The Supreme Court recently declined to hear an appeal from the Court of Appeals for the Federal Circuit addressing standing requirements for asserting a patent infringement action. In June, the Federal Circuit reversed a district court finding that Intellectual Tech (IT) possessed constitutional standing sufficient to sue Zebra Technologies (Zebra) for patent infringement.
Standing is a constitutional requirement in which a plaintiff must demonstrate (1) an injury-in-fact; (2) traceability; and (3) redressability. Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992). In Zebra the dispute was the injury-in-fact requirement—whether there was "actual or imminent" "concrete and particularized" "invasion of a legally protected interest." Id. at 560. To prove an injury-in-fact for patent infringement, a party must show it has a legally protected interest created by the Patent Act, such that it suffered legal injury from an infringer. Morrow v. Microsoft Corp., 499 F.3d 1332, 1340 (Fed. Cir. 2007). In patent parlance, these legally protected interests are called exclusionary rights.
The facts of Zebra begin in 2011, when OnAsset granted Main Street a security interest in its patents in a loan agreement. The terms gave Main Street certain rights it could exercise upon default of the loan. In 2017, after Main Street notified OnAsset that it was in default, the parties entered into a forbearance agreement. At the same time, OnAsset formed IT as a subsidiary and assigned IT all substantial interest in the asserted patent. IT then entered its own security agreement with Main Street, granting Main Street the asserted patent as collateral, if IT defaulted. And, by 2018, IT had defaulted. Because the 2011 and 2017 agreements have "mirrored" terms, Main Street's default rights were the same at the time of the complaint, regardless of whether those rights were assessed based on either OnAsset's or IT's default.
The Federal Circuit held that IT demonstrated an injury-in-fact because IT retained an exclusionary right, even after Main Street gained rights upon default. In other words, the agreement did not grant Main Street exclusive licensing upon default. An exclusive license would have granted Main Street the exclusive ability to license upon default. The court reasoned that a patent owner does not transfer all of its exclusionary rights in a non-exclusive license. At default, Main Street and IT shared the ability to license and therefore did not divest IT of all exclusionary rights. Additionally, the court analyzed an option in the agreement to assign, which Main Street had not exercised. Having an option to assign was not the same as actually exercising that option, and, therefore, IT had not been divested of its exclusionary rights. For a more robust analysis of the facts, see here.
In denying certiorari, the Supreme Court left patent owners and licensees with unanswered questions regarding standing issues in patent infringement cases. Zebra had argued that the Federal Circuit never squarely defined the term "exclusionary rights." Applicable to its case, Zebra claimed that the term carried different meanings for a patent owner compared with an exclusive licensee. This distinction was important because the Federal Circuit has previously explained that the "touchstone" for constitutional standing is whether a party possesses "exclusionary rights." Zebra also expressed concern with redressability implications. If Zebra could have obtained a license from IT or Main Street, it would have been unclear how to calculate reasonable royalties under the "hypothetical negotiation" method of awarding damages.
Looking ahead to future patent infringement actions, in circumstances where multiple parties have potential rights to a patent, parties may be unable to anticipate whether a plaintiff has standing to sue and how to determine redressability.
