First published in LES Insights
In patent-infringement litigation, a licensee will only have standing to sue without joining the patent owner if it is an exclusive licensee and it holds all substantial rights in the patent. The Federal Circuit recently held that an exclusive licensee who did not hold all substantial rights in the patent at the time it filed its patent infringement suit did not have standing to bring suit without the patent owner and could not cure the standing defect through a retroactive license agreement. The licensee's only remedy was to join the patent owner as a co-plaintiff. Because it did not do so prior to the jury's verdict, the Federal Circuit found the licensee lacked standing and vacated the jury's verdict of infringement, with instructions that the case be dismissed.
Only a "patentee" may sue for patent infringement. The courts have defined two groups of "patentees:" the patent owner and exclusive licensees who hold all substantial rights under the patent. The courts look to both the parties' intentions and the substance of the agreement to determine whether an exclusive licensee holds all substantial rights to the patent. Recently, in Alps South, LLC v. Ohio Willow Wood Co.,1 the Federal Circuit held that an exclusive licensee who lacks "all substantial rights" at the outset of the litigation cannot later acquire them through a retroactive assignment.
Applied Elastomerics, Inc. (AEI) owns a materials patent and granted Alps a license with rights to exclude, transfer its interest, and bring suit. Disclosing a particular composite, the patent identifies uses in the field of prosthetic liners, but is not limited to any particular application. Both Alps and a competitor of Alps, Ohio Willow Wood (OWW), manufacture prosthetic liners, and shortly after receiving its license under the patent, Alps sued OWW for patent infringement.
Alps initiated the lawsuit alone, in its own name, and did not join the patent owner, AEI, as a co-plaintiff. OWW moved to dismiss the case for lack of standing. While OWW's motion to dismiss was pending, Alps entered into a second agreement with AEI, which removed several restrictions on Alps's rights that were present in the original agreement. Alps and AEI entered the second agreement 16 months after Alps initiated the lawsuit, but it had retroactive effect to the date of the first agreement.
The district court determined that the first agreement, which awarded Alps rights to exclude, transfer its interest, and bring suit, sufficed for standing. The district court concluded in the alternative that the second agreement cleared the way for Alps to proceed with the case. Thus, the district court denied OWW's motion to dismiss the case. Later in the case, however, the district court expressed concern that Alps lacked standing at the outset of the litigation and invited Alps to join AEI as a co-plaintiff. Alps declined the court's invitation, and the case proceeded to trial with Alps as sole plaintiff. A jury found the patent valid and infringed. OWW appealed the district court's denial of its motion to dismiss for lack of standing.
The Federal Circuit Decision
The Federal Circuit found that the district court should have granted OWW's motion to dismiss the case.
The court began its analysis with the original agreement between AEI and Alps. Alps maintained that it had "all substantial rights" in the patent under the first agreement, because it had the rights to exclude and sue. Reiterating that a court must look to both the parties' intentions and the substance of the transfer of rights to determine whether a licensee holds "all substantial rights" under a patent, the court concluded that Alps lacked the required rights. Under the original agreement, Alps could not settle any infringement action without AEI's consent. Also, AEI retained the right to pursue an infringement action if Alps declined to do so. Furthermore, although the agreement allowed Alps to enforce the patent, its right to utilize the patent monopoly was confined to a discrete field of use (prosthetic liners). Thus, AEI retained the right to make, use, and sell products covered by the patent in all areas aside from prosthetics. This cabining of Alps's rights, the Federal Circuit stated, was "fatal" to Alps's argument that it had standing at the outset of the litigation.
The court then turned to Alps's second agreement. Both parties agreed that the second agreement conferred sufficient rights to allow Alps to sue without joining AEI, but the litigants disputed whether a retroactive agreement could cure the standing defect. Alps argued that in previous cases, plaintiffs have cured standing defects after the lawsuit began by adding the patent owner as a co-plaintiff. The court, however, found that the previous cases could not be expanded to permit a plaintiff to cure a standing defect by entering into a retroactive agreement. The court also rejected Alps's argument that a supplemental pleading can cure a standing defect, noting that only incorrect statements can be remedied by amending a pleading.
Because Alps, a licensee, did not have all substantial rights in the patent at the time it filed the lawsuit, Alps lacked standing, and neither amending its complaint after the jury verdict nor entering into a retroactive agreement could resolve Alps' standing defect. Instead, the lone remedy was for Alps to join AEI. Because it failed to do so, the court found Alps's case should have been dismissed.
Strategy and Conclusion
This decision illustrates the importance of joining a patent owner when there is a sufficient question of whether the licensee has all substantial rights in a patent that is being asserted. A licensee who may not hold "all substantial rights" in the patent and initiates litigation without the patent owner risks dismissal of its lawsuit.