice a licensed patent does not need to be joined in its exclusive licensee's lawsuit for patent infringement.

Footnote

1 The Luminara Worldwide, LLC v. Liown Electronics Co. Ltd. decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/15-1671.Opinion.2-25-2016.1.pdf.

Previously published by LES Insights

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