A Spoonful Of Licensing Helps The Medicine Go Down: Avoiding Standing
Problems Between Related Entities In Patent Cases
May 12, 2015
QuickCounsel
By Christopher C. Smith, Brooks Kushman P.C.
This resource is sponsored by:
Overview
In today's complex business world, corporate organizations often separate their operating entities from their patent portfolio by
assigning their patents to a separate intellectual property holding company ("IPHC"). IPHC's are often non-practicing entities, whose
sole function is owning, and managing, the organization's intellectual property. Historically, IPHC's were created to gain tax
advantages. But changes in state laws have eliminated many of those benefits.
Although IPHC's can provide some structural and tax advantages, they can also complicate the way an organization enforces its
intellectual property. For example, an operating entity may lack standing to enforce the organization's patents if the IPHC has not
conveyed sufficient rights to the operating entity – even if the operating entity practices the technology claimed in those patents. This
is important because the practicing-operating entity is often best-positioned to establish that it suffered harm necessitating lost profits
damages and injunctive relief.
To ensure the organization can fully enforce its patent rights, it is important that rights sufficient to confer standing are transferred to
the operating entity from the IPHC. These rights are normally conveyed via an exclusive license between the IPHC and the operating
entity.
What Are the Standing Requirements?
Whether an entity has standing to sue is a threshold question in any lawsuit. The Patent Act states that "[a] Patentee shall have remedy
by civil action for infringement of his patent." The term " patentee" is not limited to the original applicant but extends to the successors
in title to the patent. Therefore, the assignee of a patent typically has standing to sue. Standing deficiencies for a party that did not have
sufficient rights before filing a lawsuit cannot typically be cured after the lawsuit has been filed. Enzo APA & Son, Inc. v. Geapag A.G.,
134 F.3d 1090, 1093-94 (Fed. Cir. 1998).
In addition to the patent owner, entities that have acquired exclusive rights in a patent via a license may also have standing to sue if
certain requirements are met. But usually an exclusive licensee must join the patent owner in the lawsuit unless the exclusive license
"transfers all substantial rights" in the patent. Mann Foundation for Sci. Research v. Cochlear Corp., 604 F.3d 1354, 1358-59 (Fed. Cir.
2010).
Standing is tested for each entity bringing suit. Although one entity in a corporate organization may have standing to file a patent
lawsuit does not mean other entities in the same organization also have standing. If a licensee-operating entity intends to file a lawsuit
asserting a patent owned by a related IPHC, the operating company must establish, independent of the IPHC, that the license conveys
sufficient rights to confer standing to the operating entity.
What Constitutes an Exclusive License?
Generally, for a license to provide exclusivity and convey sufficient rights onto a party to establish standing, "a party must have
received, not only the right to practice the invention within a given territory, but also the patentee's express or implied promise that
others shall be excluded from practicing the invention within that territory as well." Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538,
1552 (Fed. Cir. 1995) (emphasis added). This promise to exclude others from practicing the invention within the territory is
important, and a key factor that distinguishes an exclusive license from a bare license, which does not convey standing to sue.
Exclusive licenses may be oral or in writing. Waymark Corp. v. Porta Sys. Corp., 334 F.3d 1358, 1364 (Fed. Cir. 2003). But regardless
of form, an exclusive license should include an express or implied promise to exclude others from practicing the invention in a given
territory.
If there is no written license agreement, whether an implied or expressed promise to exclude satisfies the standing requirement
becomes more subjective, and may require intervention from a court. This is the case even if the licensor and licensee are related
companies in the same corporate organization. For example, in Spine Solutions, the plaintiff-operating company, Synthes Spine,
argued that it had standing to sue for patent infringement based on an "understanding" between it and SSI, the co-plaintiff
patent-owner and Synthes Spine's sister-company. Spine Solutions, Inc. v. Medtronic Sofamor Danek USA, Inc., 620 F.3d 1305, 1318 (Fed.
Cir. 2010). The evidence was limited to testimony from SSI's corporate representative that "there was an agreement between the
parties based on the way Synthes is organized" and that based on that agreement SSI had made an "implied promise" to exclude
entities besides Synthes Spine from practicing the patent-in-suit. Id. The Federal Circuit disagreed, and held that Synthes Spine had
not provided sufficient evidence to show that SSI was prevented from licensing the patent-in-suit to a third party. Id. The Federal
Circuit concluded that "the fact that Synthes Spine is currently the only entity practicing the. . .[patent-in-suit]. . .does not mean that
SSI has promised to exclude all others from doing so." Id. And further reasoned that "[i]f we were to find standing on these facts,
this would mean that any company related to a patent owner could be treated as an exclusive licensee, so long as the patent owner
allows only that company to practice the patent, regardless of any actual agreement as to exclusivity." Id.
Thus, a corporate organization should aim to create an agreement, which makes it clear that its IPHC has transferred sufficient rights
to the operating entity to establish an exclusive licensor-licensee relationship. Although an exclusive license may be oral, a better
course of action may be to execute a written license agreement, which includes an express promise by the IPHC to exclude others
from practicing the invention. Such a written agreement should be structured to avoid ambiguity so that it can be submitted to the
court if standing is later challenged. Executing a written agreement may prevent disputes from the outset as defendants will be less
likely to challenge standing if a written agreement is provided in discovery.
Further, when preparing a license agreement, the organization should consider whether it wants its IPHC to transfer "all substantial
rights" to the operating entity, rendering the operating entity a virtual assignee that can enforce the patent by itself. Mann Foundation
for Sci. Research, 604 F.3d at 1358-59. Although the case law has not conclusively identified what constitutes "all substantial rights,"
the Federal Circuit has held that the license must transfer the "exclusive right to make, use, and sell products or services under the
patent." Id. at 1360-61. Further, the Federal Circuit has held that "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." Id. Additional rights considered include: (1) the licensees right to sub-license; (2) reversion right of the licensor
after breaches; (3) the right of the licensor to receive a recovery from a litigation; (4) the duration of the licensee's rights; (5) the
ability of the licensor to supervise the licensee's activities; and (6) the ability of the licensee to assign interests in the patent to others.
Id.
How Does Standing Affect Patent Remedies?
So why does it matter whether an operating entity has standing to sue for patent infringement? In a word: remedies. First, a party
cannot typically seek lost profit damages if it cannot prove that it has lost sales because of the infringement. Poly-Am., L.P. v. GSE
Lining Tech., Inc ., 383 F.3d 1303, 1311 (Fed. Cir. 2004). Thus, an organization that wants to collect lost profits damages should ensure
that its competing-operating entity has standing to enforce the patent. If only an organization's IPHC has standing to enforce a patent,
damages will most likely be limited to a reasonable royalty, which is often a smaller award than lost profits. It should also be noted
that damages can only be sought during the time in which standing is proper. Thus, if an organization waits until after infringement
begins to cure standing for its operating company, the amount of lost profits damages the operating entity can collect may be limited.
Second, after the Supreme Court's decision in eBay, it has become increasingly difficult for non-practicing, non-competing entities to
secure injunctive relief. eBay Inc. v. Mercexchange, L.L.C., 547 U.S. 388 (2006). So to the extent that a corporate organization seeks to
stop a competitor from infringing, ensuring that the competitor-operating company has standing to bring suit should be considered.
Helping the Medicine Go Down: Tips to Avoid Patent Standing Problems Therefore, organizations that include separate entities to manage their patent portfolios (e.g., IPHC's) should consider installing
policies to ensure that rights sufficient to establish standing are transferred back to the relevant operating company. Such a policy
could include: (1) regular audits of the IPHC's patent portfolio to ensure that all assigned patents have been licensed back to the
relevant operating entity; (2) preparation of an exclusive license that uses the proper exclusive license language set forth in Federal
Circuit precedent to execute upon assignment of the patent rights to the IPHC; and (3) creation of an intellectual property checklist
that is shared with both in-house counsel and outside patent counsel, to ensure that sufficient patent rights are licensed back to the
operating company no later than at the time of issuance of the patent. And to the extent the organization intends to file multiple
patents for a particular patent application, any license should convey exclusive rights to all related patents in that patent family back to
the operating company.
Finally, any such policies should be implemented at the beginning of the patenting process to ensure that standing is conferred to the
operating company early on so the organization can maximize the benefits of its patent rights.
Additional Resources
1. - "Recovering Lost Profits: The Resurrection of Subsidiaries (Is There Life on Mars?)," University of Saint
Thomas Law Journal
2. - "Reevaluating the Intellectual Property Holding Company," Management Accounting Quarterly
3. - "Proving Patent Damages," IP Litigator
4. - "Control of Trademarks by the Intellectual Property Holding Company," IDEA: The Journal of Law and
Technology
5. - Patent Licensing Considerations, ACC Legal Resources
About the Author
Christopher C. Smith, Brooks Kushman P.C.
http://www.acc.com/legalresources/quickcounsel/related-entities-in-patent-cases.cfm