Licensing can be a crucial part of a company’s overall business strategy. Businesses often enter into licensing agreements that, at the outset, seem to provide access to profitable technologies. Over time, however, a licensee may discover that the licensed patents may be invalid. Prior to the Supreme Court’s decision in MedImmune, a licensee would have to breach the licensing agreement in order to have standing to bring a declaratory judgment action to invalidate the patents.1 In MedImmune, the Supreme Court held that a licensing agreement provided standing for a declaratory judgment action on a licensed patent’s validity.2 Now, rather than incurring the expense of litigation in the courts, many licensees have opted to petition the USPTO for covered business method reviews (“CBMRs”) of licensed patents, relying on MedImmune to establish the required standing. The MedImmune decision, however, does not explicitly address the circumstances under which licensees may have standing to petition for a CBMR.3 In Ocean Tomo, LLC, v. Patent Ratings, LLC, the Patent Trial and Appeals Board (PTAB) recently declined to institute a CBMR for lack of standing even though the petitioner was a licensee under the subject patent.4
The Argument for Licensee Standing in CBMR
Standing is a threshold issue in a petition for a CBMR. The petitioner has the burden of establishing standing through “sufficient proof.”5 The petitioner must prove three elements to establish standing in a CBMR petition.6 First, the petitioner must prove that the patent at issue is a “business method” patent.7 Second, a petitioner must prove that it is either the “real party in interest” or “a privy.”8 Third, a petitioner must show that it has been “charged with infringement.”9 The statute defines “charged with infringement” as having “standing to bring a declaratory judgment action in Federal Court.”10
Some licensees have relied on MedImmune to establish standing in declaratory judgment actions as well as in CBMR petitions of a licensed patent. In MedImmune v. Genetech, the Supreme Court held that a licensee had standing to seek a declaratory judgment of patent invalidity without breaching or terminating its licensing agreement.11 Thus, relying on MedImmune, CBMR petitioners have argued standing by alleging that they have a license agreement that covers the patent in dispute (and the patent is a “covered business method patent”).12
Ocean Tomo, LLC v. Patent Ratings, LLC
Ocean Tomo and Patent Ratings entered into a licensing agreement in 2004. The licensing agreement granted Ocean Tomo a license under several patents directed to assessing the quality and value of patent portfolios,13 including U.S. Patent No. 9,075,849 B2 (the “‘849 Patent”).14 The licensing agreement also gave Ocean Tomo the right to use Patent Ratings’ software and databases which were covered by the patents.15 The parties were embroiled in three separate lawsuits that were consolidated into a single action in the Northern District of Illinois.16
In the district court actions, Ocean Tomo alleged nine causes of action including declaratory judgment of non-breach of the licensing agreement, breach of fiduciary duty, and conversion. Patent Ratings counterclaimed six causes of action including three causes of action for breach of contract.17 The breach of contract counterclaims asserted Ocean Tomo was in violation of the licensing agreement.18 In response to these counterclaims, Ocean Tomo asserted an affirmative defense of patent invalidity and filed a motion for summary judgment of invalidity on eight of Patent Ratings’ patents19 but did not move regarding invalidity of the ‘849 Patent.20 Instead, Ocean Tomo filed a petition for a CBMR on the ‘849 Patent.21
To establish standing for the CBMR, Ocean Tomo cited MedImmune.22 Ocean Tomo asserted that Patent Ratings’ breach of contract claims constituted a threat that Patent Ratings would bring suit against Ocean Tomo based on the licensed patents.23 Furthermore, Ocean Tomo asserted that this threat created a reasonable apprehension that Patent Ratings would enforce its patents against Ocean Tomo.24
Patent Ratings countered that a business relationship, even if built upon the license of patent rights, does not amount to a charge of infringement on a specific patent, as required for CBMR standing.25 Furthermore, Patent Ratings argued that its counterclaims based on breach of contract did not assert damages based on the validity of the ‘849 Patent.26 Patent Ratings argued that the damages in its counterclaims were based on the license for the commercial use of its database and proprietary software and not the license to its patents.27 To support this argument, Patent Ratings argued that the patents had been licensed “royalty free” under the explicit terms of the license agreement, and that the payments (and thus the damages) under the licensing agreement were only for use of its software and databases.28 Thus, Patent Ratings reasoned since the counterclaims did not depend on the validity of the ‘849 Patent but only on Ocean Tomo’s use of the licensed software and databases, Ocean Tomo did not have a reasonable apprehension that Patent Ratings would enforce its patents against Ocean Tomo.29
The PTAB’s standing analysis centered around whether Ocean Tomo had been “charged with infringement,” as it was undisputed that the patent was a business method patent and that the parties were the real parties in interest.30 First, the PTAB found that Ocean Tomo had not been formally charged with infringement.31 The PTAB’s definition of a “formal charge” focused on charges brought by a party in any legal proceeding.32 The PTAB found that Patent Ratings’ counterclaim cited by Ocean Tomo did not include a single reference to the ‘849 Patent, much less a claim of its infringement.33
Second, the PTAB found that Ocean Tomo had not been otherwise charged with infringement based on MedImmune.34 The PTAB distinguished the instant situation from that of MedImmune.35 The PTAB stated that the Supreme Court’s decision in MedImmune was based on the existence of a real dispute that was “well defined.”36 The PTAB stated that MedImmune’s dispute was “well defined,” because the plaintiff in MedImmune had a particular product that allegedly infringed the patent, and that the plaintiff specifically related the patent at issue to that product.37
The PTAB held that Ocean Tomo’s mere identification of a licensing agreement that covered the ‘849 Patent did not establish standing in its petition.38 First, the PTAB held that there was no real controversy regarding infringement of the patent at issue.39 The PTAB found the license agreement included nothing regarding payment based on the scope or validity of the patents, which were explicitly called “royalty free.”40 Instead, the PTAB found that the payments were based on use of the software and databases in the licensing agreement.41 Thus the PTAB found the validity of the patents was unrelated to the counterclaim alleging violation of the licensing agreement.42 Furthermore, the PTAB reasoned that the dispute was not “well defined” with regards to a particular product, distinguishing the instant situation from that of MedImmune.43
Finally, the PTAB held that Ocean Tomo’s cause of action for declaratory judgment of non-breach of contract regarding the licensing agreement did not establish a real and substantial controversy for CBMR standing.44 The PTAB stated that although Ocean Tomo had standing for declaratory judgment under the Declaratory Judgment Act, the standing required under the statute governing CBMR is different.45 The PTAB held that 37 CFR § 42.302(a)46 requires not just a generic controversy as required by the Declaratory Judgment Act,47 but a controversy regarding the infringement of a business method patent, which had not been proven.48 The PTAB reasoned that if CBMR standing could be established with the same generic controversy requirement that the Declaratory Judgment Act required, the requirement that a petitioner be “charged with infringement” would essentially be eliminated.49
Therefore, PTAB ultimately held that Ocean Tomo failed to meet its burden to establish standing in its the petition, and denied Ocean Tomo’s petition without proceeding to the merits.
Lessons from Ocean Tomo
Prior to Ocean Tomo, a licensing agreement covering the patent was arguably sufficient to establish standing in a CBMR petition. In light of Ocean Tomo, however, potential petitioners must be far more careful and thorough in establishing standing. It is important for petitioners to remember that the PTAB did not find that MedImmune type standing inapplicable to CBMR petitions, but rather that MedImmune is specific to the facts considered by the Supreme Court.50 The PTAB effectively limited its own standing to cases it considers to involve a “real and substantial” controversy regarding the patent.51 Thus, Ocean Tomo leaves open the door for MedImmune type standing in CBMRs for some licensees.
Ocean Tomo requires petitioners to prove explicitly how a real and substantial controversy exists that is directly related to the validity of the patents in question.52 The precise requirements for such a relationship under Ocean Tomo are not clear at this point. However, practitioners should be mindful of the key facts of Ocean Tomo when filing a CBMR (or when drafting a license under which the licensee wants to preserve the right to pursue CBMR), namely that:
- The patent is covered by the license.
- The licensing agreement includes some form of royalty tied directly to use of the patent.53
- The licensee makes, uses, or sells a product or service that could infringe the patent.
Thus, CBMR petitioners can still establish standing by ensuring they have a product that infringes or potentially infringes the patent and that the license for the patent includes a royalty for use of the patent. From a practical standpoint, this can be inconvenient as it may require a business to develop and release a product that infringes the patent before filing a petition for a CBMR.
Traditional grounds for establishing standing in a CBMR petition (e.g., the filing of a patent infringement suit) remain viable under Ocean Tomo, as long as those grounds address the patents in controversy with particularity. However, Ocean Tomo explicitly stated that a “general” case or controversy peripherally involving a license or a patent is not enough to establish standing; the case or controversy must be directly related to the validity of the patents in question.54 In Ocean Tomo, the PTAB ruled that a controversy based on a licensing agreement that did provide standing for a declaratory judgment action in federal court did not necessarily establish standing for a CBMR petitioner.55 Therefore, to ensure adequate standing in potential CBMRs, petitioners should be on the lookout for ways to allege invalidity of the subject patent in any such lawsuit.
Ocean Tomo, though primarily discussed here for its view on MedImmune, signifies the rigor the PTAB is putting forth in examining standing required for CBMR and the PTAB’s willingness to deny petitions without reaching the merits of the challenge. Petitioners should thoroughly investigate and allege in detail sufficient facts to establish a concrete controversy or at least a product that would create a real controversy. Practitioners also should be aware of these requirements in crafting license agreements for business method patents that the licensee may wish to challenge at the PTAB in the future.