Thursday, September 20, 2007

Bankruptcy Trustees and Standing

The Federal Circuit issued an opinion yesterday in a case of first impression involving the standing of bankruptcy trustees to bring suits for patent infringement, Morrow v. Microsoft Corp., 2007 WL 2713248 (Fed. Cir. Sept. 19, 2007). The court held there was no such standing and that the question of standing is governed by the Patent Act and constitutional standing requirements, rather than provisions of the bankruptcy law. The opinion, which seemingly is applicable to copyright infringement, is significant due to its insistence that the party suing actually possess one of the exclusive statutory rights and not merely be a trustee appointed to administer assets that include such rights.


Anonymous said...

I respectfully disagree with your analysis of this case.

Factually, this case did not involve the standing of a bankruptcy **trustee** to bring suit at all. Instead, under a Chapter 11 liquidating plan, the patent went to one liquidating trust (AHLT) while the right to sue for past infringement of that patent went to another (GUCLT). GUCLT was the party that filed the suit, and was held to lack standing.

The thrust of the fed circuit's decision was NOT that a bankruptcy trustee (or even a liquidating trust assigned the patent by the estate) lacks standing to sue. Instead, it was that in this *particular* situation, with one trust owning the patent and another owning the rights to sue, that the latter lacked standing under the Patent Act.

(I note also that there was a very strong and well reasoned dissent to this position, and from my past life doing Chapter 11 work I think the dissent has the better of the argument.)

There's nothing in the opinion that even remotely suggests that a bankruptcy trustee would not, as the legal owner of the patent, have standing to sue for infringement.

Further, the application of even the limited holding of this patent case to copyright cases is tenuous at best. 17 USC 501(b) provides that "the legal or beneficial owner of an exclusive right" may sue for copyright infringement. That's dramatically broader than 35 USC 281, which provides that only "a patentee" may sue for infringement, and has been interpreted to require that the patent owner be the party bringing suit.

LKB in Houston

William Patry said...

LKB, here is what I believe to be the relevant language (GUCLT being the trustees):

While GUCLT has been granted the right to sue infringers that are not controlling shareholders, AHLT is the patent title holder, holds the right to sell the patent, grant exclusive and nonexclusive licenses, grant the right to sublicense, or transfer any of the rights that AHLT holds to another party. The only limitations on AHLT's ability to control and transfer its patent rights is GUCLT's and BHLT's consent. In Speedplay, we noted that this type of consent requirement was not significantly restrictive of Speedplay's exclusionary patent rights, which included an exclusive license and the right to sublicense a potential infringer. 211 F.3d at 1252. In this case the requirement that GUCLT and BHLT consent to transfer of rights to the ′647 patent is not significantly restrictive of AHLT's exclusionary rights. Nor does this consent requirement transfer to GUCLT any exclusionary rights to the patent. Moreover, there is no indication that AHLT is restricted as to the parties to whom it could transfer any of the exclusionary rights that it holds under the ′647 patent. Thus, AHLT could grant an exclusive license to any party, which would transfer the right to exclude others from practicing the patented invention.

The problem for GUCLT and AHLT is that the exclusionary rights have been separated from the right to sue for infringement. The liquidation plan contractually separated the right to sue from the underlying legally protected interests created by the patent statutes-the right to exclude. For any suit that GUCLT brings, its grievance is that the exclusionary interests held by AHLT are being violated. GUCLT is not the party to which the statutes grant judicial relief. See Warth, 422 U.S. at 500. GUCLT suffers no legal injury in fact to the patent's exclusionary rights. As the Supreme Court stated in Independent Wireless, the right to bring an infringement suit is “to obtain damages for the injury to his exclusive right by an infringer.” 269 U.S. at 469; see also Sicom, 222 F.3d at 1381 (“Standing to sue for infringement depends entirely on the putative plaintiff's proprietary interest in the patent, not on any contractual arrangements among the parties regarding who may sue ...”); Ortho, 52 F.3d at 1034 (“[A] right to sue clause cannot negate the requirement that, for co-plaintiff standing, a licensee must have beneficial ownership of some of the patentee's proprietary rights.”).

The importance of AHLT's right to license third parties to our constitutional standing analysis is underscored by Textile Productions. This court determined that the transfer of the right to sue in that case did not provide standing to even participate in the suit because the agreement did not clearly manifest that the owner would refrain from granting a license to anyone else in the particular area of exclusivity. Textile Productions, 134 F.3d at 1485. We stated that the right to license third parties is an important patent right because implicit in the right to exclude is the right to waive that right; that is, to license activities that would otherwise be excluded. See Id.; Prima Tek II, 222 F.3d at 1379. GUCLT does not have the right to license or sublicense or otherwise forgive activities that would normally be prohibited under the patent statutes. We “pay particular attention to whether the agreement conveys in full the right to exclude” in order to find standing. Id. at 1379-80.

*9 Even in Propat, this court found that Propat had no standing to participate in an infringement suit though it enjoyed the exclusive right to sue third parties for patent infringement, the right to grant licenses to third parties, and the right to enforce license agreements. 473 F.3d at 1191. Propat's right to license and sue third parties was subject to prior approval by the legal title holder Authentix-approval that could not be unreasonably withheld. Propat was also required to receive the consent of Authentix before it assigned rights or obligations under the agreement to another party. This court held that Authentix did not assign all substantial rights to Propat and Propat could not even sue as a co-plaintiff with Authentix. Propat, 473 F.3d at 1189 (noting that even if Authentix was a party this would not ameliorate Propat's standing problem). Propat lacked sufficient exclusionary rights and therefore did not suffer statutory legal injury.

While GUCLT enjoys greater control over infringement litigation than did Propat, it lacks the important rights to grant and enforce licenses that Propat held. GUCLT lacks the right to waive the patent's exclusionary rights by waiving those rights in license or sublicense agreements.

Anonymous said...

I still contend that the holding of this case is pretty much limited to this unusual fact pattern, where the ownership of the patent and the rights to sue for infringement have been bifurcated. There's no basis for the claim that the holding applies broadly to garden variety bankruptcy trustees.

I think your error is that you are assuming that GUCLT was a "bankruptcy trustee," as that term of art is used in Title 11. It is not -- it is merely an assignee of the bankruptcy estate that happens to be in the form of a trust. Had there been a traditional Chapter 7 or 11 trustee, it would have become the owner of the patents in the estate's portfolio (as well as all other legal and equitable rights of the debtor in all types of property), and would have had standing to sue. Nothing in the opinion suggests otherwise.

Further, what say you to the distinction between 17 USC 501(b) and 35 USC 281? Not all patent law concepts necessarily apply to copyright law, especially where the statutes are different. E.g., an employee who, within the course and scope of his duties, invents something is the patentee and initial owner of the patent (absent a written assignment). As you know, that's not the case under Title 35 -- the work would be deemed a work for hire and the employer would be deemed the author and copyright owner, without the need to get an assignment from the employee.

LKB in Houston

William Patry said...

Thanks, LKB. I will happily defer to your expertise.

William Patry said...

Bob Eisenbach of Cooley Godward has a blog on the case worth reading: