Patent Licensees: Be Mindful of What You Ask

By Tennell Lockett

Many different individuals license patented technologies (“licensees”) from third-party patent owners (“licensors”) for many different reasons. Some simply want to use another’s patented technologies. Others want to prevent competitors from using a particular technology. And still others want to provide sub-licenses to industry competitors.

Knowing the goal you want to achieve with a licensing arrangement is typically easy. Structuring a proper licensing arrangement to achieve that goal is not. The best measure of whether you have the correct license in place to meet your goal is how it will fair under scrutiny. In other words, how will it hold up in litigation. How you structure a license can have a tremendous impact on your ability to subsequently enjoy your rights under the license.

As with any litigation, plaintiffs must have “standing” to bring a patent claim.  Standing requires that both “constitution” and “prudential” requirements be satisfied. Constitutional standing is a legal condition that requires, among other things, an injury-in-fact to the plaintiff that is caused by the defendant. Prudential requirements must be satisfied in addition to constitutional standing requirements. Many do not recognize how significant an impact these standing requirements have on patent licensing until it is too late.

Patent law grants a patentee a statutory right to exclude (the “exclusionary right”), the violation of which is an injury-in-fact. Consequently, the holder of the exclusionary right suffers an injury-in-fact for purposes of constitutional standing. However, as an element of the prudential standing requirement, patent law requires that the plaintiff must be the holder of legal title (often the patentee/licensor). These seemingly simple legal requirements have vast implications in the world of patent licensing.

Courts have recognized at least three categories of licensee plaintiffs. The first category is comprised of “all substantial rights” plaintiffs, which receive a license that amounts to a virtual assignment of the patent. Licensees that fall within this category satisfy both constitutional and prudential standing and have independent standing to bring a patent action. Mere use of the term “all substantial rights,” however, does not alone establish standing in the licensee. Rather, courts will ascertain the parties’ intent and the rights granted in the license. The second category consists of “exclusive licensees,” which hold exclusionary rights in a patent, but fewer rights than Category 1 licensees. Category 2 licensees are not holders of legal title and therefore do not satisfy prudential standing. They do not have a separate basis to establish standing. These licensees can only bring patent claims as co-plaintiffs.  In other words, they must get the patentee/licensor to join the suit as a co-plaintiff. The third category consists of so-called “bare licensees,” which only receive a personal right to use the invention. These licensees lack the exclusionary right and therefore cannot bring suit under any condition because they suffer no injury-in-fact. For members of this group, an action is not possible even if they are able to convince the patentee/licensor to join as plaintiff to the suit.

Achieving the proper licensing is nuanced and filled with pitfalls. For example, if the primary purpose of your licensing practice is to build a portfolio to assert against competitors, a license is without any significant value to your company if it puts you in Category 3 or puts in category 2 with a licensor that will not entertain joining as co-plaintiff in suit. Because the consequences of falling into the wrong category can be dire, and because it is exceedingly easy to inadvertently end up in one category while aiming for another, you should consult a qualified attorney before negotiating or signing any license arrangement.

 

 

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