Federal Circuit Highlights Differences in Statutory and Article III Standing in Patent Cases

On May 1, the U.S. Court of Appeals for the Federal Circuit issued a precedential decision in Intellectual Tech LLC v. Zebra Technologies Corp. reversing a Western District of Texas ruling that dismissed patent infringement claims for lack of constitutional standing. In so doing, the Federal Circuit found that Article III standing was not extinguished by the plaintiff’s default on a patent security agreement that granted a secured third party the right to assign the patents at issue in the appeal.

Default on Security Agreement Gives Third Party Rights to Assign, License Patent

The patent-at-issue in this case, U.S. Patent No. 7233247, is owned by Intellectual Tech (IT) subject to a pair of patent and trademark security agreements with lending organization Main Street Capital Corporation. The first was executed in 2011 by OnAsset, which later created IT as a subsidiary to hold the rights to the ‘247 patent; the second was executed in 2017 between IT and Main Street. In both cases, the party owning the ‘247 patent defaulted on the security agreement, although OnAsset’s default on the 2011 agreement was settled by a forbearance agreement. The terms of both agreements give Main Street the right to “sell, assign, transfer, pledge, encumber or otherwise dispose of” the ‘247 patent.

In the Western Texas lawsuit, Zebra Technologies first raised its affirmative defense on standing both on a motion to dismiss and a motion for judgment on the pleadings. While U.S. District Judge Alan D. Albright denied these motions, he granted a renewed judgment for lack of subject-matter jurisdiction under Federal Rule of Civil Procedure (FRCP) 12(b)(1) when Zebra resumed its standing argument at the summary judgment phase. Because Main Street was capable of assigning the rights to the ‘247 patent when IT defaulted on the security agreement, Judge Albright concluded that Main Street had an unconditional right to license the patent that deprived IT of its exclusionary rights.

IT requested to join or substitute Main Street as a party in the case, but the district court found that the standing issue existed at the time the case was filed and was thus incurable. After IT moved for reconsideration, Judge Albright ruled that, while any license to the ‘247 patent offered by Main Street would be under IT’s name pursuant to power of attorney provisions in the security agreement, Main Street’s right to license deprived IT of Article III standing even though Main Street hadn’t exercised its rights to do so.

Ability to Assign Patent Not a Reasonable Proxy For Determining Exclusive Rights

On appeal, the only question before the Federal Circuit was whether IT demonstrated the constitutional minimum of an injury in fact, one of three requirements for Article III standing under the U.S. Supreme Court’s 1992 decision in Lujan v. Defenders of Wildlife. Even in view of the rights gained by Main Street upon default and the security agreement’s power of attorney provision, the Federal Circuit found that IT retained an exclusionary right to pursue infringement actions despite Main Street’s ability to license the ‘247 patent.

While IT’s interest in the ‘247 patent may not meet the definition of “patentee” as required by 35 U.S.C. § 281, which governs remedies for patent infringement, the Federal Circuit noted that Section 281 is not a jurisdictional requirement in light of the Supreme Court’s 2014 decision in Lexmark International v. Static Control Components. There are different tests for Section 281’s statutory standing requirements and Article III constitutional standing, the Federal Circuit noted, adding that while Article III standing defects are incurable if they exist at the complaint’s filing, statutory standing can potentially be cured by joinder.

Zebra Technologies’ arguments on appeal relied heavily upon the Federal Circuit’s 2010 decision in WiAV Solutions v. Motorola, which the district court drew from to determine that IT lacked constitutional standing. In WiAV Solutions, the Federal Circuit examined constitutional standing in the licensee context and rejected the notion that the plaintiff must be the only party capable of practicing claims to the patent-at-issue to be considered an exclusive licensee. Calling the licensee-versus-patentee distinction between WiAV Solutions and IT’s present appeal critical, the Federal Circuit noted that questions about a party’s ability to license patent rights do not provide a reasonable proxy for determining whether a patentee retains exclusionary rights.

There was no evidence raised by Zebra Technologies that Main Street had elected to exercise the default remedies or power of attorney provisions of either patent security agreement, the Federal Circuit’s decision found. Further, in a footnote discussing joinder issues not present on appeal, the appellate court pointed out that OnAsset, Main Street and IT filed another suit in Western Texas as co-plaintiffs following Judge Albright’s summary judgment dismissal. Although the district court properly found that IT was not automatically divested of rights to the ‘247 patent following default, the Federal Circuit found that Judge Albright erred by addressing Main Street’s option to assign rights to the ‘247 patent instead of the actual state of the patent rights at the time of the ruling.