Federal Circuit Finds That Licensee Not Granted Sufficient Rights to Sue despite Right to Sue Clause

In Propat Intern. Corp. v. Rpost, Inc., 473 F.3d 1187, 81 U.S.P.Q.2d 1350 (Fed. Cir. 2007), the inventors of U.S. Patent No. 6,182,219 had assigned the patent to Authenticational Technologies LTD (hereinafter “Authentix”).  In May 2002, Authentix entered into an agreement with Propat, allowing Propat to license the patent to third parties, to enforce the license agreement, and to sue infringers.  In return, Propat was given a percentage of licensing royalties and a percentage of any judgment or settlement.  However, the license also placed certain restrictions on the licensee’s right to sue without consultation, and was not allowed to assign its patent rights without consent.  Moreover, Propat was required to use its best efforts to develop licenses for the technology, the royalties for which Authenticational received a share.

Propat International Corporation sued RPost, Inc in the United States District Court for the Central District of California, charging RPost with patent infringement.  The District Court held that Propat was not the owner of the patent and thus did not have standing to sue.  The District Court also held that because Propat had no proprietary interest in the patent, Propat lacked standing to sue infringers even with the patent owner, Authentix, joined as a party-plaintiff.  After the District Court dismissed the case, RPost moved for attorney’s fees and costs, which were denied.  Both parties appealed.

On appeal, the Federal Circuit applied the rule that, to sue in its own name, a party must have ownership or all substantial rights in the patent.  In contrast, a bare licensee with no ownership interest in the patent has no right to participate in an infringement action at the outset such that the bare licensee cannot add the patent owner to the suit to correct the lack of standing.  The rule is based upon 35 U.S.C. §281, which provides that “patentee shall have remedy by civil action for infringement of his patent.”  In 35 U.S.C. § 100, the word “patentee” includes both the original patent owner, as well as “the successors in title to the patentee.”  In combination, only the patentee can originally bring suit under 35 U.S.C. §281.

In defining “successors in title to the patentee,” even where the patentee does not transfer formal legal title, the patentee may effect a transfer of ownership for standing purposes (and the right to sue for infringement) if it conveys “all substantial rights” in the patent to the transferee.  In that event, the transferee is treated as the patentee and has standing to sue in its own name.  The patentee is not required to join in such a suit; the transferee may sue alone.  As such, for Propat to have standing to sue alone and to have initially brought the suit without Authentix, Propat would have to have to be the owner, assignee, or have “all substantial rights” in the patent. 

In view of the rule, the Federal Circuit reviewed the agreement between Propat and Authentix to determine if the agreement transferred all substantial rights to Propat.  According to the Federal Circuit, the Agreement gave Propat the right to license the patent to third parties, to enforce the license agreement, and to sue infringers, all of which are factors in favor of showing that all substantial rights had been conferred.  However, there were several factors in the Agreement which showed that Authentix retained enough control over the patent that all substantial rights had not truly been conferred. 

Specifically, in the Agreement, Propat was given a percentage of licensing royalties and a percentage of any judgment or settlement.  The agreement did not explicitly give Propat a license to practice the patent, and Propat was not an exclusive licensee.  The Federal Circuit specifically noted that the Agreement allowed Authentix to retain an equity interest in the proceeds of licensing and litigation activities, a right to notice of licensing and litigation decisions and the right to veto such decisions, and the unrestricted power to bar Propat from transferring its interest in the patent to a third party.  Finally, Propat was required under the Agreement to “use reasonable efforts consistent with prudent business practices” in its licensing and enforcement efforts, and Authentix received a substantial percentage of these efforts, which is a provision that is more consistent with the status of an agent than a co-owner.  On balance, the Federal Circuit found that the rights allocated to Propat under the Agreement made Propat a mere agent, and are not sufficiently substantial to make Propat in effect the assignee of the patent due to the rights retained by Authentix.

The Federal Circuit then reviewed the right to sue clause of the Agreement, and noted that the mere granting of a right to sue “unaccompanied by the transfer of other incidents of ownership, does not constitute an assignment of the patent rights that entitles the transferee to sue in its own name. See Indep. Wireless Tele. Co. v. Radio Corp. of Am., 269 U.S. 459, 474-75 (1926); Crown Die & Tool Co. v. Nye Tool & Mach. Works, 261 U.S. 24, 35-36 (1923); Textile Prods., Inc. v. Mead Corp., 134 F.3d 1481, 1485 (Fed. Cir. 1998); Ortho Pharm. Corp. v. Genetics Inst., Inc., 52 F.3d 1026, 1034 (Fed. Cir. 1995).”  Therefore, the Federal Circuit affirmed the District Court in dismissing the suit for lack of standing on the grounds found the 2002 Agreement between Propat and Authentix did not transfer all substantial rights in the patent, but instead made Propat a bare licensee.  

The Federal Circuit further noted that, as a bare licensee, Propat did not have a sufficient ownership interest to be involved in the suit even where Authentix was joined in the suit.  Specifically, while an exclusive licensee has a sufficient interest in the patent to have standing (even if the patent owner is a necessary party to the litigation), Propat was not an exclusive licensee under the terms of the Agreement.  By contrast to the ownership interest of the exclusive licensee, a bare licensee lacks standing to sue third parties for infringement of the patent, this lack of standing is not curable by joining the patentee as a party since the bare licensee cannot be involved as a plaintiff in the suit.   The Federal Circuit thus agreed with the District Court that Propat’s rights created by the May 2002 agreement did not accord it rights in the patent sufficient to give it standing to sue, even with Authentix named as a co-plaintiff.


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