Divided and Conquered? The Precarious Standing of Patent Licensees

In a business world of ever-growing sophistication, the division of patent rights has become increasingly popular among owners of intellectual property. Patent licenses have grown both in number and variety, with agreements that divide enforcement rights from usage rights, that limit licensees to certain geographical areas or types of use, or that put some of these limitations together in a single license.

What are the risks involved in such agreements? Could a party who has contracted for the right to enforce a patent nevertheless be denied standing to sue? To the likely dismay of many licensees, the Federal Circuit has now answered the latter question with a resounding 'yes.' In Int'l Gamco v. Multimedia, the court denied standing to the holder of a so-called 'enterprise license,' which granted exclusive rights to enforce and practice a patent within a limited territory and field of use. Int'l Gamco v. Multimedia Games, Inc., U.S. App. LEXIS 24099 (Fed. Cir. Oct. 15, 2007) (Rader, J.). This ruling comes on the heels of two other standing cases, Propat and Morrow, in which parties that held enforcement rights to a patent but not legal title were barred from pursuing those rights in court. Propat Int'l Corp. v. RPost, Inc., 473 F.3d 1187 (Fed. Cir. 2007); Morrow v. Microsoft Corp., 499 F.3d 1332 (Fed. Cir. 2007). Together, these rulings have set important new guidelines for which kinds of licensees will have independent standing to sue infringers, which will be compelled to join their patentees, and which will be left out in the cold.

Any current or potential party to a patent license agreement should take note of these decisions. In particular, licensees wishing to avoid the fate of the plaintiffs above should think hard before accepting a field-of-use limitation in a patent license, and would be advised to bind the patentee with an affirmative joinder obligation if they do so. Current holders of licenses that divide enforcement from usage rights should consider re-joining those rights by mutual agreement, unless prepared to risk forgoing enforcement of the exclusionary powers of the patent against outsiders altogether. Parties at all stages of the negotiation process should not be fooled by the presence of the word 'exclusive' in a license agreement; in the shifting sands of patent law jurisprudence, true exclusionary power requires a more sure-footed approach.

New Cases

An 'exclusive licensee' has standing to sue in its own name, without joining the patent holder, where 'all substantial rights' in the patent have been transferred. Prima Tek II, LLC v. A-Roo Co., 222 F.3d 1372, 1377 (Fed. Cir. 2000) (citing Vaupel Textilmaschinen KG v. Meccanica Euro Italia SPA, 944 F.2d 870, 875 (Fed. Cir. 1991). In such instances, licensees are effectively assignees under 35 U.S.C. '261. In addition, '261 has been construed to allow 'exclusive territorial licensees' ' whose rights are to the entire patent, but within a limited geographical area ' to sue infringers without joining the patentee. See, Waterman v. Mackenzie, 138 U.S. 252, 255 (1891). Until this year, however, the Federal Circuit had not squarely addressed the standing of enterprise licensees or of licensees who contract for enforcement rights to a patent but not the exclusive right to practice the patent.

In International Gamco, the plaintiff claimed an 'exclusive enterprise license' to sublicense a gaming technology patent for 'the lawful operation of lottery games authorized by the New York State Lottery in the state of New York,' and had sued for infringement without joining the patentee. Int'l Gamco, 2007 U.S. App. LEXIS 24099, at *4. Appraising the legal status of the license, the Federal Circuit noted the Supreme Court's previous affirmation of the standing rights of exclusive territorial licensees. Id. at 5 (citing Waterman v. Mackenzie, 138 U.S. 252, 255 (1891)). But distinguishing Waterman, the court continued, International Gamco's license constrained its rights both geographically and by field of use, creating a question of first impression. Id. at *16. The court then borrowed the reasoning of another 19th century case, Pope, in which the Supreme Court held that a licensee with exclusive rights only to a particular embodiment of an invention should not be accorded standing, given a prudential concern that alleged infringers and fellow sublicensees could become subject to a multiplicity of lawsuits. Id. at *12-14 (citing Pope Mfg. Co. v. Jeffery Mfg. Co., 144 U.S. 248 (1892). Reasoning that International Gamco's license was similarly limited 'as to the subject matter of the patent,' the court held that an enterprise licensee should be treated as a field-of-use licensee, and denied independent standing because of the same prudential concern for multiple litigation. The court did not reach the question of whether International Gamco could proceed if it joined the patent owner.

International Gamco is only the most recent Federal Circuit decision to disappoint a licensee this year. In Propat, the appellant licensing corporation had contracted not for the right to practice the patent claiming a method for document authentication, but for the responsibility to license and enforce the patent in exchange for a share of royalties and litigation awards. Propat, 473 F.3d at 1188. The patentee, Authentix, retained legal title to the patent and rights to maintain the patent, to receive proceeds from its commercial exploitation, and to veto any sub-licenses or assignments by the licensee. Id. In view of the list of rights retained by the patentee, the court concluded that the licensee's legal interests in the patent resembled those of a 'bare licensee,' and were insufficient to confer standing even if the patentee were joined in the action. Id. at 1194. Similarly, in Morrow, rights to a computer software patent had been divided such that one trust received exclusive rights to sue for infringement while another retained the legal title, licensing rights, and the exclusive rights to produce and sell the patented invention. Morrow, 499 F.3d at 1335. On appeal, the Federal Circuit addressed the question of whether the first trust had sufficient exclusionary rights to claim injury in fact. Reasoning that any infringing activities would not cause the first trust any legal injury, and noting that an equitable interest alone is insufficient to grant constitutional standing, the Morrow court found that the first trust was merely a 'bare licensee,' unable to achieve standing even through joinder of the second, patent-holding trust. Id. at 1344. Despite the clear intent of the creditors' committee to preserve and manage the rights of the patented software, the Federal Circuit reached the seemingly anomalous result that the creditors' division of rights had 'extinguishe[d] all standing to enforce the patent.' Id.

Implications

This trio of new rulings bears some powerful lessons for both patent licensees and patent licensors. In each case, a plaintiff who held a license purportedly granting the right to sue infringers was denied the standing to do so. In contrast with copyright law ' where an exclusive licensee of any exclusionary right under 17 U.S.C. '106 may sue for infringement, see Silvers v. Sony Pictures Entm't, Inc., 402 F.3d 881, 885 (9th Cir. 2005) (concluding 'the owner of the particular exclusive right allegedly infringed' may sue for copyright infringement) ' patent licensees must take extra precautions to ensure that so-called 'exclusive' rights in patent license agreements are not illusory.

While the practice of dividing the enforcement and other rights in the same patent among different parties may have apparent business benefits, Propat and Morrow demonstrate that such an approach may in fact extinguish the standing of any party to enforce the patent. Parties contemplating such agreements in the future should clearly avoid them. Moreover, current parties to such agreements should consider steps to renegotiate them, such that these rights are 're-married' in one or the other party.

A patent holder seeking to maximize its licensing revenue may sometimes seek to limit the licenses it offers by territorial scope or field of use. While the presumably lower prices of such licenses may make them more attractive to smaller or more specialized potential buyers ' and, conversely, the opportunity to sell 'exclusive' rights to multiple licensees may be attractive to patent owners ' International Gamco means that these licenses, though 'exclusive' in a limited sense, will not automatically provide standing to sue. Licensees who nevertheless go this route may seek a promise by the patent holder to join an infringement suit, and should be prepared to compel joinder if possible and necessary. See Prima Tek II, 222 F.3d at 1377 ('A patent owner should be joined, either voluntarily or involuntarily, in any patent infringement suit brought by an exclusive licensee having fewer than all substantial patent rights'). Joining a patentee against its will, however, may be problematic, including for reasons of venue or personal jurisdiction ' and, of course, an affront to a business partner.

In all events, these issues must be carefully considered in the context of patent license negotiations. The word 'exclusive,' however, should fool no one, lest licensors and licensees find themselves ' neither one holding a key to the courthouse door ' divided and conquered.

Jonathan B. Tropp ([email protected]) is a partner and Alexander ('Lex') Paulson ([email protected]) is an associate in the Stamford, CT, office of Day Pitney LLP. They are members of the firm's Intellectual Property Law department.

In a business world of ever-growing sophistication, the division of patent rights has become increasingly popular among owners of intellectual property. Patent licenses have grown both in number and variety, with agreements that divide enforcement rights from usage rights, that limit licensees to certain geographical areas or types of use, or that put some of these limitations together in a single license.

What are the risks involved in such agreements? Could a party who has contracted for the right to enforce a patent nevertheless be denied standing to sue? To the likely dismay of many licensees, the Federal Circuit has now answered the latter question with a resounding 'yes.' In Int'l Gamco v. Multimedia, the court denied standing to the holder of a so-called 'enterprise license,' which granted exclusive rights to enforce and practice a patent within a limited territory and field of use. Int'l Gamco v. Multimedia Games, Inc., U.S. App. LEXIS 24099 (Fed. Cir. Oct. 15, 2007) (Rader, J.). This ruling comes on the heels of two other standing cases, Propat and Morrow, in which parties that held enforcement rights to a patent but not legal title were barred from pursuing those rights in court. Propat Int'l Corp. v. RPost, Inc., 473 F.3d 1187 (Fed. Cir. 2007); Morrow v. Microsoft Corp., 499 F.3d 1332 (Fed. Cir. 2007). Together, these rulings have set important new guidelines for which kinds of licensees will have independent standing to sue infringers, which will be compelled to join their patentees, and which will be left out in the cold.

Any current or potential party to a patent license agreement should take note of these decisions. In particular, licensees wishing to avoid the fate of the plaintiffs above should think hard before accepting a field-of-use limitation in a patent license, and would be advised to bind the patentee with an affirmative joinder obligation if they do so. Current holders of licenses that divide enforcement from usage rights should consider re-joining those rights by mutual agreement, unless prepared to risk forgoing enforcement of the exclusionary powers of the patent against outsiders altogether. Parties at all stages of the negotiation process should not be fooled by the presence of the word 'exclusive' in a license agreement; in the shifting sands of patent law jurisprudence, true exclusionary power requires a more sure-footed approach.

New Cases

An 'exclusive licensee' has standing to sue in its own name, without joining the patent holder, where 'all substantial rights' in the patent have been transferred. Prima Tek II, LLC v. A-Roo Co. , 222 F.3d 1372, 1377 (Fed. Cir. 2000) (citing Vaupel Textilmaschinen KG v. Meccanica Euro Italia SPA , 944 F.2d 870, 875 (Fed. Cir. 1991). In such instances, licensees are effectively assignees under 35 U.S.C. '261. In addition, '261 has been construed to allow 'exclusive territorial licensees' ' whose rights are to the entire patent, but within a limited geographical area ' to sue infringers without joining the patentee. See, Waterman v. Mackenzie , 138 U.S. 252, 255 (1891). Until this year, however, the Federal Circuit had not squarely addressed the standing of enterprise licensees or of licensees who contract for enforcement rights to a patent but not the exclusive right to practice the patent.

In International Gamco, the plaintiff claimed an 'exclusive enterprise license' to sublicense a gaming technology patent for 'the lawful operation of lottery games authorized by the New York State Lottery in the state of New York,' and had sued for infringement without joining the patentee. Int'l Gamco, 2007 U.S. App. LEXIS 24099, at *4. Appraising the legal status of the license, the Federal Circuit noted the Supreme Court's previous affirmation of the standing rights of exclusive territorial licensees. Id. at 5 (citing Waterman v. Mackenzie , 138 U.S. 252, 255 (1891)). But distinguishing Waterman, the court continued, International Gamco's license constrained its rights both geographically and by field of use, creating a question of first impression. Id. at *16. The court then borrowed the reasoning of another 19th century case, Pope, in which the Supreme Court held that a licensee with exclusive rights only to a particular embodiment of an invention should not be accorded standing, given a prudential concern that alleged infringers and fellow sublicensees could become subject to a multiplicity of lawsuits. Id. at *12-14 (citing Pope Mfg. Co. v. Jeffery Mfg. Co. , 144 U.S. 248 (1892). Reasoning that International Gamco's license was similarly limited 'as to the subject matter of the patent,' the court held that an enterprise licensee should be treated as a field-of-use licensee, and denied independent standing because of the same prudential concern for multiple litigation. The court did not reach the question of whether International Gamco could proceed if it joined the patent owner.

International Gamco is only the most recent Federal Circuit decision to disappoint a licensee this year. In Propat, the appellant licensing corporation had contracted not for the right to practice the patent claiming a method for document authentication, but for the responsibility to license and enforce the patent in exchange for a share of royalties and litigation awards. Propat, 473 F.3d at 1188. The patentee, Authentix, retained legal title to the patent and rights to maintain the patent, to receive proceeds from its commercial exploitation, and to veto any sub-licenses or assignments by the licensee. Id. In view of the list of rights retained by the patentee, the court concluded that the licensee's legal interests in the patent resembled those of a 'bare licensee,' and were insufficient to confer standing even if the patentee were joined in the action. Id. at 1194. Similarly, in Morrow, rights to a computer software patent had been divided such that one trust received exclusive rights to sue for infringement while another retained the legal title, licensing rights, and the exclusive rights to produce and sell the patented invention. Morrow, 499 F.3d at 1335. On appeal, the Federal Circuit addressed the question of whether the first trust had sufficient exclusionary rights to claim injury in fact. Reasoning that any infringing activities would not cause the first trust any legal injury, and noting that an equitable interest alone is insufficient to grant constitutional standing, the Morrow court found that the first trust was merely a 'bare licensee,' unable to achieve standing even through joinder of the second, patent-holding trust. Id. at 1344. Despite the clear intent of the creditors' committee to preserve and manage the rights of the patented software, the Federal Circuit reached the seemingly anomalous result that the creditors' division of rights had 'extinguishe[d] all standing to enforce the patent.' Id.

Implications

This trio of new rulings bears some powerful lessons for both patent licensees and patent licensors. In each case, a plaintiff who held a license purportedly granting the right to sue infringers was denied the standing to do so. In contrast with copyright law ' where an exclusive licensee of any exclusionary right under 17 U.S.C. '106 may sue for infringement, see Silvers v. Sony Pictures Entm't, Inc. , 402 F.3d 881, 885 (9th Cir. 2005) (concluding 'the owner of the particular exclusive right allegedly infringed' may sue for copyright infringement) ' patent licensees must take extra precautions to ensure that so-called 'exclusive' rights in patent license agreements are not illusory.

While the practice of dividing the enforcement and other rights in the same patent among different parties may have apparent business benefits, Propat and Morrow demonstrate that such an approach may in fact extinguish the standing of any party to enforce the patent. Parties contemplating such agreements in the future should clearly avoid them. Moreover, current parties to such agreements should consider steps to renegotiate them, such that these rights are 're-married' in one or the other party.

A patent holder seeking to maximize its licensing revenue may sometimes seek to limit the licenses it offers by territorial scope or field of use. While the presumably lower prices of such licenses may make them more attractive to smaller or more specialized potential buyers ' and, conversely, the opportunity to sell 'exclusive' rights to multiple licensees may be attractive to patent owners ' International Gamco means that these licenses, though 'exclusive' in a limited sense, will not automatically provide standing to sue. Licensees who nevertheless go this route may seek a promise by the patent holder to join an infringement suit, and should be prepared to compel joinder if possible and necessary. See Prima Tek II, 222 F.3d at 1377 ('A patent owner should be joined, either voluntarily or involuntarily, in any patent infringement suit brought by an exclusive licensee having fewer than all substantial patent rights'). Joining a patentee against its will, however, may be problematic, including for reasons of venue or personal jurisdiction ' and, of course, an affront to a business partner.

In all events, these issues must be carefully considered in the context of patent license negotiations. The word 'exclusive,' however, should fool no one, lest licensors and licensees find themselves ' neither one holding a key to the courthouse door ' divided and conquered.

Jonathan B. Tropp ([email protected]) is a partner and Alexander ('Lex') Paulson ([email protected]) is an associate in the Stamford, CT, office of Day Pitney LLP. They are members of the firm's Intellectual Property Law department.