by Dennis Crouch
Azure Networks and Tri-County Excelsior v. CSR, et. al (Fed. Cir. 2014)
The court here holds that the legal owner of the patent has no standing to be a co-plaintiff with the exclusive licensee. When all substantial rights in the patent are transferred to an exclusive licensee that entity becomes the effective owner and the license is an effective assignment. In my mind, the decision here is an incorrect results-oriented decision in reaction to the plaintiffs’ too-clever pre-filing actions.
The ownership and control history of U.S. Patent No. 7,756,129 is fairly interesting, if also obscuer. The “personal area networking” patent was originally owned by the innovative company BBN, but by 2009 Azure Networks was the owner. Missing from the USPTO records is the chain-of-title from BBN to Azue. In its opinion here, the court alluded to the chain by mentioning that the patent has “passed through many hands of ownership.” From context, I believe that the chain of title was discussed in the Federal Circuit briefs, but those portions are confidential and non-public.
In an odd move, Azure transferred ownership of the patent (as a gift) to a non-profit organization – the Tri-County Excelsior Foundation which is a sub-org of the E.D.Texas Court Appointed Special Advocates (CASA) group. As part of the transfer, Azure retained (or was transferred-back) an exclusive license of “all substantial rights” that include “the exclusive, worldwide, transferable right to bring enforcement actions, unfettered control over litigation, and exclusive authority to reach settlements and grant sub-licenses” further, under the agreement the charity “may participate in litigation only at Azure’s sole discretion.” In return for grantin the back-license, the charity receives 1/3 of proceeds on the patent.
The court here suggests that the motivation for the donation was largely to ensure that the case venue would remain in the Eastern District of Texas.
In this lawsuit, Azure and Tri-County jointly filed the complaint and the question on appeal is whether Tri-County – as the patent owner – has standing as a co-plaintiff. In its decision, the Federal Circuit ruled no – the owner has no standing to join the lawsuit because it had transferred substantially all rights to the exclusive licensee.
As the district court recognized, nothing about this relationship structure indicates that Tri-County has control over any aspect of litigation involving the ’129 patent. Rather, it is clear that Azure is holding all the strings. In sum, Azure’s exclusive right to sue, exclusive license, and freedom to sublicense are factors that strongly suggest that the Agreement constitutes an effective assignment.
There are several problems with this conclusion. First, legal title remains with the charity and the tradition is that a party with legal title can be joined as a plaintiff with an exclusive licensee who has the right to enforce. Second, the charity here retains a major and direct interest in the outcome of the case (33%) that creates a genuine conflict in fact. Third, the agreement also gives the charity the right to cancel the license at will (during an annual window) or for breach (anytime). And fourth, the implicit good faith elements of the contract provide additional rights to the legal title holder.
Need Not vs Shall Not: The usual rule is that all owners of a patent must be joined-together in a lawsuit asserting the patent. In a number of prior cases, the Federal Circuit has held that a title-owner need not be joined if the plaintiff/exclusive-licensee holds all substantial rights in the patent. See Morrow v. Microsoft, 499 F.3d 1332 (Fed. Cir. 2007). Here, the court turns takes that approach substantially further by holding that the title-holder shall not be joined in this situation.
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Recording License Agreements: License agreements are not normally recorded with the USPTO. What this means is that someone who purchases a patent (or receives the patent as a security interest) without notice of the license will still be bound by the license. However, when a license is (as here) an “effective assignment,” the implicit suggestion is that it must be recorded to fully secure rights against future bonafide purchasers and creditors.