(L to R) Douglas R. Nemec and Chris McKinley, Skadden, Arps, Slate, Meagher & Flom (Photo: Courtesy Photo)

In Lone Star Silicon Innovations v. United Microelectronics, Nos. 2018-15 82 (Fed. Cir. May 30, 2019), the U.S. Court of Appeals for the Federal Circuit discussed how restrictive patent assignment agreements can prevent a party from suing for patent infringement. A patentee, or one who has “all rights or all substantial rights” in a patent, can assert that patent in an infringement suit. A party with rights to a patent, but lacking “all rights or all substantial rights” in it, is merely a patent licensee who cannot bring an infringement suit on its own. Instead, the patentee must join the licensee's suit in order for it to proceed.

Patentees may and often do transfer patent rights in transactions governed by assignment agreements, which, like any contract, differ in substance and form. Some assignment agreements convey “all right, title and interest” in a patent to the purchaser, whereas others reserve certain rights for the seller or place restrictions on what the purchaser can do with the patent. A transfer of patent rights that falls short of conveying “all right, title and interest” is a license, not an assignment. But even when an agreement includes an “all rights” provision, the seller will retain his patentee status if the agreement places too many restrictions on the purchaser or reserves too many rights for the seller. That is, depending on its terms, an assignment agreement may actually constitute a license, even if contrary to the parties' intentions. So, when patents are assigned, the question of who has “all rights or all substantial rights” in it, and, thus, who can bring suit for infringement, depends entirely on the nature of the agreement. The Federal Circuit addressed these issues in Lone Star.

The patents at issue were originally assigned to Advanced Micro Devices (AMD), then later to Lone Star Silicon Innovations LLC. Their assignment agreement purported to convey to Lone Star “all right, title and interest” in the patents, but also reserved certain rights for AMD, and placed restrictions on Lone Star. For instance, AMD and its customers retained a license to use the patents, and AMD retained the right to share in any licensing royalties that Lone Star collected. Lone Star could only assert the patents against third parties that were specifically named in a list, and additions to the list required AMD's approval. If Lone Star sued an unlisted party, AMD could sublicense the patent to that party, effectively mooting the suit. Also, Lone Star could only transfer the patents with AMD's consent, and only to a party who agreed to comply with the terms of the agreement.

Thereafter, Lone Star asserted the patents against a number of defendants not named in the list. After reviewing the assignment agreement and its provisions, the defendants moved to dismiss the suit, arguing that Lone Star was only a licensee who lacked statutory standing to bring suit on its own. The district court agreed, dismissing the case, and Lone Star appealed.

On appeal, Lone Star argued that because the agreement contained an express “all right, title and interest” provision and gave Lone Star assertion rights, the agreement was effectively an assignment. The Federal Circuit disagreed and confirmed the district court's finding that Lone Star lacked all or substantially all rights to the patent. In so doing, the court elevated substance over form, placing more weight on the legal effect of the provisions than on labels or form language. The court also noted that in deciding whether an agreement conveys “all or all substantial rights,” it considers how the agreement impacts the parties' rights to use, assert, license, or transfer the patents. Applying these principles, the court held that because AMD retained the right to use, license, and collect royalties from the patents, and because Lone Star's enforcement and transfer rights were controlled by AMD, the agreement did not convey all or all substantial rights to Lone Star. But even though the court held that Lone Star was not the patentee and could not assert the patents on its own, the court remanded the case for a determination of whether AMD could be joined as a necessary party under Rule 19.

In the wake of Lone Star, parties transacting for patent rights ought to consider whether the controlling agreement might constitute a license, even if it purports to be an assignment agreement. To that end, parties should keep in mind that a pro forma recitation like “all right, title and interest” will not, by itself, suffice to convey all or substantially all rights in a patent. To ensure that the agreement is in fact an assignment, and not merely a license, parties should limit the patent rights retained by the seller, and also the restrictions imposed on the buyer.

Douglas R. Nemec is a partner at Skadden Arps Slate Meagher & Flom who concentrates his practice on intellectual property litigation and related counseling, including providing intellectual property advice in connection with corporate transactions.

Christopher McKinley is an associate in the firm's intellectual property litigation group.