Federal Circuit Defers on Retroactive Cures for Patent Ownership Defects

  • September 24, 2021
  • Category: Patent Litigation Feature
    Market Sector: E-Commerce and Software

The Federal Circuit has decided not to disturb a Delaware ruling that led to the reversal of a $236.8M verdict won by Densify against VMware last January—at least, for now. In June 2020, District Judge Leonard Stark dismissed one of the two Densify plaintiffs in suit—Cirba Inc. (“Inc.”)—for lack of standing, finding that it lacked exclusionary rights in the asserted patents because it had transferred too many of those rights to coplaintiff Cirba IP, Inc. (“IP”). On September 22, the Federal Circuit denied Inc.’s mandamus petition challenging that standing ruling but declined to address whether the company could cure the ownership defect retroactively. The court’s decision could lead to yet another chapter in this appellate battle, which has highlighted a growing district court split over the requirements for standing in patent suits.

A Primer on Patent Standing

The caselaw governing standing requirements in patent cases has shifted in recent years, so some background may provide helpful context for the Federal Circuit’s In re: Cirba ruling—particularly in light of the aforementioned split.

This shift began with the Supreme Court’s 2014 decision in Lexmark v. Static Control Components. Lexmark, issued in a copyright case, dealt with the distinction between Article III standing (i.e., constitutional standing), which deals with a federal court’s power to hear a case and requires a party to have suffered an injury addressable by such a court to file suit; and the statutory right to sue (often called “prudential standing” before Lexmark), which partly addresses whether a plaintiff may file a claim under a particular statute. While courts have previously treated the statutory right to sue as a jurisdictional issue, the Supreme Court held that this had been incorrect. Rather, the Court ruled that when a party lacks a valid cause of action, this does not implicate subject matter jurisdiction, because the statutory right to sue does not affect a court’s statutory or constitutional power to decide the case.

The Federal Circuit has since extended Lexmark to patent litigation, first through its May 2019 decision in Lone Star Silicon Innovations v. Nanya Technology. In Lone Star, the court held that under Lexmark, the ownership of a patent is a statutory prerequisite for bringing a patent infringement claim, but confirmed that this right this does not implicate Article III standing or subject matter jurisdiction. The court also clarified that a party lacking all substantial rights in a patent, but that still possesses some exclusionary rights, may still have standing to sue—even if it cannot file suit on its own.

As detailed in RPX’s coverage, the decision also addressed the circumstances under which a party may be deemed to possess (or lack) all substantial rights, concluding that the plaintiff had not acquired such rights—in light of other rights reserved by the patents’ original owner, AMD. The court determined that the district court erred by failing to consider whether AMD should have been joined as a coplaintiff in that case.

The Federal Circuit next addressed standing in May 2020, in Schwendimann v. Arkwright Advanced Coating. In Schwendimann, the appellate court addressed a different scenario under which the plaintiff thought she owned the asserted patent at the time she filed suit but actually did not, as a result of a clerical error by the law firm that handled the assignment of the patent to her (in the form of an assignment form listing the wrong application number). A subsequent assignment agreement retroactively cured that ownership defect, and as a result the district court ruled prior to Lone Star that the plaintiff had standing.

In May 2020, the Federal Circuit affirmed the judgment but cited Lone Star in rejecting the parties’ framing of the issue as centered on standing. Under Lone Star, the court explained, the only questions were whether the plaintiff was the patentee at the time she filed suit, and whether the assignment giving her that status was through a written instrument as defined in 35 USC Section 261. The court answered both in the affirmative, holding that in Lexmark, “the Supreme Court made clear that virtually all statutory filing prerequisites are non-jurisdictional”.

The Densify District Court Litigation

Each of these decisions would be repeatedly invoked during the dispute between Densify and VMware, in which the relevant case was filed by Inc. and IP in Delaware in April 2019 (1:19-cv-00742). In that complaint, the plaintiffs in part accused VMware of infringing two patents (8,209,687; 9,654,367) through the provision of products related to virtual machine optimization. The case proceeded quickly; while Judge Stark denied the plaintiffs’ May 2019 request for injunctive relief, he greenlit an expedited trial that took place in January 2020. The trial culminated in a verdict that VMware had infringed the patents-in-suit, awarding $236.8M in damages. The verdict also included a finding of willfulness.

After trial, VMware moved to dismiss Inc.—an operating entity and a competitor of VMware—for lack of standing. The reason was that Inc. had assigned its patents to IP for tax reasons prior to filing suit, receiving a license back to the patents through a license agreement—rights that, per VMware, fell short of the threshold required for standing. In June 2020, Judge Stark granted the motion, agreeing with VMware that while the license purported to convey Inc. “an exclusive, transferable, worldwide license to use” the patents, the rights retained by IP rendered Inc. a “bare licensee” rather than an “exclusive” one. In particular, the court explained that the agreement left IP as “the exclusive owner of all proprietary rights, including rights based upon . . . patent . . . laws,” specifically noting that the agreement “gives the Licensee [Inc.] no rights in such proprietary rights”. Since the agreement gave IP the right to “enforce (or not enforce) its exclusionary rights” as it wishes, the court held that Inc. “lacks any right to exclude”.

Later that month, the two Cirba plaintiffs moved for reconsideration. They argued that Judge Stark was wrong to treat the issue of Inc.’s ownership interest as a standing issue, based on the holding of Schwendimann—which issued two days before the hearing on the motion—that whether an entity is a patentee is a statutory prerequisite to filing an infringement claim, but “does not implicate the district court’s subject matter jurisdiction”. However, Judge Stark denied that motion in December, ruling that Inc. waived the right to raise Schwendimann by failing to do so prior to its motion for reconsideration. Relatedly, because Schwendimann issued before the court’s standing decision, the fact that plaintiffs did not cite that appellate ruling meant that it could not constitute a change in controlling law that would warrant reconsideration, he continued. Finally, Judge Stark distinguished Schwendimann as dealing with a different subissue: while that case held that the issue of whether a party possesses “all substantial rights” does not implicate constitutional standing, the district court based its standing decision solely on constitutional standing. As a result, Judge Stark vacated the jury verdict, citing the fact that much of the plaintiffs’ “overarching theme” at trial—that Densify was successfully competing with VMware, and that VMware’s infringement would drive its smaller competitor out of business—really applied just to Inc. as the only operating entity of the two plaintiffs. The court then found that the trial would have been materially different without Inc. as a coplaintiff.

Densify’s Appeal

In June 2021, Inc. filed a petition for writ of mandamus with the Federal Circuit, arguing that Judge Stark was wrong on waiver, that he misconstrued the exclusivity of its license, and that his ruling on standing was legally erroneous (2021-0154). By treating Inc’s ownership as a jurisdictional issue, Inc. argued, Judge Stark had contradicted the caselaw on standing described above: “under Lexmark, Lone Star, and Schwendimann, ‘exclusionary rights’ are not required for Article III standing”. Mandamus review was warranted, Inc. continued, as a result of the split that had developed among district courts applying those three cases. To that end, the petition cited several decisions reaching the same conclusion as Judge Stark and several others that, per Inc., “correctly applied Lexmark, Lone Star, and Schwendimann by separating the statutory question of exclusionary rights from the constitutional injury-in-fact requirement”.

The Federal Circuit denied Inc’s petition on September 22, beginning by agreeing with Judge Stark that the license from IP did not grant Inc. exclusionary rights. By so holding, the court rejected Inc’s argument that it has such rights as the result of language describing the license as “exclusive” and “transferrable”. Those terms, explained the Federal Circuit, refer only to the aforementioned right to use the patents. As such, “[r]ead in context, the word ‘exclusive’ in § 2 is most reasonably read to give Inc. no more than a breach of contract claim were IP to license others to use the patent”, while the term “transferrable”, at most, “simply allows Inc. to transfer a covenant not to sue for using the Products”.

Additionally, the Federal Circuit held that Inc. had not shown that it has a “clear and indisputable” right to a writ of mandamus based on Judge Stark’s ruling “that Article III requires an injury to the plaintiff’s right to exclude”. Rather, the court agreed with VMware that “Inc. seeks a change in the law because Inc.’s position would confer Article III standing on a bare licensee, contrary to our precedent”. With that in mind, the court concluded that the precedent cited by Inc. did not fully resolve the issue of whether the injury it had identified was sufficient to convey standing. Specifically, Inc. asserted that the competitive injury it suffered as a result of VMware’s infringement was enough, arguing that this was a “concrete” injury of the type contemplated by Lexmark and its progeny. However, the Federal Circuit ruled that this was only part of the issue, holding that the necessary question was not just whether a plaintiff must have suffered a “concrete” injury, but whether the injury must also be “legally cognizable”. Lexmark, Lone Star, and Schwendimann “do not answer [this] question”, the court held—thereby requiring it to deny Inc’s petition.

The Federal Circuit further rejected Inc.’s contention that VMware had waived its right to a statutory challenge by only raising a constitutional objection to Inc.’s presence in the suit. The record did not support a finding of waiver here, explained the court. Rather, “VMware’s omission of a separate ‘statutory’ label, its accurate quotation of ‘constitutional’ from the cited [Federal Circuit caselaw], and its use of ‘jurisdiction’ (and citation to Fed. R. Civ. P. 12(b)(1)) all merely reflect the fact that ‘jurisdiction’ and ‘constitutional’ were terms used too loosely in our past cases, as we made clear in Lone Star”.

Moreover, the Federal Circuit noted that it has previously “approved treating a dismissal for want of jurisdiction as a dismissal for failure to state a claim where ‘there were no practical differences between the two forms of dismissal under the facts of th[e] case’”. That alternative rationale applied here, the court explained, because the record shows that Inc. currently lacks any exclusionary rights. Inc. had argued to the contrary that there is a distinction here because it could cure the statutory defect “by altering the License Agreement, with retroactive effect to the filing of the complaint and, indeed, to the start of the damages period”.

Significantly, in declining to accept that counterargument, the Federal Circuit did not hold that such a cure would fail to resolve the statutory issue. Rather, it noted that such a solution was at this point hypothetical, because Inc. had not yet “attempt[ed] to effect a cure through any such alteration in the district court, and it has not done so to date (though it says that it stands ready to do so)”. Therefore, the court explained, it lacked both a factual record on such a cure as well the resulting legal argument or district court ruling on how that would impact Inc.’s rights—including whether this change would result in circumstances falling “within the narrow holding of Schwendimann (whose facts are hardly matched by anything Inc. suggests occurred here in entering into the License Agreement)”. As a result, the court deferred as to the impact of a potential cure: “We therefore do not address what if any possibility of cure Inc. might have had or might yet have. In so stating, we are neither inviting nor discouraging an attempt at cure. We simply conclude that, on the present record, Inc. could readily have been dismissed for want of a statutory right to sue for the very reason the district court dismissed Inc. for want of constitutional standing”.

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