DO YOU HAVE THE RIGHT TO SUE: UNDERSTANDING CONTRACT PROVISIONS IN THE CONTEXT OF LITIGATION

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1 DO YOU HAVE THE RIGHT TO SUE: UNDERSTANDING CONTRACT PROVISIONS IN THE CONTEXT OF LITIGATION A patent grants the patentee the right to exclude others from making, using, selling, offering to sell or importing the patented invention into the United States. 35 U.S.C. 271(a). It follows that when this right to exclude is violated by an infringer, the patentee has the right to bring a civil action for infringement of [its] patent, i.e., standing to sue for patent infringement. 35 U.S.C Recently, the identity of the patentee as defined, has been called into question. The Federal Circuit has made it clear that nuances in the provisions and language used in patent licensing and assignment agreements can be critical in determining whether or not an inventor, licensee or assignee has standing to sue another party for patent infringement. Slight imperfections or even subtle deviations from what was actually intended or desired by the parties can have a profound impact on their right to sue over the patent. It is therefore imperative that practitioners are knowledgeable about the effects particular language and provisions have on a standing determination in order to ensure that their clients, whether individual inventors or corporations, licensors or licensees, preserve their right to sue for patent infringement. To bring suit for patent infringement, a party must have constitutional standing to do so. WiAV Solutions LLC v. Motorola, Inc., 631 F.3d 1257, 1264 (Fed. Cir. 2010). Where an invention is assigned by its inventor to a third party or out licensed by its owner to a third party, the question of who has standing to sue becomes more complicated. The patentee in this context includes not only the patentee to whom the patent was issued but also the successors in title to the patentee. See 35 U.S.C. 100(d). 1

2 Who are the necessary and indispensable parties to the patent infringement suit? Under what circumstances has the inventor or patent owner conveyed sufficient rights to the assignee or licensee and consequently deprived himself of standing to sue? The facts outlined in a recent Supreme Court case demonstrate the impact of the use of certain language in assignment agreements. See Bd. of Trs. of the Leland Stanford Junior University v. Roche Molecular Sys., Inc., 2011 U.S. LEXIS 4183 (June 6, 2011). In Stanford, the inventor of the patent-at-issue first signed an agreement agree[ing] to assign his right, title and interest in inventions resulting from his employment at the University to Stanford. Id. at *9. Subsequently, the inventor signed an agreement stating that he will assign and do[es] hereby assign to Cetus (later acquired by Roche), his right, title and interest in each of the ideas, inventions and improvements made as a consequence of [his] access to Cetus. Id. The invention in question was conceived during the inventor s time at Cetus, but was later tested and covered by several patent applications that were subsequently filed by the inventor when he returned to Stanford. Roche commercialized a product incorporating the technology covered by the Stanford patents and Stanford asserted its patents against Roche. The Federal Circuit held that Roche possessed an ownership interest in the patent-in-suit, depriving Stanford of standing to sue for infringement, because agree[ing] to assign an invention is no more than a mere promise to assign rights in the future, while the language that one will assign and do[es] hereby assign an invention constitutes an actual assignment of the inventor s rights in the invention. Bd. of Trs. of the Leland Stanford Junior University v. Roche Molecular Sys., Inc., 583 F.3d 832, (Fed. Cir. 2009) (emphasis added). The Supreme Court s affirmed the Federal Circuit s holding in Stanford. The Court s holding centered on whether the Bayh-Dole Act deprived the inventor of his right to the invention by vesting title to 2

3 federally funded inventions in the federal contractor, the University, and never considered the Federal Circuit s construction of the relevant agreements. Stanford, 2011 U.S. LEXIS 4183, at *11 n.2. Nevertheless, the case illustrates the importance of understanding the consequences of variations in either assignment or licensing language. In addition to having the right language, the right provisions are also critical. Federal Circuit case law on standing in the context of license agreements highlights the substantial impact of contract provisions on the right to sue for patent infringement. An exclusive licensee will have sole standing to sue for patent infringement if the owner of the patent has conveyed all substantial rights in the patent such that the license is tantamount to an assignment of the patent. Alfred C. Mann Found. v. Cochlear Corp., 604 F.3d 1354, (Fed. Cir. 2010). Not surprisingly, the provisions of the licensing agreement guide a court s determination as to whether the license rises to the level of a virtual assignment. In determining whether or not an exclusive licensee has sole standing to sue, Courts have considered: whether the provisions in the license transfer the exclusive right to make, use and sell products or services under the patent; the extent to which the licensor is able to supervise and control the licensee s activities; the duration of the license rights granted to the licensee; the scope of the licensee s right to sublicense; the responsibility to maintain the patent, including who assumes responsibility for paying patent maintenance fees; the nature of any limits on the licensee s right to assign its interests in the patent; the rights the licensor has following a breach of the licensing agreement; the nature and scope of the exclusive licensee s right to bring suit, together with the nature and scope of any right to sue retained by the licensor; the control over licensing and litigation decisions; 3

4 whether the licensor can receive a portion of the recovery in infringement suits brought by the licensee; and the ability of the parties to terminate the contract and the impact of such termination. See Alfred C. Mann Found., 604 F.3d at ; Sicom Sys. Ltd. v. Agilent Techs., Inc., 427 F.3d 971, (Fed. Cir. 2005). See also Aspex Eyewear, Inc. v. Miracle Optics, Inc., 434 F.3d 1336, (Fed. Cir. 2006) (finding that [b]y having rights for only a limited portion of the patent term, [the licensee] simply did not own the patent.... [the patent] was exclusively licensed for only a fixed period of years, which does not meet the all substantial rights standard ). While the most important consideration in determining standing is often the exclusive licensee s right to bring suit, the interplay of the remaining provisions in the contract may dictate whether the licensor has in fact conveyed substantial rights to the licensee. Alfred C. Mann Found., 604 F.3d at 1361; see also A123 Sys., Inc. v. Hydro-Quebec, 626 F.3d 1213, (Fed. Cir. 2010). In determining whether all substantial rights in a patent have been transferred, labels given by the parties do not control. A123 Sys., 626 F.3d at If the licensor retains a right to sue accused infringers, the court will likely find that not all substantial rights were transferred to the licensee. See Alfred C. Mann Found., 604 F.3d at However, if the licensor s right to sue is merely illusory, for example, because the licensee is allowed to settle licensor-initiated litigation by granting royalty-free sublicenses to the accused infringers, then the licensor might be deemed to have transferred all substantial rights to the licensee, despite retaining the right to sue. See id. at (finding the licensing agreement did not convey all substantial rights in the patent to the licensee because: (a) the licensor retained the right to sue if the licensee chose not to sue; (b) the licensee s ability to sublicense the patent was not 4

5 unfettered; and (c) any sublicense granted by the sublicensee was required to include specified pass-through royalties). Similarly, where a licensing agreement gives the licensee the right to sue for patent infringement, but such a right is unaccompanied by the transfer of other rights indicative of ownership, it is likely that a court will find that there has not been a virtual assignment of the patent. Propat Int l Corp. v. RPost, Inc., 473 F.3d 1187, (Fed. Cir. 2007) (finding that although the licensing agreement gave the licensee the responsibility to sue infringers, the licensor retained sufficient rights in the patent such that it could not be said to have assigned all substantial rights to the licensee). For example, the licensor s retention of the unrestricted power to bar the licensee from transferring its interest in the patent to a third party can indicate that the licensor has retained ownership of the patent. Id. at See also Sicom Sys. Ltd., 427 F.3d at 979. Thus, patent assignment and licensing are integral parts of the litigation dance. Drafting contract provisions with an understanding of the impact of contract language and provisions on potential standing issues will go a long way to ensuring that your client will have the right to sue for patent infringement. Authors: Michael A. Davitz, M.D. J.D. (partner) Josephine Liu, Ph.D. J.D. (associate) Tara R. Rahemba, J.D. (associate) 5