Post-Default Creditor’s Right to Assign, License and Enforce Patent does not Disturb Patentee’s Separate Right to Sue Infringers

by Dennis Crouch

The Federal Circuit’s new decision in Intellectual Tech LLC v. Zebra Techs. Corp., No. 2022-2207 (Fed. Cir. May 1, 2024) offers some interesting insight into leveraged patent transactions, and the effect of a lender’s ability to license or assign a patent on the patent owner’s standing to sue for infringement, especially after default.

For a party to have constitutional standing to bring a patent infringement suit, it must be able to show an injury in fact traceable to the defendant’s allegedly infringing conduct. In the patent context, the Federal Circuit has made clear that the injury in fact requirement stems from the exclusionary rights granted by the Patent Act. But, mere ownership of the patent does not automatically confer standing – the plaintiff, whether the patentee or an exclusive licensee, must have retained the right under the patent to exclude the accused infringer from practicing the claimed invention. Lack of any exclusionary rights against the defendant means the plaintiff has not suffered a legal injury and therefore lacks constitutional standing to sue for infringement.

The patent at issue, U.S. Patent No. 7,233,247, was previously owned by OnAsset Intelligence, Inc. (“OnAsset”) and covers RFID base station technology. In 2011, OnAsset granted a security interest in the ‘247 patent to Main Street Capital Corporation (“Main Street”) as part of a loan agreement. Upon OnAsset’s default in 2013, Main Street gained certain rights in the ‘247 patent under the security agreement, including the ability to license, assign, transfer, or otherwise dispose of the patent. In 2017, OnAsset assigned the ‘247 patent to its newly formed wholly owned subsidiary, Intellectual Tech LLC (“IT”), which then entered into its own security agreement with Main Street, granting Main Street a similar security interest in the patent as OnAsset had previously granted. When IT later defaulted in 2018, Main Street’s rights in the ‘247 patent under the security agreements became a central issue in determining whether IT retained sufficient exclusionary rights to have constitutional standing to sue for infringement without also joining Main Street.

The agreement between the patentee-debtor and the lender indicated that the Debtor would “be permitted to control and manage … the right to exclude others from making, using or selling items covered by the Patents and Trademarks and any licenses thereunder.”  However, the agreement goes on to indicate that “in the event of a default” the lender “may, at its option … sell assign, transfer, pledge, encumber or otherwise dispose of the Patents … [and/or] enforce the patents.”

IT sued Zebra for infringement in the W.D.Tex., but Judge Albright dismissed the case – holding that the IT lacked constitutional standing to sue for infringement because IT had not joined the owners together as co-plaintiffs (including Main Street).  Specifically, the district court found that even though Main Street had not exercised its rights to license or assign the patent, the mere possibility that Zebra could obtain a license from Main Street deprived IT of its exclusionary rights in the patent, which are necessary for constitutional standing.

On Appeal, the Federal Circuit has reversed and remanded. 

In the case, IT was able to convinced the appellate panel to characterize Main Street’s rights as an “unexercised option” — something quite different from having a right to own and control. The opinion by Judge Prost rejected Zebra’s argument that Main Street had the exclusive ability to license the ‘247 patent upon OnAsset’s default. The court found nothing in the loan agreement indicating that the mere triggering of Main Street’s options under the agreement automatically deprived IT of its rights under a separate provision allowing IT to control and manage the patent. The court also rejected Zebra’s contention that Main Street’s non-exclusive ability to license the patent stripped IT its  exclusionary rights. Citing precedents such as Aspex Eyewear, Inc. v. Miracle Optics, Inc., 434 F.3d 1336, 1342–43 (Fed. Cir. 2006), and Alfred E. Mann Found. for Sci. Rsch. v. Cochlear Corp., 604 F.3d 1354, 1361 (Fed. Cir. 2010), the court concluded that a patent owner retains exclusionary rights even if it grants another party the ability to license the patent.

In its analysis, the CAFC emphasized the distinction between constitutional standing and the separate issue of whether a party qualifies as a “patentee” under 35 U.S.C. § 281, stating:

We need not determine whether IT’s legal interest in the ‘247 patent was sufficient to meet the ‘patentee’ requirement of 35 U.S.C. § 281, an issue the district court did not reach. This court has clarified, in light of the Supreme Court’s opinion in Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014), that § 281 is not a jurisdictional requirement.”

The court also quoted its recent decision in Uniloc USA, Inc. v. Motorola Mobility LLC, 52 F.4th 1340, 1345 (Fed. Cir. 2022), which observed that “[p]atent owners and licensees do not have identical patent rights, and patent owners arguably do not lack standing simply because they granted a license that gave another party the right to sublicense the patent to an alleged infringer.”  For Judge Taranto, it boils down to a simple question: “Why is that not enough for Article III to say you can exclude that person and it’s a valuable right to exclude them because they might be willing to pay you?” (Judge Taranto, oral arguments, minute 25).  Judge Hughes followed up with monologue at oral argument:

The fact that somebody else could grant a license that would give you a defense doesn’t mean at the time the suit was filed against you, if you don’t have a license, that they’re not suffering damages by your alleged infringement. If you want to run and get a license and you can get it from somebody, you can assert it as a defense. And that will be [a defense] to the cause of action. But the patent owner is still damaged by you infringing it without a license.

In response to these arguments, Zebra heavily relied on the Federal Circuit’s decision in WiAV Sols. LLC v. Motorola, Inc., 631 F.3d 1257(Fed. Cir. 2010).  Zebra contended that under the reasoning in WiAV, if a party other than the plaintiff can obtain a license from someone else, the plaintiff lacks an exclusionary right and therefore lacks standing to sue for patent infringement.  In that case, the court wrote that an “exclusive licenses lacks standing to sue a party who has the ability to obtain such a license from another party with the right to grant it.”

However, the Federal Circuit rejected Zebra’s reliance on WiAV, emphasizing that the WiAV decision dealt with the specific context of exclusive licensees attempting to enforce patent rights, not patent owners. The court clarified that WiAV‘s analysis of exclusionary rights and the ability to obtain a license from a third party was focused on determining whether a licensee had received sufficient rights from the patent owner to qualify as an exclusive licensee. In contrast, for a patent owner, the mere possibility that an accused infringer could potentially obtain a license from another party does not automatically deprive the patent owner of its exclusionary rights and standing to sue. Thus, the court distinguished the rights of patent owners from those of exclusive licensees.

An important tweak is once default occurred Main Street did not simply have the right to license, but it also had the right to enforce the patents by filing its own lawsuits, with IT agreeing to participate and facilitate those actions.  But the court found that the provision did not automatically strip IT of its exclusive rights, and I believe it was critical in this case that Main Street had not exercised any of its options and therefore had not divested IT.

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Ultimately, the appellate panel concluded that “Main Street’s default rights under the patent and trademark security agreement did not deprive IT of all exclusionary rights. Thus, the district court incorrectly determined that IT could not demonstrate that infringement of the ‘247 patent amounted to an injury in fact.”

= = =

The outcome in this case is somewhat unsatisfying because it is difficult for me to discern the difference between (1) a post-default secured creditor who can take various actions at their ‘option’ as compared with (2) a co-owner of the patent who can also take those same actions.  In both cases we may have situations whether the creditor/co-owner has not exercised their right to assign/sue, but the law treats the two differently.  Notably, the law generally requires all co-owners of a patent to join as plaintiffs in order to sue for infringement.  Ethicon, Inc. v. United States Surgical Corp., 135 F.3d 1456 (Fed. Cir. 1998).   But here, we learn that is not the case for a post-default creditor who has the right to assign, license and sue.  The distinction here appears to be technical in nature, driven by property and contract law.  A secured creditor, such as Main Street in this case, obtains certain conditional rights that become actionable only upon the event of a default. These rights, which include the ability to license, enforce, or transfer the patent, are contingent and do not equate to ownership or the inherent rights that come with being a co-owner of a patent. Co-owners, on the other hand, inherently possess an undivided interest in the patent and can exploit the patent (e.g., by licensing or selling) without the occurrence of a specific event like a default.

= = =

1. A Radio Frequency Identification (RFID) base unit, comprising:

Radio Frequency (RF) circuit adapted to communicate with at least a first and a second RFID circuit type of a plurality of RFID circuit types; and

a control module including processor means at least coupled to the RF circuit, the processor means of said control module being configured to communicate with external devices through at least a first and a second connection standard of a plurality of connection standards.

6 thoughts on “Post-Default Creditor’s Right to Assign, License and Enforce Patent does not Disturb Patentee’s Separate Right to Sue Infringers

  1. 3

    BTW, there is a patent assignment agreement provision that sometimes gets overlooked, creating similar problems. Namely, the assignment to the assigneee of the right of the assignee to recover damages from infringers for infringements occuring prior to the assignment of the patent.

  2. 2

    Since the patent owner was in default (presumably due to non-payment/s on the loan; but perhaps not?), why didn’t Main Street join the suit in order to increase the odds of being paid? Or perhaps at least bringing in some $$$ by licensing to Zebra?

    Perhaps they now will.

    1. 2.1

      When IT filed its opposition to the motion to dismiss in the district court, it did ask the court to allow Main Street be added as a plaintiff in the event IT lacked standing. But the court didn’t address that issue because it found lack of constitutional standing, a deficiency that cannot be cured by joinder. Footnote 3 of today’s decision notes that after the dismissal, IT and Main Street filed a new lawsuit in the same court as co-plaintiffs.

      Now that the original suit by IT has been revived, one possible outcome on remand is that Main Street and OnAsset will join the original suit to cure any remaining issues relating to prudential standing.

      1. 2.1.1

        Thanks for the additional info L.R.

  3. 1

    Dennis writes:

    > Notably, the law generally requires all co-owners of a patent to join as plaintiffs
    > in order to sue for infringement. Ethicon, Inc. v. United States Surgical Corp.,
    > 135 F.3d 1456 (Fed. Cir. 1998). But here, we learn that is not the case
    > for a post-default creditor who has the right to assign, license and sue.

    This latter sentence is not accurate to the extent it suggests that the patent owner here can maintain the suit by itself as sole plaintiff, without joining Main Street (the holder of the default rights) as a plaintiff. The court here addressed only the issue of constitutional standing, and expressly noted in a footnote that it was not addressing whether joinder of Main Street would be required, for example based on prudential or statutory standing. (Slip opinion, at 11 n.3 (“In light of our determination that IT does have constitutional standing, issues of joinder can, if necessary, be addressed on remand.”).) That same footnote noted that IT and Main Street had filed in fact a separate action as co-plaintiffs.

    It is difficult to why IT under these facts would be allowed to maintain this suit without joining Main Street as a party. Otherwise, the defendant could be faced with multiple suits for the same allegedly infringing conduct (first by IT and then by Main Street if it belatedly exercises its default options), which is precisely what prudential standing is intended to prevent.

    1. 1.1

      Thanks for adding these comments.

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