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A Party Must Hold All Legal Rights or Exclusionary Rights to a Patent to Have Constitutional Standing to Sue for InfringementRobert E. McBride

06-1512
September 19, 2007

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Last Month at the Federal Circuit - October 2007

Judges: Prost (dissenting), Plager, Moore (author)

[Appealed from: N.D. Cal., Judge Wilken]

In Morrow v. Microsoft Corp., Nos. 06-1512, -1518, -1537 (Fed. Cir. Sept. 19, 2007), the Federal Circuit reversed the district court’s finding that the plaintiff had standing to sue Microsoft Corporation (“Microsoft”) for patent infringement and, as a result, held that the district court lacked jurisdiction and vacated its infringement rulings.

At Home Corporation (“AHC”), a provider of Internet services, went through Chapter 11 bankruptcy proceedings in 2001. During the bankruptcy proceedings, AHC’s creditors entered into a settlement agreement, which was incorporated into a liquidation plan. The resulting liquidation plan created three entities to represent the rights of various creditors: (1) theGeneral Unsecured Creditors’ Liquidating Trust (“GUCLT”), (2) the At Home Liquidating Trust (“AHLT”), and (3) the Bondholders Liquidating Trust (“BHLT”). The liquidation plan distributed certain assets and rights among the trusts. BHLT received the rights to causes of actions against AHC’s controlling shareholders. GUCLT received the rights to all other causes of action, including claims for infringement of AHC’s patents. AHLT received legal title to AHC’s intellectual property, including U.S. Patent No. 6,122,647 (“the ’647 patent”).

Frank A. Morrow and Hank M. Spacone (collectively Spacone) were appointed as former and current trustees, respectively, for GUCLT. In 2003, Spacone sued Microsoft for infringement of the ’647 patent. Microsoft answered and asserted counterclaims against Spacone and Jacquelyn Crawford, trustee for AHLT, seeking a declaration of noninfringement, invalidity, and unenforceability of the ’647 patent. Microsoft then filed a motion for SJ contending that GUCLT lacked standing and Spacone filed a cross-motion for SJ contending that it had standing. The district court denied Microsoft’s motion and granted Spacone’s cross-motion, concluding that GUCLT had standing to sue under bankruptcy law principles and based on its trust beneficiary status. Subsequently, in response to SJ motions, the district court held that the ’647 patent was invalid and not infringed. Spacone and Crawford appealed, and Microsoft cross-appealed the district court’s determination of standing.

On appeal, the Federal Circuit considered, as a threshold matter, the district court’s determination that bankruptcy principles governed the standing inquiry in this case. The Court noted that the question as to how bankruptcy or trust law relationships affect the standing analysis was a question of first impression. It noted that GUCLT and AHLT certainly gained rights to the ’647 patent through the bankruptcy proceeding, but that this suit was filed pursuant to and is governed by patent laws. It observed that “[t]he patent statutes govern the creation and protection of patent rights, how rights can be transferred, and the parties entitled to assert those rights.” Slip op. at 6. It explained that while bankruptcy courts and courts of equity have the power to order assignment of legal title from the original owner to the receiver or trustee, “the patent statutes have long been recognized as the law that governs who has the right to bring suit for patent infringement, . . . .” Id. at 7. Accordingly, the Court held that it must determine whether GUCLT had standing to sue Microsoft for patent infringement under the patent statutes.

To determine whether GUCLT had standing, the Federal Circuit stated that it must first understand GUCLT’s rights to the ’647 patent at the time this suit was initiated. The Court noted that AHC owned the ’647 patent before the effective date of the liquidation plan and that after the effective date, AHC’s assets, rights, obligations, and causes of action were divided among GUCLT, BHLT, and AHLT. The Court observed that GUCLT was given the right to bring suit on intellectual property assets, but that it did not hold the right to make, use, or sell the invention of the ’647 patent, much less the exclusive right to do any of these things with the patented technology. Additionally, noted the Court, GUCLT was not given the right to grant licenses or sublicenses under the ’647 patent or collect any licensing royalties. The Court found that it was “undisputed that AHLT [held] legal title to the ’647 patent and all the ‘sticks’ in the ‘bundle of rights’ associated with the patent that were not specifically transferred to GUCLT.” Id. at 9. It noted that AHLT held all rights to license the ’647 patent and collect royalties, and that AHLT held the exclusive right to make, use, and sell the patented technology.

Given this disposition of patent rights between AHLT and GUCLT, the Court observed that to have standing, GUCLT must meet both constitutional and prudential standing requirements. It explained that Article III of the U.S. Constitution limits the judicial role to resolution of “cases” and “controversies.” It noted that the standing inquiry enforces this constitutional restriction on the power of the courts. It stated that to demonstrate the minimal constitutional standing requirements have been satisfied, “[a] plaintiff must allege personal injury fairly traceable to the defendant’s allegedly unlawful conduct and likely to be redressed by the requested relief.” Id. at 9-10 (alteration in original) (citation omitted). It explained that these requirements have been described as the injury in fact, traceability, and redressability inquiries.

The Court noted that “[t]here are three general categories of plaintiffs encountered when analyzing the constitutional standing issue in patent infringement suits: those that can sue in their own name alone; those that can sue as long as the patent owner is joined in the suit; and those that cannot even participate as a party to an infringement suit.” Id. at 11. The Court observed that the first category includes plaintiffs that hold all legal rights to the patent as the patentee or assignee of all patent rights—the entire bundle of sticks. It added that such a party that “holds all rights or all substantial rights” has standing to sue for infringement. Id. The second category of plaintiffs, noted the Court, holds exclusionary rights and interests created by the patent statutes, but not all substantial rights to the patent. The Court reasoned that parties that hold the exclusionary rights are often identified as exclusive licenses because the grant of an exclusive license to make, use, or sell the patented invention carries with it the right to prevent others from practicing the invention. However, noted the Court, these exclusionary rights must be enforced through or in the name of the owner of the patent, and the patentee who transferred these exclusionary interests is usually joined to satisfy prudential standing concerns. The Court observed that the patentee is joined for the purpose of avoiding the potential of multiple litigations and multiple liabilities and recoveries against the same alleged infringer. Finally, the Court noted that the third category of plaintiffs includes those that hold less than all substantial rights to the patent and lack exclusionary rights under the patent statutes to meet the injury in fact requirement. The Court reasoned that “[t]hey are not injured by a party that makes, uses, or sells the patented invention because they do not hold the necessary exclusionary rights.” Id. at 13. The Court further noted that “[t]his standing deficiency cannot be cured by adding the patent title owner to the suit.” Id. at 13-14.

With this framework in mind, the Court noted that the issue before it was whether GUCLT held exclusionary rights and suffered constitutional injury in fact. In holding that GUCLT lacked the requisite injury in fact and thus did not meet the constitutional standing requirements, the Court noted that while GUCLT had been granted the right to sue certain infringers, it lacked exclusionary rights. The Court observed that AHLT was the patent title holder and held the right to sell the ’647 patent, grant exclusive and nonexclusive licenses, grant the right to sublicense, or transfer any of the rights that AHLT held to another party. The Court reasoned that the problem for GUCLT and AHLT was that the exclusionary rights had been separated from the right to sue for infringement. It observed that for any suit that GUCLT brings, its grievance is that the exclusionary interests held by AHLT are being violated. The Court added that GUCLT was not the party to which the statutes granted relief and suffered no legal injury in fact to the ’647 patent’s exclusionary rights.

In addition, the Court noted that AHLT’s participation as a third-party defendant did not affect GUCLT’s standing to bring this suit. The Court found that “[t]o demonstrate entitlement to join as a co-plaintiff GUCLT must have the right to exclude others from making, using, or selling the invention in the United States.” Id. at 18. It noted that “the fact that AHLT ha[d] been brought into this case as a third party defendant [did] not cure GUCLT’s constitutional standing deficiencies.” Id. at 19. The Court reasoned that “[o]nly when a party holds the exclusionary rights to the patent but lacks all substantial rights may the party join the legal title owner in a suit to enforce patent rights.” Id. It stated that while joining the legal title holder may satisfy prudential standing requirements, it cannot cure constitutional standing deficiencies. Accordingly, the Court held that GUCLT failed to meet constitutional standing requirements and could not be a party to this suit for patent infringement. Because GUCLT lacked constitutional standing, the Court held that the district court lacked jurisdiction, reversed the district court’s decision concerning standing, and vacated its infringement rulings.

Judge Prost dissented. She agreed with the majority insofar as it held that GUCLT did not have standing to enforce the ’647 patent in its own name, but disagreed with the majority that GUCLT and AHLT, as coplaintiffs, lacked standing to sue Microsoft. She reasoned that the majority erred by excluding GUCLT from the second category of plaintiffs. She noted that GUCLT had no need to add AHLT because Microsoft’s counterclaims brought AHLT into the case, thus satisfying the prudential standing requirements. She opined that “[t]he majority narrowly define[d] the second category without any reasoned basis.” Prost Dissent at 3. According to her, while the majority effectively treated the second category as occupied by exclusive licenses, that category may properly include other types of plaintiffs. She would hold that GUCLT did suffer an injury in fact because it held an equitable interest in the title to the ’647 patent as beneficiary to AHLT and received the explicit right to sue as part of the bankruptcy agreement. Accordingly, she opined that while neither GUCLT nor AHLT individually may pursue infringement litigation, she would not deprive the ’647 patent of all value and would allow GUCLT and AHLT, as coplaintiffs, standing to sue Microsoft.