United States: Takeaways From Fed. Circ. Chip Patent Ruling

On May 30, 2019, the U.S. Court of Appeals for the Federal Circuit revived a pair of patent infringement cases initiated by Lone Star Silicon Innovations LLC, a Texas licensing entity, against chipmakers Nanya Technology Corp. and United Microelectronics Corp. Lone Star allegedly acquired the asserted patents from Advanced Micro Devices Inc. through an agreement that purported to convey "all right, title and interest" in the asserted patents, but which had also significantly curtailed Lone Star's rights to enforce and transfer the asserted patents.

Prior to the appeal, Judge William Alsup of the U.S. District Court for the Northern District of California dismissed the lawsuit after ruling that Lone Star lacked "all substantial rights" in the asserted patents. In so doing, he declined to join Advanced Micro Devices as a necessary party because he claimed that doing so would reward Lone Star for its "litigation gimmick."

The Federal Circuit held that the district court's failure to consider whether AMD could have been, or needed to be, joined under Rule 19 before dismissing the case was legal error and remanded with instructions for the district court to consider whether AMD must be joined as a necessary party.

As discussed below, the Federal Circuit's analysis provides important guidance to plaintiffs and defendants in patent cases on issues such as the "all substantial rights" doctrine, standing to sue for infringement, and required joinder under Rule 19.

The broad conveyance of "all right, title and interest" is insufficient to convey "all substantial rights" where the remainder of the agreement substantially curtails rights

As the U.S. Supreme Court cautioned in Waterman v. Mackenzie more than a century ago: "[w]hether a transfer of a particular right or interest under a patent is an assignment or a license does not depend upon the name by which it calls itself, but upon the legal effect of its provisions."

And so the Federal Circuit refused to give dispositive weight to the transfer agreement's use of terminology suggesting a transfer of "all right, title and interest" and examined instead "the total effect of the agreement." In determining whether the total effect of an agreement reflects a transfer of "all substantial rights," the Federal Circuit "ha[s] often focused on two salient rights: enforcement and alienation."

As the Federal Circuit concluded, the transfer agreement at issue in Lone Star imposed several significant limitations on Lone Star's rights to enforce and/or transfer the asserted patents.

As to enforcement, Lone Star only had the right to assert the covered patents against "Unlicensed Third Party Entit[ies]" specifically listed in the agreement. And new entities could only be added to the list if AMD consented to their addition. Moreover, if Lone Star sued an unenumerated entity, AMD could grant the entity a sublicense and negate the lawsuit.

As to the right to transfer the patents, Lone Star could not transfer the patents under the agreement unless the buyer agreed to be bound by the same restrictions as Lone Star.

The Federal Circuit noted several other factors supporting its conclusion that AMD did not transfer "all substantial rights" in the patents to Lone Star, including AMD's contractual right to share in the revenue from the "monetization efforts" of the patents.

There is no requirement to allege the plaintiff is an "exclusive licensee" at the pleadings stage

The Federal Circuit further clarified the distinction between "statutory standing," i.e., whether a party can sue under a statute such as 35 U.S.C. § 281, and constitutional standing. Section 281 provides that "[a] patentee shall have remedy by civil action for infringement of his patent." The term "patentee" is defined to include the original patentee (whether the inventor or original assignee) and any "successors in title." But it does not include mere licensees.

Nanya and UMC argued that Lone Star lacked constitutional standing because it did not allege it was an "exclusive licensee." However, the Federal Circuit clarified that allegations of exclusionary rights and infringement are all that is required to confer constitutional standing at the pleadings stage.

In so clarifying, the Federal Circuit acknowledged the apparent confusion between constitutional standing and the requirements of § 281, stating that its authority "ha[s] often treated 'statutory standing' ... as jurisdictional." However, the Federal Circuit pointed out that the Supreme Court's decision in Lexmark International Inc. v. Static Control Components Inc. is irreconcilable with this earlier authority.

"Statutory standing" defects are properly brought under Rule 12(b)(6) or 12(b)(7) rather than rule 12(b)(1), and so a party lacking statutory standing must be given the opportunity to join the patentee to cure the standing problem.

Because the issue of whether a party possesses "all substantial rights" in a patent does not implicate standing or subject matter jurisdiction, motions to dismiss based on "statutory standing" defects are properly brought under Rule 12(b)(6) or 12(b)(7), rather than Rule 12(b)(1). For this reason, a court must consider whether the plaintiff can cure the deficiency through joinder of the patentee.

Rule 19 commands that a necessary party who is subject to service of process and whose joinder will not otherwise destroy a court's subject matter jurisdiction "be joined." If a party cannot be feasibly joined, a court may consider whether the case should proceed anyway or be dismissed because that party is indispensable.

As the Federal Circuit explained, it has interpreted Rule 19 and the Supreme Court's decision in Independent Wireless Telegraph Co. v. Radio Corporation of America as directing courts to join patentees along with licensees who otherwise have standing. Accordingly, the Federal Circuit held that the district court's failure to engage in the requisite Rule 19 analysis was legal error.

Strategic Takeaways

This recent decision provides significant guidance for plaintiffs and defendants involved in, or faced with the prospect of, patent litigation. For example, it is important to fully analyze any relevant patent license or assignment agreements, as a facially broad conveyance of rights may be curtailed by additional restrictions. As discussed above, this is particularly salient where restrictions relate to enforcement and alienation.

The Federal Circuit has provided additional guidance in this area. For example, the Federal Circuit has held that a patent assignment did not convey "all substantial rights" where the assignee did not receive the right to practice, but only license and enforce, the patents.¹ Receiving rights limited to a particular field-of-use has also been held to confer less than "all substantial rights."²

Where "all substantial rights" are arguably not transferred, it is particularly important to note the distinction between statutory and constitutional standing in preparing any motions to dismiss, as a defect in statutory standing invokes the court's obligation to apply the Rule 19 analysis for required joinder and therefore may not be case-dispositive and/or may force the introduction of other parties into litigation.

In particular, a company that seeks to utilize a patent assertion entity to monetize its patents, but also wishes to retain certain rights, may have difficulty distancing themselves from a patent infringement suit involving the licensed patents. As discussed above, AMD had a contractual right to share in the revenue from the "monetization efforts" of the asserted patents, evidencing its intent to utilize a patent assertion entity for litigation. However, under Lone Star, companies such as AMD may likely find themselves directly a party to litigation.

In the context of state universities and/or other parties entitled to sovereign immunity, this may cause further complications. A sovereign entity cannot be joined involuntarily, and so a patent-assertion entity without "all substantial rights" would not be able to cure the standing issues unless the sovereign entity voluntarily joined the suit.

On the other hand, this may also complicate declaratory judgment actions on the part of any potential defendants threatened by a patent-assertion entity. For example, in A123 Systems Inc. v. Hydro-Quebec, the Federal Circuit affirmed a decision not to reopen a dismissed declaratory judgment action alleging noninfringement and invalidity against a licensee where the licensee did not receive "all substantial rights" in the asserted patents from the Board of Regents, The University of Texas System.³ The Federal Circuit's decision was premised on the finding that UT was an indispensable party under Rule 19 who could not be joined because it had not waived sovereign immunity.⁴

Footnotes

1. Diamond Coating Technologies, LLC v. Hyundai Motor America, 823 F.3d 615, 619-21 (Fed. Cir. 2016).

2. A123 Sys., Inc. v. Hydro-Quebec, 626 F.3d 1213, 1222 (Fed. Cir. 2010) ("Because {Hydro-Quebec} is a field-of-use licensee and UT has retained non-overlapping rights in the patents in suit, UT may very well be able to assert infringement claims against A123 that HQ cannot, creating the risk of multiple lawsuits and of inconsistent relief.").

3. Id., at 1216, 1222.

4. Id.

Originally published by Law360.

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