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Patent Owner Is a Necessary and Indispensable Party Where Exclusive Licensee Acquired Less Than All Substantial Rights

November 10, 2010
Bianco, Krista E.

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Last Month at the Federal Circuit - December 2010

Judges: Lourie (author), Bryson, and Dyk

[Appealed from: D. Mass, Judge Tauro]

In A123 Systems, Inc., v. Hydro-Quebec, No. 10-1059 (Fed. Cir. Nov. 10, 2010), the Federal Circuit affirmed the district court’s denial of A123 Systems, Inc.’s (“A123”) motion to reopen and dismissal of A123’s DJ action against Hydro-Quebec (“HQ”).  A123 filed a DJ action in the District of Massachusetts, seeking a declaration of noninfringement and invalidity of two patents, U.S. Patent Nos. 5,910,382 and 6,514,640 (collectively, “the patents-in-suit”), assigned to the Board of Regents, The University of Texas System (“UT”) and licensed to HQ.  The patents-in-suit are directed to cathode materials for secondary (rechargeable) lithium batteries and claim a genus of lithium-based cathode materials.  HQ moved to dismiss A123’s suit, arguing that UT was a necessary and indispensable party because, pursuant to UT and HQ’s Patent License Agreement, UT had transferred to HQ less than all substantial rights in the patents-in-suit, granting HQ only an exclusive field-of-use license.  A month later, HQ and UT jointly initiated an infringement suit against A123, among others, in the Northern District of Texas.  After A123 successfully requested a reexamination of both patents, the Texas action was stayed, and the Massachusetts’ district court dismissed A123’s DJ action without prejudice to either party to reopen within thirty days following the termination of the reexaminations.  The district court then subsequently denied A123’s timely motion to reopen the case, yielding jurisdiction over A123’s DJ suit to the later-filed suit in Texas.  The district court concluded that A123’s first-filed action, if reopened, would be subject to imminent dismissal for failure to join a necessary party.  Moreover, the district court found that A123 could not join UT because UT had not waived its Eleventh Amendment sovereign immunity in the Massachusetts action.

On appeal, the Federal Circuit first rejected A123’s argument that HQ’s own actions and representations proved that HQ had acquired all substantial rights in the patents-in-suit from UT.  Specifically, A123 contended that HQ previously held itself out as an exclusive licensee of the patents-in-suit with the right to sublicense the technology and enforce the patents in an earlier lawsuit against a third party and in a letter threatening A123 with suit for infringement.  A123 also argued that HQ attempted to enforce the patents-in-suit against the third party without joining UT.  Citing the testimony of both HQ’s general counsel and UT’s Associate Vice Chancellor, the Court held that the district court did not err in finding that HQ was a field-of-use licensee because while UT granted HQ a license to two fields of use, UT retained the right to license other parties in all other patented fields of use.  The Court further found that the representations relied upon by A123 were consistent with HQ being a field-of-use-licensee.  The court noted that HQ’s statements in its first amended complaint in the lawsuit against the third party unmistakably identified HQ’s license as less than a complete grant of rights, and while HQ used the label “exclusive licensee” in its letter accusing A123 of infringement, it did not say anything to indicate that its license is exclusive to all fields of use.  Moreover, even if HQ had held itself out as having all substantial rights in the patents-in-suit, the Court explained that “[i]n determining ownership for purposes of standing, labels given by the parties do not control.  Rather, the court must determine whether the party alleging effective ownership has in fact received all substantial rights from the patent owner.”  Slip op. at 7-8.  

The Court also rejected A123’s argument that the district court erred by not examining HQ and UT’s Patent License Agreement and further abused its discretion by not granting A123’s requested discovery of the Agreement.  Concluding that the record did not reflect that A123 did, in fact, request discovery of the Agreement, the Court held that A123 waived its argument.  Thus, the Court held that because HQ had acquired less than all substantial rights, UT was a necessary party to A123’s DJ action.

Next, undertaking a de novo review, the Court considered whether UT had waived its Eleventh Amendment sovereign immunity in the Massachusetts action by filing the Texas action.  In Biomedical Patent Management Corp. v. California, Department of Health Services, 505 F.3d 1328 (Fed. Cir. 2007) (“BPMC”), the Court held that where a waiver of immunity occurs in one suit, the waiver does not extend to an entirely separate lawsuit, even one involving the same subject matter and the same parties.  Id. at 1339.  Accordingly, the Court held that UT’s waiver of Eleventh Amendment immunity in the Texas action did not result in a waiver of immunity in the Massachusetts action since it was a separate infringement action. 

Finally, applying First Circuit law, the Court found that dismissal of the DJ suit was appropriate under Fed. R. Civ. P. 19(b) when a party is deemed necessary under Fed. R. Civ. P. 19(a), but cannot be joined.  The Court rejected A123’s argument that the district court erred by not conducting an analysis under Rule 19.  The Court held that even though the district court did not undertake a Rule 19(b) analysis, the district court made sufficient factual findings for the Court to determine whether UT is an indispensable party.  Further, while remand is the “preferred position” under First Circuit precedent, the Court may rule on Rule 19(b) determinations on appeal de novo. 

Guided by Rule 19(b), the Court considered four factors to determine when joinder of a necessary party is not feasible.  Analyzing the first factor, the Court found that although HQ and UT undoubtedly share the same overarching goal of defending the patents’ validity, neither that goal nor UT’s decision to file suit jointly with HQ in Texas demonstrated that UT’s interest will be adequately represented by HQ.  While HQ and UT’s interests in the patents-in-suit were overlapping, they were not identical.  Under the second factor, the Court noted that A123 had not suggested any alternative that would reduce the prejudice to UT.  Turning to the third factor, the Court agreed with the district court’s implicit finding that a judgment rendered without UT would be inadequate.  Allowing a field-of-use licensee like HQ to sue or be sued alone poses a substantial risk of multiple suits and multiple liabilities against an alleged infringer for a single act of infringement.  Finally, the Court held that the fourth factor also weighed in favor of holding UT to be an indispensable party.  As the district court found, A123 could assert counterclaims for a declaration of noninfringement in the Texas action in view of UT’s waiver of immunity and, thus, had a forum to litigate its defenses.  Accordingly, the Court held that UT was not only a necessary party but also an indispensable party, making dismissal appropriate.


Summary authored by Krista E. Bianco, Esq.