Alfred E. Mann Foundation (AMF) v. Cochlear (CAFC 2009-1447) precedential

There are various scenarios of licensing assignment with regard to standing.

To determine whether an exclusive license is tantamount to an assignment, we "must ascertain the intention of the parties [to the license agreement] and examine the substance of what was granted." Mentor H/S, Inc. v. Medical Device Alliance, Inc., 240 F.3d 1016, 1017 (Fed. Cir. 2001). Here, the license agreement is to be interpreted under California law, under which the district court's interpretation of a contract presents a question of law that we review de novo. DVD Copy Control Ass'n v. Kaleidescape, Inc., 176 Cal. App. 4th 697, 713, 97 Cal. Rptr. 3d 856, 869 (Cal. Ct. App. 6th Dist. 2009). To the extent that determining the intention of the parties to the license agreement requires evaluation of parol evidence, the district court's evaluation presents a question of fact that we review deferentially. Id.

As noted above, a patent owner may grant an exclusive license to his patents under such terms that the license is tantamount to an assignment of the patents to the exclusive licensee. This happens when the exclusive license transfers "all substantial rights" in the patents. Vaupel Textilmaschinen, 944 F.2d at 873-74. When this happens, the exclusive licensee has sole standing to sue those suspected of infringing the patents' claims. Id. In addition, we have held that, where an exclusive license transfers less than "all substantial rights" in the patents to the exclusive licensee, the exclusive licensee may still be permitted to bring suit against infringers, but the patent owner is an indispensable party who must be joined. Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372, 1377 (Fed. Cir. 2000). Typically, we are confronted with cases in which an exclusive licensee sues an accused infringer, and we must decide whether the licensee has been granted rights sufficient to confer standing. This case presents a converse scenario in which the patent owner seeks to bring suit, requiring us to determine whether the patent owner transferred away sufficient rights to divest it of any right to sue.

We were faced with a similar set of facts in Aspex Eyewear, Inc. v. Miracle Optics, Inc., 434 F.3d 1336 (Fed. Cir. 2006). There, the patent owner, Contour Optik, Inc., had granted an exclusive license to Chic Optic, Inc., which was not a party to the infringement litigation. Id. at 1338. In turn, Chic Optic assigned its rights to Aspex Eyewear. Id. Shortly before the grant of rights from Chic Optic to Aspex Eyewear, Contour Optik and Aspex Eyewear jointly sued Miracle Optics for infringement. Id. We held that, because the grant from Contour Optik to Chic Optic was a grant of less than all substantial rights, Contour remained the owner of the patents-in-suit and retained standing to sue for infringement. Id. at 1343.

Under Aspex Eyewear, a patent may not have multiple separate owners for purposes of determining standing to sue.² Either the licensor did not transfer "all substantial rights" to the exclusive licensee, in which case the licensor remains the owner of the patent and retains the right to sue for infringement, or the licensor did transfer "all substantial rights" to the exclusive licensee, in which case the licensee becomes the owner of the patent for standing purposes and gains the right to sue on its own. In either case, the question is whether the license agreement transferred sufficient rights to the exclusive licensee to make the licensee the owner of the patents in question. If so, the licensee may sue but the licensor may not. If not, the licensor may sue, but the licensee alone may not. When there is an exclusive license agreement, as opposed to a nonexclusive license agreement, but the exclusive license does not transfer enough rights to make the licensee the patent owner, either the licensee or the licensor may sue, but both of them generally must be joined as parties to the litigation. Aspex Eyewear, 434 F.3d at 1344 (citing Independent Wireless Tel. Co. v. Radio Corp., 269 U.S. 459, 466 (1926)).

² Of course, the patent may be owned by a group, as when a patent with multiple named inventors first issues. But, at least for purposes of determining standing to sue for infringement, there may not be multiple groups or unaffiliated individuals who claim ownership of the patent; one of these groups or individuals must be determined to be the owner, and that owner is the only party with standing to sue on its own.

Determining standing is a two-step process. First, was the license exclusive or nonexclusive. A nonexclusive licensee has no standing.

A finding that the license was exclusive is necessary, but not in itself sufficient, to find that the licensee has standing to sue. Both parties to this appeal agree that the license agreement between AMF and AB was exclusive, and they could hardly argue otherwise.

The second step boils down to determining who has the right to sue - whether the patent owner licensed that right away to the exclusive licensee.

Having found that AMF granted AB an exclusive license, we next need to determine the scope of that license grant in order to decide which party to the agreement was the owner of the patents-in-suit. If AMF remained the owner, then it had standing to sue for infringement. If AMF transferred sufficient rights to AB to render AB the owner, then AMF was not permitted to sue for infringement, and the district court properly dismissed the case for lack of standing.

A patent "is, in effect, a bundle of rights which may be divided and assigned, or retained in whole or part." Vaupel Textilmaschinen, 944 F.2d at 875. Thus, although all the various rights available under the patent are initially held by the named inventor or inventors, they may, as a result of licensing agreements and assignments, become separated and be held by multiple individuals. When a sufficiently large portion of this bundle of rights is held by one individual, we refer to that individual as the owner of the patent, and that individual is permitted to sue for infringement in his own name. When a plaintiff lacking a sufficiently large portion of rights brings suit, that plaintiff does not have standing to sue on his own, and the suit must be dismissed, or additional holders of rights under the patent must be joined as parties to the suit, as appropriate given the plaintiff's status as either an exclusive or a nonexclusive licensee.

Our prior decisions have never purported to establish a complete list of the rights whose holders must be examined to determine whether a licensor has transferred away sufficient rights to render an exclusive licensee the owner of a patent. But we have listed at least some of the rights that should be examined. Of course, transfer of the exclusive right to make, use, and sell products or services under the patent is vitally important to an assignment. Propat, 473 F.3d at 1193-94. We have also examined the scope of the licensee's right to sublicense, the nature of license provisions regarding the reversion of rights to the licensor following breaches of the license agreement, the right of the licensor to receive a portion of the recovery in infringement suits brought by the licensee, the duration of the license rights granted to the licensee, the ability of the licensor to supervise and control the licensee's activities, the obligation of the licensor to continue paying patent maintenance fees, and the nature of any limits on the licensee's right to assign its interests in the patent. See Intellectual Prop. Dev., Inc. v. TCI Cablevision of Cal., Inc., 248 F.3d 1333, 1345 (Fed. Cir. 2001); Mentor H/S, 240 F.3d at 1018; Prima-Tek II, 222 F.3d at 1378-79; Vaupel Textilmaschinen, 944 F.2d at 875. Frequently, though, the nature and scope of the exclusive licensee's purported right to bring suit, together with the nature and scope of any right to sue purportedly retained by the licensor, is the most important consideration. See AsymmetRx, Inc. v. Biocare Med., LLC, 582 F.3d 1314, 1320-21 (Fed. Cir. 2009); Sicom Sys. Ltd. v. Agilent Techs., Inc., 427 F.3d 971, 979-80 (Fed. Cir. 2005); Abbott Labs. v. Diamedix Corp., 47 F.3d 1128, 1132 (Fed. Cir. 1995). Where the licensor retains a right to sue accused infringers, that right often precludes a finding that all substantial rights were transferred to the licensee. It does not, however, preclude such a finding if the licensor's right to sue is rendered illusory by the licensee's ability to settle licensor-initiated litigation by granting royalty-free sublicenses to the accused infringers. Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245, 1251 (Fed. Cir. 2000). Under the prior decisions of this court, the nature and scope of the licensor's retained right to sue accused infringers is the most important factor in determining whether an exclusive license transfers sufficient rights to render the licensee the owner of the patent.

In the agreement between AMF and AB, both are required to notify the other upon learning of infringement. AB gets first bite at the litigation apple. Any settlement of judgment is shared. If AB passes, AMF may take a swing, as in this case.

Here, as noted above, the license agreement provides as follows regarding infringement litigation. Both AMF and AB are required to notify the other party upon learning of a possible infringement of the patents. After this notification, AB has the absolute right to decide whether or not to initiate litigation against the accused infringer. If AB chooses to exercise this right by filing suit, it maintains complete control over the litigation. AB is required to keep AMF informed of the progress of the litigation, and AMF is permitted to participate in the litigation using counsel of its choice, but AB has the final say on all decisions relating to the litigation. This decision-making power extends to the resolution of the litigation: AB must consult with AMF before settling a lawsuit, but after this consultation, AB is permitted "to enter into any settlement or judgment that involves any outcome . . . whether or not involving the payment of money without the prior written approval of AMF." The proceeds of the litigation, whether obtained through settlement or judgment, are to be shared between AMF and AB according to a formula that gives each party a substantial portion of the proceeds. If, however, AB chooses not to file suit against an accused infringer, AMF has the right (but not the obligation) to initiate litigation. If AMF chooses to exercise this right, it controls the litigation in much the same way that AB controls litigation it initiates. Thus, while AB is permitted to join in the litigation, AMF has the final say regarding all decisions, including decisions about whether and how to settle the litigation. As with AB-initiated litigation, the proceeds of AMF-initiated litigation are to be shared between the parties, with each party taking a substantial portion.

The parties disagree as to whether this scheme of litigation rights leaves AMF with a right to sue substantial enough to find that AMF remains the owner of the patents-in-suit. AMF argues that its rights under the license agreement are substantial, allowing suit in at least some circumstances, including the circumstances of this case. Cochlear correctly notes that AMF's rights to sue are secondary to those of AB and argues that this means AMF's rights are insubstantial.

A complicating factor is the right of AB to grant sublicenses under the license agreement... Even if AB is permitted to sublicense defendants sued by AMF, the license agreement specifies sublicense terms that would prevent such sublicenses from rendering illusory AMF's right to sue those defendants. By contrast, in Speedplay, we held that a licensee's right to grant royalty-free sublicenses to defendants sued by the licensor rendered illusory the licensor's right to sue. 211 F.3d at 1251. We expressly distinguished an earlier case in which the licensor's right to sue was not illusory because any sublicenses the licensee might grant included the requirement to pay royalties. Id. (citing Abbott Labs., 47 F.3d at 1132). Here, AB's right to sublicense is similarly fettered: any sublicense AB grants must include specified pass-through royalties. Under Speedplay and Abbott Laboratories, AB's right to sublicense does not render illusory AMF's right to sue accused infringers.

As AMF can call the shots in litigation, it has the heft to sue, with a nuanced exception.

But if AMF's right to sue suspected infringers is not illusory, is it still substantial enough to find that AMF remains the owner of the patents-in-suit? We think it is. While AMF's right to choose to sue an infringer does not vest until AB chooses not to sue that infringer, it is otherwise unfettered. Once its right to sue an infringer activates, AMF can decide whether or not to bring suit, when to bring suit, where to bring suit, what claims to assert, what damages to seek, whether to seek injunctive relief, whether to settle the litigation, and the terms on which the litigation will be settled. AMF is required to inform AB of the status of the litigation while it is ongoing, but AMF has complete discretion to decide what trial strategy and tactics to employ.

Such a broad right to decide whether to bring suit and to control litigation is thoroughly inconsistent with an assignment of the patents-in-suit to AB. In AsymmetRx, we held retained litigation rights were sufficient to preserve the licensor's ownership of the patents-in-suit even when those rights failed to give the licensor complete control over the litigation it initiated; instead, the licensor and licensee would have joint control of the litigation. 582 F.3d at 1321. Here, AMF retained significantly greater litigation rights, because it maintained absolute control over any suit it brought in its own name. In Sicom Systems, we held that a licensor maintained ownership of the patents-in-suit when that licensor retained the right to sue only noncommercial accused infringers, having transferred to the licensee the sole and unconditional right to sue commercial infringers. 427 F.3d at 978-79. Here, AMF retained greater litigation rights than the licensor in Sicom Systems, because AMF had the right, following AB's refusal to bring suit, to sue any accused infringer, not just those falling into a particular class.

AMF's retained right to sue suspected infringers here is most similar to the licensor's litigation rights at issue in Abbott Laboratories, where we found the retained rights sufficient to preclude the exclusive license agreement from being deemed a virtual assignment of the patents-in-suit. There, the exclusive licensee had the "right of first refusal in suing alleged infringers," but if the licensee "decline[d] to so do, [the licensor] ha[d] the right to prosecute its own infringement action." Abbott Labs., 47 F.3d at 1132. This prevented the licensee from "enjoy[ing] the right to indulge infringements, which normally accompanies a complete conveyance of the right to sue." Id. Similarly, here, if AB declined to bring an infringement action against an infringer, AMF was permitted to file suit.

[T]he district court should have held that, although the agreement between AMF and AB was an exclusive license agreement, it was not a virtual assignment of the patents-in-suit.

The CAFC left open the question of whether AB is "indispensable." If so, either AB must join under FRCP 19, or the case may be dismissed.

Reversed and remanded.