Extracted from Law360
Parties seeking to transfer ownership of a patent subject to preexisting licenses often face a difficult task.
On the one hand, the patent owner may desire to obtain the benefits of those prior licenses even after the patent is assigned to a new owner.
On the other, any rights retained by the patent owner, and any restrictions placed on the future assignee, may jeopardize the standing of the assignee to enforce the patent without joining the former owner.
To further complicate this delicate balance, the U.S. Court of Appeals for the Federal Circuit's decision in Lone Star Silicon Innovations LLC v. United Microelectronics Corp., and subsequent district court cases applying that decision, have looked to the totality of the contract at issue to determine whether the assignee has standing, subjecting any contractual restrictions on the assignees' rights to further scrutiny.
It is therefore useful to determine which encumbrances must be contractually imposed (and subjected to additional scrutiny) and which are automatically transferred to the assignee when it steps into the shoes of the assignor. It is well-settled that an assignee takes a patent subject to any preexisting encumbrances that run with the patent. But what does it mean to run with the patent? And how should an assignor ensure that future transferees are bound by those provisions?
An Overview of What Runs With the Patent
Patents are, by definition, the right to exclude others from using an invention. When the patent owner has given up the right to exclude another entity through the grant of a license or covenant not to sue, it cannot then transfer that right to exclude to another party. This is true regardless of whether the assignee is aware of the prior actions by the patent owner. In other words, a patent owner cannot assign more rights than it possesses.
The patent owner may also have contractual obligations, or even incentives, to protect those prior license grants. Consequently, it may want to shield the earlier licensees by reserving rights for itself, or imposing restrictions on future purchasers.
This dilemma is further complicated by standing considerations. Courts across the country have grappled with what rights a licensee must possess to have standing to sue for patent infringement. The generally accepted principle is that the licensee must have all substantial rights to sue in its own name.[1] Courts look at the totality of the agreement, i.e., all provisions and their cumulative effect on substantial rights. Courts tend to focus, however, on restrictions that impair enforcement and alienation.
Thus, particular care should be taken when imposing contractual limitations on an assignee's ability to enforce the patent or further transfer the rights it obtains. The line between a preexisting encumbrance that runs with the patent and a substantial right retained by the former patent owner is often difficult to ascertain.
In the recent Lone Star case, the Federal Circuit considered an agreement that restricted assignee Lone Star's ability to enforce or assign the patents without consent of the patent owner, and it further restricted Lone Star's ability to transfer the patents unless the subsequent buyer agreed to be bound by the same restrictions as Lone Star. The court concluded that, when viewed in the totality, Lone Star lacked all substantial rights and thus had standing to sue only if it joined the original patent owner.
Since the Lone Star decision, district courts have examined contractual restrictions to determine whether transferees had all substantial rights necessary to maintain suit without joining the respective patent owners. For example, following Lone Star, district courts have refused to allow an assignee to sue in its own name where the assignee was required to obtain consent prior to filing suite against two specific entities.[2]
As a result of the uncertainty surrounding standing to sue when preexisting rights exist, patent owners looking to assign future rights are wise to consider which rights and obligations automatically transfer and which ones must be contractually imposed.
And for any encumbrances that are imposed contractually, the impact on the assignee's standing to sue should be assessed. Ultimately, patent owners need to assess the relative risks of protecting their existing licensing arrangements against the possibility that doing so will result in the loss of the assignor's independent standing to sue.
Encumbrances That Run With the Patent
As a general rule, only those encumbrances that relate to the actual use of the patent are deemed to run with that right to exclude. The most common encumbrances of this type are those that restrict the ability to use an invention, including explicit licenses authorizing use, and covenants not to sue to enforce a patent right. Once granted, the patent owner's exclusionary rights against the receiving party are diminished. A subsequent assignee then takes a patent subject to those existing licenses and covenants not to sue.[3]
But the term license in this context can be misleading. Most patent license agreements contain not only provisions granting rights to use the patent at issue but also other provisions governing payment (through running royalties or lump sums), dispute resolution, confidentiality and many other issues. A common misperception is that the entire license runs with the patent and therefore binds subsequent assignees, but sellers — and buyers — should beware.
In contrast to license grants and covenants not to sue that impact use of an invention and run with the patent, procedural terms in a licensing agreement that do not directly impact the use of the patent may not be binding on subsequent buyers. Yet the outcome of such provisions is often unclear.
Arbitration Clauses
The Federal Circuit has held that arbitration clauses do not run with the patent because they are unrelated to the actual use of the patent.[4] Instead, these provisions are viewed as features of the underlying contract negotiated by the original parties that do not bind any subsequent patent owner unless that restriction is imposed as part of the contractual patent assignment.
Confidentiality Provisions
Patent license agreements often contain contractual obligations to keep terms of the agreement confidential. Courts have classified confidentiality provisions as procedural terms that do not bind subsequent assignees.[5] Like arbitration clauses, confidentiality provisions relate to the contractual obligations between the negotiating parties, rather than the patent itself, and again generally do not run with the patent upon transfer.
Royalties
Licenses to use a patent are often directly conditioned on royalty payments for that use. Similarly, patent assignments sometimes require payment of royalties to the original patent owner for future enforcement actions brought by the assignee. While royalty rights may seem to run with the patent — as the commercial benefit of the grant of a right to use the patented invention — some courts have found they do not.[6] These courts have reasoned that the royalty payments are personal between the contracting parties and thus do not bind future assignees.
This outcome is particularly concerning if a patent is assigned to a party in return for a share of future royalties earned by the new patent owner. If that new patent owner subsequently assigns the patent to a third party, the original owner may not have any recourse against that third party to enforce its royalty rights absent a separate contractual arrangement that binds the future assignee.
Not all courts have reached the same conclusion, however. At least one court has distinguished between past royalties, which are not transferred, and future royalties, which are transferred.[7] The court explained that the assignee of a patent becomes vested with the rights of the patentee, but also takes the patent subject to the patentee's previous acts. Under this view, royalties due after the transfer are incident to and transferred with the patent absent an express reservation.
That presumption is reversed with previously accrued royalties though. The right to recover prior royalties or damages for prior infringement may be assigned, but the assignment of a patent without more is not sufficient to confer those rights on the assignee.
Practice Recommendations
Only those encumbrances deemed to run with the patent — those that relate to the actual use of the patent — are likely to bind successors in interest. Potential buyers should perform due diligence on the patents to determine whether the patents are subject to any preexisting licenses or covenants not to sue. Even if the patent owner does not inform the potential buyer of such commitments, they will likely bind the buyer after transfer.
To the extent a patent owner wants (or is contractually obligated) to ensure that existing encumbrances continue to bind future assignees of the patent, it should make sure that all restrictions not specifically tied to the use of the patent are contractually imposed on future assignees.
Such provisions preserve the patent owner's breach of contract rights against the original licensee should that licensee transfer the agreement without the obligations it was required to include. Care should be taken, however, to ensure that any contractual restrictions do not result in the retention of a substantial right that impedes the assignees' standing to sue future infringers.
[1] Lone Star Silicon Innovations LLC v. United Microelectronics Corp. , UMC Grp. (USA), 925 F.3d 1225 (Fed. Cir. 2019).
[2] Home Semiconductor Corp. v. Samsung Elecs. Co., Ltd. , No. 13-cv-2033, 2020 WL 1470867 (D. Del. Mar. 26, 2020).
[3] Innovus Prime, LLC v. Panasonic Corp. , No. C-12-00660, 2013 WL 3354390 (N.D. Cal. July 2, 2013).
[4] Datatreasury Corp. v. Wells Fargo & Co. , 522 F.3d 1368, 1372-73 (Fed. Cir. 2008).
[5] Paice, LLC v. Hyundai Motor Co. , No. 12-499, 2014 WL 3533667, at *9-10 (D. Md. July 11, 2014).
[6] In re Particle Drilling Techs., Inc. , No. 09-33744, 2009 WL 2382030 (S.D. Tex. July 29, 2009); Jones v. Cooper Indus., Inc. , 938 S.W.2d 118 (14th Dist. Tex. 1996).
[7] In re Novon Int'l, Inc. v. Novamont S.P.A. , Nos. 98-cv-677E(F), 96-BK-15463B, 2000 WL 432848, at *5 (W.D.N.Y. Mar. 31, 2000).