United States: A Patent Owner Lost Its Standing To Sue For Patent Infringement Litigation When It Transferred All Substantial Rights In The Patent To Another Entity

Abstract

The patent owner had entered into an agreement where it transferred ownership of the patent to its co-plaintiff but retained the right to control the patent infringement litigation. When the patent owner transferred substantially all patent rights except the right to control a patent litigation, it lost its standing to sue for patent infringement and the court dismissed the pending litigation.

Background

Under U.S. law, a patent consists of a bundle of rights that may be divided, licensed, assigned, sold, or retained either in whole or in part. Clifford Lowe owned a U.S. patent directed to a floor marking tape, and he granted InSite Solutions, LLC ("InSite North Carolina") an exclusive license to that patent. Lowe and Insite North Carolina filed a complaint in the Northern District of Ohio against their competitors ShieldMark, Inc., Advanced Plastics, Inc., and Crown Equipment Corporation, alleging they infringed Lowe's patent.

During the litigation, Lowe sold his patent to InSite North Carolina. A week after the sale, InSite North Carolina gave third-party InSite Solutions, LLC of Delaware ("InSite Delaware") a paid-up, permanent, and irrevocable, but non-exclusive, license to the patent. The InSite North Carolina–InSite Delaware License did not restrict InSite Delaware's ability to sublicense the patent in the future.

Defendants found out about the change in the patent's ownership and moved the court to dismiss the action on the basis that plaintiffs lost their standing to sue for patent infringement. The court found that since Lowe and InSite North Carolina did not have exclusionary rights, they lacked standing to continue the lawsuit, and the court dismissed the action.

The Lowe Order

The concept of "standing" broadly refers to a party's right to have a court rule upon the merits of its claims. It is a threshold jurisdictional matter that must be met to maintain an action in federal court when seeking relief. In a patent infringement lawsuit, the touchstone of standing is whether a party can establish that it has an exclusionary right in a patent that, if violated, would cause injury. Exclusionary rights involve the ability to prevent others, or license others, from practicing the technology of the patent. This right to exclude, however, must be measured for each accused infringer because should the accused infringer obtain a license from a third party, the plaintiff then does not have exclusionary rights against that infringer and consequently not have standing to sue that infringer.

Crucial to the court's analysis were two patent ownership documents. The first was an assignment from Lowe to InSite North Carolina, where Lowe "sold, assigned, conveyed and transferred" his "entire right, title, and interest" in the patent to InSite North Carolina, including all of his rights related to "any cause(s) of action and damages accruing prior to this assignment." The second was the license agreement InSite North Carolina entered with InSite Delaware, where InSite North Carolina gave a non-exclusive license to InSite Delaware:

InSite North Carolina also granted InSite Delaware an "exclusive option" to purchase the patent for no additional cost including "all causes of action (whether known or unknown or whether currently pending, filed, or otherwise)." Id.

In the license agreement, InSite Delaware acknowledged and agreed that Lowe and InSite North Carolina retained "the exclusive rights to elect to maintain, control, and settle" the pending litigation and "the exclusive rights to enforce" the patent for recovery of damages for infringement before the license agreement was executed. The court noted that Lowe and InSite North Carolina contended that the license agreement provided evidence that InSite North Carolina granted Lowe the "exclusive right to continue to assert infringement." The plaintiffs, however, did not cite to any separate license agreement. Nor did they affirmatively state that there was an oral agreement to this effect.

The court found that Lowe no longer had standing for the lawsuit because he gave up his entire interest in the patent, including all causes of action through the Lowe-InSite North Carolina assignment. The court also found that Lowe failed to show that he was an exclusive licensee of the patent, which would provide him exclusionary rights. At most, Lowe had the "purported ability to control" the then pending litigation but there was inadequate evidence that an exclusive license—whether written or oral—ever existed. Moreover, the court noted that the non-exclusive license from InSite North Carolina to InSite Delaware would conflict with any such grant of exclusive right from InSite North Carolina to Lowe. Because a right to continue litigation is not enough to satisfy the constitutional standing requirement, the court held that Lowe did not have standing since he "kept no exclusionary rights," only the alleged right to litigate this action.

The court next found that while InSite North Carolina retained title to the patent, InSite North Carolina transferred all substantial rights to InSite Delaware, and lacked standing to continue the suit. Crucial to the court's analysis was InSite Delaware's right to issue sublicenses. According to the court, the InSite North Carolina–InSite Delaware agreement showed that InSite Delaware could sublicense without restriction, and nothing in it limited InSite Delaware from granting sublicenses to the defendants. Further, InSite North Carolina's carveout of an exclusive right for recovery of damages only covered the period before the date of the license, which by implication meant that InSite North Carolina had given up its patent enforcement rights after the date of the license. Thus, InSite North Carolina's right to control the litigation, if any, was illusory.

Lastly, the court noted several other conditions that weighed against a finding that InSite North Carolina continued to have standing: the InSite North Carolina–InSite Delaware agreement was a "royalty-free," "fully paid-up" license with no future financial obligations, it was unrecallable, and it provided a no-cost option for InSite Delaware to purchase title and obtain "all causes of action."

The Court thus found that both Lowe and InSite North Carolina lacked standing and that the standing defect was not curable because InSite Delaware was a third-party, non-exclusive licensee.

Strategy and Conclusion

The Lowe order shows that to have standing to sue for patent infringement, a party generally must have some exclusionary right. In addition, the grant of an unrestricted right to sublicense, even to a related company, may have unintended consequences for standing purposes.

Further Information

The Lowe order can be found here.

Originally published by LES Insights

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