Co-written by Nathaniel I. Watts
I. INTRODUCTION
The essence of a patent is the right to exclude: “Every patent shall contain . . . a grant to the patentee, his heirs or assigns, of the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States . . . . ”1 In order to exercise this right, the patent statute authorizes “[a] patentee” to bring a “civil action for infringement of his patent.”2 From this clear expression of the “patentee’s” right to exclude by bringing an action for infringement, comes the more ambiguous situation in which the patentee has granted some or all of his exclusive rights under the patent either by way of license or assignment. This article examines when such licensees have standing to sue.
II. STANDING
In order to bring any civil lawsuit in the United States, including patent infringement actions, the party suing must have “standing.” The term “standing” generally includes requirements imposed directly by Article III of the United States Constitution as well as “prudential considerations” imposed by the courts.
Article III of the Constitution limits the judicial power of the United States federal courts to the resolution only of “cases” or “controversies.” In order to have sufficient standing to satisfy this Constitutional limitation, the party who invokes the court’s authority must be able to "show that he personally has suffered some actual or threatened injury as a result of putatively illegal conduct by the defendant,” that the injury can fairly be traced to the challenged conduct, and that the injury is likely to be redressed by a favorable court decision.3
Beyond the Constitutional requirements, the federal judiciary has also adhered to a set of “prudential principles” that bear on the question of standing. For example, the courts have held that a plaintiff must generally assert his own legal rights and interests, and cannot rest his claim to relief on the rights and interests of third parties.4
The question of a party’s “standing” goes directly to the subject matter jurisdiction of the federal court -- i.e., the power of the court to hear the case. Consequently, a party’s failure to have proper standing is a matter that can be raised by the parties or by the court sua sponte, at any time during the litigation (even on appeal), and cannot be waived either intentionally or by a party’s failure to raise the issue.5
Obviously, it is therefore important for a plaintiff to make sure that all standing requirements have been satisfied in order to avoid dismissal of its lawsuit. Conversely, a defendant should consider seeking dismissal of the suit if it believes the plaintiff lacks standing.
III. STANDING OF LICENSEES OF PATENT RIGHTS
The basic rules for standing are as follows. An assignee who receives all of the patent owner’s substantial rights generally has standing to sue for patent infringement in its own name. An exclusive licensee may bring suit, but generally must join all the patent owners as plaintiffs as well. A “bare” or non-exclusive licensee under a patent has no standing to sue for patent infringement. The name of the agreement transferring rights under the patent is not controlling -- the courts look to the “substance” of the agreement and its provisions to determine in which category it falls.6
Since nothing in the law is as simple as three general rules, each of these topics is addressed in more detail below.
A. “Bare” Or Non-Exclusive Licensees Have No Standing
A non-exclusive, or “bare,” licensee has no standing to bring suit for patent infringement.7 The justification for this rule can be found in Crown Die & Tool Co. v. Nye Tool & Machine Works,8 a case often cited in supporting the above proposition. Crown Die explained that one who seeks to bring an action for infringement must hold legal title to the patent during the time of infringement. Since a non-exclusive license does not expressly or impliedly hold any promise by the patentee to exclude others from using the patented technology, the patentee has transferred no property interest in the patent to the licensee.
The Court of Appeals for the Federal Circuit has set forth guidance as to whether a licensee may be fairly characterized as a bare licensee who has no standing or an exclusive licensee who as discussed below may have standing. In Rite-Hite Corp. v. Kelley Co., Inc.,9 the patentee sold its products through independent-sales-organizations (“ISOs”) under sales agreements. The agreements provided that the ISOs had “exclusive” rights to solicit sales in certain territories in that the patentee would not appoint other sales representatives in these territories so long as the patentee felt the ISO was doing an adequate job. The patentee also retained the right to sell in the given territory. After the patentee sued a defendant for infringement, the ISOs sought to intervene in order to share in the damages being sought. The ISOs argued that the exclusivity of their sales territories made them exclusive licensees and gave them standing. The Court of Appeals for the Federal Circuit, however, reversed the decision allowing intervention, finding that the ISOs were at most bare licensees who had no standing. The Court explained:
To be an exclusive licensee for standing purposes, a party must have received, not only the right to practice the invention within a given territory, but also the patentee’s express or implied promise that others shall be excluded from practicing the invention within that territory as well. If the party has not received an express or implied promise of exclusivity under the patent, i.e., the right to exclude others from making, using, or selling the patented invention, the party has a “bare license,” and has received only the patentee’s promise that that party will not be sued for infringement. [Internal citations omitted.]
The court found that the ISOs simply possessed sales contracts: they had no implied or explicit right to exclude others from practicing the patented invention; the patentee had no obligation to sue infringers; and the licensees had no right to share any recovery from a patent infringement suit.10
In contrast to a “bare” licensee, courts generally hold that an exclusive licensee has standing to sue for infringement, provided it joins the patent owner/licensor as a plaintiff. In Independent Wireless Telegraph Co. v. Radio Corp. of America,11 the Supreme Court held:
The presence of the owner of the patent as a party is indispensable not only to give jurisdiction under the patent laws but also, in most cases, to enable the alleged infringer to respond in one action to all claims of infringement for his act, and thus either to defeat all claims in the one action, or by satisfying one adverse decree to bar all subsequent actions.
After holding that the patent owner must be a named plaintiff in a lawsuit brought by the exclusive licensee, the Court laid out the rules which apply if the patent owner either refuses to join the suit or cannot be joined. “If the owner of a patent, being within the jurisdiction, refuses or is unable to join an exclusive licensee as coplaintiff, the licensee may make him a party defendant by process, and he will be lined up by the court in the party character which he should assume” (i.e., as plaintiff). The Court reasoned that the owner of a patent who grants an exclusive license impliedly authorizes a lawsuit in his name in order to effectuate the exclusivity of the license by excluding infringers. The Court further held that if the “licensor is hostile and is out of the jurisdiction where suit for infringement must be brought,” the exclusive licensee “may make the owner . . . a coplaintiff without his consent.” In this situation, the owner must first be requested to join suit. If he declines, he may be made a coplaintiff in name, and will be bound by the judgment.12
There is a rare exception to the general rule that the patent owner must be named. If the patent owner is itself the accused infringer (i.e., the exclusive license is exclusive even to the patent owner), the patent owner need not be joined as a plaintiff.13
In situations where the patent owner must be a plaintiff but refuses to join suit, the exclusive licensee may utilize Fed. R. Civ. P. 19(a), which allows involuntary joinder of necessary parties.14 Indeed, the 1937 Advisory Committee Notes to Rule 19 point to Independent Wireless as an example of a “proper case for involuntary plaintiff.”
The Federal Circuit has expressly held that the requirement that an exclusive licensee must join the patent owner in a lawsuit is a “prudential” standing requirement, not a “constitutional” one.15 Accordingly, a failure to join the patent owner at the outset of the lawsuit does not necessarily require dismissal for lack of jurisdiction. If the patent owner can be subsequently joined without prejudice to the defendant, the court will allow joinder under Fed. R. Civ. P. 21, rather than dismissing the case.16
C. An Assignee Has Standing To Sue Without Joining The Original Owner, Including When An Exclusive License Rises To The Level Of An Assignment
As noted above, the patent statute authorizes suit by the “patentee.” The term patentee includes “not only the patentee to whom the patent was issued but also the successors in title to the patentee.”17 Also, the patent statute explicitly contemplates assignments, providing that “patents shall have the attributes of personal property. Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing.” 18
If an agreement, even one expressly termed an exclusive license, in fact transfers all “substantial rights” in a patent to the grantee, the agreement is said to rise to the level of an assignment and confer standing on the grantee to sue in its own name, without joinder of the grantor.
There is a large body of Federal Circuit precedent examining whether a given agreement constituted an exclusive license or assignment. In some decisions, the Federal Circuit found that an exclusive license constituted an assignment, sufficient to give the licensee standing to sue in its own name. For example, in Vaupel Textilmashinen KG v. Meccanica Euro Italia S.P.A.,19 the court found that an exclusive license was an assignment where the agreement transferred not only an exclusive license under the patent but also gave the licensee the right to sue for infringement and keep a portion of the damages recovered, subject to the requirement to inform the licensor. The fact that the patent owner also retained the rights to veto sublicenses, obtain patents on the invention in foreign countries, receive a portion of the infringement damages, and a reversionary interest in the event of bankruptcy by the licensee, did not preclude an assignment. Similarly, in Speedplay, Inc. v. Bebop, Inc.,20 the court held that an exclusive license giving the licensee the right to enforce the patents was an assignment, even though the licensor retained the right to bring suit if the licensee failed to do so within three months, the licensee needed the consent of the licensor to further assign the rights (which consent was not to be unreasonably withheld), rights in improvements were to be assigned to the licensor, the licensee was required to mark products for foreign sale in accordance with the licensor’s instructions, the licensor reserved the right to inspect the licensee’s books, and the license terminated upon insolvency of the licensee.
In other decisions, the Federal Circuit held that an exclusive license was just that -- and did not allow the exclusive licensee to sue in its own name. In Abbott Labs. v. Diamedix Corp.,21 the exclusive licensor retained a limited right to make, use and sell the invention, the exclusive license was subject to prior licenses granted by the licensor, the licensor retained the right to bring suit if the licensee declined to do so and if the licensee did sue it was obligated not to impair the patent rights, the licensor could participate in the suit regardless, and the licensor had the right to prevent the licensee from assigning its rights under the patent to anyone but successors in interest. In Mentor H/S, Inc. v. Medical Device Alliance, Inc.,22 the exclusive licensor retained the rights to develop and manufacture patented products for sale to the licensee and to supervise and control the licensee’s product development, had an obligation to pay patent maintenance fees, and retained the right and first obligation to sue infringers with the licensee having the right to sue only if the licensor does not. In Intellectual Property Development, Inc. v. TCI Cablevision of California, Inc.,23 the exclusive licensor retained the rights to prevent the licensee from assigning its rights to third-parties, and to permit infringements by third-parties when the licensor was a “necessary” party (which was not defined) or to be kept fully informed and consulted with in the event of litigation when the licensor was not a necessary party.
This article does not attempt to discuss all the cases concerning interpretation of exclusive license agreements, but rather provides a few examples. Parties faced with a given license agreement or proposal who are trying to determine whether standing exists should carefully review the provisions of the agreement and the full body of case law on the subject.
IV. PRACTICAL IMPLICATIONS
The strict standing requirements raise many issues which should be considered both in negotiating and drafting license agreements and during litigation.
As noted above, a court may raise the issue of standing sua sponte even for the first time during appeal. Thus, in the most egregious circumstances, parties may potentially spend millions of dollars litigating on the merits only to have the case thrown out on appeal because of a lack of original standing. Before bringing suit on behalf of an assignee or licensee, the agreement should be carefully studied to determine whether the patent owner needs to be joined, or possibly whether the licensee should seek further transfers of rights from the patent owner.
The standing requirement can also impose hardship on the accused infringer. Consider the situation where the patent owner is more “friendly” to the potential infringer than the licensee. If the licensee is a bare licensee, the potential infringer can obtain a license or a covenant not to sue directly from the patent owner. However, if the licensee is an exclusive licensee, such a tactic may not be effective. In that case, a covenant not to sue granted by the patent owner may be without any effect, since the exclusive licensee has the right to seek involuntary joinder of a non-consenting patent owner.
The involuntary joinder provision also can make things difficult for the patent owner who is an exclusive licensor. For example, what if a patent owner decides it is economically beneficial to settle with an accused infringer rather than litigate, but the exclusive licensee would rather litigate? Under Independent Wireless, the patent owner who refuses to litigate can be joined involuntarily. Thus, the patent owner’s ability to settle a lawsuit with a potential infringer can be prevented by the desires of an exclusive licensee. If the exclusive licensor wishes to prevent this, it should include express provisions in the license agreement authorizing it to settle any lawsuit brought by the licensee.
What if the patent owner believes that there is no infringement taking place at all (and indeed that an allegation of infringement would not satisfy Fed. R. Civ. P. 11), but the exclusive licensee believes otherwise? The licensee may have more incentive to bring suit rather than allow a license -- having a competitor while paying royalties to the patent owner would be the worst of both worlds for the licensee. Moreover, the licensee may have less at risk were the patent to be held invalid -- indeed, such a ruling could have potential benefits by allowing the licensee to stop paying royalties. Under the law discussed above, if the exclusive licensee believes there is infringement, the patent owner can be involuntarily joined in the lawsuit even if it does not want to litigate. Again, to avoid such problems, the patent owner might consider including a provision in the license agreement giving it the right to veto a lawsuit if it believes such a suit cannot be brought in good faith, or requiring that any suit brought by the licensee protect and maintain the patent.
Lastly, foreign patent owners should consider the potential geographic hardships raised by an exclusive license. For example, consider a foreign patent owner who is not otherwise subject to personal jurisdiction in a particular State in the United States. If an exclusive licensee brings a lawsuit in such a State, however, the patent owner may find itself forced to litigate there, lest it receive a binding judgment against it. Thus, foreign patent owners may want to include restrictions on the places where exclusive licensees can bring suit without prior authority from the patent owner.
The above restrictions tend to favor the patent owner. Obviously, these provisions therefore are a matter of negotiation between the exclusive licensor and licensee. The patent owner should also be aware however that, as discussed above, restrictions on the exclusive licensee could potentially convert the exclusive license into a “bare” license depriving the licensee of any standing at all. They should therefore also be considered carefully by the patent owner if its desire is to give the exclusive licensee power to bring suit.
1 35 U.S.C. § 154(a)(1).
2 35 U.S.C. § 281.
3 Valley Forge Christian College v. Americans United for Separation of Church and State Inc., 454
U.S. 464, 472 (1982); Gladstone Realtors v. Village of Bellwood, 441 U.S. 91, 99 (1979).
4 Valley Forge, 454 U.S. at 474-75.
5 Mentor H/S, Inc. v. Medical Device Alliance, Inc., 240 F.3d 1016, 1017-19 (Fed. Cir. 2001).
6 Ortho Pharm. Corp. v. Genetics Inst., Inc., 52 F.3d 1026, 1030 (Fed. Cir. 1995).
7 Kalman v. The Berlyn Corporation, 914 F.2d 1473, 1481 (Fed. Cir. 1990).
8 261 U.S. 24, 40-41(1923).
9 Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1542 (Fed. Cir. 1995).
10 Id. at 1552-53; see also Ortho Pharm., 52 F.3d 1026 at 1031-43 (Fed. Cir. 1995) (license was
non-exclusive and therefore licensee had no standing to sue, even though the license purported to
give the licensee the right to sue, because the licensor retained the right to license to others);
Textile Prod’s, Inc. v. Mead Corp., 134 F.3d 1481, 1484 (Fed. Cir. 1998) (requirements contract
whereby patentee agreed to buy all of its requirements for a product embodying the patented
invention from licensee was not an exclusive license; patentee could in theory have licensed
others to make product for third-parties).
11 Independent Wireless Tel. Co. v. Radio Corp. of America, 269 U.S. 459, 468 (1926).
12 Id. at 469-73.
13 Textile Prod’s, Inc. v. Mead Corp.,134 F.3d 1481, 1484 (Fed. Cir. 1998).
14 E.g., Calgon Corp. v. Nalco Chem. Co., 726 F. Supp 983, 989 (D. Del. 1989).
15 Intellectual Property Development, Inc. v. TCI Cablevision of Cal., Inc., 248 F.3d 1333,1348-49
(Fed. Cir. 2001); Mentor, 240 F.3d at 1018-19.
16 Compare Mentor, 244 F.3d 1365, 1373 (Fed. Cir. 2001) (allowing joinder of patent owner during
appeal) with Prima-Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372, 1381-82 (Fed. Cir. 2000)
(refusing to allow joinder and dismissing suit where defendant prejudiced by lack of discovery;
noting also that a patent owner’s agreement to be bound by the judgment in a case by an exclusive
licensee does not eliminate the requirement for joinder).
17 35 U.S.C. § 100(d).
18 35 U.S.C. § 261.
19 944 F.2d 870, 874-77 (Fed. Cir. 1991).
20 211 F.3d 1245, 1250-53 (Fed. Cir. 2000).
21 47 F.3d 1128, 1131-32 (Fed. Cir. 1995).
22 240 F.3d 1016, 1018-19 (Fed. Cir. 2001).
23 248 F.3d 1333, 1344-45 (Fed. Cir. 2001).
Mr Wexler is a partner and Mr Watts is an associate in the New York office of Fitzpatrick, Cella, Harper & Scknto. The authors' practices focus on complex patent litigation.
This is a commentary to update those involved in regulated banking, investment, or corporate activities, on important developments affecting them. Since this is a quick reference facility, it is not a substitute for obtaining specific professional advice.
