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Future of Patent Licensing Deals on the Line at Federal Circuit

Sept. 6, 2022, 8:01 AM

The Federal Circuit will probe Tuesday whether a patent owner who gives the ability to sublicense a patent can still sue another for infringement in a case that could have implications for similar transactions.

Uniloc Luxembourg SA has suffered a series of district court losses in its infringement suits against Motorola Mobility LLC, Apple Inc., and Google LLC over its deal with a Fortress Investment Group affiliate. When Uniloc defaulted on a Fortress loan it used to pay for the lawsuits, it triggered a provision in the deal that ceded its patent sublicensing rights to Fortress.

Uniloc no longer had exclusionary rights to the patents and thus didn’t have legal standing to sue, judges in Delaware and the Northern District of California ruled. The cases have now reached the US Court of Appeals for the Federal Circuit. A ruling that speaks to the issue would affect similar types of litigation funding transactions, which have gained popularity in recent years, attorneys said.

“The most important thing that’s going to come out of this case, we hope, is a clear answer on the question of standing in patent law and whether or not someone who has some rights to a patent—but not enough rights to exclude from the market—can actually bring suit,” said Matt Warren, the founding partner of Warren Lex LLP. “The result will likely have a big effect on a bunch of other big transactions.”

‘Blow Up’ Financing Deals

Uniloc and its exclusive licensee, Uniloc USA Inc., initially filed suit in 2018 in the District of Delaware, alleging Motorola’s Android devices that allow users to pair a smartphone with a wearable device infringed its US Patent No. 6,161,134, which covers receiving phone calls on a smartwatch.

When Uniloc sought litigation funding, Fortress agreed to loan $26 million the company in exchange for a share of future licensing revenue from its patents. Uniloc gave Fortress a license in its patent portfolio as security, which would allow Fortress to sublicense the patents if Uniloc defaulted. The arrangement is similar to those used by other owners of patent portfolios, Warren said.

Motorola argued that because Uniloc defaulted on the loan, Fortress’ new ability to sublicense the patent deprived Uniloc of any exclusionary rights in the patent. The US District Court for the District of Delaware agreed with Motorola and dismissed the suit.

Uniloc will argue to the Federal Circuit that standing shouldn’t be contingent on a “conditional (but never-exercised) right to sublicense the patent,” according to its opening brief.

Uniloc’s situation shows the “peril of that arrangement” for the patent owner, Warren said. If the Federal Circuit now sides with Motorola, new transactions will need different ways of ensuring lenders have security without depriving the companies of their right to enforce their patents, he said.

“If the defense is right, then a bunch of transactions written before the plaintiffs were thinking about these issues could blow up,” Warren said. “Separately from that, future transactions would be structured differently to avoid this issue.”

Ruling Toss-Up

While the Federal Circuit could avoid the issue altogether—Motorola is also arguing that Uniloc is estopped from bringing the suit because a judge in the Northern District of California already dismissed Uniloc’s suit against Apple—the issue would still return, attorneys said.

“There’s a lot of money at stake,” Warren said, “and there’s a lot of cases.”

These kinds of licensing deals are one part of a burgeoning litigation financing industry. Patent litigation attracted 29% of the $2.8 billion that litigation funders committed to new deals in the US market in 2021, according to a report by Westfleet Advisors that put the industry’s total assets under management at $12.4 billion.

A number of other cases on the standing question are already percolating, said Dmitry Kharshtedt, a law professor at George Washington University.

The Federal Circuit and other courts have inconsistently applied standing rules, Uniloc argues in its opening brief, saying courts have “struggled to define what an exclusive licensee is.”

“That struggle has been exacerbated by inconsistent rulings about the meaning and scope of the right to exclude that comes with a patent,” Uniloc said in the opening brief. “The resulting body of case law for constitutional standing in patent cases lacks coherence and breeds confusion.”

TheFederal Circuit has held in some decisions that any licensing at all defeats the exclusionary right and means the patent owner doesn’t have standing, Kharshtedt said, but other cases have gone the other way.

“The main question here is the lack of clarity in the law,” Kharshtedt said. “There are cases going the other way. This is one of those areas where cases literally go both ways.”

Clarity Needed

The case presents a good vehicle for the Federal Circuit to provide clarity on what precedent should be followed after the Supreme Court’s decision in Lexmark International Inc. v. Static Control Components Inc., said Megan La Belle, an intellectual property and procedure professor at Catholic University’s Columbus School of Law.

Lexmark clarified that whether a plaintiff satisfies the requirements of a statute is not a question of standing under Article 3 of the Constitution. Though, lower courts still struggle to apply the proper law, La Belle said.

Two Federal Circuit cases on the issue—Lone Star Silicon Innovations LLC v. Nanya Tech. Corp. and Schwendimann v. Arkwright Advanced Coating, Inc.—seem to be in conflict, she said.

To make it clear which precedent to follow, the full Federal Circuit may need to hear the issue, or the Supreme Court may need to step in, La Belle said.

“This is potentially a good vehicle but they need to make clear what is no longer good law to lower courts and litigants,” she said. “There’s still a lot of confusion in this area.”

To contact the reporter on this story: Samantha Handler in Washington at shandler@bloombergindustry.com

To contact the editors responsible for this story: Tonia Moore at tmoore@bloombergindustry.com; Adam M. Taylor at ataylor@bloombergindustry.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com