April 28, 2015
LES Insights
Authored by D. Brian Kacedon and John C. Paul
A Minnesota court recently rejected a challenge to a licensee's right to sue for infringement without joining the patent owner. The court found that the licensee obtained from the patent-owner "all substantial rights" in the licensed patents, because the licensee received an exclusive license to practice the patented inventions, to enforce the patent rights, and to sublicense and assign its rights. In addition, the retention by the patent owner of a non-exclusive right to practice the invention did not prevent the licensee from receiving all substantial rights. The court also found that the licensee's merger during the litigation with its sublicensee necessarily conveyed the right to enforce the patents to the post-merger entity.
A court may not hear a case if the plaintiff lacks standing to sue when it files the complaint. U.S. patent law provides that only the patent owner and successors in title have standing to sue for patent infringement. However, even if it does not receive title, an entity that receives all substantial rights under the patent from the patent owner is considered the "effective patent owner" and has standing to sue for patent infringement.
In a recent case, Luminara Worldwide, LLC v. Liown Electronics Co.,1 the U.S. District Court for the District of Minnesota rejected defendants' motion to dismiss a lawsuit, finding that the plaintiff had standing to sue for patent infringement.
Candella, LLC entered into a licensing agreement with Disney Enterprises, Inc., obtaining a worldwide, exclusive license on patents directed to flameless candles, including the right to make, have made, use, sell, offer for sale, and import products that embody the patented inventions. Under the agreement, Candella received the unfettered right to grant sublicenses and the sole and exclusive right to enforce the patents against third parties. Disney retained formal title to the patents, the right to receive royalty payments from Candella, and a nonexclusive right for itself and its affiliates to practice the inventions. Either party can terminate the agreement, if both parties agree to do so, or if either party materially breaches the contract.
Candella entered into an exclusive sourcing and distribution agreement with Luminara, which included the right to exclude others from making, using, or selling any products under the licensed patents. The Candella-Luminara agreement provided that Luminara could institute proceedings against third parties and join Candella as a party, but Candella would have the right to all damages, excluding litigation costs and expenses. Furthermore, Candella retained the ownership rights in the patents and the right to enforce the patents. Thus, either Candella or Luminara could institute proceedings to enforce the patents.
Searching for a manufacturer for its flameless candles, Candella entered into a nondisclosure agreement with Liown Electronics Co. Ltd., a Chinese company. During negotiations, Candella showed Liown a prototype candle and design drawings. Ultimately, the negotiations failed. Liown filed a patent application in China and the United States directed to flameless-candle technology, and it began selling its own flameless candles in the United States.
Candella filed a lawsuit against Liown, which resulted in a settlement agreement. Subsequently, days after Liown's U.S. patent issued, Liown informed Luminara that it no longer intended to comply with the settlement-agreement terms. Candella and Luminara sued Liown and later added several additional defendants, who allegedly sold or offered for sale flameless candles manufactured by Liown. The defendants moved to dismiss the complaint, claiming that the court lacked jurisdiction over the lawsuit because Candella and Luminara lacked standing to sue for patent infringement. While defendants' motion to dismiss remained pending, Candella and Luminara merged, forming Luminara Worldwide.
The court first analyzed whether Candella received "all substantial rights" from Disney. Defendants argued that because Disney retained the unlimited right to practice the invention for itself and its affiliates, Candella cannot have received all substantial rights in the patents. Looking to prior cases, the court observed that when an entity obtains an exclusive license and "all substantial rights" to a patent, that entity has standing to sue for patent infringement on its own, without joining the patent owner. No complete list of determinative factors exists regarding whether an exclusive licensee received "all substantial rights." Courts, however, generally assess factors like 1) whether the licensee has the right to bring suit, sublicense, and assign rights and 2) whether the licensor has reversionary rights at the end of the license, the ability to supervise or control the licensee's activities, or the obligation to continue paying maintenance fees on the licensed patent. Relying on these commonly referenced factors, the court determined that Candella received all substantial rights because it received an exclusive license to the patents, the sole and exclusive right to enforce the patents, the right to sublicense, and the right to assign. Because Candella received all substantial rights, the court concluded that Candella had standing to sue for patent infringement at the time it filed the complaint.
Next, the court rejected defendants' argument that Disney's retention of a nonexclusive right to practice the patents foreclosed Candella from receiving all substantial rights. Defendants argued that Disney's retention of the rights to practice the patents and to have the patented products made for itself and its affiliates essentially permitted Disney to license third parties to practice the patents. According to the court, however, although Disney could have the candles made for its own use, Disney did not have the authority to make or have others make the candles for third parties. Thus, Disney did not retain an unrestricted right to license third parties to practice the patents. The court also found that Disney's right to receive royalties from infringement litigations, remain informed about Candella's sublicensing agreements, and terminate the license did not outweigh the other significant factors, which indicated that Disney transferred all substantial rights in the patents to Candella.
Finally, the court held that because Candella maintained all substantial rights in the patents before the merger, Luminara Worldwide, the post-merger entity, necessarily continues to have standing to maintain the infringement suit.
This decision illustrates that parties negotiating licenses and sublicenses should pay close attention to the rights conveyed and retained. If the parties intend for the licensee to have the sole and exclusive right to enforce the licensed patent rights, the licensee must obtain "all substantial rights." Otherwise, courts may find that the licensee does not have the right to enforce the patent rights without joining the patent owner.
1 The district court's opinion can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2015/Luminara_v_LiownElectronics.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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