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A licensee could not sue for patent infringement

Monday, March 18, 2019   (0 Comments)
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A licensee could not sue for patent infringement where the patent owner, a state university, retained substantial rights in the patents and preserved its sovereign immunity

By John Paul, Brian Kacedon, Cecilia Sanabria, Clara Jimenez, and Jorge Gonzalez

Edited by John Paul, Brian Kacedon, Cecilia Sanabria, and Clara Jimenez

Abstract: A Texas court dismissed a patent infringement suit because the plaintiff did not have standing to bring the lawsuit without joining the patent owner and could not involuntarily join the patent owner.   The patents were owned by a state university who retained substantial rights under the patent, so the state university needed to join the lawsuit as a party for the lawsuit to proceed. But the state university was able to refuse to join the lawsuit because it was entitled to sovereign immunity as a government agency and it did not waive its sovereign immunity rights under the Eleventh Amendment.

Background

The Board of Regents of the University of Texas System (“UT”) owned the rights to two U.S. patents directed to methods for inducing an immunologic response to treat cancer. UT granted an exclusive license to commercialize the patented methods to a third party that in turn assigned those rights to Gensetix.

William Decker, one of the named inventors, developed the patented methods during his tenure at UT. Decker then left UT to join Baylor College of Medicine (“BCM”) where he continued working on developing cancer treatments. Believing Decker was still using the patented technology at BCM, Gensetix approached BCM and Decker to assert its patent rights and acquire any rights to improvements or new discoveries from Decker’s continued use of the patented methods. Decker allegedly interfered with the negotiations between Gensetix and BCM, and BCM eventually assigned its rights for any developments to a different company, Diakonos. Diakonos offered to sublicense the patents from Gensetix, but Gensetix declined and instead sued BCM, Decker, and Diakonos asserting civil conspiracy, interference with contracts, and patent infringement. Gensetix also sought to join UT as an involuntary plaintiff pursuant to Fed. R. Civ. P. 19(a).

BCM and Decker moved to dismiss the complaint for failure to state a claim. UT also filed a motion to dismiss alleging that because it is an arm of the state of Texas, it is immune from suit pursuant to the Eleventh Amendment. The court focused its opinion on UT’s motion and the issues of sovereign immunity, standing, and Rule 19 joinder, and ultimately dismissed the case.

The Gensetix Decision
The court began its decision addressing the issue of sovereign immunity and the Eleventh Amendment, clarifying that the Eleventh Amendment does not necessarily deprive federal courts of subject matter jurisdiction. Instead, the court explained that the Eleventh Amendment confers a waivable immunity upon sovereign entities, which means the entities can waive their immunity and allow a federal court to hear and decide a case against it.

Gensetix cited Supreme Court and Federal Circuit precedent to argue that the Eleventh Amendment should not bar its joinder of UT. The court, however, disagreed and distinguished the cited precedent because (1) the patent owner was a private company, not an arm of the state in one case and (2) the sovereign entity in the other case had agreed to participate in the original lawsuit. The court explained that the purpose of the Eleventh Amendment is to prevent states from being compelled to litigate when the state neither initiated nor agreed to participate in the lawsuit. Here, because UT was clear from the beginning, in that it is not voluntarily joining the suit, the court reasoned that UT did not waive its immunity and could not be coercively joined.

Next, the court considered whether Gensetix had standing to bring the suit on its own, without UT. In order to be able to sue on its own, Gensetix was required to establish that it possessed “all substantial rights” in the patents.  The court ultimately found, however, that UT retained “substantial rights” in the patent.

The court first considered whether UT retained a right to sue under the patents, noting that that most courts find the transfer of the right to sue to be the most critical. Here, although Gensetix had a contractual obligation to sue infringers, if it failed to do so within six months, the right to sue reverted to UT. The court reasoned that UT’s reversion of broad rights to control litigation—including whether, when, and where to bring suit, what claims to assert and damages to seek, whether to seek injunctive relief and settle the litigation, and any settlement terms—is inconsistent with the assignment necessary to confer standing to a licensee and found this factor weighed against Gensetix. The court also relied on the fact that UT retained its right to practice and certain limited rights to license the patent for non-commercial use. In addition, Gensetix’s rights were subject to termination, at which point they may revert back to UT, if (1) UT invoked its secondary right to sue, (2) Gensetix failed to take steps towards commercializing or commencing clinical studies directed towards human treatment within a certain time frame, or if (3) Gensetix’s sublicensees do not commercialize the patent. On balance, the court determined the rights retained by UT weighed against a finding that the license agreement conveyed “all substantial rights” to Gensetix, and therefore, UT was a required party in a patent infringement suit.

Lastly, the court considered the issue of joinder based on the factors set forth under Federal Rule of Civil Procedure 19, which governs whether a party is required to join a litigation. Only one of the four factors (whether the plaintiff would have an adequate remedy if the action were dismissed for nonjoinder) weighed against dismissal. In dismissing the case, the court explained that while a dismissal may be harsh, it is an inherent risk for anyone choosing to contract with a sovereign entity.

Strategy and Conclusion
Licensees seeking to license patent rights from a government entity should consider whether having the ability to enforce those rights in the future may be important or necessary.  If so, those licensees may consider language in the license agreement ensuring all substantial rights in the patent are transferred or obtaining the licensor’s advance agreement to join it in any litigation.

Further Information

The Gensetix decision can be found here.

Editors and Authors

The editors and authors are attorneys at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP.

John Paul                         john.paul@finnegan.com
Brian Kacedon               brian.kacedon@finnegan.com
Cecilia Sanabria             cecilia.sanabria@finnegan.com
Clara Jimenez                 clara.jimenez@finnegan.com
Jorge Gonzalez              jorge.gonzalez@finnegan.com

This article is for informational purposes only and does not constitute legal advice.
The views expressed do not necessarily reflect the views of LES or Finnegan.


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