Abstract
A California court found that a patent owner did not have constitutional standing to sue for patent infringement because the owner was in default of a loan agreement that granted the lender the right to license the patent to others.
Background
In 2017, Uniloc brought multiple patent infringement actions against Apple. In one of the actions, the district court found the sole asserted patent invalid as directed toward ineligible subject matter. Uniloc appealed, and the other actions proceeded.
While the appeal was pending, Apple uncovered evidence undermining Uniloc's standing to sue. Uniloc received litigation funding from Fortress Credit Co. LLC, and as collateral for the loan, Fortress received a non-exclusive license, including the right to grant sublicenses to Uniloc's patents. The agreement specified that Uniloc would only grant Fortress such a license following an "Event of Default," defined as the failure to perform or observe any of the covenants that required Uniloc to deliver certain amount of revenues at specific dates.
Apple moved to dismiss the other cases still in district court. It argued that Uniloc defaulted on its agreement with Fortress because Uniloc failed to pay Fortress as agreed, granting Fortress the non-exclusive license in the asserted patent, and divesting Uniloc of standing to sue. The court denied the motion noting the license did not deprive Uniloc of standing but authorized discovery on that issue. These other cases were stayed pending inter partes review before significant discovery.
While this case was on appeal, Apple alerted the Federal Circuit about the standing challenge and the panel hearing the appeal remanded the case back to the district court for discovery and resolution on the question of standing to sue.
The District Court Decision
On remand, the district court noted there are three categories of plaintiffs:
(1) Those who may sue for patent infringement without the need to join any other parties. Such plaintiffs hold all substantial rights to the patents.
(2) Those who may sue for patent infringement and need to be joined by the patent owner. Such plaintiffs hold exclusionary rights, but not all substantial rights to the patent.
(3) Those who may not sue for infringement and cannot cure their standing to sue by later joining the patent owner. Such plaintiffs lack exclusionary rights and hold less than all substantial rights to the patent.
The court noted that having substantial rights in a patent supports a party's right to sue under the patent statute, while exclusionary rights in a patent are needed to satisfy the requirements for standing to sue under the provisions of the U.S. Constitution. For patent infringement claims, statutory standing is conferred under Section 281 of the patent statute, which permits a patentee with substantial rights in the patent to sue for patent infringement. For standing to sue under the U.S. Constitution, however, a party must show some concrete, particularized, and actual or imminent injury in fact. The court explained that patent infringement injures a party's exclusive right. Thus, without having the exclusionary rights, a party is unable to show constitutional standing.
Here, the facts were uncontested: Uniloc did not gather the revenue required under the agreement for the relevant time period; Fortress testified that even though Uniloc did not satisfy the revenue threshold, it did not believe Uniloc to be in default; and Uniloc took no action to remedy the default.
The agreement provided three mechanisms to annul the default:
(i) Fortress waives the default in writing,
(ii) Uniloc cures the default to Fortress' reasonable satisfaction, or
(iii) an amendment is agreed upon that expressly cures the default.
Uniloc submitted no writings from Fortress waiving the default (option i) and none of the amendments to the agreement provided express terms curing the default (option iii). Instead, Uniloc argued that testimony from Fortress showed it did not believe Uniloc had defaulted and that Fortress was reasonably satisfied as evidenced by the parties' subsequent amendment (option ii).
The court disagreed. The evidence showed Uniloc did nothing to cure the issue after it defaulted. And if Fortress was satisfied with Uniloc's inaction, that would amount to a waiver, which had to be in writing. Thus, due to Uniloc's uncured default, Fortress held an unfettered right to license the asserted patent at the time the case was filed.
The court then found that Fortress's broad rights divested Uniloc's standing to sue. Here, because Fortress held an unfettered right to license the asserted patent, Uniloc could not have had an expectation that others would not practice the patent and would not be injured if others did in fact practice the patent.
The court dismissed Uniloc's argument that there "must always be one" party with the right to sue, finding instead that parties are free to enter into licensing agreements that may divest all interest holders of standing or potentially destroy the patent right all together.
The court also rejected Uniloc's argument that the agreement could not divest it of standing to sue retroactively since it only provided Fortress a prospective right to grant sublicenses. The court found no support in the agreement for such a limitation.
Because Uniloc lacked exclusionary rights to the asserted patent, it was in turn deprived of constitutional standing to sue, which cannot be cured even through joining a patent owner in the lawsuit. This case is currently on appeal. See CAFC Docket No. 21-1568.
Strategy and Conclusion
Before bringing a patent infringement action, a party must have statutory and constitutional standing. Loan agreements that grant a license to a patent in the event of a default can prevent the patent owner from suing for infringement.
The Uniloc v. Apple decision can be found here.
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