Patent Licenses and the Right to Sue – Licensor’s Option to Sue Infringer Upheld on Appeal

Patent licenses were analyzed in the recent Federal Circuit Court of Appeals decision in Alfred E. Mann Foundation for Scientific Research v. Cochlear Corp., No. 09-1447 (Fed. Cir. May 14, 2010)(available here).  The patent licensor, Alfred E. Mann Foundation (“AMF”), brought suit against an accused infringer because the license permitted AMF a “secondary right to sue” when either AMF or the licensee Advanced Bionics (“AB”) discovered an infringement, and when licensee AB declined to bring suit.  The Federal Circuit appeals court reversed the district court’s dismissal of the suit, and re-instated the litigation finding that, once AB chose not to sue, AMF had substantial rights to enforce the patent, including whether or not to bring suit, when to bring suit, where to bring suit, what claims to assert, what damages to seek, whether to seek injunctive relief, whether to settle the litigation, and to determine the terms of settlement.

The following list of licensor AMF’s rights and licensee AB’s rights is instructive.

AB: The exclusive, worldwide right to make, have made, use, lease, offer to lease, sell, offer to sell, and otherwise commercially exploit the ’616 and ’691 patents for the full term of those patents.
AB: The first right to sue to enforce the patents when either AMF or AB learns of any alleged, actual, suspected, potential, or threatened infringement, misappropriation, or unauthorized use. This right to choose whether to sue includes the right to control any litigation commenced by AB, including the right to choose counsel and the right to make unilateral decisions about litigation and settlement strategy and tactics.
AB:  The right to settle any AB-controlled litigation on any terms (with or without payment of money) without any prior authorization by AMF. Exercise of this right does require first consulting with AMF.
AB:  The right to grant sublicenses, as long as the sublicenses include specified confidentiality requirements; particular reporting, inspection, and audit rights; provisions terminating the sublicense if the license is terminated; and the payment of specified pass-through royalties to AMF.

AMF: The secondary right to sue to enforce the patents when either AMF or AB finds out about any alleged, actual, suspected, potential, or threatened infringement, misappropriation, or unauthorized use and when AB declines to exercise its right to sue, described above. This secondary right to sue includes the right to control any litigation commenced by AMF, including the right to choose counsel and the right to make unilateral decisions about litigation and settlement strategy and tactics.
AMF:  The apparent obligation to pay maintenance fees on the patents-in-suit.
AMF:  The right to some significant portion of the recovery in infringement suits, whether initiated by AB or by AMF.
AMF:  The apparent right to grant licenses to settle litigation initiated by AMF.
AMF:  The right to prevent AB from assigning its rights to anyone else except under certain specified conditions. AMF’s consent to AB’s assignment of its rights cannot be unreasonably withheld.
AMF:  The right to terminate the license agreement and any sublicenses if AB misses payments to AMF.

The Federal Circuit held that AMF retained “substantial rights” in the patent and suit by licensor AMF was appropriate.

Practitioners will note that when there is a nonexclusive license agreement, both licensee and the licensor must be joined as parties to the litigation.  Aspex Eyewear, Inc. v. Miracle Optics, Inc., 434 F.3d 1336, 1344 (Fed. Cir. 2006); and Independent Wireless Tel. Co. v. Radio Corp., 269 U.S. 459, 466 (1926).  The result in Alfred E. Mann was different because patent licensor AMF retained an option to sue.

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