The U.S. Court of Appeals for the Federal Circuit has recently issued two decisions clarifying the standing of patent licensees to sue for infringement, and to appeal from district court judgments in such cases. The first case – International Gamco, Inc. v. Multimedia Games, Inc., Civ. No. 2007-1034 (Fed. Cir. Oct. 15, 2007) – establishes definitively what some lower courts had already concluded: a licensee holding an exclusive field of use license, even with geographic exclusivity, does not have standing to sue for infringement and must join the patent owner as a plaintiff. The second case – Schwarz Pharma, Inc. v. Paddock Labs., Inc., Civ. 2007-1074 (Fed. Cir. Oct. 12, 2007) – permits a licensee that cannot sue on its own to appeal on its own from a district court judgment in which the patent owner participated, but declined to appeal. These decisions round out the jurisprudence on the subject of licensee standing, providing the licensing community with clear rules that remove potential sources of licensor/licensee discord.

International Gamco – Exclusive Enterprise Licensee Cannot Sue Alone

International Gamco (“Gamco”) assigned U.S. Patent No. 5,324,035 (“the ‘035 patent”) to International Game Technology (“IGT”), but reserved rights to sublicense and sue for infringement in the New York State lottery market. International Gamco, at 3. After dismissal of Gamco’s suit against Multimedia Games, Inc. (“Multimedia”) for lack of standing, Gamco and IGT entered into a new license agreement that included the following terms: “IGT grants to Gamco the exclusive right and license, within the Territory, to make, use, sell, and offer to sell … game system networks covered by the ‘035 Patent ….” Id. The term “Territory” was defined as “the lawful operation of lottery games authorized by the New York State Lottery in the state of New York.” Id. at 4. After execution of the new agreement, Gamco amended its complaint against Multimedia, and Multimedia again moved to dismiss for lack of standing.

The district court construed the new license as granting to Gamco an “‘exclusive enterprise’ license – a hybrid between a territorial license and a field of use license,” and certified the question on interlocutory appeal to the Federal Circuit as to whether an exclusive licensee “restricted to the activities of a specific enterprise within a specific geographical territory” has sufficient standing to sue for patent infringement without the participation of the patent owner. Id. (quoting International Gamco, Inc. v. Multimedia Games, Inc., Civ. No. 04CV1053-B, slip op. at 4, 8 (S.D. Cal. Sept. 1, 2006)).

Judge Randall R. Rader wrote the decision for a panel consisting of himself and Judges Daniel M. Friedman and Kimberly A. Moore (though Judge Friedman also issued a separate opinion dubitante). The panel began the analysis by observing that a licensee that holds “all substantial rights” in the patent is effectively an assignee and has standing to sue in its own name. Id. at 5 (citing Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372 (Fed. Cir. 2000)). The Federal Circuit also noted that the Supreme Court had previously ruled that an exclusive territorial licensee, that was only geographically constrained, has standing to sue in its own name. Id. (citing Waterman v. Mackenzie, 138 U.S. 252, 255 (1891)). However, the court recognized that the particular license at issue constrained Gamco’s rights both geographically and by field of use, and the field of use limitations raised an additional consideration not addressed by existing precedent. Id. at 5-6.

The Federal Circuit relied primarily upon the Supreme Court’s opinion in Pope Manufacturing Co. v. Jeffery Manufacturing Co., 144 U.S. 248 (1892), to conclude that Gamco lacked proper standing to sue without joining the patent owner. The Pope decision recognized that conferring standing to a plaintiff with rights limited to particular embodiments of the patent at issue could expose the defendant to multiple infringement suits for a single act of alleged infringement. International Gamco, at 7-8 (citing Pope Manufacturing, 144 U.S. at 249-52). The Federal Circuit analogized the “claim-by-claim exclusive license” that was at issue in Pope to “an exclusive field of use license” because both “divide the scope of a patent right by its subject matter.” Id. at 8. The court further distinguished a field of use license from a territorial license by noting that a geographically limited license “is likely to give rise to only one viable suit for infringement by the exclusive territorial licensee in the jurisdiction where the infringement occurred.” Id. at 9-10.

In reviewing Gamco’s license, the Federal Circuit concluded that “[t]he problem of a multiplicity of lawsuits arising from an exclusive field of use license is not cured by adding a geographic restriction.” Id. at 10. Because “Gamco’s exclusive enterprise license limits its rights to lottery games, but the ‘035 patent extends beyond that limitation,” there exists a “potential of suits among licensees or between the licensee and licensor.” Id. at 11. (For example, a potential defendant “could offer blackjack, keno, mahjong, and lottery games.” Id.)

Accordingly, the Federal Circuit reversed the lower court’s denial of summary judgment and held that an exclusive enterprise licensee does not hold all substantial rights in the patent and therefore cannot sue in its own name without the participation of the patent owner. Id. at 12.

Apparently harboring doubt about the conclusion reached by the panel, but not strongly enough to dissent, Judge Friedman’s opinion dubitante questions the opinion’s reliance on Pope. He views that case as prohibiting a licensee from suing on its own when its license covers only certain patent claims, which is not equivalent to a license to all claims in a particular field of use. Judge Friedman also is concerned that the majority opinion potentially conflicts with 35 U.S.C. § 261, which states that “‘patents, or any interest therein, shall be assignable’ by a written instrument and that the patentee or his assignee ‘may in like manner grant an exclusive right under his . . . patents to the whole or any specified part of the United States.’” It strikes Judge Friedman as “unlikely that Congress intended only the latter (geographical), but not the former (‘any interest’ in a patent) assignees to be able to sue in their own names.” Furthermore, he doubts that field of use licenses pose any serious danger of multiple suits, which might otherwise justify the holding articulated by Judge Rader.

Schwarz Pharma – Exclusive Licensee to Single Composition May Not Sue on Its Own, But May Appeal on Its Own

In Schwarz Pharma, Inc. v. Paddock Labs., Inc., Schwarz Pharma (“Schwarz”) was an exclusive licensee that joined the patentee as a plaintiff in the lower court proceedings. Schwarz Pharma, at 1. Chief Judge Paul R. Michel wrote the opinion for the panel, consisting of himself and Judges Alan D. Lourie and Kimberly A. Moore. Warner-Lambert, Co. (“Warner-Lambert”) owns U.S. Patent No. 4,743,450 (“the ‘450 patent”) and Schwarz holds an “exclusive” license limited to one composition of the ‘450 patent.1 Id. After Paddock Laboratories, Inc. (“Paddock”) filed an Abbreviated New Drug Application with the Food and Drug Administration, Warner-Lambert and Schwarz sued Paddock for infringement. Id. at 2, 4. After the trial court entered a summary judgment finding of non-infringement, Schwarz filed an appeal to the Federal Circuit without the participation of Warner-Lambert. Id. at 4.

Paddock argued that Schwarz lacked standing to appeal because Warner-Lambert, the patent owner, did not also join the appeal. Id. at 4. Paddock reasoned that Warner-Lambert was joined by necessity in the lower court proceedings because Schwarz was an “exclusive” licensee that nonetheless did not hold all substantial rights to the patent, and thus Warner-Lambert should be considered a necessary party to the appeal. Id. Schwarz countered by arguing that it was required to join Warner-Lambert in the original suit for prudential reasons of standing and not for constitutional reasons that would have barred the appeal. Id. Schwarz also asserted that the prudential reasons for joinder were fully served by joinder of Warner-Lambert in the lower court proceedings. Id.

The Federal Circuit agreed with Schwarz, explaining that joinder of the patent owner in the initial proceedings is necessary to avoid “the possibility that the alleged infringer would be subject to multiple actions” and to ensure that the “[patentee’s] rights are protected in a suit brought by its licensee, that could expose the patent to invalidity challenge.” Id. Thus, the requirement is “one of prudential rather than constitutional standing.” Schwarz Pharma, at 6. The court reasoned that “Warner-Lambert has already been joined in the infringement action, and, if not joined in the appeal, will continue to be bound by the judgment of the trial court and the [Federal Circuit],” thus avoiding the danger of subjecting the defendant to multiple actions. Id. The Federal Circuit also suggested that the patent owner’s rights were sufficiently protected from the possibility of an invalidity attack because “Warner-Lambert was joined in the infringement suit and had an opportunity to protect its interests.” Id. at 6-7. Having properly joined Warner-Lambert in the district court proceeding, Schwarz should be able to appeal an adverse judgment notwithstanding Warner-Lambert’s unwillingness to do so. Id. at 7.

This set of decisions should prove useful to patent licensors and licensees by providing unambiguous guidance concerning which party will have the right to enforce the patent. All participants in licensing should also take care not to rely on the term “exclusive” to confer that right. These decisions demonstrate that only a licensee possessing “all substantial rights” in the patent, either throughout the United States or in a specified geographic territory, has standing to sue on its own to enforce the patent.