Big CAFC decision gives operating companies that transfer patents to NPEs plenty to consider

Your company’s patents are reaching expiration. There could be some untapped value in them. But you are not interested in suing your competitors. You decide to transfer the rights to a non-practising entity in order to monetise them. But you need some assurances. You want to be sure that certain customers and business partners will be shielded from any infringement suits. You want to make sure that the new owners do not transfer the patents to your competitors. You also want to be certain that your company will not be required to join in any enforcement litigation.

What has been a common practice for monetising patents may now result in your company being forcibly dragged into litigation. In a recent Court of Appeals for the Federal Circuit decision – Lone Star Silicon Innovations LLC v. Nanya Technology Corp – the court relied on the combination of numerous rights retained by the transferer to hold that the transferee did not obtain “all substantial rights” and could not bring suit in its own name. The Federal Circuit then went on to clarify the ease with which the transferee can invoke Rule 19 of the Federal Rules of Civil Procedure to forcibly join the transferee in the litigation if it is found that the transferee does not have sufficient rights to bring suit in its own name. This decision could leave many IP owners rethinking their patent transfer agreements and arrangements with transferees.

What went wrong?

In Lone Star, AMD had provided Lone Star Silicon Innovations LLC with a number of patents under a patent transfer agreement that purported to convey “all right, title and interest” in the patents to Lone Star. However, the transaction involved no payment from Lone Star to AMD at the time of the agreement. AMD retained certain rights and control over the patents, including limiting the parties against which Lone Star could bring suit and controlling the entities to which the patents could be further transferred. Furthermore, AMD was entitled to a share of the proceeds of Lone Star’s “monetisation efforts” and was allowed to continue to practise the patents in its own right.

Lone Star sued multiple parties, asserting multiple patents in each suit. After Lone Star produced the transfer agreement in the litigation (nearly a year after filing the suits), the defendants brought motions to dismiss, asserting that Lone Star had not received all substantial rights in the patents and therefore could not bring suit in its own name. Lone Star opposed the motions and, in the alternative, argued that it should be allowed to join AMD if the district court found that Lone Star alone did not have standing. The district court agreed with the defendants and exercised its discretion to not allow Lone Star to join AMD, concluding that doing so would “reward Lone Star for its litigation gimmick and unfairly prejudice defendants”. As a result, the district court dismissed the case. The appeal followed.

Broad language is insufficient to convey all substantial rights when other provisions withhold rights

The Federal Circuit affirmed that Lone Star did not have standing to bring the suit in its own name. The Federal Circuit reaffirmed that labels - such as an alleged broad conveyance of “all right, title and interest” in the patents - do not matter. Rather, the question turns on whether “the ‘totality’ of the transfer agreement reflects a transfer of all substantial rights in the asserted patents”. The Federal Circuit noted that it has “often focused on two salient rights: enforcement and alienation”.

As to enforcement, Lone Star could only assert against entities specifically listed in the transfer agreement. If Lone Star asserted the patents against a target not listed in the agreement, AMD had the right to grant a sublicence to the entity and negate the lawsuit. The court explained that AMD could indulge infringement by third parties “by refusing to add that party to the list of approved targets. AMD could even withhold its consent conditional on payments from the unlisted target”.

As to alienation, Lone Star could only transfer the patents with AMD’s consent, which AMD could not unreasonably withhold. In addition, any future transferee had to agree to be bound by the terms and conditions of the agreement. The Federal Circuit found that these provisions “substantially restrict Lone Star’s ability to transfer the patents, [as] it ensures that AMD will always control how the patents are asserted”.

The Federal Circuit held that these provisions and others demonstrated that Lone Star did not receive all substantial rights. By failing to convey “all substantial rights”, AMD remained the patentee and Lone Star could not sue in its own name.

Constitutional standing and the ability to join the true patentee

With regard to joining AMD, the Federal Circuit found that joinder of a patentee under Rule 19 of the Federal Rules of Civil Procedure, if possible, is mandatory when a plaintiff possesses constitutional standing. But before getting to Rule 19, the court had to overrule prior precedent regarding the issue of standing.

The patent statute, 35 USC § 281, grants the patentee statutory standing to sue for infringement.  Article III of the US Constitution grants standing to anyone with a case or controversy that is amenable to resolution by a federal court. The district court had dismissed the case because it had found that Lone Star lacked statutory standing and because it had insufficient rights to enforce the patents-in-suit. Lone Star also lacked Article III standing.

The Federal Circuit reversed that finding and used the Supreme Court’s 2014 decision in Lexmark v Static Control Components to overrule its own prior precedent. The Federal Circuit ruled that even without all substantial rights, Lone Star still had Article III standing because “its allegations” established a case or controversy: “The fact that it believed its rights included all substantial rights does not mean its allegations fall short of alleging a cognisable injury.” Here, Lone Star did not have all exclusionary rights and was not the patentee, but it did have some exclusionary rights, at least against the entities listed in the agreement, and also had the right to grant licenses. Lone Star thus had Article III standing to invoke the federal judicial power even if it did not have statutory standing to bring suit alone.

The court recognised the confusion in its prior precedent, stating that: “The district court’s mistake, repeated by the parties on appeal, is understandable. Indeed, we have often treated ‘statutory standing,’ i.e. whether a party can sue under a statute such as § 281, as jurisdictional.” It continued: “We therefore firmly bring ourselves into accord with Lexmark and our sister circuits by concluding that whether a party possesses all substantial rights in a patent does not implicate standing or subject-matter jurisdiction.”

Because Lone Star had Article III standing, it was properly before the district court and could then correct statutory standing under § 281 by attempting to add AMD via Rule 19. Under Rule 19, the district court will need to decide whether AMD’s joinder is “feasible”. If it is: “Then AMD must be joined—involuntarily if need be.” If AMD joinder is not “feasible”, then the district court must consider whether the case should proceed anyway or be dismissed because AMD is indispensable.

Are you going to be joined in litigation of patents you thought you got rid of?  

This new precedent squarely puts patent owners who try to monetise their patents by transferring their patents to NPEs at risk of being joined in the litigation - an outcome most are trying to avoid in the first place by creating what have been termed “hunting licence” transfers. Some saw these transfers as a no-risk proposition: take patents of limited value to the patentee (or at least insufficient value for the patentee to begin its own enforcement campaign against competitors that might counterclaim with their own patents) and transfer them to an enforcement entity, while securing a percentage of the upside if the enforcement is successful.

Some patentees might consider these types of provisions reasonable or even a business necessity when transferring patents to enforcement entities. For example, one can imagine a transferer perhaps wanting to shield its customers and business partners from suit even if those entities also used unlicensed products of the transferer’s competitors. Similarly, one can understand why a transferer would insist on some assurances that a subsequent transferee would be subject to the same terms and conditions as the agreement with the first transferee to prevent the first transferee from simply laundering away the agreement in a sham transaction. 

But these types of provisions might mean that the transferor is still a necessary party to litigation. Courts now have a clearer definition of what rights are considered “substantial”. If patentees are not careful to convey “all” of them, they may find themselves joined to the litigation under the mandatory terms of Rule 19.

The views expressed in this article are those of the authors and not necessarily those of BakerHostetler or its clients. The authors represented one of the defendant groups in the underlying district court litigation and in the appeal, through oral argument. Their case settled prior to the Federal Circuit issuing its decision