District Court Must Consider Whether the Patentee Must be Joined Before Dismissing the Case for Lack of Statutory Standing

The question of who must join a patent infringement suit often raises interesting questions of rights, obligations, and control of the litigation. In the global marketplace with increased licensing arrangements, the extent of retaining rights can have a direct impact on the viability of a lawsuit and protecting intellectual property. Recently, the Federal Circuit in Lone Star Silicon Innovations v. Nanya Technology provided further clarification on what meets the standing requirement to bring a patent infringement case, and for dismissing a case for lack of standing.

In this patent litigation, the asserted patents (twelve in all) were originally assigned to Advanced Micro Devices (AMD). AMD later executed an agreement purporting to transfer “all right, title and interest” in the patents to Lone Star. The transfer agreement, however, imposes several limitations on Lone Star. For example, Lone Star may only assert the patents against “Unlicensed Third Party Entit[ies]” specifically listed in the agreement. To add new entities, Lone Star and AMD both must agree. If Lone Star sues an unlisted entity, AMD has the right, without Lone Star’s approval, to sublicense the patents to the unlisted entity. Further, AMD can prevent Lone Star from assigning the patents, and AMD and its customers can continue to practice the patents. Finally, AMD shares in any revenue Lone Star generates from the patents through “monetization efforts.”

Lone Star filed suit against a qualified “Unlicensed Third Party Entity.” After Lone Star produced its transfer agreement, the Defendant filed a Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction which the district court granted, concluding that AMD did not transfer all substantial rights in the patents to Lone Star, and thus that Lone Star could not sue in its own name. The court further refused to consider Lone Star’s request to join AMD to the lawsuit. Lone Star appealed and the Federal Circuit vacated and remanded.

Section 281 of the Patent Act allows a “patentee” to bring a civil action for patent infringement. The term “patentee” under the Act includes the original patentee (whether the inventor or original assignee) and “successors in title,” but it does not include mere licensees. If the party asserting infringement is not the patent’s original patentee, the court must determine “whether an agreement transferring patent rights to that party is, in effect, an assignment or a mere license.” In distinguishing between an assignment and a mere license, the court examines “whether the agreement transferred all substantial rights to the patents.” If a party cannot bring suit in its own name, it may still bring suit along with the patentee so long as the party possesses “exclusionary rights.”

Here, the Federal Circuit held that AMD did not transfer all substantial rights in the asserted patents to Lone Star. Although the agreement purported to convey “all right, title and interest” to Lone Star, mere wording is not sufficient. The court must analyze the totality of the agreement, focusing on two salient rights: “enforcement and alienation.” As to enforcement, “Lone Star needs AMD’s consent to file suit against unlisted entities.” As to alienation, “the agreement restricts Lone Star’s ability to transfer the asserted patents.” In addition to these restrictions, the agreement secures a share of Lone Star’s monetization efforts to AMD, and allows AMD and its customers to practice the patents. These facts together supported the conclusion that AMD did not transfer all substantial rights in the asserted patents to Lone Star.

Notwithstanding the lack of statutory standing, the Federal Circuit held that Lone Star’s allegations satisfy Article III standing to bring suit. To satisfy constitutional standing, a party must “show that its case or controversy is amenable to resolution by a federal court, by demonstrating that it suffers an injury which can be fairly traced to the defendant and likely redressed by a favorable judgment.” Those who possess “exclusionary rights” in a patent suffer an injury when their rights are infringed. Exclusionary rights involve the ability “to exclude others from practicing an invention or to forgive activities that would normally be prohibited under the patent statutes.” Lone Star did not have to specifically allege it was an “exclusive licensee.” The complaint sufficiently alleged that Lone Star possesses the sort of exclusionary rights that confer Article III standing.

Because Lone Star has constitutional standing, the appellate court held that it should have been allowed to join AMD as a necessary party before its case was dismissed. Under FRCP 19(a)(1) a necessary party who is subject to service of process and whose joinder will not otherwise destroy a court’s subject-matter jurisdiction “must be joined” unless, under Rule 19(b), the party cannot be feasibly joined or the court determines the case should proceed anyways or be dismissed because that party is indispensable. Rule 19 requires courts to engage with this two-step inquiry when a plaintiff asserts claims that also implicate the rights of necessary third parties. The Federal Circuit has interpreted this rule “as directing courts to join patentees along with licensees who otherwise have standing.” The district court dismissal was inconsistent with Rule 19 and Federal Circuit precedent. Instead of engaging the Rule 19 analysis, the district court declined to join AMD because it thought doing so “would reward Lone Star” for a “litigation gimmick” and prejudice the defendants.

The Federal Circuit thus vacated the district court’s dismissal and remanded for the district court to consider “whether AMD must be joined.”

The Federal Circuit decision provides guidance for plaintiffs and defendants facing or potentially facing patent litigation. Potential plaintiffs should do their pre-suit diligence by carefully reviewing all agreements to ensure both statutory and constitutional standing to bring suit. If statutory standing is lacking, potential plaintiffs should explore revising agreements to clarify rights as well as joining the patentee to the lawsuit. Conversely, defendants should diligently engage in post-suit diligence through discovery requests to ensure that the plaintiffs meet the statutory and constitutional standing requirements, and move to dismiss the case accordingly if standing is lacking.