Abstract
The Federal Circuit Court of Appeals recently held that a licensor did not need to be joined in its exclusive licensee's patent infringement case despite the fact that the licensor retained the right to practice the patent, concluding that the licensor's right to practice the licensed patent was not a "substantial" right.
In a recent case, Luminara Worldwide, LLC v. Liown Electronics Co. Ltd.1, the U.S. Court of Appeals for the Federal Circuit affirmed a district court's holding that a licensor did not need to be joined in its exclusive licensee's patent infringement case despite the fact that the licensor retained the right to practice the patent. On separate grounds, the Federal Circuit vacated the district court's claim construction of a claim term and vacated the grant of a preliminary injunction.
Background
Candella licensed patents from Disney relating to artificial
candles in 2008. In 2014, Candella merged with Luminara Worldwide
LLC, (both parties are referred to as Luminara in this article).
Disney renewed its patent license agreement with Luminara in 2012,
and revised the terms of the agreement four more times over the
course of the next three years to grant Luminara additional rights
in the licensed patents, including the ability to assign its rights
as a licensee and to control litigation of the licensed patents
without Disney's consent.
Luminara twice entered into failed negotiations with Liown to
manufacture Luminara's artificial candles. Following those
negotiations, Liown began selling its own competing artificial
candles, and Luminara ultimately brought suit for patent
infringement, tortious interference, and trademark infringement in
the U.S. District Court for the District of Minnesota. Liown moved
to dismiss the lawsuit, arguing that Luminara lacked standing to
sue without Disney because Disney retained the right to freely
license the technology by creating new "Affiliates" under
the license. Liown argued because Disney retained the right to
license its new affiliates, Luminara did not have exclusionary
rights to the asserted patents and couldn't assert the patents
without Disney.
The district court denied Liown's motion, finding that Luminara
had both Constitutional and prudential standing to sue. The
district court also granted a motion for a preliminary injunction
filed by Luminara, essentially holding that Luminara's case was
strong enough (and the risk of harm without an injunction was great
enough) to justify blocking further sales of Liown's product
while the litigation progressed. Liown appealed both the denial of
its motion to dismiss and the grant of Luminara's motion for
preliminary injunction.
Liown's Motion to Dismiss for Lack of Standing
The Federal Circuit first addressed whether Luminara had
standing to sue. The court noted that the initial patent license
between Disney and Luminara restricted Luminara's rights in
several ways, including restrictions on assigning, sublicensing,
and transferring ownership of rights under the license, as well as
restrictions on enforcing the patents without Disney's express
consent. The initial license was later amended four times to extend
the term of the patent license and to transfer additional rights to
Luminara, including the right to transfer/assign Luminara's
rights under the license and to sue to enforce the patents without
Disney's consent.
In assessing whether Luminara had standing to sue, the Federal
Circuit focused on whether Luminara held "exclusionary
rights" to the asserted patents such that it could sue
competitors for infringement. Liown argued that Luminara did not
hold exclusionary rights to the patents because Disney retained the
right to "freely license the technology to any entity by
creating new Affiliates," thus retaining the ability to
license the patents to entities other than Luminara. The court
observed that the issue of standing hinged on the interpretation of
the term "Affiliate" in the license agreement—if
Disney could indeed license any entity to manufacture and sell its
artificial candles, Luminara did not have exclusionary rights to
the asserted patents. On the other hand, if Disney did not retain
the effective right to license the patents through the
"Affiliate" provision, Luminara did hold exclusionary
rights to the patents.
Liown argued that the definition of "Affiliate" in the
license encompassed any entity "operated by or under license
from" Disney, meaning that any entity "under
license" from Disney (but not operated by Disney) could
practice the patents as an "Affiliate," effectively
allowing Disney to freely license the patents. The Federal Circuit
disagreed concluding that Liown's proposed interpretation of
the license was incorrect since the license agreement repeatedly
stated that Luminara did have exclusive rights to the artificial
candle technology claimed in the licensed patents, and that such a
statement "would be a fiction" under Liown's proposed
reading of the contract. The court further determined that the
amendments to the license were intended by the parties to confer
standing to sue upon Luminara.
The court also rejected Liown's argument that, because Disney
retained substantial rights under the license, Luminara could not
bring suit in its own name without joining Disney as a co-plaintiff
in the litigation. The court explained that an exclusive licensee
holding all substantial rights to a patent may sue without joining
the patent owner, but that otherwise, the owner of the patent must
be joined to the suit. The court noted that the joinder requirement
exists for two reasons: to protect the alleged infringer from
facing multiple lawsuits on the same patent; and to protect the
patent owner from losing substantial rights if its patent claims
are invalidated or rendered unenforceable in an action in which it
did not participate.
The court explained that whether the right to sue for infringement
was conveyed under the license is a "critical"
consideration. While Liown argued that Disney retained a number of
rights under the license, including the right for Disney and its
affiliates to practice the patents, title to the patents, the
responsibility to pay maintenance fees to keep the patents in
force, a financial interest in litigation and licensing, and a
right to notice of litigation and licensing activities, the court
concluded that none of those retained rights, individually or
cumulatively, were substantial enough to preclude Luminara from
bringing suit in its name alone.
The court specifically explained that the retained right to
practice the patent is not a "substantial" right
requiring joinder, because Disney would not lose this right if the
claims were invalidated or the patent held unenforceable. Rather,
if the claims were invalidated or the patent were held
unenforceable, "everyone, including Disney Enterprises and its
affiliates, could freely practice the patent." The court
further explained that a "patentee that merely retains the
right to practice the patent does not risk losing a substantial
right if the claims are invalidated or the patent held
unenforceable. The retained right to practice a patent is not the
same as a retained right to exclude others from doing
so."
The court thus determined that Luminara held all
"substantial" rights to the patents, including the sole
and exclusive right to sue for infringement, and that Disney was
not in danger of losing substantial rights by not being joined. The
court concluded that Disney did not need to be joined as a
co-plaintiff with Luminara.
Luminara's Motion for a Preliminary Injunction
After determining that Luminara had standing to sue, the Federal
Circuit turned to Liown's argument that the preliminary
injunction was improper since there was a substantial question of
validity regarding the sole claim upon which the injunction was
based. The parties agreed that a prior art reference disclosed
every limitation of the sole claim forming the basis of the
preliminary injunction except for one disputed claim term.
The Federal Circuit determined that the district court's
construction of the disputed term did not comport with its
"plain meaning," which a court is bound to adopt unless
the patentee defines the claim term in a particular way or disavows
the normal scope of a term. The Federal Circuit vacated the
district court's construction in favor of a new construction.
The court concluded that, because the prior art patent appeared to
disclose the disputed claim term under the Federal Circuit's
new construction, a substantial question of validity existed with
respect to the asserted patent claim that warranted vacating the
district court's preliminary injunction.
The court noted that the vacated preliminary injunction was based
on just one claim of one of the asserted patents, and that an
injunction based on other grounds might still warrant entry of a
preliminary injunction.
Strategy and Conclusion
This case illustrates that the right to practice a patent is not a "substantial right" retained by a licensor, and that a licensor who retains the right to practice a licensed patent does not need to be joined in its exclusive licensee's lawsuit for patent infringement.
Footnote
1 The Luminara Worldwide, LLC v. Liown Electronics Co. Ltd. decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/15-1671.Opinion.2-25-2016.1.pdf.
Previously published by LES Insights
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