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Court Restricts Rights of Patent Licensees

When Propat International licensed a patent for e-mail authentication technology from Authentix, the company thought it was getting robust rights to use and enforce the patent. The agreement gave Propat, a Houston-based licensing company, authority to sell licenses and sue infringers, sharing the profits with Authentix.

But when Propat went after RPost Inc. for infringement, it discovered it didn't have the strong rights the licensing agreement seemed to confer. In January the Court of Appeals for the Federal Circuit (CAFC) affirmed summary judgment for RPost in Propat International v. RPost Inc., finding Propat lacked standing to sue because its license did not give it an ownership interest in the patent. And despite the district court's earlier judgment that RPost had infringed the patent, the CAFC said Propat, as a "bare licensee," couldn't salvage the case by joining Authentix as co-plaintiff.

"The court said because there's no operative language giving Propat the right to make, use and sell the technology, it has no right to go into court," says Timothy W. Johnson, an attorney with Matthews Lawson Bowick & Al-Azem who represented Propat.

The decision, along with several other recent cases involving licensee rights, could seriously damage the value of some patent-licensing deals. At the very least, it forces companies to reconsider how they structure their licensing agreements.

Bare License

The CAFC's decision didn't address the validity of the Authentix patent, nor whether RPost had infringed it. Instead, the appeal focused on the wording of Propat's licensing agreement with Authentix and whether it conferred legal standing to sue for infringement.

On its face, the agreement gave Propat the responsibility to license the patent, enforce licensing agreements and sue infringers in exchange for a percentage of its earnings from those activities. Under the agreement, Authentix retained the right to approve or reject Propat's licensing and litigation decisions and would join Propat in litigation if a court required it--but only if Propat provided counsel and paid Authentix's expenses.

Despite this seemingly clear language, the court found Propat didn't actually have the right to sue to enforce the patent because it had neither an ownership interest in the patent nor an exclusive license to use it.

Patent law creates three categories of licenses. The strongest type assigns all substantial rights, allowing the licensee to sue for infringement in its own name without joining the patent owner. At the opposite extreme is the bare license, which courts have defined as a covenant stating the licensor won't sue the licensee for infringement. By this definition, a bare licensee would not suffer injury from third-party infringement and therefore would have no standing to sue. In between the two extremes are exclusive licenses, which give licensees the sole right to practice the patent and thus standing to sue as a co-plaintiff.

The CAFC initially had some trouble deciding which type of license Propat had. "The case does not fit neatly within either of these two categories," wrote Judge William Curtis Bryson, for a three-judge panel of the CAFC.

The court ultimately decided Propat had a bare license. Because the license left Authentix in control of licensing and litigation decisions and gave Propat no right to practice the patent, the court determined Propat lacked standing.

In effect the ruling expands the traditional definition of a bare license, calling into question the rights of other patent licensees with agreements similar to Propat's--agreements that give the licensee significant authority to make money from the patent, but no explicit right to manufacture it.

"If you are a licensor and you transfer the right simply to enter into a bunch of licenses with someone else, you have effectively hired an agent," says Henry Ben-Zvi, a Santa Monica attorney who represented RPost. "Being an agent for purposes of sub-licensing doesn't make you an owner. But if you have the right to manufacture and use the patent, that's a big step toward the right to sue."

Trolls Beware

The facts in Propat v. RPost suggest the CAFC's decision will affect only licensing arrangements that confer stripped-down patent rights and won't disturb agreements in which the patent owner gives the licensee the right to use the patent in a product. However, the court drew no clear distinction between "bare license" and "exclusive license."

"At what point does a license provide enough rights for the licensee to be a co-plaintiff?" Ben-Zvi asks. "That is the biggest gray area for future conduct."

In-house counsel might avoid the problem by specifying patent owners will stand as plaintiffs in infringement suits with provisions apportioning litigation costs. Ideally, patent owners will avoid entering bare licenses altogether.

"As a licensor you need to be serious about what you are doing," says Lawrence Sung, a partner with Nixon Peabody in Washington, D.C. "Licenses need to be structured to give some rights to the licensee. And if you are simply a patent-holding company or speculation firm, you should be concerned about Propat."

The decision is emblematic of legal trends that are complicating the business models of patent-licensing companies.

"The true significance of this case is how it fits into a continuing line of decisions," Sung says. "If there is a perception the judiciary looks unfavorably upon patent-license companies, it is manifested in rulings that indicate their licenses are not particularly beneficial for society."

Such rulings offer relief to companies being harassed by patent trolls, but they are making life more difficult for legitimate licensing companies--as well as the patent owners who rely on licensing deals with those companies to protect and extract value from their IP.

Editor-at-Large

Michael T. Burr

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