First published in LES Insights

Abstract

The U.S. Court of Appeals for the Federal Circuit recently held that a patent owner did not have standing to join as a coplaintiff with its licensee in an infringement suit because the patent owner transferred all control over litigation and licensing matters to the licensee, making the licensee the effective patent owner and stripping the patent owner of the right to bring suit or join as a coplaintiff. In reaching this conclusion, the court rejected the patent owner's argument that it had not transferred all substantial rights in the patent because it retained the right to royalties, right to practice the patent, right to terminate the agreement, and a future reversionary interest in the patent.

The patent law provides that only the patent owner and successors in title have standing to sue for patent infringement. However, even if a patent owner does not formally transfer legal title, a party that has been granted all substantial rights under the patent is considered the effective patent owner and has standing to sue for patent infringement. An effective assignment exists, therefore, when the patent owner conveys substantially all rights to a patent, making the transferee the effective patent owner for standing purposes.

In a recent case, Azure Networks, LLC v. CSR PLC,1 the U.S. Court of Appeals for the Federal Circuit held that a patent owner lacked standing to join a suit for patent infringement brought by its licensee against an accused infringer even though the patent owner retained the right to royalties, right to practice the patent, right to terminate the agreement, and a future reversionary interest in the patent. In finding that the patent owner had transferred substantially all of its patent rights to the licensee and therefore lacked standing to join the patent-infringement suit, the Court focused on the fact that the patent owner completely transferred control over litigation and licensing of the patent to the licensee in determining that the patent owner lacked standing to join a patent-infringement suit.

Background

Azure Networks, LLC and Tri-County Excelsior Foundation sued the Appellees in Texas for infringing the '129 patent. which describes a network for wireless communications between a central hub device and surrounding peripheral devices in close proximity with the hub.

Azure originally owned the application that later issued as the '129 patent. It donated the application to Tri-County in 2010, and they entered into an "Exclusive Patent License Agreement" whereby Tri-County licensed the patent back to Azure. The Agreement granted Azure the exclusive, worldwide, transferable right to practice, in any manner, the invention disclosed in the patent. The Agreement also granted Azure the full right to enforce and/or sublicense the patent, including the authority to reach settlements without Tri-County's consent and "the exclusive right, but not the obligation, to maintain, enforce, or defend" the patent. In exchange, Tri-County received licensing revenue, the nonexclusive right to practice the patent, the right to terminate the agreement due to nonperformance by Azure, and a reversionary interest in the patent once the Agreement expired in March 2018, unless Azure exercised an option to renew the Agreement. Additionally, the Agreement obligated Tri-County to participate in litigation only at Azure's request and at Azure's sole discretion.

In the district court, the Appellees filed a motion to dismiss Tri-County from the lawsuit for lack of standing. The Appellees argued that because the Agreement transferred significant patent rights to Azure, Tri-County had no standing to sue as coplaintiff. The district court granted the Appellees' motion, finding that Tri-County had effectively assigned the '129 patent to Azure. Tri-County and Azure appealed.

The Azure Networks Decision

The Federal Circuit considered two issues. First, it assessed whether Tri-County transferred all substantial rights to the '129 patent to Azure, making Azure the effective patent owner. Second, the court considered whether Tri-County, even if it had transferred all substantial rights to Azure, nevertheless had standing to join in the suit.

On the first issue, the court explained that standing is governed by the Patent Act, which grants standing to sue only to the patent owner and successors in title. A patent owner is one who holds legal title to the patent, either by issuance or by assignment. Assignment of a patent thus confers to the assignee, and strips from the assignor, standing to sue for infringement. Even if a patent owner does not formally transfer legal title, a party that has been granted all substantial rights under the patent is considered the effective patent owner. An effective assignment exists, therefore, when the transferor conveys substantially all rights to a patent, making the transferee the effective patent owner for standing purposes. Retention of control over litigation decisions is a key factor for assessing whether an agreement transfers all substantial rights in a patent.

Tri-County argued that it retained enough rights to show that it had not transferred all substantial rights in the '129 patent. Tri-County relied on its right to patent royalties, right to practice the patent, ability to terminate the Agreement, and its reversionary interest in the patent, as evidence that it retained substantial rights in the patent. But the Federal Circuit found that none of these factors could overcome Tri-County's transfer of full control over litigation and licensing matters, which constituted an effective assignment of the patent to Azure. The court explained that an economic interest in royalties, nonexclusive right to practice the patent, and right to terminate the Agreement without any control or authority over litigation and licensing activities do not indicate that Tri-Country retained ownership of the patent. Further, the court noted, the provision permitting Azure to renew the Agreement before the termination date created a presumption that the patent would not return to Tri-County. On balance, Tri-County's economic interests and limited termination rights and reversionary interest did not outweigh Azure's sole control over litigation and licensing decisions, making Azure the effective patent owner and sole entity with standing to sue for patent infringement.

Turning to the second issue, the Federal Circuit explained that to bring or join a suit, Tri-County must have an exclusionary right or interest in the patent. Having merely an interest in litigation does not confer standing. Because Tri-County transferred all substantial rights in the '129 patent to Azure, including all exclusionary rights, the court held that Tri-County was effectively a nonexclusive licensee. A bare licensee does not have standing to bring suit and cannot cure its lack of standing by joining the patent owner as a party to the litigation. The court therefore affirmed the district court's decision that Tri-County lacked standing to join the litigation as a coplaintiff.

Strategy and Conclusion

This case illustrates that a patent owner may lose standing to join in a patent-infringement lawsuit if it does not retain sufficient rights in the licensed patent. In particular, retaining some rights to control litigation, including notice requirements and veto power over the licensee, may be central to a court's assessment of whether a patent licensor has standing to sue or join in a patent-infringement litigation.