Frcp 19: a Preferable Alternative to Traditional Judicial Rules for Determining Patent Licensee Standing

• Citation: Vol. 4 No. 2
• Publication year: 2007

Shidler Journal of Law, Commerce & Technology Volume 4, Issue 2Autumn 2007

Intellectual Property

Cite as: Jeffrey Bashaw, FRCP 19: A Preferable Alternative to Traditional Judicial Rules for Determining Patent Licensee Standing, 4 Shidler J. L. Com. & Tech. 7 (Oct. 17, 2007), at [http://www.lctjournal.washington.edu/Vol4/a07Bashaw.html]

FRCP 19: A Preferable Alternative to Traditional Judicial Rules for Determining Patent Licensee Standing

Jeffrey Bashaw1

©2007 Jeffrey Bashaw

Abstract

In Aspex Eyewear v. Miracle Optics, a patent infringement claim was initially dismissed because the court found that the parties bringing suit, a patentee and a patent sub-licensee, lacked standing because although the patentee had given all substantial rights to a licensee, the sub-licensee's license did not convey "all substantial rights." Thus, neither party had "all substantial rights," the traditional threshold test for patent licensee standing. While the Federal Circuit ultimately reversed and allowed the suit to go forward, the case demonstrates how the current patent standing rule only magnifies the expense of litigating an infringement suit by requiring additional resources for debating "all substantial rights." This Article analyzes the current standing rules for licensees of intellectual property under the various federal intellectual property statutes. In general, exclusive licensees have standing to sue, either alone or by joining the licensor. Although the fundamental motivation for this rule is sound, the rule can be unnecessarily rigid as applied and can prevent licensing arrangements from reflecting the intent of the parties. This article will also analyze FRCP 19's approach, which provides a more flexible and predictable rule.

Table of Contents

IntroductionCurrent Standing Rules for Licensees of Intellectual PropertyPatentsCopyrightsTrademarksRegistered TrademarksUnregistered Trademarks & Trade DressCritique of Rationale for Denying Standing to Exclusive Licensees in Patent Infringement CasesBenefits of Exclusive Patent Licensees Being Able to Sue in Their Own NamesConclusionPractice Pointers for Patent Licensees

Introduction

[1] Licensing of intellectual property is a significant business, with U.S. receipts of royalties and fees from trade in intellectual property totaling $48.3 billion in 2003.2 Unfortunately, commerce in IP licensing does not always easily mesh with existing IP law. As a result, counsel involved in IP licensing transactions struggle to discern what terms are required for their clients, who may be overprotected or underprotected, with transaction costs3 needlessly increased.4 Moreover, litigating infringement lawsuits is expensive, with the median cost to each party of litigating a patent infringement suit through trial being five hundred thousand dollars where "the stakes are relatively modest," and rising to four million dollars where there is more than twenty-five million dollars at risk.5 In Aspex Eyewear v. Miracle Optics, a patent infringement claim was initially dismissed because the court found that the parties bringing suit, a patentee and a patent sub-licensee, lacked standing because although the patentee had given all substantial rights to a licensee, the sub-licensee's license did not convey "all substantial rights." Thus, neither party had "all substantial rights," the traditional threshold test for patent licensee standing. On appeal, however, the Federal Circuit reversed, allowing the suit to go forward. This case demonstrated how the current patent standing rule only magnifies the expense of litigating an infringement suit by requiring additional resources for debating "all substantial rights."6 In addition to monetary dissuasion from bringing a lawsuit, licensors are less capable of detecting unauthorized use, and may not have as strong an interest in suing infringers.7 As a result, it is often necessary that licensees have the flexibility to file lawsuits themselves. However, current standing rules unnecessarily prevent a patent licensee from suing in certain scenarios.

[2] This Article outlines current standing rules for licensees of various forms of intellectual property and examines the rationale behind them. Ultimately, the Article will conclude that the traditional patent standing rule is unnecessary in light of Federal Rule of Civil Procedure 19 ("FRCP 19" or "Rule 19"). Rule 19 addresses both of the concerns underlying the traditional test, but also provides a more efficient rule, for it does not always require the joinder of the patentee-licensor in order for the exclusive licensee to pursue an infringement claim. That is, where patent infringement is within the scope of the exclusive license, validity is not at issue,8 and the licensor has not reserved the right to sue, there is no reason to require joinder, which unnecessarily magnifies the costs of litigation and, in turn, transaction costs.9 This Article describes some of the common situations in which license agreements may have unintended consequences, and concludes with practice pointers for counsel working under the current rules to help avoid potential pitfalls of patent licensing agreements.

Current Standing Rules for Licensees of Intellectual Property

[3] A nonexclusive license grants a right to use the IP without being sued for infringement - and nothing more.10 By contrast, an exclusive license grants not only a right to use the IP without fear of being sued for infringement, but also the licensor's covenant not to license the IP to any other party, and the right to make, use, and sell the intellectual property. As such, exclusive licensees enjoy freedom from competition to the extent of the scope of the license.11 In general, nonexclusive licensees have no standing to sue. In contrast, exclusive licensees generally do have standing to sue, either in their own name or by joining the licensor, depending on the type of IP involved.

Patents

[4] Under 35 U.S.C. § 281, "[a] patentee shall have remedy by civil action for infringement of his patent." Section 100(d) defines "patentee" to include "not only the patentee to whom the patent was issued, but also the successors in title to the patentee." Thus, the term "patentee" includes assignees. In determining whether an assignment has occurred, courts traditionally look to whether there has been a transfer of "all substantial rights under the patent" to the licensee, who in effect becomes an assignee.12 Thus, not only patentees but also assignees (or exclusive licensees holding "all substantial rights") of a patent may sue for infringement.13

[5] In addition, exclusive licensees not holding "all substantial rights" may generally sue for infringement upon joining the patentee-licensor. Courts have insisted upon joinder of the patentee-licensor for two primary reasons: (1) to avoid multiple lawsuits so that an infringer may only be sued once for the same infringing activity,14 and (2) to prevent a court from invalidating a patent without the patentee-licensor having the opportunity to defend its patent, because an infringement claim is often answered with a challenge to the patent's validity.15 Exclusive patent licensees do have standing to sue in their own names where the patentee-licensor is the infringer.16 Nonexclusive patent licensees are denied standing to sue for infringement.17 Courts have denied standing to nonexclusive licensees because, since the licensor retains the ability to grant additional licenses, the "nonexclusive license[e] suffers no legal injury from infringement and, thus, has no standing to bring suit or even join in a suit with the patentee."18

Copyrights

[6] Exclusive copyright licensees do have standing to sue in their own names.19 17 U.S.C. § 501(b) provides that "[t]he legal or beneficial owner of an exclusive right under a copyright is entitled . . . to institute an action for any infringement of that particular right committed while he or she is the owner of it." Moreover, a "copyright owner" expressly includes an exclusive licensee.20 In this regard, copyright standing reflects the economic realities of copyright value. Like patent standing remains today, copyright standing once reflected a view of the property as "indivisible," meaning that an assignment that would confer standing could only be made of an undivided interest.21 Anything less than all rights was a mere license. While patent law retained this view, as reflected in its standing rule, copyright evolved and is now viewed as "divisible,"22 with courts relying on FRCP 19 to determine questions of standing and joinder. This difference may be explained, in part, by reference to the underlying IP: copyrights are more prone to being divided, and copyrights are less frequently invalidated than patents.23 However, the nature of copyright does not fully explain the difference in the way the law has progressed, and even commentators who acknowledge that copyrights are more prone to division continue to view patent indivisibility as an "outmoded concept."24

[7] In addition to copyright infringement, Congress enacted the Digital Millennium Copyright Act. This statute provides much broader standing than for copyright infringement, granting standing to "[a]ny person injured by a violation" of the anti-circumvention25 and anti-trafficking26 rules.27 As such, even nonexclusive licensees likely have standing to enforce these new rights.28

Trademarks

[8]...