Patent Owners and Litigators Beware: Patent Transfer Agreements May Lead to Involuntary Joinder of the Original Patent Owner
Before Lone Star Silicon Innovations LLC v. Nanya Technology Corporation,1 defendants often challenged a plaintiff’s failure to receive all substantial rights in a patent transfer agreement with a Rule 12(b)(1) motion to dismiss for lack of standing. But Lone Star reminds litigants that, under both Supreme Court and Federal Circuit precedent, failure to obtain all substantial rights in the asserted patents does not necessarily destroy the plaintiff’s constitutional standing and its ability to bring a lawsuit. Rather, the rights in a patent influence a plaintiff’s so-called “statutory standing,” and whether it has sufficiently pled facts that it is a proper “patentee” under 35 U.S.C. § 281. When a plaintiff fails this inquiry, courts must determine whether the plaintiff can remedy this error by joining the original patent owner to the suit, even involuntarily, under Rule 19. Lone Star’s review of Article III standing and joinder may affect the necessary parties in a patent infringement suit, change defendants’ case strategies, and require companies to reexamine the language in their patent transfer agreements.
Background
In 2016, Lone Star Silicon Innovations LLC sued Nanya Technology Corporation in the Northern District of California for infringement of multiple semiconductor patents.2 Lone Star acquired the patents from the original patent owner under a patent transfer agreement that granted Lone Star “all right, title, and interest” in the relevant patents, but also contained several provisions limiting Lone Star’s use and control of the transferred patents.3 For example, the agreement required Lone Star to receive the original patent owner’s consent to file suit against certain entities and restricted Lone Star’s ability to transfer the asserted patents.4
In 2018, the district court dismissed the case for lack of standing. The district court determined that to have constitutional standing, a plaintiff suing for patent infringement must either (1) possess “all rights or all substantial rights” under the patent to sue in its own name alone or (2) be an exclusive licensee (or a party with some exclusionary rights) and join the patentee in the suit.5 After finding that the patent transfer agreement did not grant Lone Star “all substantial rights” in the patents, the district court dismissed the case.6 Further, the district court rejected Lone Star’s request in the alternative to remedy standing by joining the original patent owner under Federal Rule of Civil Procedure 19.7 The district court reasoned that joinder would reward Lone Star’s “litigation gimmick and unfairly prejudice defendants.”8 The Federal Circuit vacated and remanded.
Litigants should consider patent transfer agreements to determine statutory standing at the motion to dismiss stage
On the standing issue, the Federal Circuit agreed with the district court that Lone Star lacked all substantial rights in the asserted patents, and thus was not a patentee who could assert these patents in its own name.9 However, the Federal Circuit rejected Nanya’s argument that there was no Article III standing because Lone Star was not a patentee and failed to plead that it was an exclusive licensee.10 Instead, Lone Star’s allegations of exclusionary rights in the patents and infringement by Nanya met Article III’s standing requirements.11 In other words, alleging infringement of some exclusionary rights—even if those rights are less than “all substantial rights”—pleads an injury traceable to the defendant and redressable by the court, which is sufficient to provide Article III standing.12 The Federal Circuit differentiated Article III standing and “statutory standing,” where a plaintiff failed to qualify as a “patentee” under 35 U.S.C. § 281 because it lacked all substantial rights in the asserted patents.13 In short, the Federal Circuit found that “‘statutory standing’ defects do not implicate a court’s subject-matter jurisdiction.”14 Although noting that it had previously treated “statutory standing” as a jurisdictional issue, the Federal Circuit fell in line with its own precedent and Supreme Court precedent distinguishing the plaintiff’s ability to bring a statutory cause of action from the court’s constitutional power to adjudicate the case.15
A potential plaintiff should be certain to sufficiently allege facts in the complaint to qualify as a “patentee” under 35 U.S.C. § 281. On the flip side, defendants should consider addressing a plaintiff’s failure to allege facts to qualify as a “patentee” under Rule 12(b)(6) or 12(b)(7) rather than 12(b)(1).
A patent owner who retains rights to control enforcement may risk involuntary joinder in transferee’s lawsuits
The portions of Lone Star addressing transfer of all substantial rights simply reiterate the Federal Circuit’s prior decision in Diamond Coating,16 but Lone Star also reminds patent owners that failing to transfer all substantial rights may have severe consequences, including involuntary joinder. The district court in Lone Star had denied joinder and dismissed the case to avoid rewarding Lone Star for withholding the patent transfer agreement.17 But the Federal Circuit, citing the Supreme Court’s Independent Wireless decision, found the application of Rule 19 “mandatory, not discretionary.”18 In fact, a patentee “must be joined,” even involuntarily if need be, because a patentee is obligated to protect its exclusive licensees from infringers.19 The Federal Circuit noted that Rule 19, although mandatory, is also flexible:20 its two-step inquiry requires a court to determine if joinder of an absent party is both (1) necessary and (2) feasible.21 The district court erred when it refused to allow Lone Star to join the original patent owner.
In light of Lone Star, patent owners looking to monetize assets via a third party may consider surrendering control over those assets so that a third party transferee may assert patents in court as the sole named plaintiff. Provisions retaining control over enforcement or monetization, or retaining the right to practice the patents, may permit the third party to involuntarily join the patent owner.22 Transferees looking to assert patents should assess whether their patent transfer agreement contains these types of provisions and consider joining, or filing a lawsuit with, the original patent owner to avoid challenges under 12(b)(6) or 12(b)(7).23
Conclusion
Lone Star reaffirms both the totality-of-the-agreement test for “all substantial rights” and the difference between the “all substantial rights” inquiry and Article III standing. With their constitutional standing intact, exclusive licensees can invoke Rule 19 to involuntarily join patent owners. Litigants should keep an eye out for transfer agreements and file the appropriate motion when a plaintiff lacks all substantial rights. Patent owners looking to monetize should consider whether transfer agreements will expose them to involuntary joinder.
1 Lone Star Silicon Innovations LLC v. Nanya Tech. Corp., 925 F.3d 1225 (Fed. Cir. 2019).
2 Id. at 1228.
3 Id.
4 Id. at 1232–33.
5 In re Lone Star Silicon Innovations LLC, No. C 17-03980 WHA, 2018 WL 500258, at *1 (N.D. Cal. Jan. 20, 2018), vacated and remanded sub nom. Lone Star, 925 F.3d 1225 (Fed. Cir. 2019).
6 In re Lone Star, 2018 WL 500258, at *1.
7 Id. at *6. Essentially, Lone Star argued that it had at least some exclusionary rights in the patent, so the standing issue would be remedied if it joined the original patent owner who retained rights in the asserted patents.
8 Id. Specifically, the defendants would be prejudiced by the patentee’s ability to shield itself from counterclaims and by limitations on counterclaim damages due to the patentee’s late joinder. See id. at *1, *6; 35 U.S.C. § 286 (West, Westlaw through Pub. L. No. 116-73).
9 Lone Star, 925 F.3d at 1234.
10 Id. at 1234 (“[C]onstitutional standing also does not depend on labels; it is the substance of the allegations that matters. Lone Star adequately alleged that it possesses exclusionary rights . . .”).
11 Id. at 1234–35.
12 Id.
13 Id.; 35 U.S.C. § 281 grants a civil remedy for patent infringement to a “patentee.”
14 Id. at 1235.
15 See Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 128 n.4 (2014). The Federal Circuit failed to mention that its prior decision in Intellectual Property Development addressed the same standing (non)issue as that addressed in Lone Star. Lone Star, 925 F.3d at 1231; Int. Prop. Dev., Inc. v. TCI Cablevision of Cal., Inc., 248 F.3d 1333, 1346–48 (Fed. Cir. 2001).
16 The Federal Circuit held that Lone Star did not receive all substantial rights because the original patent owner retained rights to practice, to control enforcement, and to control alienation of the transferred patents. The Diamond Coating decision addressed a patent transfer agreement with similar provisions. Diamond Coating Techs., LLC v. Hyundai Motor Am., 823 F.3d 615, 619 (Fed. Cir. 2016). The Lone Star court emphasized four provisions in particular: (1) Lone Star could assert the transferred patents only against a specific list of unlicensed entities, and the prior patent owner’s consent was required to expand the list; (2) Lone Star could not assign the patents or permit them to enter the public domain without the prior patent owner’s consent; (3) the prior patent owner and its customers retained the right to practice the patents, and Lone Star received no right to practice; and (4) the prior patent owner shared in revenue derived from Lone Star’s monetization efforts. Lone Star, 925 F.3d at 1227–28, 1231–33.
17 In re Lone Star, 2018 WL 500258, at *6. The district court focused on protection from counterclaims, but late joinder may also prevent early challenges to venue and subject-matter jurisdiction based on the patentee’s presence. Venue and subject-matter jurisdiction, however, may be addressed later as part of Rule 19’s two-step inquiry.
18 Lone Star, 925 F.3d at 1238; Indep. Wireless Tel. Co. v. Radio Corp. of Am., 269 U.S. 459, 469–70 (1926).
19 Id. at 1236. Further, Rule 19 applies whether a defendant invokes Rule 12(b)(1), 12(b)(6), 12(b)(7), or any other rule. Id. at 1238.
20 Id. at 1236.
21 Fed. R. Civ. P. 19(a)(1), 19(b). The feasibility inquiry, however, does not appear to encompass the district court’s concerns regarding unfair prejudice to defendants. See Fed. R. Civ. P. 19 advisory committee’s note to 1966 amendment (noting that joinder may not be possible “because of limitations on service of process, subject matter jurisdiction, and venue,” but not mentioning issues relating to counterclaims or limitations on damages).
22 Lone Star, 925 F.3d at 1236.
23 Unfortunately, whether “all substantial rights” have been transferred may be difficult to predict with confidence. See Alfred E. Mann Found. For Sci. Research v. Cochlear Corp., 604 F.3d 1354, 1360 (Fed. Cir. 2010) (“Our prior decisions have never purported to establish a complete list of the . . . sufficient rights to render an exclusive licensee the owner of a patent.”).
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