Property, intangible

a blog about ownership of intellectual property rights and its licensing

Not Clever Enough Yet

Oh those patent trolls, cleverer and cleverer. To try to keep their cases in Texas, NPEs have rented empty office space in Texas and “anchored” lawsuits with Texas defendants, a tactic that the AIA put to an end. But never underestimate a plaintiff who wants the Texas venue.

Azure Networks acquired patents and then collaborated with a local charity, the Court Appointed Special Advocates of Harrison County, to form Tri-County Excelsior Foundation, a Texas non-profit corporation. Azure donated multiple patents and applications to Tri-County, including the patent-in-suit. Tri-County then licensed back the patent to Azure, the defendants allege in order to further establish venue in the Eastern District of Texas and to offset Azure’s tax liability with a charitable donation.

Azure and Tri-County sued for patent infringement and the defendants moved to dismiss Tri-County from the case. The defendants argued that so many rights were transferred back to Azure in the license agreement that it was a “virtual” assignment back to Azure, leaving Tri-County without standing.

And the defendants were right. As Stephens Media learned with the Righthaven copyright cases, an assignment is meant to be a surrender of the fundamental rights attendant to ownership, so if you’re not really willing to surrender them then your assignment will fail. Azure had read the case law and tried to structure a license that would work, but the Federal Circuit wasn’t fooled.

So what rights did Tri-County give back to Azure in the license agreement? Azure had the exclusive, worldwide, transferable right to practice any invention in any manner under the patent, the right to enforce it, and to sublicense it, including settling suits without Tri-County’s consent. Tri–County was obligated not to encumber the patent and to participate in litigation at Azure’s request and in Azure’s sole discretion. In exchange, Tri-County would get 33% of the proceeds from Azure’s litigation or licensing activities for the first five years and 5% after that. The license was to expire two years before the end of the patent term, but Tri–County had the option to renew for two one-year increments. Tri–County also reserved for itself “a royalty-free, personal, non-transferable, non-exclusive right” to practice the patent.

The court noted that “Azure’s exclusive right to sue, exclusive license, and freedom to sublicense are factors that strongly suggest that the Agreement constitutes an effective assignment.” Tri-County’s lack of control over the litigation was also telling, since retaining control is “critical to demonstrating that the patent has not been effectively assigned.”

Tri-County’s own right to practice the patent didn’t change the balance: “in this case, this factor has little force as Tri–County does not make or sell any products, and the evidence on record suggests that Tri–County will not make or sell any products in the future.” Tri-County could terminate the license for breach, including for Azure’s failure to exercise good-faith judgment in monetizing the patents, but “Tri–County does not explain—nor can we envision—how a general good-faith requirement that inures to the financial benefit of both parties, with nothing more, would allow Tri–County to trump Azure’s express and unilateral rights and exert control over Azure’s licensing or litigation decisions.”

And the expiration of the agreement before the end of the patent term wasn’t enough to salvage the license either. “Such short patent term life following expiration, coupled with the rolling renewal cycle that can extend to the end of the patent’s term, provides another indicator that Tri–County transferred all substantial rights to the patent.”

The Federal Circuit therefore affirmed district court’s dismissal of Tri-City from the suit. Although I’m not sure why it matters.

Azure Networks, LLC v. CSR PLC, No. 2013-1459 (Fed. Cir. Nov. 6, 2014).

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