Transfer of “All Substantial Rights” in a Patent Licensing Agreement

Transfer of “all substantial rights” in a patent from a patentee/licensor to a licensee is essential for the licensee’s standing to sue an infringer (i.e., right to enforce the patent) in courts.  Despite parties’ intent to transfer “all substantial rights” in a patent license agreement, the actual terms in a licensing agreement are more dispositive on whether the licensee has the “substantial rights” and therefore the standing to enforce/sue.

An analysis of case laws suggests that a court tends to inquire into two fundamental questions in determining whether a licensing agreement has transferred all substantial rights in a patent from a patentee/licensor to a licensee.  Therefore, to ensure the transfer of all substantial rights transferred by a licensing agreement, a licensor should check the effect of each term in the agreement against the two fundamental questions to understand whether any term prevents the transfer of all substantial rights.

Fundamental property rights inquiry

Similar to rights in a personal property, ownership (i.e., substantial rights) to a property (such as a patent) includes the rights to use, exclude others from using, and dispose such property freely.  Therefore, any substantive encumbrance to these rights prevents a transfer of all substantial rights.

Based on this inquiry, in order to transfer all substantial rights, a license agreement must assure that the licensee:

-          -- has the right to make, use, sell, and offer for sale the patented invention.

-         --  has the right to license to others and/or grant sublicenses to others

o   without being subject to the patentee/licensor’s veto rights to the proposed assignments of the exclusive license, especially a veto right in the patentee/licensor’s sole discretion.

-        --  has the exclusive right to assert the patent

o   without joining the patentee/licensor

o   without being subject to or junior to any other party’s right to assert

o   without having to seek consent from the patentee/licensor; veto rights by the patentee/licensor will defeat a transfer of all substantial rights.

o   it is ok that the patentee/licensor share in an insubstantial part of the exclusive licensee’s monetary recovery received from patent infringers.

o   It is ok that the licensee has the duty to keep the patentee/licensor informed and consult with the patentee as to any litigation and settlements.

Public policy inquiry

The policy reason behind the requirement that an exclusive licensee/assignee must have “all substantial rights” in order to have the standing to sue is to avoiding the multiplicity of lawsuits against the same infringer arising from the same act. 

Based on this inquiry, in order to transfer all substantial rights, a license agreement must assure that:

-         --  the patentee/licensor does not divide up the exclusive license by the patent’s claims or the fields of use and that the licensee has the exclusive right to concurrently assert the patent in all domains, whether commercial or non-commercial or otherwise; any division of enforcement rights by fields of use will defeat a transfer of all substantial rights.

-         --  there is preferably no prior licenses to the patent.

-       --  the agreement does not grant the patentee/licensor a reversionary interest in the patent except for bankruptcy or objectively egregious breaches of the agreement; at will termination of the license agreement by the patentee/licensor will prevents a transfer of all substantial rights.

-         -- the license to the underlying patent lasts the remaining term of the patent; an exclusive license with a termination date before the expiration of the patent will prevent a transfer of all substantial rights in the patent.

-         -- it is ok that the patentee/licensor grants to an exclusive licensee all substantial rights in a specific geographic area of the United States; a division by geographic areas is ok.

Thanks for reading.

Connie

cwan@patentonomy.com