Opinion
Case No. 22-cv-02453-JST
2023-03-31
FLOW DEVICES AND SYSTEMS, INC., Plaintiff, v. PIVOTAL SYSTEMS CORPORATION, Defendant.
Joshua Osborn, Stephen Michael Lobbin, SML Avvocati P.C., San Diego, CA, Stephen M. Lobbin, One LLP, Newport Beach, CA, for Plaintiff. Richard T. Mulloy, Richard Thomas Mulloy, DLA Piper LLP, San Diego, CA, Matthew Ganas, Pro Hac Vice, DLA Piper LLP, New York, NY, Nandan R. Padmanabhan, Boies, Schiller & Flexner, Santa Monica, CA, for Defendant.
Joshua Osborn, Stephen Michael Lobbin, SML Avvocati P.C., San Diego, CA, Stephen M. Lobbin, One LLP, Newport Beach, CA, for Plaintiff. Richard T. Mulloy, Richard Thomas Mulloy, DLA Piper LLP, San Diego, CA, Matthew Ganas, Pro Hac Vice, DLA Piper LLP, New York, NY, Nandan R. Padmanabhan, Boies, Schiller & Flexner, Santa Monica, CA, for Defendant.
ORDER DENYING MOTION TO DISMISS AND MOTION FOR LEAVE TO AMEND
Re: ECF Nos. 36, 41 JON S. TIGAR, United States District Judge
Before the Court are Defendant Pivotal Systems Corporation's motion to dismiss, ECF No. 36, and Plaintiff Flow Devices and Systems, Inc.'s motion for leave to amend its complaint under Rule 15, ECF No. 41. The Court will deny both motions.
I. BACKGROUND
Flow Devices and Systems ("FDS") alleges that Pivotal infringes U.S. Patent No. 7,204,158 ("the '158 patent"). ECF No. 1. The complaint alleges that FDS is the "exclusive licensee" of the '158 patent. Id. ¶ 7. The complaint does not allege what other rights, if any, were transferred to FDS under its license agreement.
Pivotal previously moved to dismiss the suit on multiple grounds, challenging FDS's Article III standing and patentee status under 35 U.S.C. § 281. ECF No. 15. Judge Cormac J. Carney found that FDS has Article III standing to sue based on its exclusionary rights to the '158 patent but declined to rule on whether FDS can enforce the '158 patent in its own name. ECF No. 23. Following a transfer to this district for venue, Pivotal now renews its argument that FDS is not the patentee under Section 281. ECF No. 36. FDS opposes the motion and seeks leave to amend its complaint to add the apparent patent owner - Parker Intangibles, LLC - as a party. ECF No. 41.
Parker Intangibles, LLC is the apparent patentee of the '158 patent based on judicially noticeable facts in the USPTO's assignment history at ECF No. 36-3. Publicly available government records, including USPTO files, are properly subject to judicial notice. See Fed. R. Evid. 201(b); DeHoog v. Anheuser-Busch InBev SA/NV, 899 F.3d 758, 763 n.5 (9th Cir. 2018) (taking judicial notice of "government documents . . . and undisputed matters of public record"); Threshold Enters. v. Pressed Juicery, Inc., 445 F. Supp. 3d 139, 145 (N.D. Cal. 2020) ("Materials in the online files of the USPTO and other matters of public record are proper subjects of judicial notice.").
According to USPTO records, the '158 patent was first assigned to the Parker-Hannifin Corporation. ECF No. 36-3. Parker-Hannifin then assigned the patent to its subsidiary Parker Intangibles, LLC. Id. Parker-Hannifin - "by and through" its Veriflo division in Richmond, CA, and acting "jointly and severally" with Parker Intangibles - licensed the patent to FDS. ECF No. 36-2.
Under the terms of the license agreement, FDS may "make, have made, use, sell, offer for sale, import, and distribute" products practicing the '158 patent. ECF No. 36-2 § 2.1. The license is exclusive within a defined "Field of Use" except with respect to the licensor. Id. FDS may not grant sublicenses without the prior written consent of the licensor. Id. § 2.2. Nor can FDS contributorily infringe or induce infringement of the patent. Id. § 2.1(b). Although FDS has the "first right" to sue suspected infringers within the field of use, it must inform the licensor of any suspected infringement. Id. § 2.3. If FDS "fails to take action to [the licensor's] satisfaction against the alleged infringer" within two months, the licensor retains the right to file its own lawsuit. Id.
II. JURISDICTION
The Court has jurisdiction under 28 U.S.C. §§ 1331 and 1338(a). III. LEGAL STANDARDS
A. Ability to sue for patent infringement
Section 281 authorizes a "patentee" to sue for infringement. 35 U.S.C. § 281. Because the patentee is the original owner of the patent or its successors in title, 35 U.S.C. § 100(d), a licensee only qualifies as the patentee if their license amounts to an effective assignment of the patent. Lone Star Silicon Innovations LLC v. Nanya Tech. Corp., 925 F.3d 1225, 1229 (Fed. Cir. 2019). A patent is effectively assigned when "all substantial rights" are transferred to the licensee. Id.
A court determines whether all substantial rights to the patent were transferred based on the totality of the agreement. Id. Important considerations include whether the agreement grants the licensee an exclusive license, the ability to sue suspected infringers, and the freedom to sublicense. Univ. of S. Fla. Rsch. Found., Inc. v. Fujifilm Med. Sys. U.S.A., 19 F.4th 1315, 1320 (Fed. Cir. 2021); Alfred E. Mann Found. for Sci. Rsch. v. Cochlear Corp., 604 F.3d 1354, 1360-61 (Fed. Cir. 2010). The transfer of these rights turns on the effect of the agreement, not the labels chosen by the parties. A123 Sys., Inc. v. Hydro-Quebec, 626 F.3d 1213, 1218 (Fed. Cir. 2010).
A party with fewer than all substantial rights may remain party to the suit if it has exclusionary rights such that it is legally injured by infringement. Lone Star, 925 F.3d at 1234 ("[T]hose who possess 'exclusionary rights' in a patent suffer an injury when their rights are infringed."); Propat Int'l Corp. v. RPost, Inc., 473 F.3d 1187, 1193 (Fed. Cir. 2007) ("A party that is neither the legal owner . . . nor the transferee of all substantial rights . . . still has standing . . . if [it] has a legally protected interest in the patent . . . so that it can be said to suffer legal injury from . . . infringement."). However, the patentee must be joined to the suit so that Section 281 is satisfied. Lone Star, 925 F.3d at 1237; Fed. R. Civ. P. 19.
Consequently, there are three categories of prospective plaintiffs in patent infringement actions:
First, a patentee, i.e., one with 'all rights or all substantial rights' in a patent, can sue in its own name. Second, a licensee with 'exclusionary rights' can sue along with the patentee. And, finally, a licensee who lacks exclusionary rights has no authority to assert a patent (even along with the patentee).Lone Star, 925 F.3d at 1228 (internal citations omitted).
B. Rule 12(b)(6)
Challenges to a plaintiff's patentee status are properly brought under Rule 12(b)(6) because the requirements of Section 281 do not implicate subject-matter jurisdiction or Article III standing. Lone Star, 925 F.3d at 1235-36.
To survive a Rule 12(b)(6) motion to dismiss, a complaint must contain sufficient factual matter that, when accepted as true, states a claim for relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. In assessing plausibility, the Court must accept well-pleaded facts as true and construe the pleadings in the light most favorable to the non-moving party. Knievel v. ESPN, 393 F.3d 1068, 1072 (9th Cir. 2005).
IV. DISCUSSION
A. FDS's Patentee Status
FDS does not plausibly allege that it can sue in its own name under Section 281 because FDS does not have all substantial rights to the '158 patent.
1. Allegations in the Complaint
To sue in its own name, FDS must provide well-pleaded facts supporting a reasonable inference that it has "all substantial rights" to the '158 patent. See Lone Star, 925 F.3d at 1229; Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. In its complaint, FDS solely alleges that it is an "exclusive licensee" to the '158 patent. ECF No. 1 ¶ 7. Even accepted as true, that allegation alone is insufficient to establish that FDS plausibly has all substantial rights to the patent because other substantial rights like enforcement and alienation are not addressed. See Lone Star, 925 F.3d at 1229.
FDS argues that Judge Carney already found that the complaint adequately alleges exclusionary rights. ECF No. 37 at 2. But FDS confuses the standard for constitutional standing with the standard for "patentee" status under Section 281. While it is true that exclusionary rights against the defendant area necessary and sufficient condition for Article III standing, "patentee" status under Section 281 is a distinct inquiry that requires the plaintiff to control all substantial rights. Lone Star, 925 F.3d at 1235-36 ("[W]hether a party possesses all substantial rights in a patent does not implicate standing or subject-matter jurisdiction."); id. at 1236 (finding that licensee's exclusionary rights satisfied Article III standing requirements but did not grant "patentee" status under Section 281). FDS's exclusionary rights, without more, do not qualify it as a Section 281 "patentee" who can sue in its own name. Id.
WiAV Sols. LLC v. Motorola, Inc., 631 F.3d 1257, 1267 (Fed. Cir. 2010) ("[T]he key question in determining whether [Plaintiff] has [Article III] standing . . . is whether [Plaintiff] has shown that it has the right under the patents to exclude the Defendants from engaging in the alleged infringing activity and therefore is injured by the Defendants' conduct.") (emphasis omitted).
2. All Substantial Rights
Because FDS does not control all substantial rights under the license agreement, it cannot sue in its own name. The license agreement confirms that FDS does not have all substantial rights to the '158 patent. Instead, it reveals that the agreement significantly restricts FDS's ability to practice, sublicense, and enforce the patent. See ECF No. 36-2.
The Court finds that the license agreement at ECF No. 36-2 is incorporated into the complaint by reference because "the document forms the basis of the plaintiff's claim." See Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1002 (9th Cir. 2018) (quoting United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003)). Here, the license agreement to the asserted patent is central to the Plaintiff's claim for infringement. No party questions the authenticity of the copy attached to Pivotal's motion. See ECF Nos. 36, 37.
Under the agreement, FDS may only practice the invention within a particular "Field of Use." ECF No. 36-2 § 2.1. This restriction alone destroys FDS's ability to bring suit without the patent owner. See Int'l Gamco, Inc. v. Multimedia Games, Inc., 504 F.3d 1273, 1279 (Fed. Cir. 2007) ("[A]n exclusive field of use licensee [cannot] sue in its own name without joining the patent owner."); A123, 626 F.3d at 1217 ("[A]n exclusive licensee with less than all substantial rights in a patent, such as a field-of-use licensee, [cannot] sue for infringement without joining the patent owner.") Moreover, even within the particular field of use, FDS cannot exclude the licensor, who is free to use the invention for its own benefit and to honor pre-existing contracts. ECF No. 36-2 § 2.1(a). This also suggests that FDS has fewer than all substantial rights to the patent. See Abbott Lab'ys v. Diamedix Corp., 47 F.3d 1128, 1132 (Fed. Cir. 1995) (finding that licensee could not sue on its own where licensor retained the right to practice the invention and fulfill pre-existing contracts).
Under the agreement, FDS also lacks the right to sublicense without the licensor's prior written consent. ECF No. 36-2 § 2.2. The ability to sublicense is an important right for the purposes of evaluating a plaintiff's patentee status. Prima Tek II, LLC v. A-Roo Co., 222 F.3d 1372, 1380 (Fed. Cir. 2000) ("A licensee's right to sub-license is an important consideration in evaluating whether a license agreement transfers all substantial rights."); Propat, 473 F.3d at 1191 ("[The licensor's] right to veto licensing and litigation decisions also constitutes a significant restriction on [the licensee's] interest in the patent."). Just as in Propat, where the licensor could veto sublicenses, here too the licensor can veto FDS's attempts to sublicense by withholding consent. This suggests that the licensor, not FDS, retains control of the patent rights. See Propat, 473 F.3d at 1191.
Finally, the license agreement purports to give FDS a "first right" to sue. ECF No. 36-2 § 2.3. FDS argues that this clause allows it to proceed without the licensor. ECF No. 37 at 3. But two parties to an agreement cannot contract around the statutory requirements of Section 281. See A123, 626 F.3d at 1218 ("In determining ownership . . . labels given by the parties do not control. Rather, the court must determine whether the party alleging effective ownership has in fact received all substantial rights from the patent owner."). Moreover, where a licensee only has a first right to sue, the licensor retains the ability to indulge infringement. Abbott, 47 F.3d at 1132 ("[A]lthough [the licensee] has the option to initiate suit for infringement, it does not enjoy the right to indulge infringements, which normally accompanies a complete conveyance of the right to sue."). Here, the licensor retains the ability to sue if FDS fails to enforce the '158 patent satisfactorily. ECF No. 36-2 § 2.3. This, too, suggests that the license agreement grants FDS fewer than all substantial rights.
Because FDS lacks all substantial rights to the '158 patent, it cannot sue in its own name under Section 281.
3. Exclusionary Rights
Though it cannot sue in its own name, FDS can remain party to the suit because it has exclusionary rights to the '158 patent. "If a party cannot bring suit in its own name, it may still bring suit along with the patentee so long as it possesses 'exclusionary rights.' " Lone Star, 925 F.3d at 1229 (quoting Morrow v. Microsoft Corp., 499 F.3d 1332, 1340 (Fed. Cir. 2007)). " 'Exclusionary rights' involve the ability to exclude others from practicing an invention." Id. at 1234 (quoting Morrow, 499 F.3d at 1342). Here, FDS bargained for the right to exclusively practice the invention in a particular field of use. ECF No. 36-2 § 2.1. Viewed in the light most favorable to the non-moving party, the complaint alleges that Pivotal practices the invention within that field. ECF No. 1 ¶ 10. Therefore, FDS can proceed as a party to the case so long as the patentee is joined. See Lone Star, 925 F.3d at 1237 ("We have interpreted Rule 19 and Independent Wireless [Tel. Co. v. Radio Corp. of Am., 269 U.S. 459, 46 S.Ct. 166 (1926),] as directing courts to join patentees along with licensees who otherwise have standing.").
Specifically, FDS has "an exclusive, except with respect to Parker, divisible, perpetual, fully paid up, irrevocable, and freely-transferable as expressly provided herein, worldwide license with all substantial rights for FDS to use the Licensed IP: (i) [t]o make, have made, use, sell, offer for sale, import, and distribute Licensed Products within the Field of Use; [and] (ii) [t]o perform or have performed any processes covered under the Licensed IP to make, have made, use, sell, offer for sale, and distribute Licensed Products within the Field of Use which are the result of such processes[.]" ECF No. 36-2 § 2.1(a).
In opposition, Pivotal attempts to re-litigate its argument that because the licensor reserved the right to practice the invention, FDS is not a true "exclusive licensee" and therefore cannot sue. ECF No. 38 at 8; see also ECF Nos. 22, 23. As discussed above, such an exemption is relevant to patentee status, but a plaintiff need not have a perfectly exclusive license to proceed as a party. Lone Star, 925 F.3d at 1234. Indeed, in cases Pivotal cites, the Federal Circuit allowed licensees to proceed as parties even where licensors exempted themselves from exclusivity provisions. Id. at 1238 (remanding for joinder analysis where "[licensor] and its customers c[ould] also continue to practice the patents"); Abbott, 47 F.3d at 1132 (allowing licensee to proceed as party where "[licensor] retained the right to make and use, for its own benefit, products embodying the inventions claimed in the patents" and honor pre-existing contracts).
Because the issue in Abbott was patentee status under Section 281, there was no explicit consideration of whether the licensee possessed exclusionary rights despite the licensor exempting itself from the exclusivity provision. 47 F.3d at 1132. However, the licensee's exclusionary rights would implicate Article III standing and appellate courts "are obliged to examine standing sua sponte where standing has erroneously been assumed below." Adarand Constructors, Inc. v. Mineta, 534 U.S. 103, 110, 122 S.Ct. 511, 151 L.Ed.2d 489 (2001). Instead, the Federal Circuit allowed the case to proceed with both the licensor and the licensee as plaintiffs. Abbott, 47 F.3d at 1133-34.
Nor is the Court persuaded by Pivotal's attempts to analogize this case to Propat, 473 F.3d at 1187. ECF No. 38 at 8-9. In Propat, the license did not convey exclusionary rights to the invention. 473 F.3d at 1194. In fact, the Propat agreement did not contemplate the licensee practicing the invention whatsoever, rendering it an impermissible hunting license under longstanding precedents. Id. ("The Court in Crown Die [& Tool Co. v. Nye Tool & Mach. Works, 261 U.S. 24, 43 S.Ct. 254, 67 L.Ed. 516 (1923),] refused to permit the right to sue to be segregated from formal ownership of the patent."); see also Prima Tek II, 222 F.3d at 1381 (disapproving of patent "hunting licenses" that only grant a right to sue for infringement). Here, FDS has more than a mere hunting license; the license agreement grants FDS the exclusive right to practice the invention within the field of use. ECF No. 36-2 § 2.1(a).
CONCLUSION
For the foregoing reasons, FDS is not the patentee of the '158 patent and cannot proceed as the sole plaintiff in this action. However, Defendant's motion to dismiss is denied. FDS has exclusionary rights to the patent, allowing it to proceed as a plaintiff so long as the patentee is joined. FDS is therefore ordered to file an amended complaint naming Parker Intangibles, LLC as a defendant pursuant to Rule 19. The complaint shall not be amended except as described in this order, and FDS shall file the amended complaint within 14 days. FDS's motion for leave to amend under Rule 15 is denied as moot.
Plaintiff's counsel attests that Parker Intangibles, LLC has been unresponsive to requests to join the instant action as a co-plaintiff. ECF No. 41-1. "If a person has not been joined as required, the court must order that the person be made a party. A person who refuses to join as a plaintiff may be made either a defendant or, in a proper case, an involuntary plaintiff." Fed. R. Civ. P. 19. The Court reserves ruling on whether this is a proper case in which to invoke the involuntary plaintiff procedure.
IT IS SO ORDERED.