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Licensor Retains Standing to Sue Because Exclusive License Not a Virtual Assignment of Patents

May 14, 2010

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Last Month at the Federal Circuit - June 2010

Judges: Michel (author), Newman, Dyk

[Appealed from: C.D. Cal., Judge King]

In Alfred E. Mann Foundation for Scientific Research v. Cochlear Corp., No. 09−1447 (Fed. Cir. May 14, 2010), the Federal Circuit reversed and remanded the district court’s holding that the Alfred E. Mann Foundation for Scientific Research (“AMF”) lacked standing to sue. 

AMF conducts research aimed at developing implantable medical devices, including cochlear implants, devices that are placed in the inner ear to allow profoundly deaf or severely hard−of−hearing patients to regain their ability to hear.  The patents−at−issue disclose and claim cochlear implants and related technologies.  In 2004, AMF licensed the patents to Advanced Bionics (“AB”).  Afterwards, AMF notified AB of alleged infringing activity by Cochlear Corporation and Cochlear Ltd. (collectively “Cochlear”), and, having received assurance that AB did not plan to sue over this alleged infringement, AMF filed suit against Cochlear in December 2007.

After learning of the 2004 license agreement between AMF and AB during discovery in the district court, Cochlear filed a motion to dismiss AMF’s infringement claims for lack of standing to sue.  The district court granted the motion, finding that because AMF had transferred to AB all substantial rights under the patents, AB should be considered the owner of the patents−at−issue.  AMF appealed the dismissal.

The Federal Circuit first noted that this case presents the converse of the typical situation in which an exclusive licensee sues an accused infringer and the Court must decide whether the licensee has been granted rights sufficient to confer standing.  Here, the patent owner sought to bring suit, requiring the Court to determine whether the patent owner transferred away sufficient rights to divest it of any right to sue.  The Court explained that if a patent owner grants an exclusive license to his patents that transfers “all substantial rights” in the patents to the licensee, then the licensee has sole standing to sue for infringement of the patents.  Where an exclusive license transfers less than “all substantial rights” in the patents to the licensee, the licensor remains the owner of the patent and retains the right to sue for infringement.  Therefore, to determine whether AMF had standing to sue Cochlear, the Court had to determine whether AMF had transferred “all substantial rights” in the patent to AB.  If it did, then AMF did not have standing to sue.

The Court first looked to the language of the 2004 agreement between AMF and AB to determine, based on the explicit language of the agreement, that it granted an exclusive (rather than nonexclusive) license to AB for the patents−at−issue.  Having found that AMF granted AB an exclusive license, the Court next analyzed the scope of the license grant. 

Acknowledging that the Court’s prior decisions have never purported to establish a complete list of the rights whose holders must be examined to determine whether a licensor has transferred away sufficient rights to render an exclusive licensee the owner of a patent, the Court explained that at least some of the rights that should be examined include (1) the exclusive right to make, use, and sell products or services under the patent; (2) the scope of the licensee’s right to sublicense; (3) the nature of the license provisions regarding the reversion of rights to the licensor following breaches of the license agreement; (4) the right of the licensor to receive a portion of the recovery in infringement suits brought by the licensee; (5) the duration of the license rights granted to the licensee; (6) the ability of the licensor to supervise and control the licensee’s activities; (7) the obligation of the licensor to continue paying patent maintenance fees; (8) the nature of any limits on the licensee’s right to assign its interests in the patent; and, most importantly (9) the nature and scope of the exclusive licensee’s purported right to bring suit, together with the nature and scope of any right to sue purportedly retained by the licensor. 

Further, the Court noted that where the licensor retains a right to sue accused infringers, that right often precludes a finding that all substantial rights were transferred to the licensee unless the licensor’s right to sue is rendered illusory by the licensee’s ability to settle licensor−initiated litigation by granting royalty−free sublicenses to the accused infringers.  Noting that the nature and scope of the licensor’s retained right to sue accused infringers is the most important factor in determining whether an exclusive license transfers sufficient rights to render the licensee the owner of the patent, the Court focused on analyzing the license agreement’s provisions regarding infringement litigation. 

First, the Court outlined the provisions of the license that relate to AMF’s and AB’s infringement litigation rights, including that (1) both AMF and AB are required to notify the other party upon learning of a possible infringement of the patents; (2) after this notification, AB has the absolute right to decide whether or not to initiate litigation against the accused infringer and, if AB chooses to exercise this right by filing suit, it maintains complete control over the litigation; and (3) if AB chooses not to file suit against an accused infringer, AMF has the right (but not the obligation) to initiate litigation and, if AMF chooses to exercise this right, it controls the litigation in much the same way that AB controls the litigation it initiates.

Next, the Court found that AB’s right to sublicense does not render illusory AMF’s right to sue accused infringers because any sublicense AB grants must include specified pass−through royalties. 

Finally, the Court found that AMF’s right to sue suspected infringers is substantial enough such that AMF remains the owner of the patents−in−suit.  The Court explained that while AMF’s right to choose to sue an infringer does not vest until AB chooses not to sue that infringer, it is otherwise unfettered.  The Court specifically noted that once AMF’s right to sue an infringer activates, it can decide whether or not to bring suit, when to bring suit, where to bring suit, what claims to assert, what damages to seek, whether to seek injunctive relief, whether to settle the litigation, and the terms on which the litigation will be settled.  Furthermore, AMF is required to inform AB of the status of the litigation while it is ongoing, but AMF has complete discretion to decide what trial strategy and tactics to employ.  The Court held that “[s]uch a broad right to decide whether to bring suit and to control litigation is thoroughly inconsistent with an assignment of the patents−in−suit to AB.”  Slip op. at 12. 

The Court agreed with AMF that it makes no difference that the license agreement fails to specify a time within which AB must make its decision as to whether to sue.  The Court explained that under California law, a reasonable time is allowed when no time period is specified; thus, AB has only a reasonable amount of time before it must decide whether or not to sue an infringer, depriving AB of the right to indulge infringements indefinitely.  Because AB cannot indulge infringements for an unlimited time, under Abbott Laboratories v. Diamedix Corp., 47 F.3d 1128 (Fed. Cir. 1995), AB holds substantially less than the complete right to sue.  Thus, AMF’s retained right to sue is significant, and the Court held that the license agreement was not a virtual assignment of the patents−in−suit to AB.

Accordingly, AMF retained standing to sue accused infringers, and the Court therefore reversed the district court’s dismissal of AMF’s claims and remanded to the district court with instructions to (1) consider whether AB is an indispensable party to this litigation and, if the district court finds that AB is indispensable, then (2) consider whether, under Rule 19 of the Federal Rules of Civil Procedure, AB or its successor must be joined as a party, or whether dismissal of the case is warranted.  The Court expressed no opinion as to the proper disposal of this issue and further instructed the district court that if all standing issues are resolved favorably to AMF, it should address the merits of AMF’s claims.