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District Court Grants Motion to Dismiss for Lack of Standing Where Plaintiff Could Not Establish That It Owned All Substantial Rights to Patent and Could Not Argue Alter Ego to Establish Ownership

Plaintiff Max Sound Corporation (“Max Sound”) filed a First Amended Complaint (“FAC”) against three defendants: Google, Inc., YouTube, LLC and On2 Technologies (collectively, “Defendants”), for the infringement of Patent No. 7,974,339 (the “‘339 patent”). As part of the complaint, Max Sound also included the owner of the ‘339 patent, Vedanti Systems Limited (“Vedanti”), as a party to the lawsuit.

Defendants filed a motion to dismiss pursuant to Fed.R.Civ.Pro. 12(b)(1), asserting that this action must be dismissed because Max Sound lacks standing to sue. As explained by the district court, “[a]ccording to Defendants, VSL had no authority to confer any rights under the ‘339 patent to Max Sound on June 20, 2014, because the true owner of the ‘339 patent at that time was Vedanti. Moreover, Defendants believe the plain language of the June 20th license agreement makes clear that the contract was only between VSL and Max Sound – not Vedanti.”

The district court explained the following on standing: “The essential issue regarding the right to sue on a patent is who owns the patent.” Aspex Eyewear, Inc. v. Miracle Optics, Inc., 434 F.3d 1336, 1341 (Fed. Cir. 2006). Consequently, the Patent Act requires that “a suit for infringement of patent rights ordinarily be brought by a party holding legal title to the patent.” Propat Int’l Corp. v. Rpost, Inc., 473 F.3d 1187, 1189 (Fed. Cir. 2007) (citing 35 U.S.C. ยงยง 100, 281). A plaintiff asserting patent infringement “‘must demonstrate that it held enforceable title to the patent at the inception of the lawsuit’ to assert standing.” Abraxis, 625 F.3d at 1364 (quoting Paradise Creations, Inc. v. UV Sales, Inc., 315 F.3d 1304, 1309-310 (Fed. Cir. 2003)). “‘[I]f the original plaintiff lacked Article III initial standing, the suit must be dismissed, and the jurisdictional defect cannot be cured’ after the inception of the lawsuit.” Id. (quoting Schreiber Foods, Inc. v. Beatrice Cheese, Inc., 402 F.3d 1198, 1203 (Fed. Cir. 2005)).

“[A] licensee normally does not have standing to sue without joinder of the patentee.” Aspex, 434 F.3d at 1340. However, the Federal Circuit has held that an “exclusive licensee” has have been transferred to the exclusive licensee. Int’l Gamco, Inc. v. Multimedia Games, Inc., 504 F.3d 1273, 1276 (Fed. Cir. 2007); see Morrow v. Microsoft Corp., 499 F.3d 1332, 1340 (Fed. Cir. 2007) (“When a party holds all rights or all substantial rights [to a patent], it alone has standing to sue for infringement.”); see also Alfred E. Mann Found. for Scientific Research v. Cochlear Corp., 604 F.3d 1354, 1358-59 (Fed. Cir. 2010) (“A patent owner may transfer all substantial rights in the patents-in-suit, in which case the transfer is tantamount to an assignment of those patents to the exclusive licensee, conferring standing to sue solely on the licensee.”). In those circumstances, the licensee becomes the “virtual assignee.” Enzo APA & Son, Inc. v. Geapag A.G., 134 F.3d 1090, 1093 (Fed. Cir. 1998).

“To determine whether an agreement constitutes just an exclusive license or instead also transfers ‘all substantial rights’ in a patent, [the court] must ascertain the intention of the parties and examine the substance of what was granted by the agreement.” Mentor H/S, Inc. v. Med. Device Alliance, Inc., 240 F.3d 1016, 1017 (Fed. Cir. 2001). “The party asserting that it has all substantial rights in the patent ‘must produce . . . written instruments documenting the transfer of proprietary rights.'” Id. (quoting Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245, 1250 (Fed. Cir. 2000)).

The district court then explained that Max Sound had not shown it received “all substantial rights” to the ‘339 patent “Indeed, of all the agreements described above, the one critical to Max Sound’s standing is the license agreement it executed on June 20, 2014. But two aspects of the June 20th agreement cannot be disputed, both of which are unfavorable to Max Sound: first, that the agreement involved, if anything, a transfer of rights between Max Sound and VSL and not a transfer between Max Sound and Vedanti, and second, that the agreement does not reference the ‘339 patent anywhere in the document. It therefore follows that Max Sound could not have received any rights to the ‘339 patent – let alone substantial ones – through the license agreement it signed with VSL because the uncontradicted evidence shows that Max Sound did not contract with the entity that owned those rights. See Quantum Corp. v. Riverbed Tech., Inc., No. C 07-04161 WHA, 2008 U.S. Dist. LEXIS 11348, at *9, 2008 WL 314490 (N.D. Cal. Feb. 4, 2008) (“Given that the August 2007 licensing agreement was not signed by Rocksoft, no rights in the ‘810 patent were transferred by that agreement.”). Thus, the inescapable conclusion on this record is that Max Sound cannot independently pursue this action for infringement of the ‘339 patent. It lacks standing to do so, no matter what litigation it believes was authorized in “margin notes” or in the June 20th agreement itself. Authorization to sue is not a substitute for standing.”

The district court also rejected the plaintiff’s alter ego argument. “Max Sound also argues that VSL was either Vedanti’s agent or alter ego. Both theories require Max Sound to make a specific showing in order to overcome the presumption of distinct corporate forms.” The district court also rejected the plaintiff’s argument that there was a unity of interest because the CEO was the same for both companies. “Moreover, the fact that Nash is the CEO of both companies is not enough to raise the “unity of interest” required to prove that VSL is the alter ego of Vedanti. See Sys. Div., Inc. v. Teknek Elecs., Ltd., 253 Fed. Appx. 31, 34 (Fed. Cir. 2007) (observing that under California law “[t]here are two general requirements for disregarding the corporate entity: there must be ‘such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist,’ and it must be demonstrated that ‘if the acts are treated as those of the corporation alone, an inequitable result will follow.'”).”

Accordingly, the district court granted the motion to dismiss for lack of standing.

Max Sound Corp. v. Google, Inc., Case No. 5:14-cv-04412-EJD (N.D. Cal. Nov. 24, 2015)

The authors of are patent trial lawyers at Jeffer Mangels Butler & Mitchell LLP. For more information about this case, contact Stan Gibson at 310.201.3548 or