Judges: Newman, Mayer, Bryson (author) [Appealed from C.D. Cal., Judge Selna]

In Propat International Corp. v. RPost, Inc., Nos. 06-1222, -1223, -1270 (Fed. Cir. Jan. 4, 2007), the Federal Circuit affirmed the district court’s holding that Propat International Corporation (“Propat”) lacked standing to sue for infringement of a patent it had asserted against RPost, Inc. and related parties (collectively “RPost”). The Court also affirmed the district court’s denial of attorney fees and costs to RPost.

Authentix Technologies Limited (“Authentix”) is the assignee of U.S. Patent No. 6,182,219 (“the ’219 patent”), directed to a method for authenticating that a sender has sent certain information to a recipient via a dispatcher. Authentix signed an agreement granting Propat some interest in the ’219 patent, specifically the responsibility to license the ’219 patent to other parties, enforce the licensing agreements, identify new targets for licensing and suit, and to sue infringers of the ’219 patent. The agreement did not specifically address whether Propat was granted a license to practice the ’219 patent. Under the agreement, Propat must obtain prior approval from

Authentix to seek a licensing agreement with or sue a particular third party, but Authentix may not unreasonably withhold or delay such approval. In exchange for these services, Propat was entitled to a percentage of any licensing royalties and any litigation judgment or settlement. Propat’s rights under the agreement were not transferable without the consent of Authentix, which Authentix could freely withhold. Authentix retained a right to terminate the agreement in the event of Propat’s breach, insolvency, failure to produce minimum levels of income from the ’219 patent, or abandonment of its responsibilities under the agreement. Finally, Authentix agreed that it will consent to be joined as a party to any infringement action brought by Propat if a court requires Authentix to be joined.

Propat sued RPost, alleging infringement of the ’219 patent. On crossmotions on the question of Propat’s standing to bring suit, the district court ruled that Propat does not have standing to sue in its own name because it is a bare licensee, and not the owner of the ’219 patent. The district court further concluded that Propat lacked sufficient interest in the ’219 patent, even to sue as a coplaintiff, and dismissed the case without acting on Propat’s request to join Authentix. Further, the district court denied RPost’s motion for an award of attorney fees and costs, ruling that the case was not “exceptional” within the meaning of the fee-shifting provision under 35 U.S.C. § 285. Propat appealed the order of dismissal, and RPost cross-appealed the denial of an award of attorney fees and costs.

In affirming the district court’s dismissal of the action, the Federal Circuit agreed with the district court’s conclusion that Authentix had not conveyed all substantial rights in the ’219 patent to Propat as would be required for Propat to bring suit in its own name. The Court acknowledged that “[a] patentee may effect a transfer of ownership for standing purposes” without transferring formal legal title “if it conveys all substantial rights in the patent to the transferee,” but reasoned that such an effective transfer did not take place in this case. Slip op. at 3.

The Court noted, in particular, that (1) the agreement, on its face, acknowledges that Authentix is, and continues to be, the owner of the ’219 patent; (2) Authentix retained responsibility for maintaining its patents, including the ’219 patent, for its full term, and such responsibility has previously been recognized by the Court to indicate ownership; and (3) Authentix retained economic interests and substantial control over decisions affecting the patent rights. The Court noted that although a patent owner’s retention of a right to a portion of the proceeds from a patent does not automatically defeat an effective transfer of all substantive rights for standing purposes, “the fact that Authentix retains a substantial share of the proceeds is consistent with Authentix’s retaining ownership rights in the patent, while allocating to Propat the duty to provide licensing and enforcement services.” Id. at 7. Further, Authentix’s right to veto licensing and litigation decisions is also a significant restriction on Propat’s interest in the ’219 patent. The Court found Authentix’s veto power of Propat’s transfer of rights to be a particularly significant indicator that Authentix did not transfer all substantive patent rights to Propat. Finally, Authentix’s right to terminate the agreement in the event that Propat fails to meet certain benchmarks in exploiting the ’219 patent, while not dispositive in itself, indicates that Authentix retained significant ownership of the ’219 patent.

Propat had argued to the district court that, in the alternative to having standing in its own name alone, Propat should be allowed to join Authentix as a party in order to continue the action. In affirming the dismissal of the action, the Federal Circuit upheld the district court’s ruling that Propat lacked sufficient interest to sue, even as a coplaintiff. The Court recognized precedent that an exclusive licensee has sufficient interest in a patent to sue for infringement, but that a bare licensee lacks standing to bring such a suit. Further, “[a] bare licensee cannot cure its lack of standing by joining the patentee as a party.” Id. at 12. The Court acknowledged that under these facts, Propat does not fit cleanly into either the exclusive or bare licensee category because the agreement was silent as to Propat’s right or intention to practice the ’219 patent, exclusively or otherwise. The Court reasoned, however, that the right to sue should not be segregated from formal ownership of the ’219 patent, with very narrow exceptions (including the exclusive licensee). Because Propat lacks important indicia of true ownership interest in the ’219 patent, the Court agreed with the district court that the agreement did not assign Propat sufficient rights as to create standing to sue, even as a coplaintiff.

The Federal Circuit also reviewed the district court’s denial of an award of attorney fees and costs for abuse of discretion. RPost argued that (1) the district court should have found the case “exceptional” under 35 U.S.C. § 285 and awarded attorney fees because “Propat’s lack of standing was manifest”; (2) the district court should have granted fees and costs under 28 U.S.C. § 1927, which authorizes an award where an attorney “multiplies the proceedings in any case unreasonably and vexatiously”; and (3) the district court should have awarded costs to RPost under 28 U.S.C. § 1919, which allows for an order of payment of just costs by the plaintiff when a district court dismisses a suit. Id. at 13-14. The Federal Circuit upheld the district court’s holding that the case was not “exceptional” because the district court reasonably held that the behavior of Propat’s counsel with respect to the standing argument was not so reckless as to warrant sanctioning. With respect to the § 1927 claim, the Federal Circuit found reasonable the district court’s decision to “leave the parties where it finds them” because the behavior of both parties’ counsel “fell far short of a model prosecution and defense of a patent action” and because the district court had already sanctioned Propat during the pendency of the action for its litigation misconduct. Id. at 15. Finally, the Federal Circuit found no abuse of discretion in the district court’s decision not to grant a discretionary award of costs under 28 U.S.C. § 1919, where the district court cited the nonmodel conduct of counsel for both parties as the basis for its decision.