Patent License Agreements Are Not as Straightforward as They Seem

December 2011

I am asked all the time by new clients what they can (or should) do with a patent once they get one. There are really only two options: you can make and sell your invention, or you can let someone else make and sell your invention. If you take the latter route, you will need to transfer your patent rights. This transfer may take one of two forms: you may assign your patent rights, or you may license them. An assignment is basically a sale of your patent rights - you do not retain any rights to the invention. With a license, you may set certain limits (for example, by restricting the license to a certain period of time or geographic territory), and if the licensee exceeds those limits, you may revoke the license.

It sounds simple enough, right? An assignment is just a contract for the sale of an asset, and a license is a straightforward agreement giving permission to someone to make and sell an invention. Unfortunately, the line between assignments and license agreements is blurry, and there is a whole host of rules surrounding when an agreement will be considered an assignment and when an agreement will be considered a license. If these rules are not followed, then what the parties intended to be a license may in fact be considered an assignment and vice versa.

The U.S. Court of Appeals for the Federal Circuit is the only court that handles appeals in patent infringement cases. In Alfred E. Mann Foundation for Scientific Research v. Cochlear Corp., 604 F.3d 1354 (Fed. Cir. 2010), the Federal Circuit addressed the rules for distinguishing between an assignment and a license. The general rule is that if the patent holder transfers "all substantial rights" to the patent, then the agreement is an assignment. If, on the other hand, the patent holder does not transfer "all substantial rights," then the agreement is a license. A license may be either exclusive or non-exclusive. Thus, there are four scenarios: (1) all substantial rights transferred; (2) substantial rights not transferred and license is exclusive; and (3) substantial rights not transferred and license is nonexclusive. Each of these scenarios is addressed below.

When all substantial rights to the patent are transferred, then the agreement is deemed an assignment even if the parties intended for it to be a license. In determining whether all substantial rights were transferred, courts will consider: whether the license is exclusive (if the license is nonexclusive, the agreement will not be considered an assignment); whether the licensee has the right to sublicense, and if so, whether the agreement requires the sublicensee to pay royalties to the licensor; whether the agreement states that the license is revoked and all rights revert back to the licensor upon material breach of the agreement by the licensee; whether the licensor shares in any recovery of proceeds obtained through patent infringement litigation brought by the licensee; how long the license period is (the longer the period, the more inclined a court may be to treat the agreement as a license); whether the licensor has any contractual right to supervise or control the licensee's activities; whether the licensor or the licensee is responsible for paying patent maintenance fees (the more financial responsibilities are placed upon the licensee, the more likely the agreement will be treated as an assignment); and whether the agreement places any restrictions on the licensee's right to assign the agreement.

The significance of a "license" agreement actually being an assignment is that the patent holder has no standing to sue for infringement. If, applying the above factors, it is determined that all substantial rights in the patent were not transferred, the next question is whether the license is exclusive or nonexclusive. If the license is exclusive, then either the licensor or the licensee may sue for infringement, but in most cases the other party will need to be joined as a party to the litigation. If the license is nonexclusive, then the licensee has no standing to sue, but the licensor may sue without joining the licensee as a party.

In Alfred E. Mann, the court held that the patent holder/licensor (Alfred E. Mann) had not transferred all substantial rights to the licensee because it retained the right to sue in the event the licensee elected not to pursue an infringer, and its right to sue was unfettered (the licensor could decide whether to bring suit, where and when to bring suit, whether and when to settle, etc.). In addition, the court noted that although the licensee had the ability to grant sublicenses, the agreement required sublicensees to pay royalties to the licensor according to a specific formula. Accordingly, the court held that Alfred E. Mann had standing to sue for patent infringement where the licensee had elected not to.


Amicable photo of Toni

Antoinette M. Tease, P.L.L.C.