February 7, 2011
LES Insights
Authored by D. Brian Kacedon, Douglas W. Meier, and John C. Paul
When patent owners license their patents to companies who commercialize the technology and assert the patents, the patent owner may be required to join any patent infringement lawsuit brought by the company. Specifically, if the license transfers less than all substantial rights in a patent (such as in an exclusive field of use license), the patent owner will need to join any infringement action before that action may continue to proceed. The same is also true when an accused infringer wishes to preemptively file a suit to have a patent declared invalid or not infringed. Thus, even if an exclusive licensee alone makes an infringement allegation, the accused infringer may still be required to sue both the licensee and the university patent owner in its action for patent invalidity.
When the patent owner is a state university, the situation becomes more complicated. The Eleventh Amendment to the U.S. Constitution grants state universities, like any other state agency, immunity from suit in Federal Court. This immunity may, in effect, prevent an accused infringer from filing an action for patent invalidity when the patent is owned by a state university - even where the exclusive licensee of that patent has made an explicit infringement allegations against it.
Just such a situation arose in A123 Systems, Inc. v. Hydro-Quebec, No. 2010-1059 (Fed. Cir. Nov. 20, 2010).1 In that case, the Federal Circuit decided that the University of Texas ("UT") was a necessary and indispensable party to an action to declare a patent invalid that it owned but had exclusively licensed to a private party. UT, however, could not be joined as a party because it was entitled to sovereign immunity. Therefore, to the court dismissed the action to invalidate the patent because all necessary and indispensible parties could not be joined.
UT owned and licensed two patents to Hydro-Quebec ("HQ") in an exclusive field-of-use license. A123 Systems, Inc. ("A123") filed suit in Massachusetts seeking a declaration of noninfringement and invalidity of the UT patents. HQ moved to dismiss the suit arguing that UT was a necessary and indispensable party but could not be joined because it had not waived sovereign immunity. HQ and UT then jointly sued A123 in Texas, claiming infringement of the same two patents.
A123 stayed the Texas action following successful requests for reexamination of both patents. In Massachusetts, the court dismissed A123's declaratory judgment suit without prejudice to either party to reopen within thirty days following the termination of the reexamination. When the reexamination was concluded, A123 moved to reopen the Massachusetts actions. The district court denied A123's motion, however, because, in the court's view, if the case were reopened, it would be subject to dismissal for failure to join UT, a necessary party.
On appeal, A123 argued that the district court erred in finding that UT was a necessary party to the litigation. First, A123 argued that UT had transferred all substantial rights in the patents in suit to HQ by virtue of the exclusive license. As evidence to support its argument, A123 relied on HQ's representations that UT had transferred all substantial rights in the patents in suit to HQ. Specifically, in a previous lawsuit, HQ held itself out as an exclusive licensee of the same patents. In addition, HQ attempted to enforce the patents without joining UT in that case. The Federal Circuit, however, rejected A123's argument, explaining that the actual transfer of rights, not labels given by the parties, controls the analysis. In this case, because the license was only an exclusive field of use license, HQ could not have all substantial rights.
A123 also argued that the district court erred by finding that UT could not be joined because of sovereign immunity. A123 did not dispute that UT is an arm of the State of Texas, and therefore entitled to sovereign immunity. Instead, A123 argued that UT waived its immunity in the Massachusetts action when it filed suit against A123 for infringement of the same patents in Texas. HQ countered that UT's voluntary participation in the Texas action did not constitute a retroactive waiver of immunity in the Massachusetts action. The Federal Circuit agreed with HQ, noting that waiver of immunity in one action does not extend to an entirely separate lawsuit, even one involving the same subject matter and the same parties. Thus, UT's waiver of immunity in the Texas action did not result in a waiver of immunity in the Massachusetts action.
Finally, A123 argued that the district court abused its discretion by failing to expressly determine whether UT, even if a necessary party, was also an "indispensable party." Under the applicable Federal Rule of Civil Procedure, if a court deems a party "necessary" but that party cannot be joined, the court must consider whether that party is "indispensable," thereby making dismissal appropriate. Although the Massachusetts court did not undertake a full indispensability analysis in denying A123's motion to reopen the case, the court did state that it chose to exercise its discretion because A123's action would be subject to imminent dismissal for failure to join a necessary party. The Federal Circuit determined that this statement made an indispensability analysis necessary. But because the Massachusetts court had made sufficient factual findings to enable the Federal Circuit to make such a determination, the Federal Circuit, chose to decide the issue in the first instance on appeal.
In determining whether a party is indispensible, a court considers four factors: (1) the extent to which a judgment rendered in the person's absence might prejudice that person or the existing parties; (2) the extent to which any prejudice could be lessened or avoided . . .; (3) whether a judgment rendered in the person's absence would be adequate; and (4) whether the plaintiff would have an adequate remedy if the action were dismissed for nonjoinder. In its decision, the district court addressed the first factor in an indispensability analysis. Specifically, the district court found that maintaining jurisdiction over A123's declaratory judgment suit posed a significant risk of prejudicing UT's interests in the patents because, were the court to reinstate the action and declare the patents invalid, UT would lose all patent rights despite the fact that it had no opportunity to defend its interests in litigation. Agreeing with the district court's analysis, the Federal Circuit noted that HQ and UT's interests in the patents were overlapping but not identical.
Regarding the second factor, the Federal Circuit briefly noted that A123 had not suggested any alternative that would reduce the prejudice to UT. Turning to the third factor, the Federal Circuit agreed with the district court that a judgment rendered without UT would be inadequate because it would create the risk of multiple lawsuits and inconsistent relief. Finally, addressing the fourth factor, the district court had noted A123's interest in having a forum to litigate its defenses to claims of infringement and found that because UT had waived immunity to suit in Texas, A123 may assert counterclaims for a declaration of noninfringement and invalidity there. The Federal Circuit agreed with this assessment and found that three of the four factors weigh in favor of holding UT to be an indispensable party. Accordingly, the Federal Circuit found that UT was not only necessary but also indispensable, and therefore that it appropriate to dismiss the lawsuit.
(1) Isolating Licensors from Litigation: By licensing less than all substantial rights to a patent, a licensor may open itself to future litigation because it remains a necessary party to an infringement suit. Therefore, to best isolate itself from litigation, a patent owner should grant all substantial rights to a patent.
(2) Avoiding the Filing of Unsustainable Litigation: An entity who is accused of infringement should determine if the entity who has made the infringement allegation is the owner of the patent or merely a licensee. If only a licensee, the accused company should determine who the owner is and whether such owner would need to be joined in any action for invalidity or non-infringement before initiating any litigation. If the owner is a state agency such as a state university, the accused entity should further recognize that it may be unable to sue the university and therefore may be unable to sustain the action at all.
(3) Preventing Preemptive Lawsuits: When the patent owner is a state university, sovereign immunity may prevent that university from being sued without its consent. As a result, a licensing entity whose patents are owned by a university may be able to shield itself from being preemptively sued for declaratory judgment in an unfavorable forum by an accused infringer if the university agrees not to join the lawsuit.
1 The A123 Systems v. Hydro-Quebec decision: http://www.cafc.uscourts.gov/images/stories/opinions-orders/10-1059.pdf.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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