In a case involving a bankruptcy reorganization in which a trustee in bankruptcy was given the right to pursue claims of misappropriation or infringement (but not ownership of the bankrupt’s intellectual property), the U.S. Court of Appeals for the Federal Circuit reversed the district court finding that the no trustee had standing to bring suit. Morrow, et al. v. Microsoft Corp., Case Nos. 06-1512, -1518, -1537 (Fed. Cir., Sept. 19, 2007 (Moore, J.; Prost, J., dissenting).

Hank M. Spacone, as the trustee authorized to pursue infringement of At Home Corp.’s intellectual property (AHC IP), filed suit against Microsoft alleging infringement. Under the reorganization plan, Spacone has the exclusive right or duty to decide, at his discretion, whether to investigate, pursue or dismiss patent infringement actions (without consultation with co-trustees); collect damages from infringement litigations; incur any liability arising from claims or defenses of any infringement defendant; incur all costs and expenses associated with such litigations; and assume any litigation sanctions. Spacone did require consent from the trustee that owned the AHC IP to settle patent infringement litigation.

Microsoft filed a motion for summary judgment contending that Spacone lacked standing as another trustee, Morrow, had been granted ownership of the AHC IP in the reorganization. Spacone filed a cross-motion for summary judgment that standing existed. The district court denied Microsoft’s standing motion and granted Spacone’s cross-motion, concluding that Spacone had standing to sue under bankruptcy law principles and based on his trust beneficiary status. Specifically, the district court found that Spacone’s rights “arise out of bankruptcy law and trust relationships, rather than a traditional patent licensing relationship.” The district court determined that Spacone had a “proprietary interest” in the patent as AHC’s successor and as a trust beneficiary of the patent (that yet another trustee holds in trust for Spacone), as well as an equitable title holder. The district court did not analyze Spacone’s standing under patent law standing principles. Microsoft moved the district court to certify the standing order for interlocutory appeal, but the district court denied the motion.

Spacone later filed a motion in the bankruptcy court requesting clarification of his rights under the liquidation plan approved by that court. Spacone sought a declaration that he had the right to prosecute and settle patent infringement claims, the right to grant nonexclusive licenses to settle these claims, and the right to receive revenues generated from these settlement licenses. After bankruptcy court ruled in Spacone’s favor, the district court reversed, holding that Spacone did not have the right under the reorganization plan to grant licenses to settle certain litigation or receive licensing revenues since under the liquidation plan, ownership of and licensing rights in the intellectual property was assigned to another trustee.

After the district court granted Microsoft’s motion for summary judgment of non-infringement and invalidity, Spacone appealed. Microsoft also appealed on the standing issue.

The Federal Circuit considered the question as to how bankruptcy or trust law relationships affect the standing analysis in a patent infringement case as a question of first impression. The majority, citing the venerable (1922) Supreme Court case of Crown Die and Tool Co., noted that the patent infringement suit against Microsoft is governed by the patent laws and that it is patent law principles, not bankruptcy or trust law principles, which govern which parties are entitled to assert which rights. Under patent law principles, only a patentee or its “successors in title” is entitled to bring a “civil action for infringement of his patent.” Under Federal Circuit precedent, a successor in title is the party holding legal title to the patent.

In analyzing whether Spacone had suffered any injury in fact as a result of the alleged infringement (to warrant standing), the Court noted that Spacone held no license rights in the AHC IP, much less any exclusive rights. Further, Spacone did not have the right to grant licenses or sublicenses under the patent or to collect licensing royalties. Rather, co-trustee Morrow held legal title to the AHC IP and the right to license third parties and collect royalties from its licenses; royalties not shared with the co-trustees.

Noting that “[t]here are three general categories of plaintiffs encountered when analyzing the constitutional standing issue in patent infringement suits: those that can sue in their own name alone; those that can sue as long as the patent owner is joined in the suit; and those that cannot even participate as a party to an infringement suit,” the Court analyzed which category fit Spacone’s situation.

The first category includes plaintiffs that hold all legal rights to the patent as the patentee or assignee of all patent rights. Additionally, if a patentee transfers “all substantial rights” to the patent to a party, this amounts to an assignment or a transfer of title, which confers constitutional standing on the assignee to sue for infringement in its own name alone. Spacone was not found to fit this category.

The second category consists of exclusive licensees who are granted the right to prevent others from practicing the invention and who hold exclusionary rights and interests created by the patent statutes, but not all substantial rights to the patent. These exclusionary rights “must be enforced through or in the name of the owner of the patent,” and the patentee who transferred the exclusionary interest is usually joined to satisfy standing concerns. The Court found that Spacone did not fit this category either. The third category consists of those that hold less than all substantial rights to the patent and lack exclusionary rights altogether. Such parties “are not injured by a party that makes, uses, or sells the patented invention because they do not hold the necessary exclusionary rights.” Plaintiffs in this category lack constitutional standing. A non-exclusive license confers no constitutional standing to bring suit or even to join a suit. The Court placed Spacone in this third category.

The Court concluded that although Spacone had been given the naked right to sue infringers under the reorganization plan, Morrow was the patent title holder, holder of the right to sell the patent, to grant exclusive and nonexclusive licenses or transfer any of the rights that it holds to another party. The Federal Circuit noted that unfortunately for Spacone, the “liquidation plan contractually separated the right to sue from the underlying legally protected interests created by the patent statutes—the right to exclude.”

The Court went on to note that Spacone’s future beneficial ownership interest in whatever assets are held by his co-trustee when the wind-down of AHC’s business is completed does not affect the outcome of the standing analysis, finding that an equitable future interest in the patent is not tantamount to legal exclusionary interest as of the time this suit was initiated.

Judge Prost, in dissent, argued that Spacone should be considered a “category two” plaintiff. Under Judge Prost’s analysis, Spacone does suffer an injury in fact since he holds an equitable interest in the title to the patent as beneficiary to the liquidating trust, noting that under the reorganization plan, the liquidating trust explicitly holds the title to the intellectual property in trust for Spacone . Thus, in her view, “infringement of the patent diminishes its value and directly reduces the benefit enjoyed by Spacone.”