Patent Licensee Cannot Sue for Infringement When Licensor Retains Right to Substantial Portion of Litigation Recovery and Restricts Licensee Rights to Assign, Enforce, and Abandon

Abstract

A Colorado court recently held that a patent licensee did not have standing to bring an infringement lawsuit, finding that the license agreement failed to convey all substantial rights to the licensee because it restricted the licensee’s right to assign, enforce, or abandon the patent and also reserved a substantial portion of any litigation recovery for the licensor.

A Federal court can only consider a claim for patent infringement if the plaintiff has “standing” to sue for that infringement. The Patent Act provides only that the patent owner or any “successors in title” to the patent has standing to sue for infringement. Generally, anything less than a complete transfer of rights is merely a license and standing to bring suit remains with the patent owner. In a limited exception, however, where the patent owner conveys “all substantial rights” in the patent to a licensee, the license is tantamount to a virtual assignment and the licensee gains standing to bring suit in its own name for patent infringement.

Determining whether a license agreement conveys “all substantial rights” requires a court to analyze the rights under the license agreement and the intent of the parties. Recently, in KW-2, LLC v. Asus Computer International, et al., a Colorado federal district court dismissed a licensee’s patent-infringement suit for lack of standing, finding that the license agreement failed to convey all substantial rights to the licensee because it restricted the licensee’s rights to assign, enforce, or abandon the patent and also reserved a substantial portion of any litigation recovery for the licensor.

Background

Plaintiff KW-2, LLC sued Defendants Asus Computer International, Asustek Computer, Inc., and Dell Inc. for infringing U.S. Patent No. 6,027,835 (“the ’835 patent”). KW-2 asserted that it is the “exclusive licensee” of the ’835 patent under the terms of a License Agreement executed in February 2015 between KW-2 and Ryujin Patent & Licensing Ltd, the owner of the ’835 patent. The Defendants moved to dismiss KW-2’s suit, arguing that KW-2 lacked standing to enforce the ’835 patent because the License Agreement did not transfer all substantial rights in the patent to KW-2.

The Court’s Decision

To determine whether the License Agreement transferred all substantial rights to KW-2, the Court examined the respective rights allocated to KW-2 and Ryujin under the Agreement. Although the license was styled as an “Exclusive Patent License Agreement” and purported to grant “all substantial rights” to KW-2, five specific features of the license discussed below led the Court to conclude that it did not transfer all substantial rights to the licensee.

First, the Court observed that under the License Agreement Ryujin would retain an interest in 94% of any net recovery obtained from enforcing the ’835 patent. Although KW-2 argued that this was merely a means of compensating Ryujin under the Agreement, the Court found that Ryujin’s retention of a 94% interest in litigation recovery was far greater compared to other cases and could suggest a transfer of fewer than all substantial rights when combined with other relevant considerations.

Second, the License Agreement provided that none of the “rights, interests or obligations under this Agreement shall be assigned or transferred . . . without the prior written consent of the other party,” giving Ryujin the right to restrict KW-2’s ability to assign its rights under the License Agreement. KW-2 asserted that it would gain an unencumbered right to assign its rights once it has paid off the promissory note securing the License Agreement. Observing, however, that the note was not due until 2023 and required KW-2 to pay Ryujin $50 million to gain full rights to assign, the Court found KW-2’s future right to assign contingent on a set of “improbable” circumstances.

Third, the Court observed that under the Agreement KW-2 cannot enforce the ’835 patent against five specific entities and their affiliates without Ryujin’s consent. Ryujin’s retention, the Court explained, of an absolute right to veto KW-2’s potential enforcement decision was inconsistent with a transfer of all substantial rights.

Fourth, Ryujin retained the worldwide right and license to make, use, and sell products or services covered by the ’835 patent. The Court rejected as irrelevant KW-2’s argument that Ryujin does not presently make or sell products covered by the patent and does not intend to.

Fifth, the Court pointed to KW-2’s obligation to obtain Ryujin’s consent before it can abandon the ’835 patent by not paying the periodic maintenance fees to the U.S. Patent Office. According to the Court, the right to dispose of an asset free from encumbrance is an important indicia of ownership.

On balance, because the License Agreement restricted KW-2’s right to assign, enforce, or abandon the patent and reserved for Ryujin both a substantial portion of any litigation recovery and the right to make, use, and sell products under the patent, the Court determined that KW-2 did not gain all substantial rights in the patent and thus granted the Defendants’ motion to dismiss for lack of standing.

Strategy and Conclusion

This decision shows that while a license agreement may claim to be “an exclusive license agreement” that transfers “all substantial rights,” determining whether the licensee has standing to sue for infringement depends on whether the agreement truly provides all substantial rights and standing to sue and requires an examination of the specific rights allocated between the parties. Here, factors that contributed to a finding of no standing based on a transfer of fewer than all substantial rights included prior approval of transfer or abandonment of rights; prior approval of enforcement against five specific entities; retention of worldwide rights to make, use, and sell patented products or services; and, interestingly, the high percentage of litigation recovery retained by the licensor.

Endnotes
¹ The KW-2, LLC v. Asus Computer Int’l, et al. decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/KW2LLCvASUSComputerInternationaletal.pdf.