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From Intellectual Property Law Daily, July 15, 2013

Company lacked standing to sue government for certain expired patents and for patent it did not license all substantial rights

By Peter Reap, J.D., LL.M.

Demodulation, Inc., lacked standing to sue the United States for patent infringement of certain patents that Demodulation had allowed to expire, the United States Court of Federal Claims has determined (Demodulation, Inc. v. United States, July 12, 2013, Braden, S.). Therefore, the Government’s Motion for Partial Summary Judgment, solely as to the post-expiration infringement claims as to the '166, '249, '417, '439, '645, and '771 patents, as alleged in Count III of the Second Amended Complaint was granted.

Moreover, Demodulation did not have an exclusive license and therefore did not have standing to enforce the '591 patent, the court decided. The Government’s Motion For Partial Summary Judgment was granted with respect to Demodulation’s claims regarding the '591 patent and Demodulation’s October 26, 2012 Cross-Motion to join the Institute as an involuntary co-plaintiff was denied.

Background. Demodulation owned patents, trade secrets, and proprietary technology concerning microwire, very fine glass-coated wire used in various defense applications. On or about February 12, 2007, The United States Department of Energy (DOE) entered into a Cooperative Research and Development Agreement (“CRADA”) with Demodulation. Thereafter, DOE “thoroughly vetted and characterized the microwire and its myriad applications,” according to Demodulation’s amended complaint. During this process, Demodulation also disclosed other “proprietary information and trade secrets” to DOE, including: “the composition of the wire, the method for making the wire and variations in its chemistry, means for detecting the wire and proprietary signal processing technology.”

On February 12, 2009, the March 23, 2007 CRADA expired, without DOE agreeing to purchase or license Demodulation’s microwire technology. Thereafter, on information and belief, DOE allegedly disclosed Demodulation’s proprietary technology and trade secrets to Government agencies and private entities, without Demodulation’s authorization.

On January 26, 2010, Demodulation filed a petition with DOE, requesting an administrative dispute resolution be initiated, pursuant to 10 C.F.R. § 782. DOE accepted and acknowledged Demodulation’s petition, but did not otherwise respond.

Since Demodulation received no response to its January 26, 2010 Petition, on April 14, 2011, Demodulation filed a Complaint in the United States Court of Federal Claims, against the United States. At the time the Complaint was filed, Demodulation’s '417, '439, and '771 patents had expired for nonpayment of maintenance fees, but the '166, '249, and '645 patents were viable.

On May 4, 2012, Demodulation filed a Second Amended Complaint with five Counts: Count One - Breach of Express Contract; Count Two - Breach of Implied-In-Fact Contract; Count Three - Patent Infringement; Count Four - Violation of the Takings Clause of the Fifth Amendment as to Demodulation’s trade secrets and other intellectual property; and Count Five - Misappropriation of Trade Secrets. On September 10, 2012, the Government filed an Answer and a Motion For Partial Summary Judgment Relating To The Plaintiff’s Ability To Recover For Expired Patents and the '591 patent, together with exhibits.

Recovery for post-expiration infringement. The Government’s Motion for Partial Summary Judgment states that “the United States cannot be held liable for any alleged manufacture or use of the inventions claimed [under the '166, '249, '417, '439, '645, and '771 patents] after the expiration of those patents,” the court noted.

On April 14, 2011, when the initial Complaint in this case was filed, Demodulation’s '166, '249, and '645 patents were viable, and Demodulation had standing to seek an adjudication of past and ongoing infringement claims as to those patents under 28 U.S.C. § 1498(a), the court held. Subsequently, however, Demodulation failed to pay the maintenance fees on the '166, '249, and '645 patents. In doing so, Demodulation voluntarily relinquished its right to sue for post-expiration infringhement. Demodulation, however, retained standing to seek an adjudication of pre-expiration infringement claims as to the '166, '249, and '645 patents, according to the court. Likewise, Demodulation also had standing to seek adjudication of pre-expiration infringement as to the '417, '439, and '771 patents that expired before the April 14, 2011 Complaint was filed.

As previously stated, Demodulation retained standing to seek an adjudication of pre-expiration infringement as to the '166, '249, '417, '439, '645, and '771 patents, and it may eventually be able to seek damages for ongoing infringement of the '417, '439, and '771 patents. Discovery, specifically as to Counts I, II, IV, and V, will reveal whether the Government engaged in affirmative “misconduct” and made a misrepresentation of fact, on which Demodulation relied in allowing the '417, '439, and '771 patents to expire, the court explained.

Since Demodulation was aware that the Government allegedly was infringing the '166, '249, and '645 patents on April 14, 2011, the date of Demodulation’s initial Complaint, Demodulation’s subsequent decision to allow these patents to expire barred reinstatement under 25 U.S.C. § 41(c)(1).

Standing to seek adjudication of infringement claims regarding '591 patent. The Government argued that USPTO records indicated that the '591 patent was owned by the Romanian National Institute of Research and Development for Technical Physics (“Institute”) and there is no recorded assignment of that patent to Demodulation. Demodulation responded that it is the exclusive licensee of the '591 patent.

As a matter of law, a license that conveys “all substantial rights in the patents-in-suit” is tantamount to an assignment of those patents to the exclusive licensee, conferring standing to sue solely on the license, the court noted. An exclusive licensee that has “less than ‘all substantial rights’” also has standing to sue for infringement, but in such suits the patent owner is an indispensable party who must be joined. Demodulation asserts that on April 10, 2002, the Institute entered into a license agreement that conferred to Demodulation “all significant rights” in the '591 patent.

The United States Court of Appeals for the Federal Circuit has identified the following factors for the trial court to consider in determining whether a license confers “all substantial rights”:

[(1)] the scope of the licensee’s right to sublicense, [(2)] the nature of license provisions regarding the reversion of rights to the licensor following breaches of the license agreement, … [(3)] the duration of the license rights granted to the licensee, [(4)] the ability of the licensor to supervise and control the licensee’s activities … and [(5)] the nature of any limits on the licensee’s right to assign its interests in the patent.

Alfred E. Mann, 604 F.3d at 1360-61.

As to the first factor, Article 12 of the Institute Agreement provides that Demodulation can transfer the invention covered by the '591 patent only to entities of which it “controls directly or indirectly at least 30% of the outstanding shares, stock, or voting rights,” and any such transfers are subject to royalty payments to the Institute. This is a significant limitation on Demodulation’s right to sublicense or assign its interests in the '591 patent and weighs against construing the Institute Agreement as conferring “all substantial rights,” the court reasoned.

As to the second factor, the reversionary rights of the licensor have not been held to be a barrier to the transfer of all the substantial rights to a patent. But, a provision that allows the termination of a licensing agreement, if the licensee does not meet certain benchmarks, has been recognized as the retention of a substantial right by the licensor. The Institute Agreement provides that Demodulation’s license can be terminated, in the event of a breach of any one of the conditions provided therein. Therefore, this factor weighed against construing the Institute Agreement as one that confers “all substantial rights” of the '591 patent to Demodulation, the court determined.

The third factor, however, supported Demodulation’s position that it has an exclusive license, because the term of the Institute Agreement is equal to the life of the '591 patent. The fourth factor cut against Demodulation, because the Institute has the right to exercise significant supervision over the use of the '591 patent. Although the Institute did not exercise control over Demodulation’s activities, it did exercise significant supervision, suggesting that Demodulation does not have all significant rights under the '591 patent, the court observed.

In addition to the above factors, the Federal Circuit has held that “an important substantial right is the exclusive right to sue for patent infringement. The Institute Agreement, significantly, did not provide Demodulation with the express right to sue for third-party infringement. The Institute Agreement, however, did contain an integration clause, whereby the Institute conveyed to Demodulation only those rights enumerated therein.

On balance, these factors weighed against determining that the Institute Agreement transferred to Demodulation “all substantial rights” or “all significant rights” under the '591 patent, the court decided. As such, Demodulation did not have standing to sue for infringement of the '591 patent as the sole plaintiff.

In the alternative, Demodulation argued that if it did not have standing to sue on its own, the Institute should be joined as an involuntary co-plaintiff. It was true that the Institute agreement explicitly stated that the Institute conferred an exclusive license on Demodulation. But simply using the word “exclusive” was not sufficient to confer standing to sue for infringement, according to the court. The Institute Agreement does purport to give Demodulation the exclusive right to make, use, and sell the patent.

As a matter of law, the reservation of the right to license to others defeated any claim that Demodulation may have to being an exclusive licensee, because the Institute can grant to others the right to practice the patented invention.

The case is No. 11-236.

Attorneys: Benjamin D. Light (Aromando, Light & Croft, LLC) for Demodulation, Inc. Gary Lee Hausken (United States Department of Justice) for the United States.

Companies: Demodulation, Inc.

MainStory: TopStory Patent

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