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Exclusive Licensee Must Join Patent Owner

May 07, 2001
Vance, Andrew J.

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Last Month at the Federal Circuit - June 2001

Judges: Gajarsa (author), Lourie, and Schall

In Intellectual Property Development, Inc. v. TCI Cablevision of California, Inc., No. 00-1236 (Fed. Cir. May 7, 2001), the Federal Circuit affirmed a district court’s decision to dismiss with prejudice the complaint of Plaintiffs/Counterdefendants, Intellectual Property Development, Inc. (“IPD”) and Communications Patents Ltd. (“CPL”). The Federal Circuit also affirmed the district court’s decision to dismiss without prejudice the counterclaim of Defendant/Counterplaintiff, TCI Cablevision of California, Inc. (“TCI-California”), for a DJ of noninfringement, invalidity, and unenforceability, based on a lack of subject matter jurisdiction.

U.S. Patent No. 4,135,202 (“the ‘202 patent”), assigned to CPL, is directed to wired broadcasting systems. Following a liquidation of CPL, IPD entered into an agreement (“the Agreement”) with CPL that granted IPD an exclusive license in the ‘202 patent to make, use, and sell the inventions disclosed in the patent, to grant sublicenses, to collect monies, damages, and/or royalties for past infringement, and to bring legal action for infringement. Under the Agreement, however, CPL retained the rights to: (1) require IPD to obtain CPL’s revocable consent to proceed with litigation when CPL is a “necessary” party; (2) be fully informed and to be consulted with regard to litigation when CPL is not a “necessary” party; (3) assign all of its rights and obligations under the Agreement; (4) prevent IPD from assigning its benefit under the Agreement without prior written consent from CPL; (5) require its consent to settlements (which shall not be “unreasonably withheld”); and (6) collect fifty percent of profits realized from any patent litigation. IPD’s “exclusive” license was also subject to a nonexclusive license in the ‘202 patent previously granted to third-party cable companies and their customers.

IPD filed a patent infringement action asserting the ‘202 patent against UA-Columbia Cablevision of Westchester, Inc. (“UA-Westchester”) and Tele- Communications, Inc. (“TCI”) in the United States District Court for the Southern District of New York (“N.Y. district court”). TCI, the parent of both TCICalifornia and UA-Westchester, filed a motion to dismiss the complaint, alleging that IPD lacked standing or, alternately, that CPL was an indispensable party. In response, IPD obtained a letter from CPL, wherein CPL agreed to be bound by any judgment issued in that case. The N.Y. district court denied TCI’s motion, determining that IPD had standing to bring the suit in its own name.

Thereafter, IPD filed twelve other infringement actions against TCI’s subsidiaries, including a suit against TCI-California in the United States District Court for the Central District of California (“California district court”). TCI-California responded by filing the above-mentioned DJ counterclaim and dismissal motion. Contrary to the decision of the N.Y district court, the California district court agreed that IPD lacked standing, but permitted IPD to amend its complaint to add CPL as a party Plaintiff, thereby rectifying the “lack of standing” problem. In denying a motion of TCI-California for reconsideration, the California district court clarified that its decision that IPD lacked standing was based on prudential grounds, not a lack of constitutional standing.

Subsequently, IPD settled all of the cases against TCI subsidiaries except for the case against TCI-California. In the case against TCI-California, IPD filed a motion to voluntarily dismiss the action with prejudice pursuant Fed. R. Civ. P. 41(a) and to dismiss TCI-California’s DJ counterclaim. Attached to IPD’s motion was a statement of nonliability, stipulating that TCI-California had no liability under the ‘202 patent to IPD, CPL, or any successors in interest thereto. The California district court had granted IPD’s motion, and TCI-California appealed.

The first issue considered by the Federal Circuit was whether TCI-California had standing to bring this appeal. IPD argued that TCI-California lacked standing since its appeal sought a judgment identical to the lower court’s, but for a different reason (i.e., lack of standing). TCI-California countered by arguing that the judgment failed to address the merits of its counterclaim for a DJ of invalidity and unenforceability, which left TCI-California with concerns based on indemnity and direct liability to potential transferees of rights in the ‘202 patent. Agreeing with TCI-California, the Federal Circuit held that TCI-California had standing to appeal because the lower court’s decision failed to address all avenues of potential infringement liability.

The Federal Circuit next considered whether the lower court had properly dismissed TCICalifornia’s DJ counterclaims for lack of subject matter jurisdiction in view of IPD’s statement of nonliability and the voluntary dismissal with prejudice. Noting that the statement of nonliability filed by IPD and CPL estops IPD, CPL, and any successors in interest to the ‘202 patent from asserting liability against TCI-California for infringement of the ‘202 patent, the Federal Circuit held that TCI-California has no reasonable apprehension of an infringement suit based on the ‘202 patent and, therefore, fails to satisfy the justiciability test for its DJ counterclaim. In so holding, the Federal Circuit rejected an argument by TCI-California that it had a reasonable apprehension because it could be required to
indemnify an entity that may be held to infringe the ‘202 patent in a future case.

Turning to the issue of IPD’s standing to sue on the ‘202 patent, the Federal Circuit initially considered whether the Agreement between IPD and CPL conveyed some or all of CPL’s substantial rights in the ‘202 patent to IPD. The Federal Circuit noted that in making such a determination it is helpful to consider rights retained by the grantor in addition to rights transferred to the grantee. Holding that the Agreement did not convey all of the substantial rights in the ‘202 patent to IPD, the Federal Circuit found significant the fact that the Agreement allows CPL to permit infringement in cases where it is a “necessary” party, requires CPL to consent to certain actions and be consulted in others, and limits IPD’s right to assign its interests in the ‘202 patent. In view of the patent rights retained by CPL, the Federal Circuit held that the Agreement granting rights in the ‘202 patent to IPD did not amount to a transfer of title, but that IPD was an exclusive licensee having some but not all substantial rights in the ‘202 patent.

The Federal Circuit then applied the constitutional standing test and found that IPD satisfied each element of the test. Namely, the Federal Circuit held that: (1) IPD suffered an injury in fact from TCI-California allegedly making, using, and selling the invention claimed in the ‘202 patent; (2) there was a causal connection between the injury and TCI-California’s conduct; and (3) the injury would likely be redressed in a successful infringement suit against TCI-California. Accordingly, the Federal Circuit held that IPD suffered a constitutional injury.

Notwithstanding that IPD had satisfied the constitutional standing requirement, however, the Federal Circuit ruled that a prudential principal of standing requires a patent owner to be joined (either voluntarily or involuntarily) in any patent infringement suit brought by an exclusive licensee having fewer than all substantial patent rights. Since IPD was an exclusive licensee and not an assignee, IPD was required to join CPL in the infringement suit against TCI-California on prudential standing grounds. The Court concluded that the district court had not erred when it permitted IPD to join CPL after initially filing the suit solely. Since IPD and CPL had standing to maintain the suit, they had standing to move for a voluntary dismissal under Fed. R. Civ. P. 41(a). Therefore, the Federal Circuit affirmed the lower court’s ruling.