The apportionment of patent rights can be a tricky business—particularly where a plaintiff has pledged its patents as collateral, as just illustrated by a new precedential decision from the Federal Circuit. In May 2022, Western District of Texas Judge Alan D. Albright dismissed a case brought by Intellectual Tech LLC (IT) against Zebra Technologies due to lack of standing, holding that because the plaintiff’s default on a loan gave its lender the option to sell the plaintiff’s patent or assert the patent itself, the plaintiff had been deprived of all substantial rights in that patent. However, the Federal Circuit ruled on May 1 that Judge Albright had fallen into an increasingly familiar trap by confusing the jurisdictional issue of standing, which requires a mere injury; with the issue of whether the plaintiff is a “patentee” as required to bring an infringement suit under 35 USC § 281.

While IT filed the underlying lawsuit (6:19-cv-00628) in October 2019, the loan agreement at issue preceded its 2017 formation in Texas by several years: The original agreement was executed in 2011 between OnAsset Intelligence, IT’s now-parent and the owner of the asserted patent (7,233,247) at the time; and lender Main Street Capital, to which OnAsset granted a security interest in its portfolio, in exchange for a loan of up to $7M. OnAsset defaulted on the agreement in 2013. In June 2017, by which point OnAsset allegedly owed nearly $14M in unpaid principal and interest, OnAsset and Main Street entered into a forbearance agreement that required OnAsset to monetize the ’247 patent, for which purpose it formed IT and transferred the patent to it. IT also joined the 2011 loan agreement as a borrower, but by 2018 that entity had also defaulted.

Crucially, the relevant security agreements (identical between the 2011 and 2017 agreements) provided that upon a default—the occurrence of which was not here in dispute—Main Street could sell or transfer the patent and could also enforce it through licensing or litigation, in connection with which Main Street was also deemed the debtors’ attorney in fact as a mechanism to enforce these rights. However, the record does not show that Main Street took any action to sell or assert the ’247 patent or to exercise this authority as the debtors’ attorney in fact.

In May 2022, Judge Albright partially granted Zebra’s motion for summary judgment for lack of subject matter jurisdiction, in which the company had “primarily argued that OnAsset’s initial default in 2013 triggered an immediate transfer of exclusionary rights to Main Street such that OnAsset had no exclusionary rights to assign IT as of the 2017 assignment agreements” (as later paraphrased by the Federal Circuit). While Judge Albright (restyling the motion as one brought under Rule 12(b)(1)) found that the default had not “automatically divest[ed] OnAsset of title to the ’247 patent”, he determined that it did give Main Street the option to enforce or variously sell or transfer the patent. He then found that because “Zebra could obtain a license on the [’247] patent from Main Street” as a result of the default, IT had been stripped of all of its exclusionary rights, granting dismissal on that basis due to the lack of Article III standing.

However, the Federal Circuit held in its May 1 ruling on appeal (2022-2207) that Judge Albright had erred by conflating the requirements for Article III standing (i.e., constitutional standing), which generally 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, which partly addresses whether a plaintiff may file a claim under a particular statute. While courts previously treated the statutory right to sue as a jurisdictional issue (often using the term “prudential standing” or “statutory standing”), the Supreme Court held in its 2014 Lexmark v. Static Control Components decision, issued in a copyright case, that this prior approach 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 subsequently extended Lexmark to patent litigation in its May 2019 decision in Lone Star Silicon Innovations v. Nanya Technology. Courts’ failure to distinguish the above issues before Lexmark and Lone Star may have led to Judge Albright’s error in this case, the Federal Circuit remarked: “The lack of delineation between these two separate legal questions in prior opinions may have caused some of the uncertainty the district court grappled with here”.

Under the correct approach to standing, the Federal Circuit continued, what is actually at issue here is “whether IT demonstrated the irreducible constitutional minimum of an injury in fact”—which, in this context, merely “requires . . . that IT retained an exclusionary right—i.e., infringement would amount to an invasion of IT’s legally protected interest” (emphasis in original). As to whether it had such retained an exclusionary right, “[t]he answer is a clear yes”, the court found. After declining to accept Zebra’s reading of the contract as providing Main Street with an exclusive ability to license upon a default, based on its own de novo reading of the contract language, the Federal Circuit then “conclude[d] that IT retained exclusionary rights even though Main Street had the non-exclusive ability to license the ’247 patent”. The appellate court held that its prior caselaw establishes that a patent owner retains some exclusionary rights when it grants a nonexclusive license, as the patent owner may still sue “unlicensed infringers”.

Zebra’s argument that this nonexclusive license stripped IT of all exclusionary rights depended on the Federal Circuit’s 2010 decision in WiAV Solutions v. Motorola, but the court rejected that comparison here as covering a different situation—merely considering the distinction between an exclusive licensee (one with an exclusionary right) and a bare licensee (one just receiving the right not to be sued), and not contemplating rights retained by a patent owner, which is the case here. That distinction is “critical”, explained the court, because a “patent owner has exclusionary rights as a baseline matter unless it has transferred all exclusionary rights away”, whereas a “licensee ordinarily obtains freedom from suit but does not necessarily obtain an interest in preventing others from practicing the patent”. It is not necessary to “enumerate” or “fully define” the exclusionary rights of a patent here, merely to establish that IT was not divested of all exclusionary rights here. Main Street’s right to license the patent did not do so, the court found: “In sum, IT still suffers an injury in fact from infringement even if IT and Main Street can both license the patent”.

Nor did the Federal Circuit agree with Zebra that Main Street’s ability to sell or transfer the patent deprived IT of all exclusionary rights. Rather, the court held that “it is clear that assignment must be evaluated based on the actual transfer of rights, not mere ability”. As a result, it ruled that Judge Albright erred by treating the option to assign as having “presently divested IT of all other legal interests in the ’247 patent”, underscoring that any exclusionary rights that would be lost must be “evaluated in the same way the court evaluated title—based on the actual state of rights instead of their hypothetical redistribution at some unspecified point in the future”.

In a footnote, the Federal Circuit invoked another notable dispute over standing in litigation filed by subsidiaries of Uniloc Corporation Pty. Limited against Apple throughout 2017 and 2018. Uniloc has been backed by Fortress Investment Group LLC for years, the two enterprises entering into a complex set of funding agreements that, according to Northern District of California District Judge William Alsup, deprived the Uniloc subsidiaries of standing to file suit by the time that they did. In 2020, Judge Alsup found that one or more defaults under those agreements robbed Uniloc of sufficient rights in patents subject to those agreements, such that Uniloc no longer owned the patents and therefore could not sue for infringement of them. However, a settlement ended that litigation before the ruling could be tested on appeal, and the Federal Circuit applied collateral estoppel to prevent Uniloc from later relitigating the standing issue in cases against other defendants. Here, the Federal Circuit emphasized that it had not signed off on Judge Alsup’s holding in that case: “The reasoning of the district court’s standing determination in Uniloc has not been endorsed by this court”.

For more on Judge Alsup’s order in the Uniloc litigation, see “Apple Wins Long-Simmering Battle with Fortress and Uniloc over Standing” (December 2020). Further details about how the Federal Circuit dealt with remaining standing questions, after Fortress and Uniloc signed a revised agreement to fix their prior issues, can be found at “Federal Circuit Tidies Up the Fortress-Uniloc Standing Mess” (November 2022).