Define Frustration: Appealing from Decision in Suit Against Co-Owner’s Wholly Owned Subsidiary with Major Issues Still Undecided

By on October 22, 2020
Posted In Patents

The US Court of Appeals for the Federal Circuit vacated a grant of summary judgment of non-infringement and remanded for resolution of numerous factual issues in a case addressing “extremely frustrating” issues involving the litigant’s failure to differentiate statutory prerequisites for bringing suit under 35 USC §262 and Article III standing, waiver of a co-owner’s right to refuse to join a patent enforcement action, and the existence of an express or implied license. AntennaSys, Inc. v. AQYR Techs., Inc., Case No. 19-2244 (Fed. Cir. Oct. 7, 2020) (O’Malley, J.).

AntennaSys and Windmill International are co-owners of the patent in suit. AntennaSys and Windmill entered into a license agreement pursuant to which Windmill acquired an exclusive license to AntennaSys’s one-half interest in the patent in two separate markets. In exchange, AntennaSys was entitled to a royalty of 3% of gross sales. Windmill was also required to create a wholly owned LLC, GBS Positioner, which would own both the license interest and Windmill’s ownership interest in the patent. In the event that Windmill failed to meet the minimum sales targets, the exclusive license became non-exclusive and either party was granted the right to commence a lawsuit against “third party” infringers.

Windmill did not meet its sales targets. AntennaSys subsequently brought suit against AQYR Technologies, a wholly owned subsidiary of Windmill, for patent infringement and several state-law claims. The suit named Windmill as a co-defendant. Following claim construction, AntennaSys conceded that it could not prevail on its patent infringement claim under the court’s construction of one of the claim terms. In an apparent attempt to moot the affirmative defenses of invalidity and unenforceability, AntennaSys sought summary judgment of non-infringement, which the district court granted. Additionally, after a hearing where AntennaSys admitted that its state law claims were dependent on the success of its patent infringement claim, the court entered judgment in favor of defendants on the state law claims. AntennaSys appealed.

AntennaSys challenged the district court’s claim construction. Windmill and AQYR countered that the Federal Circuit need not reach the merits because AntennaSys “lacks standing” to bring an infringement action in federal court absent joining co-owner Windmill as a co-plaintiff.

The Federal Circuit agreed that the need to join Windmill as a co-plaintiff was a threshold question, but stressed that the issue did not affect AntennaSys’s Article III standing. Instead the issue stemmed from AntennaSys’s ability to satisfy the statutory prerequisites for bringing an infringement action. Under 35 USC § 262, each joint owner of a patent may make, use, offer to sell, or sell the patented invention without the consent of, and without accounting to, the other owners. Furthermore, in order to bring an action for infringement, all co-owners must be joined as plaintiffs. The Court acknowledged two exceptions to this rule: (1) when any patent owner has granted an exclusive license, and (2) when a co-owner waives its right to refuse to join an infringement action.

As the license in this case had morphed into non-exclusive status, the question became whether Windmill waived its § 262 challenge by failing to raise the argument earlier under Fed. R. Civ. P. 12(b)(6). The Federal Circuit noted that dismissal of an action for failure to state a claim for relief should be asserted in a responsive pleading, a motion for judgment on the pleadings or in a motion to dismiss at trial, and that absent “unusual circumstances” the defense may not be presented for the first time on appeal. However, given the unusual procedural path here, the Court found the appellate record insufficient to determine whether a waiver had occurred, noting that “it may be that [the issue] remained live pending a trial that never occurred or that this case presents ‘unusual circumstances’ warranting consideration of the issue even after final judgment. We decline to read into the appellate record a waiver that the district court is better positioned to address.”

Even if a waiver had occurred, however, the Federal Circuit noted that AQYR may still have avoided a finding of infringement based on an explicit or implied license. Acknowledging that as a co-owner, “Windmill had every right to license the patent,” the Court next attempted to analyze the license agreement itself. Unfortunately, “review of the agreement produce[d] more confusion than clarity.” Not only was there no evidence of an express or implied license to AQYR, the Court noted that under the agreement Windmill was to create and assign all its interest in the patents to GBS Positioner. Despite some evidence that this entity had been created, there was no discussion in any of the briefings as to GBS Positioner’s role or whether it should be included as an indispensable party to the litigation.

Ultimately, the Federal Circuit remanded to the district court to address these numerous issues, including whether Windmill waived the right to object to AntennaSys’s failure to meet the § 262 prerequisites; whether GBS or Windmill holds or retains ownership interest in the patent; and whether there exists an express or implied license to AQYR.

Practice Note: In its conclusion, the Court expressed that “[t]his exercise has been an extremely frustrating one for the court,” noting that “just as bad facts can make bad law, misdirected lawyering can do the same.” No matter how strong a case may be on the merits, this opinion serves as a reminder of how important it is to timely observe all relevant procedural requirements.

 

 

Thomas DaMarioThomas DaMario
Thomas DaMario focuses his practice on intellectual property litigation and patent prosecution. Read Thomas DaMario's full bio. 

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