12.05.07
By R. Joseph Trojan and Olga Kay
Trojan Law Offices
Tom Sawyer’s company sells medical equipment. Wanting to stay at the cutting edge of technology, Tom secured a license for the newest intravenous (IV) drip, invented and patented by Huck Finn. This was a good business decision—the drip is very popular and customers are gladly paying higher price for the patented device.
Things are going great, until Tom notices a drop in sales. It appears that Becky Thatcher is selling an IV drip suspiciously similar to the one patented by Huck. Tom is certain that Becky does not have a license from Huck. Because Becky is not paying royalties, she is able to offer the drip at a lower price and lure away Tom’s customers.
Tom understands that Becky is infringing Huck’s patent and violating the law. He calls a patent attorney intending to sue Becky in federal court. The attorney asks to see Tom’s licensing agreement with Huck. Surprised, Tom sends over a copy. Having reviewed the agreement, the attorney says that to sue Becky, Tom must join Huck in the complaint. Without Huck as plaintiff, the suit would be thrown out of court. Tom is disappointed. Huck is away, fulfilling his dream of rafting down every major river on Earth. He currently is on the Nile, where traffic and crocodiles cause endless delays. Huck will not be reachable for many months. Tom is reluctant to involve Huck in a lawsuit without first notifying him. Alas, Tom is in for another quarter of losses, while Becky prospers at his expense. What went wrong with Tom’s licensing agreement that doomed him to this fate?
Generally, an owner of a patent can transfer some or all of the rights under the patent by agreement. There are three types of transfers: assignment, non-exclusive license and exclusive license.
Assignment
The sum of all patent rights is referred to as a “bundle.” An agreement that transfers the entire bundle of rights is called an assignment of the patent. An assignment allows the new owner to use, make and sell the invention or sell the right to do so to others. Any infringer of the patent now must answer only to the new owner and not to the prior owner. Assignments are recorded with a special department at the US Patent and Trademark Office.
Non-exclusive License
A license transfers only some of the rights from the bundle. The simplest is a non-exclusive license. Simply put, a non-exclusive license is a right to use the invention and not be sued. The patent owner may give out as many non-exclusive licenses as he or she wishes on any terms desired. If one licensee gets better terms and gains a competitive advantage, the other licensees have no right to complain. Any infringer must answer only to the patent owner and not to the non-exclusive licensees. This may seem unfair—the infringer is hurting licensees by not paying royalties and likely offering lower prices. However, a non-exclusive license does not promise the use of the invention free of competition. Non-exclusive licensees have no right to complain about competition from other licensees or infringers. They may not sue infringers either alone or together with the patent owner.
Exclusive License
An exclusive license is much more than a right not to be sued. Because the patent owner promises not to give licenses to anyone else, the exclusive licensee secures freedom from competition. In that case, an infringer cuts directly into the licensee’s domain. An exclusive licensee may join the patent owner in a lawsuit and collect damages.
The Role of the Patent Owner
The patent owner must take part in every infringement lawsuit. In the case of a non-exclusive license, the patent owner does it alone. The licensees may benefit indirectly when the infringer is brought into compliance. This rule is fair to the infringer—in addition to the patent owner, who would want to be suddenly swarmed by a crowd of licensees, each demanding damages? In the case of an exclusive license, the licensee may join with the patent owner. This rule also benefits the infringer. The exclusive licensee’s damages are separate from the patent owner’s damages. If the licensee could sue alone and get damages, the infringer potentially would face the second lawsuit, this time by the patent owner, over the same matter.
It often happens that an exclusive license gives the licensee so many rights that it becomes almost an assignment. Then licensees are tempted to argue that the patent owner no longer needs to join the lawsuit. To eliminate this gray area, the Supreme Court came up with the principle of “prudential standing.” Under this principle, a licensee that has less than all patent rights must always join the patent owner in a lawsuit. In other words, unless there is an assignment, the patent owner must take part in a lawsuit.
A Role of the License Agreement
A license agreement specifies whether the license is exclusive or non-exclusive. Often, agreements also specify the parties’ rights with respect to infringement lawsuits. Importantly, such agreements may not override the law. For example, an agreement may never give a non-exclusive licensee a right to sue infringers. In the same way, an agreement may not give an exclusive licensee a right to sue infringers without the patent owner. To make life easier, exclusive licenses often allow licensees to sue infringers on behalf of the patent owner. A licensing agreement may state that the parties have a duty to promptly notify each other of any infringement. After a grace period, each party is given the right to include the other party as a co-plaintiff and go ahead with a lawsuit.
* * *
Knowing of Huck’s wanderlust, Tom should have put two conditions into the license agreement. First, he should have secured an exclusive license from Huck. Unless the license is exclusive, Tom may never sue infringers. Second, Tom should have secured a right to sue on Huck’s behalf when Huck is away. Had Tom had this right to sue, he immediately would have stopped Becky from causing further damage. Such a licensing agreement would have had real value for Tom’s business.