A Cautionary Tale for Universities about Patent Ownership Rights from the Lone Star State

A recent decline in patent litigation has beenattributed to the evolving patent eligibility standard, as well as to an increase in post-grant review proceedings at the Patent Office, now reported to be “the second-biggest forum for patent disputes in the country.”¹ If this foreshadows the impending demise of the U.S. patent system, someone forgot to tell research universities.

Universities have steadily increased patenting and licensing their new technologies.² Over 800 new companies were created in 2013 as a result of technology transfer, representing a 16% increase over 2012. And the pipeline in no way looks to be drying up—over 25,000 new patent applications were filed last year by universities, who, collectively, were issued over 5,700 new patents.³ What is being patented? Not surprisingly, many universities are actively protecting their innovations in biotechnology, including the University of Texas.⁴

Looking down the road, as all patent holders do, universities undoubtedly consider the prospect of litigating their patents. Statistically, infringement suits brought by universities tend to be far more successful than suits brought by other entities that do not practice their own inventions.⁵ But whether or not a university desires to be part of an enforcement suit will vary, so care must be taken to draft license agreements that reflect the patent holder’s desires.

In the United States, only a patent owner or its exclusive licensee may bring an infringement suit.⁶ In some instances, when an exclusive licensee has not obtained all substantial rights in a patent, it must join the patent holder in suit.⁷ However patent holders—including universities—cannot necessarily count on being able to join suits brought by their exclusive licensees. In some cases, they may have transferred away enough of their rights so that only their licensee may enforce the patent. A Texas non-profit, Tri-County, recently found this out the hard way.

Tri-County exclusively licensed a wireless communication patent to another Texas company, Azure. In doing so, it granted Azure the exclusive rights to use the technology, as well as full enforcement and sublicensing rights.⁸ Azure was also given the ability to assign its rights, and the right to control any future prosecution. The patent holder, Tri-County, kept only the following rights for itself: (1) the right to receive a percentage of any litigation or licensing proceeds; (2) a non-exclusive right to practice the patented technology; (3) the right to terminate the license agreement if Azure was in breach; and (4) revisionary rights for the last two years of the patent’s term, should Azure choose not to renew the license.

Tri-County and Azure filed a patent infringement suit as co-plaintiffs against numerous defendants, only to face a motion to dismiss Tri-County, which the district court granted. In its view, Tri-County’s exclusive license to Azure transferred so many rights under the patent that it amounted to an assignment.⁹ On appeal, the Federal Circuit agreed.

Tri-County had completely assigned enforcement rights to Azure, failing to retain any control over litigation or settlement. Although it had a non-exclusive right to practice the technology, it was Azure that had the ability to sublicense, or to exclude. Tri-County’s other retained rights—the right to proceeds, a right to terminate for breach, and potential revisionary rights (should Azure decline to extend the agreement)—were insufficient to demonstrate any of the retained ownership rights.

Lesson of this story?  Carefully draft license agreements. Universities, in particular, often have a vested interest in participating in patent enforcement efforts. This tale from Texas makes clear that universities need to know what rights they are transferring, what rights they are retaining, and what rights are needed to maintain standing as a co-owner for litigation.