When exclusive licenses aren't so exclusive: how to ensure a patent agreement provides standing to sue

Thomas McNulty, BridgeTower Media Newswires

Anyone wishing to gain exclusivity in a patent should scrutinize a potential patent agreement, whether a license or an assignment, to ensure that the agreement grants them the ability to enforce the exclusivity rights they seek.

Courts look to the entirety of an agreement, with a close look at the rights (if any) retained by the licensor, to determine whether a licensee or assignee has standing to sue.

Standing is one of the most important aspects to be considered when licensing exclusive rights in a patent because lack of standing divests a court of subject matter jurisdiction and results in the dismissal of a lawsuit.

Patent agreements come in three forms, with differing degrees of standing:

Assignments: All exclusive rights are transferred. Where the agreement is an assignment, the assignee has standing to sue in its own name.

Exclusive licenses: Some but not all exclusive rights are transferred. Exclusive licensees must join with the patent holder to bring suit.

Non-exclusive, or “bare,” licenses: The licensee receives some rights to practice the invention but receives no exclusive rights. Non-exclusive licensees cannot assert infringement even with the patent owner.

A recent U.S. District Court decision in Uniloc 2017 LLC v. Paychex, Inc. highlights the issue of standing. 

Uniloc asserted a pair of patents that it had obtained via an assignment from IBM. Under the terms of the assignment, IBM retained a right to sublicense its strategic partners, but otherwise ceded all rights in the patents to Uniloc.

The assignment defined “strategic partners” as entities that had purchased at least $10 million in products or services from IBM or its subsidiaries over the five years prior to the assignment.

Paychex had not received a sublicense to the patents from IBM, but after substantial discovery and motion practice, the court determined that Paychex nevertheless qualified as a “strategic partner” under the assignment and was thus immune from suit.

Judge Richard G. Stearns subsequently dismissed the case for lack of standing, finding that an otherwise-exclusive licensee (Uniloc) has no exclusionary rights with respect to an entity that merely can obtain a sublicense, without regard to whether the entity actually had a sublicense. 

As standing affects a court’s subject matter jurisdiction, standing challenges are not waivable and can be brought at any time during a lawsuit, including on appeal.  Accordingly, before executing an agreement, one should ensure that the agreement provides sufficient exclusivity for the potential licensee to have standing to bring infringement claims. 

First, the grant of a right to sue is a necessary clause, although it is not enough on its own to create standing. The agreement must also convey some degree of exclusivity. Exclusivity can exist for some, but not all, of the rights under a patent, such as a right to sell a patented invention, but not to make it or have it made. 

Exclusivity can be further limited to specific geographic areas or fields of use. Of course, the licensee will have standing only if the defendant infringes in the area of the licensee’s exclusivity. 

Finally, the licensor must not have the ability to exert control over the licensee’s exclusive rights. Provisions such as requirements for the licensor’s consent to sublicense others or to control litigation and settle patent suits, requirements to split proceeds from litigation, and certain reversion rights weigh against the licensee having standing.

While a licensee can generally force a patent holder to join in a litigation, there are situations in which this would not be desirable. 

For example, where a governmental entity such as a state university is the patent holder, it may be able to successfully prevent joinder by claiming sovereign immunity. When that occurs, the court will then consider whether the patentee is an indispensable party pursuant to Fed. R. Civ. P. 19(b), looking at factors such as the extent to which its absence might prejudice the patentee. If the court determines that the patentee is indispensable, the case will be dismissed, leaving the licensee with no way to enforce its exclusive rights.

In light of this, it is recommended that each part of a patent license or assignment be carefully considered to ensure the agreement provides the rights that the parties intend. 

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Thomas McNulty is counsel at Boston intellectual property law firm, Lando & Anastasi and the author of the D. Mass. IP Litigation Blog. He can be contacted at TMcNulty@LALaw.com.