When inventors give an exclusive license on a patent to a third party, they may be giving up more than they understand. These license agreements are often tantamount to fully transferring all rights in the invention to someone else. Exclusive licenses can be used when an inventor conceives a novel device but does not feel they have the financial resources or the desire to proceed with a commercial endeavor. The inventor is able to reap the financial benefits of their invention while continuing, and funding, their concentration in innovation. This scenario is what occurred in a recent U.S. Court of Appeals for the Federal Circuit case decided on May 14th, 2010 involving the Alfred E. Mann Foundation for Scientific Research and the Cochlear Corporation.
The Alfred E. Mann Foundation for Scientific Research (“AMF”) is a foundation designed to innovate solutions to increase the quality of life of individuals suffering from debilitating medical conditions. One such innovation came in the form of a cochlear implant, also referred to as “bionic ears.” These devices are implanted in the ear of a deaf or mostly deaf person in order to allow a level of hearing. Upon completion of the device and retention of a patent, AMF decided to license the patent to Advanced Bionics (“AB”). AB is a “for profit” company that sells cochlear implants. The two organizations entered into a license agreement granting certain rights to each party. A summary of the pertinent rights granted to each party include:
* Exclusive right to make
* Exclusive right to have made
* Exclusive right to use
* Exclusive right to lease
* Exclusive right to offer to lease
* Exclusive right to sell
* First right to sue
* Right to settle
* Secondary right to sue
* Right to portion of recovery
* Right to settle if initiated suit
* Right to prevent assignment by AB on reasonable grounds
* Right to terminate license for nonpayment
During the course of this relationship, AMF informed AB of an alleged infringement by Cochlear Corporation (“CC”). CC is a manufacturer and seller of hearing devices, in particular, cochlear implants. AMF inquired whether AB would proceed with an infringement lawsuit against CC, since due to their licensing agreement, AB had the first right to sue. Upon receiving AB’s decision not to file a lawsuit, AMF filed suit. CC became aware of the license agreement between AMF and AB during pretrial discovery and moved to have AMF’s suit be dismissed for lack of standing. CC claimed that AMF had given up any right to sue when it gave an exclusive license to AB. The district court agreed and dismissed the case. AMF appealed that decision to the Court of Appeals for the Federal Circuit. In its recent decision, the Federal Circuit reversed that dismissal and found that AMF did have standing to sue CC for alleged infringement.
The established rule is that a transfer of all substantial rights in a patent (the right to make, sell, use, etc.) in the form of an exclusive license acts as an assignment of the patent which would grant the sole right to file suit on the licensee, in this case AB. To resolve this issue, the Federal Circuit decided it needed to resolve two questions: first, was the license exclusive, and second, what was the scope of the license. Regarding the first question, the court quickly concluded that the license agreement was exclusive since both parties conceded it was, as did the language of the agreement itself. As for the second question, the court underwent a more in-depth analysis.
Using the common legal illustration of a bundle of rights, each right representing a singular distinct privilege pertaining to the patent, the court found that as more and more rights were transferred to the licensee, the less likely the licensor was to be found to have retained enough interest in the patent to file suit. These rights include the right to make, sell, use, sublicense, recover in the event of a suit, supervise licensee, pay maintenance fees, and right to assign. However, the most important factor, though not solely determinate, was the right of the licensee to bring suit set against the licensor’s retained right to file suit, if any. Since, in this case, AB had first right to sue bundled with sole control of litigation, but upon refusal of that right, AMF retained the right to file suit with sole control of litigation, the court determined that AMF did have a right to sue. In order for that right to be exercised; however, AB must first refuse to file suit, at which time the right vests in AMF. This is exactly what had occurred and the court reversed the dismissal.
From the court’s decision, the main point to understand is that had AMF not explicitly retained the right to sue upon AB’s refusal to do so this case would have been upheld finding that AMF lacked standing to sue. That simple retention of the secondary right to file suit enabled AMF to protect its patent even thought it had an exclusive license agreement with AB. While other factors did weigh into the decision, the secondary right to sue clause as it appeared in this licensing agreement carried the most weight.
 Alfred E. Mann Foundation for Scientific Research v. Cochlear Corp., No. 09-1447 (Fed. Cir. May 14, 2010).
 Alfred E. Mann Foundation, No. 09-1447, slip op. at 2-4.
 Alfred E. Mann Foundation, No. 09-1447, slip op. at 4.
 Id. at 5.
 Id. at 14.
 Vaupel Textilmaschinen KG v. Meccanica Euro Italia SpA, 944 F.2d 870, 873-74 (Fed. Cir. 1991).
 Alfred E. Mann Foundation, No. 09-1447, slip op. at 7-8.
 Id. at 10.
 Id. at 13.
 CC attempted to argue that since AB could license to anyone, AB could just license to anyone AMF decided to file suit again; therefore, the AMF right to file suit was illusory. The court did not agree. It held that the licensing by AB was restricted by the requirement to pay royalties to AMF. Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245 (Fed. Cir. 2000); Abbot Labs v. Diamedix Corp., 47 F.3d 1128 (Fed. Cir. 1995).