Licensing the Right to Sue for Third-Party Patent Infringement

By Tennell Lockett

IP Licensing is everywhere. Many of us were introduced to licensing practices during the 1990’s when shrink wrap licensing was popularized by Microsoft and other software manufacturers. More recently, click-through (or click wrap) licenses have emerged. With the rise of shrink wrap and click-through licensing, most of us, whether wittingly or unwittingly, are or have been a patent or technology licensee. Whether you read the license or simply check the “I have read and agree to be bound by the foregoing terms” box before you hit the download button, you understand the basic concepts: you get some right to a licensed technology or product, usually the right to use that technology or product, subject to certain restrictions and conditions. This type of licensing is typically referred to as end-user licensing.

End-user licensing is conceptually similar to license arrangements between companies, which can be referred to as business-to-business, or B-to-B licensing. Basically, one company acquires some right to a licensed technology or product from another company. Patent rights licensed in B-to-B licensing arrangements, however, tend to be very different in many respects. One arrangement that is sometimes used by patent owners involves granting a licensee the right to sue third-parties for infringements of licensed patent claims.

Several years ago, I had a client that was in an industry where this practice was heavily used. It provides a good example of one of the reasons why companies might license enforcement rights to another company. The industry was large, lucrative and was dominated by a handful of huge companies. Each of the top feeders owned a portfolio of patents that, if asserted against the others, would be crippling to the market. Specifically, each seemed to appreciate that launching a direct patent infringement assault against one of the other major actors would cause the target of the assault to counter with its own patent claims, which would most likely cause a chain reaction of escalating assaults which would ensure mutual self-destruction for all. To avoid that outcome, the patent holder would typically assign a patent, or more commonly license a right to sue on the patent, to a third party, who could then sue the target or otherwise enforce patent rights against the target. Although it was clear what was going on to anyone paying attention, this veil of plausible deniability was enough for patent holders to strategically slow down their competitors and prevent total industry meltdown.

The scenario above is just one example of how licensing the right to sue can be strategically used in patent cases. Be mindful, however, that patent licensing in this area is extremely nuanced and any strategy involving granting the right to sue to another party should be carefully thought out and well planned. As outlined in my April 26, 2010, Legal Beat blog post,  too often patent holders intend to grant a licensee the right to sue under a patent. But they only discover at the time of suit that the licensee can only bring suit if the patent holder is joined as a co-plaintiff or may discover that the licensee has no right to bring suit under any condition. This result can undermine the entire license strategy and might only be discovered after significant time has passed and after the licensee has paid substantial license fees to the licensor. Moreover, as outlined in my May 10, 2010, blog post, it is possible to arrive at a much more damaging result through poor licensing, where no one has the right to bring suit on the patent(s).