PTAB Denies Institution of CBM Review for Lack of Standing in view of Covenant Not to Sue

Written by Ben J. Everton and David T. Kim

The PTAB denied institution of Covered Business Method (CBM) Review, finding that the parties’ license agreement and covenant not to sue removed any “imminent” threat of an infringement suit. MasterCard International Inc., v. Alexam, Inc., CBM2017-00041, Paper 12 (P.T.A.B. September 21, 2017).

In 2005, petitioner MasterCard and patent owner Alexam entered into a licensing agreement covering Alexam’s patents.  MasterCard was granted a nonexclusive and nontransferable license to practice and sublicense the patented technology. The agreement also provided that other parties participating in a licensed transaction with MasterCard may be deemed sublicensed.  In return, Alexam covenanted not to sue MasterCard for any claim or alleged liabilities relating to the patented technology before or during the term of the agreement.

In 2013, Alexam was successful in asserting its patents against third party IDT Corporation. Alexam, Inc. v. IDT Corp., 715 f . 3d 1336, 1346 (Fed. Cir. 2013). However, in that case, the Federal Circuit upheld the district court’s determination that certain IDT transactions were automatically deemed sublicensed under the MasterCard-Alexam agreement and thus reduced the damages owed to Alexam.  In 2015, Alexam sued MasterCard for breach of contract in district court based on the alleged non-payment of IDT royalties, and MasterCard filed counterclaims seeking declaratory judgment of non-infringement and invalidity of Alexam’s patents.  Alexam filed a motion to dismiss the counterclaims, arguing that its covenant not to sue eliminates any justiciable case or controversy and thus prevents declaratory judgment jurisdiction. The court denied Alexam’s motion to dismiss, concluding that it was premature to determine the appropriateness of a declaratory relief, which depends on interpretation of the license agreement.

While the district court case was pending, MasterCard also sought to invalidate one of Alexam’s patents by CBM review. However, unlike inter partes review, institution of CBM review requires that the petitioner “has been sued for infringement of the patent or has been charged with infringement under that patent.”  AIA § 18(a)(1)(B).

The Board determined that Alexam had not sued MasterCard for infringement because it had not brought a claim against MasterCard under the Patent Act. Instead, Alexam sued MasterCard for state-law breach of contract for allegedly failing to pay royalties. The Board recognized that in some cases the Federal Circuit has not limited ”infringement” to only claims under the Patent Act, especially where the accused infringer cannot otherwise be sued (absent waiver of sovereign immunity) and is not presumed to have a preexisting right to practice the patented technology. See e.g. Return Mail v. United States Postal Service, Appeal No. 2016-1502 (Fed. Cir. Aug. 28, 2017). However, the Board distinguished these cases because MasterCard could be sued in a separate patent infringement action and has a preexisting license with Alexam.

The Board also concluded that MasterCard had not been charged with infringement. MasterCard argued that it had been charged with infringement because it had Article III standing to bring a declaratory judgment action. MasterCard cited the Supreme Court’s decision in MedImmune, Inc. v. Genentech, Inc., asserting that a licensee is not required to break or terminate a license agreement before seeking declaratory judgment that the underlying patent is invalid, unenforceable, or not infringed. 549 U.S. 118, 137 (2007). However, the Board noted that MedImmune did not include a covenant not to sue, which moots any dispute between the parties such that there is no “case or controversy” under Article III.

Finding that MasterCard had not established standing, the Board denied institution of the CBM review. This decision is a helpful reminder that parties contemplating or facing CMB review should carefully consider the specific standing requirements, as they differ from the standing requirements for inter partes review and declaratory judgment.