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Patent Transfer and the Bundle of Rights
Andrew C. Michaels
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933
Patent Transfer and the Bundle of
Rights
Andrew C. Michaels
†
INTRODUCTION
When patents subject to a license agreement are
transferred, to what extent do the benefits and burdens of the
license agreement run with the patent? This question involves
separating the in personam contract from its effect on underlying
in rem intellectual property rights . But this theoretical question is
of some contemporary practical significance.
Consider the patent troll.
1
The bête noire of the patent
law community,
2
the troll lies in wait under technological
bridges, until it emerges threatening to cast its prey into a
†
Visiting Associate Professor of Law and Frank H. Marks Intellectual
Property Fellow, George Washington University Law School. J.D., New York
University School of Law. For helpful comments, the author particularly thanks Henry
Smith, John Duffy, Katherine Strandburg, Barton Beebe, Jason Rantanen, Robert
Brauneis, Michael Abramowicz, Dmitry Karshtedt, Shubha Ghosh, Joshua Sarnoff,
Joseph Sanders, Emily Berman, and Eric Clayes, as well as those who participated in
the 2016 Mid-Atlantic Works-in-Progress Colloquium at American University
Washington College of Law, the 2017 Works-in-Progress in IP conference at Boston
University School of Law, the 2017 JSIP conference at Michigan State University
College of Law, and the 2017 IP roundtable at Texas A&M University School of Law,
and finally, the editors of the Brooklyn Law Review.
1
The more polite terms are “Non-Practicing Entity” (NPE), and “Patent
Assertion Entity,” (PAE). See Kristen Osen ga, Formerly Manufacturing Entities:
Piercing the “Patent Troll” Rhetoric, 47 CONN. L. REV. 435, 439 (2014); see also Sara
Jeruss, Robin Feldman & Joshua Walker, The America Invents Act 500: Effects of
Patent Monetization Entities on US Litigation, 11 DUKE L. & TECH. REV. 357, 358
(2012) (“Any discussion of flaws in the United States patent system inevitably turns to
the system’s modern villain: non-practicing entities.”).
2
See Osenga, supra note 1, at 437 (“Everyone seems to hate ‘patent trolls.’ ”);
see also Edward Lee, Patent Trolls: Mor al Panics, Motions in Limine, and Patent
Reform, 19 STAN. T ECH . L. REV. 113, 116 (2015) (“In the extreme, such prejudice leads
to a moral panic in which rational policymaking and decision-making give way to
hysteria to fight the proverbial ‘folk devil’ (substitute: patent troll).”) (citing STANLEY
COHEN, FOLK DEVILS AND MORAL PANICS (1972)). But see id. at 114 (“‘I like patent
trolls,’ Judge Richard Posner confessed to a group of patent scholars . . . .” ); Jean Xiao,
In Defense of Patent Trolls: Patent Assertio n Entities as Commercial Litigation
Funders, 16 CHI.-KENT J. INTELL. PROP. 36, 37 (2016). Cf. JOHN LINDLOW, TROLLS: AN
UNNATURAL HISTORY 9 (2014) (“It is fair to say that the troll has been one of the most
powerful and enduring images of otherness in large parts of the world, with a
resonance that is inescapable.”).
934 BROOKLYN LAW REVIEW [Vol. 83:3
cascade of costly patent litigation.
3
The License on Transfer
(LOT) Network fancies itself the “solution to the patent troll
problem,”
4
something like the fabled big billy goat.
5
The idea is
that a group of companies makes a pact that none of them will
transfer any of their patents to a troll. If any company breaks the
pact, a license is automatically granted to all of the other
companies in the group, which takes effect immediately upon
transfer of the patent to the troll. The LOT’s plan to “eliminate
the patent troll threat,”
6
is thus apparently premised on some
notion that the LOT agreement—or part of it—runs with
transferred patents. The enforceability of the LOT is questionable
in certain situations,
7
and implicates the question: to what extent
is the LOT an in personam contract, and to what extent does it
have in rem effects on intellectual property?
On the one hand, it cannot be that the mere transfer of
a patent wipes the patent clean of all outstanding licenses. But
at the same time, the LOT agreement is a complex ten-page
contract with various provisions relating to bankruptcy, third-
party beneficiaries, costs, governing law, and other issues.
8
It
cannot be that a patent troll unwittingly becomes a full party
to that co ntract automatically merely by virtue of acquiring a
single patent from a LOT member. So what “runs with the
patent” must be something including the bare license but
something less than the entire contract or license agreement
creating the license.
9
Even if the parties to a license agreement attempt to
address this issue in the contract, that would not necessarily
3
Cf. LINDLOW, supra note 2, at 14–17 (explaining that trolls first entered
the literary record in Viking Age poetry, when a “Bragi the Old,” was “accosted . . . in
verse” by a troll claiming to be a “giant’s wealth-sucker,” which according to Lindlo w,
“sounds bad, and is probabl y an attack on human prosperity.”).
4
See How Lot Works, LOT NETWORK, http://lotnet.com/how-lot-works
[https://perma.cc/Y7VM-Y53V].
5
Cf. LINDLOW, supra note 2, at 131 (“Probably the most famous troll is the
one under the bridge in The Three Billy Goats Gruff.”). In the Norwegian folktale, three
billy goats cross a bridge in search of food. Under the bridge live s a troll who threatens
to eat each billy goat. The first two billy goats each in turn convince the troll to save its
appetite for the next, larger, billy goat following behind. But the third billy goat is so
large that it soundly defeats the troll, thus solving the troll problem, as the LOT
purports to do. See id. at 69–70.
6
LOT NETWORK, http://lotnet.com [https://perma.cc/Z66C-J6HV].
7
See infra Section II.E.
8
See LOT Agreement, Version 2.0 §§ 2.3, 5.3, 5.5, 5.6, 5.11 (May 10, 2017)
[hereinafter LOT Agreement], http://lotnet.com/download-lot-agreement [https://perma.cc/
4NDT-5KBX].
9
See Christopher M. Newman, A License Is Not a “Contract Not to Sue”:
Disentangling Property and Contract in the Law of Copyright Licenses, 98 IOWA L. REV.
1101, 1103 (2013) (distinguishing between “license” and “license agree men t”).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 935
settle the matter.
10
The parties could certainly agree that a
license would terminate upon the transfer of a certain patent.
But could the parties agree that a confidential license
agreement in its entirety would run with a patent? It would
seem inconsistent with basic principles of contract law to make
such private in personam contractual promises binding on
patent purchasers without consent.
11
Such questions and
inconsistencies can arise in the context of patent troll
litigation, as trolls often acquire patents from other entities,
which may have previously entered into various complex
license agreements.
12
Courts have developed and applied a test stating that
aspects of the license agreement that relate to the “actual use” of
the patented invention are “encumbrances” running with the
patent.
13
The idea seems to be that some portion of the license
agreement somehow breaks off and attaches to the patent,
binding the new patent owner upon acqu isition of the patent.
However, this theory is not consistently applied and is
problematic. For example, courts have (reasonably) held that
royalty rights do not automatically run with the patent,
14
though
it is not clear how royalty rights received in exchange for allowing
use of a patented invention do not relate to actual use of that
patented invention. The encumbrance theory is also inconsistent
with the principle that there can be no covenants running with
10
See infra Section II.E.
11
See Datatreas ury Corp. v. Wells Fargo & Co., 522 F.3d 1368, 1373 (Fed.
Cir. 2008) (“[R]equiring a non-signatory party to arbitrate solely on the basi s of an
arbitration clause in a license agreement between signatory parties would be
inconsistent with basic principles of contract law.”); United States v. Waterman S.S.
Corp., 471 F.2d 186, 188 (5th Cir. 1973) (“[T]he government was neither party nor
privy to the bill of lading, and therefore, under traditional principles of contract law, is
not bound by its provisions, absent consent to be bound.”); see also McCoy v. Mitsuboshi
Cutlery, Inc., 67 F.3d 917, 920 (Fed. Cir. 1995) (“Whether express or implied, a license
is a contract ‘governed by ordinary principles of state contract law.’” (quoting Power
Lift, Inc. v. Weatherford Nipple-Up Sys., 871 F.2d 1082, 1085 (Fed. Cir. 1989))).
12
See, e.g., Telefonaktiebolaget LM Ericsson Inc. v. Wi-LAN USA, Inc., No.
14-21854-CV-MIDDLEBROOKS, 2015 WL 11233112, at *2 (S.D. Fla. Aug. 14, 2015)
(“Ericsson . . . argu[es] that Wi-LAN is bound by the Siemens License, the Siemens
License precludes claims of patent infringement based in whole or in part on Ericsson’s
products for the use of certain patents, and that by seeking licenses from Ericsson’s
customers, Wi-LAN has breached the Siemens License.”); Brief of Dell et al. as Amici
Curiae in Support of Respondents at 30–31, SCA Hygiene Prods. Aktiebolag v. First
Quality Baby Prods., LLC, 137 S. Ct. 954 (2017) (No. 15-927) (“One recurring
pattern . . . involves an operating company that for business or other reasons chooses
not to assert a patent during most of that patent’s lifetime, but later sells the nearly
expired patent to an NPE.”).
13
See, e.g., Innovus Prime, LLC v. Panasonic Corp., No. C-12-00660-RMW,
2013 U.S. Dist. LEXIS 93820, at *15 (N.D. Cal. July 2, 2013) (“[A]greements involving
the actual use of the patent ‘run with the patent’ and are binding on subsequent
owners.”) (quoting Datatreasury Corp., 522 F.3d at 1372).
14
See infra Section II.B.
936 BROOKLYN LAW REVIEW [Vol. 83:3
personal property, given that patents are by statute to be treated
as having the attributes of personal property.
15
With the help of Wesley Newcomb Hohfeld’s jural
relations,
16
and the “bundle of sticks” conception of property,
this article attempts to develop a more useful and coherent
framework for analysis of these issues. Under the theory of this
article, a patentee may give up a stick in the bundle, such as the
right to exclude the licensee, through the license agreement. In
Hohfeld’s terminology, the (non-exclusive) license agreement
effects a change in the relation between the patentee and the
licensee, from “Right / Duty,” to “No-Right / Privileg e.”
17
Thus by
entering into the license agreement, the patentee diminishes the
patent bundle of rights, in exchange for other forms of value
such as royalty rights or cross-licenses. When the patentee
transfers the patent, it transfers only what is left in the bundle
of patent rights, though the license agreement or contract
remains between the two signatories. This comports with the
principle that one cannot transfer what one no longer owns, or,
nemo dat quod non habet.
18
After using Hohfeld’s platform to conceptually separate
the license agreement (as contract) from its effect on the
underlying intellectual property rights, this article proposes
two guiding principles that inform the extent to which the
underlying intellectual property can be customized by a license
agreement. First, the bundle of patent rights granted by the
United States Patent and Trademark Office (USPTO) can be
diminished but not enlarged through a license agreement. For
example, though royalty righ ts might be received by a licensor
in exchange for giving up one stick in the patent bundle, such
rights would not be considered part of the bundle of patent
rights, and so would not automatically transfer with the
patent. A patent does not initially include a right to receive
royalties, and a license agreement cannot operate to add that
right to the in rem patent bundle.
19
Second, this article
proposes that in close cases courts should err on the side of
15
See 35 U.S.C. § 261 (2012 ) (“[P]atents shall have the attributes of personal
property.”); infra Section I.A.
16
See Wesley Newcomb Hohfeld, Some Fundamental Legal Conceptions as
Applied in Judicial Reasoning, 23 YALE L.J. 16 (1913); infra Section I.C.
17
See infra Section I.C.
18
See, e.g., Commerce Bank, N.A. v. Chrysler Realty Corp., 244 F.3d 777, 783
(10th Cir. 2001) (“[The holding] that an assignee can acquire rights no greater than those
held by the assignor is consistent with the basic principle of commercial law encapsulated in
the Latin phrase nemo dat qui non habet. . . . The basic concept behind nemo dat is that a
transferee’s rights are no better than those held by his transferor.” (footnotes omitted)); L.L.
Brown Paper Co. v. Hydroiloid, Inc., 118 F.2d 674, 677 (2d Cir. 1941).
19
See infra Section I.B.
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 937
keeping agreements in personam rather than having them run
with the patent, so as to minimize information costs, in accord
with the numerus clausus principle that in rem rights should
have a limited number of forms.
20
Part I illustrates the problem, discusses the divide
between property and contract, and reviews Hohfeld and the
“bundle of sticks” conception of property. Part II compares the
bundle theory with the actual use test and the law of covenants
and encumbrances that “run with” property interests, and
evaluates aspects of license agreements under these two
frameworks, demonstrating that the bundle theory provides a
more coherent explanation. Part III explores some broader
implications of the bundle theory for other doctrines in patent
law, such as patent exhaustion, FRAND commitments, prior user
rights, and copyright end user software license agreements.
I. BUNDLE THEORY AND HOHFELD
A. Illustration of the Problem
Consider companies A and B, which own ten patents
each and enter into a cross-license agreement. Under the
agreement, A has a license to all ten of B’s patents, and B has a
license to all ten of A’s patents. Then, A transfers one of its ten
patents (patent X) to company C. Does company C have a right
to sue company B for infringement of patent X? It seems clear
that in general the answer is no. B paid for a license to patent
X when A owned that patent. To protect legitimate
expectations, B should not, absent contrary agreement, be
deprived of the license bargained for, merely because A later
decided to transfer the licensed patent.
21
Courts that have considered the question have generally
reached this result.
22
The courts have ruled that even a “bona
20
See infra Sections I.B, II.E; see also Thomas W. Merrill & Henry E. Smith,
Optimal Standardization in the Law of Property: The Numerus Clausus Principle, 110
YALE L.J. 1, 3 (2000).
21
Cf. Lawrence Berger, A Policy Analysis of Promises Respecting the Use of
Land, 55 MINN. L. REV. 167, 168 (1970) (“It was early apparent that unless agreements
(contained in deeds or leases) respecting the use of land were binding not only upon the
promisor (covenantor) who entered into them but also upon purchasers from him, such
undertakings would be worthless, since otherwise they could be avoided by a mere
transfer to a third party.”); Jay P. Kesan & Carol M. Hayes, FRAND’s Forever:
Standards, Patent Transfers, and Licensing Commitments, 89 IND. L.J. 231, 304 (2014)
(“[I]f a patentee could extinguish the benefits of a FRAND commitment by transferring
the patent to a third party, this would lead to inequitable results.”).
22
See, e.g., Innovus Prime, LLC v. Panasonic Corp., No. C-12-00660-RMW,
2013 U.S. Dist. LEXIS 93820, at *15 (N.D. Cal. July 2, 2013).
938 BROOKLYN LAW REVIEW [Vol. 83:3
fide purchaser” of a patent takes the patent subject to pr ior
“licenses, of which he must inform himself as best he can at his
own risk.”
23
The intuition seems to be that the purchaser of a
patent should recognize the possibility that licenses o n the
patent might exist, and should take steps to investigate
whether they in fact do exist.
24
In other words, the purchaser is
on “inquiry notice” with regard to the potential existence of
license agreements affecting the patents to be transferred.
25
Of
course, a true bona fide purchaser patent assignee may have
some claim sounding in tort or contract against a patent seller
who is less than forthright about the extent to which the patent
has been licensed, particularly where the license or its terms
are not public knowledge.
26
But how does the license travel with the patent, and
how much of the license agreement runs with the patent?
Courts have treated aspects of a license agreement relating to
23
Jones v. Berger, 58 F. 1006, 1007 (C.C.D. Md. 1893) (citing WILLIAM C.
ROBINSON, THE LAW OF PATENTS FOR USEFUL INVENTIONS § 817 (1890)); see also
Innovus Prime, 2013 U.S. Dist. LEXIS 93820, at *16 (“This occurs whether or not an
assignee had notice.”); V-Formation, Inc. v. Benetton Grp., SpA, No. 02-cv-02259-PSF-
CBS, 2006 U.S. Dist. LEXIS 13352, at *20 (D. Colo. Mar. 10, 2006) (“The Court does
not agree that the doctrine of ‘bona fide purchaser’ as urged by V-Formation precludes
Benetton from asserting the covenant no t to sue as a defense in this case.”).
24
See Menachem Mautner, “The Eternal Triangles of The Law”: Toward a
Theory of Priorities in Conflicts Involving Remote Parties, 90 MICH. L. REV. 95, 116
(1991) (“Clearly, whenever the purchaser acts with actual knowledge or presumed
suspicion of the existence of a prior conflicting claim, the purchaser is the party best
located to prevent the conflict by avoi ding the transaction.”).
25
See Sanofi, S.A. v. Med-Tech Veterinarian Prods., 565 F. Supp. 931, 940–41
(D.N.J. 1983) (explaining in the context of patent exhaustion that “[b]ecause the
purchaser [of patented products] is under an obligation to inquire of the seller as to the
existence of any outstanding licenses, the purchaser cannot claim that his expectations
have been frustrated if he fails to make the necessary inquiry”). Cf. Van Mahamedi,
Note, Recording Security Interests In Patents: Accepting A Traditional Federal System
To Preserve the Policies Of Patent Law, 2 B.U. J. SCI. & TECH. L. 15 para. 41, n.184
(1996) (“Patent law incorporates the common law rule that an equitable interest in a
patent survives a subsequent assignment if the assignee is on ‘inquiry notice’ that the
equitable interest exists.” (citing FilmTec Corp. v. Allied-Signal Inc., 939 F.2d 1568,
1573–74 (Fed. Cir. 1991) )).
26
See Yongae Jun, Note, The Imperfect State of Patent Perfection, 5 AKRON
INTELL. P ROP. J. 279, 281 (2011) (“Courts have argued that . . . section 26 1 of the
Patent Act [regarding recording ownership interests with the USPTO] concerns itself
with only ownership rights, as opposed to lesser rights such as li ens or licenses.” (citing
In re Cybernetic Servs., Inc., 252 F.3d 1039, 1052 (9th Cir. 2001))); Pauline Stevens,
Security Interests in Patents and Patent Applications?, 6 U. PITT. J. TECH. L. & POL’Y 2,
19 (2005) (“The Manual of Patent Examining Procedure distinguishes ‘security
interests’ of the type created under Article 9 from other types of legal interests that
transfer of title or ownership rights . . . anything that does not convey an ownership
interest in a patent is a ‘mere license.’” (quoting In re Cybernetic Servs., Inc., 252 F.3d
at 1052)). Although patents licenses generally need not be recorded, the fact of a li cense
may be recorded upon request. See 35 U.S.C. § 261 (2012) ; MANUAL OF PATENT
EXAMINI NG PROCEDURE § 301, 313 (2018), https://mpep.uspto.gov/RDMS/MPEP/current#/
current/d0e17683.html [https://perma.cc/PWM8-76QX].
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 939
“actual use” of a patent or invention as encumbrances running
with the patent.
27
This theory seems to be derived from the
common law rule that only covenants that “touch and concern”
the land will “run with the land,”
28
but application of this rule
to patent law can be problematic, in part because it is in some
tension with the principle that covenants cannot run with
personal property, given that by statute, “patents shall have
the attributes of personal property.”
29
In light of the inconsistency and incoherence wrought by
the actual use test currently employed in the courts, this article
proposes instead reasoning primarily from nemo dat, the
general principle that one cannot transfer what one does not
own.
30
Where a patentee, via a license agreement, has already
given up the right to exclude a particular licensee, the patentee
cannot then transfer that right. Using the “bundle of sticks”
analogy,
31
where a patentee has already given up one stick in
the bundle, the patentee transfers only the sticks that remain.
Returning to the hypothetical, A had already given up
the right to exclude B from practicing patent X, so A could not
transfer that right to C. A transferred to C a diminished bundle
of stic ks, that is, only those sticks that remained in the bundle.
As such, company C did not acquire the right to sue company B
for infringement of patent X. The nemo dat principle is
sometimes invoked alongside the actual use encumbrance test
27
See, e.g. , Innovus Prime, 2013 U.S. Dist. LEXIS 93820, at *15
(“[A]greements involving the actual use of the patent ‘run with the patent’ and are
binding on subsequent owners.” (citing Datatreasury Corp. v. Wells Fargo & Co., 522
F.3d 1368, 1372 (Fed. Cir. 2008))).
28
See CHARLES E. CLARK, REAL COVENANTS AND OTHER INTERESTS WHICH
“RUN WITH THE LAND” 92–96 (2d ed. 1947); Berger, supra note 21, at 207.
29
35 U.S.C. § 261; see also In re Particle Drilling Techs., No. 09-33744, 2009
Bankr. LEXIS 2151, at *7 (S.D. Tex. July 29, 2009) (“Patents are personal property.
Real property concepts (such as covenants running with the land) do not apply to
personal property.”); Jones v. Cooper Indus., Inc., 938 S.W.2d 118, 123 (Tex. App. 1996)
(“Since a patent is to be treated as personal property, there can be no covenants that
‘run with’ the patent.”).
30
See Sanofi, 565 F. Supp. at 939 (explaining that it is “a principle of patent
law . . . that the purchaser does not acquire any rights greater than those possessed by
the owner of the patent.”(citing Featherstone v. Ormonde Cycle Co., 53 F. 110, 111
(C.C.N.Y. 1892))).
31
See, e.g., Lexmark Int’l, Inc. v. Impression Prods., Inc., 816 F.3d 721, 741
(Fed. Cir. 2016) (en banc), rev’d and remanded 137 S. Ct. 1523 (2017) (“It has long been
a familiar feature of our legal landscape that property rights in a particular thing—like
the separate interests in making, selling, using, etc., an invention—are viewed as a
‘bundle’ of rights (or sticks) that can generally be transferred separately. ”); STEPHEN R.
MUNZER, A THEORY OF PROPERTY 22–36 (2d prtg. 1992); Thomas C. Grey, The
Disintegration of Property, in PROPERTY: NOMOS XXII 69 (J. Roland Pennock & John
W. Chapman eds., 1980).
940 BROOKLYN LAW REVIEW [Vol. 83:3
within a single case, or even a single sentence.
32
But these two
possibilities—the “encumbrance” theory and the “bundle”
theory—have significant differences. To begin with, they are
aesthetic opposites in that under the encumbrance theory,
something (an encumbrance) is added to the patent, whereas
under the bundle theory, something (a sti ck or a right) is
subtracted. They are different aesthetics, frameworks for
conceptualizing and understanding the issues.
There are practical differences as well. If the license
agreement is a contract, and if the contract (or part of it) is an
encumbrance that travels with the patent, a new patent owner
who attempts to sue the prior licensee or otherwise fails to
abide by the contract terms could then potentially be subject to
a claim for breach of contract.
33
By contrast, under the bundle
theory, although a prior licensee would have a license defense
to an infringement claim by the new patent owner, the prior
licensee would not have a breach of contract claim against the
new patent owner as the contract remains in personam
between the original two parties.
34
The bounds of the rights of the new patent owner are
also potentially different under the two theories. Royalty rights
to a percentage of licensee sales on a patented invention woul d
certainly relate to the use of the patented invention, and
possible use of the patent as well (depending on what it means
to “use” a patent).
35
The encumbrance theory thus seems to
counsel that such royalty rights should run with the patent,
just as rent from a tenant would run with the land to a new
32
See, e.g., Datatreasury, 522 F.3d at 1372 (“[B]ecause the owner of a patent
cannot transfer an interest greater than that which it possesses, an assignee takes a
patent subject to the legal encumbrances thereon.”); Innovus Prime, 2013 U.S. Dist.
LEXIS 93820, at *15; Paice LLC v. Hyundai Motor Co., Civ. No. WDQ-12-0499, 2014
U.S. Dist. LEXIS 95042, at *32 (D. Md. July 11, 2014) (“[A] patent owner cannot
transfer an interest greater than that which it possesses, and assignees take patent
rights subject to the legal encumbrances thereon.”).
33
See, e.g., ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1450 (7th Cir. 1996)
(“[W]e treat the licenses as ordinary contracts . . . .”); Kesan & Hayes, supra note 21, at
286 (“When a patent owner grants a license to another party, the license is often
analyzed as a contract.”); Mark R. Patterson, Must Licenses Be Contracts? Consent and
Notice in Intellectual Property, 40 FLA. ST. U. L. REV. 105, 10 9 (2012) (“This Article
argues that the weight of judicial authority and sound policy support a contractual
approach to license formation.”); H. Justin Pace, Note, Anti-Assignment Provisions,
Copyright Licenses, and Intra-Group Mergers: The Effect of Cincom v. Novelis, 9 NW. J.
TECH. & INTELL. PROP. 263, 267 (2010) (“Copyright and patent licenses are contracts
and as such are interpreted according to state law.”).
34
Cf. Telefonaktiebolaget LM Ericsson v. Wi-LAN USA, Inc., No. 14-21854-
CV-MIDDLEBROOKS, 2015 WL 11233112, at *5 (S.D. Fla. Aug. 14, 2015) (“Ericsson
does not have standing to maintain its claim for breach of contract.”).
35
See infra Section II.B.
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 941
landlord.
36
But where, as in the illustrative hypothetical of this
Section, only a fraction of the licensed patents are transferred,
it could be difficult to apportion the extent to which royalty
benefits shift to the new owner.
Under the bundle theory, royalty rights would not travel
with a patent. To be sure, a patent transferor and transferee
could make an in personam agreement to transfer monetary
payments along with the patent. That is different from saying
that the royalty payments transfer automatically as a part of
the in rem patent bundle of rights. The bundle of patent rights
granted by the USPTO did not include the right to rece ive
royalties. The royalty rights were extracted by the original
patent owner in exchange for giving up the right to exclu de the
licensee. But that does not make the royalty rights part of the
patent bundle,
37
for an in personam contract entered into by a
patent owner cannot add to the in rem bundle of patent rights
transferred to a subsequent patent owner.
B. Numerus Clausus
This article posits that the bundle of patent rights can
be diminished but not enlarged through a license agreement. It
is true that through claim construction, a patent owner might
broaden the scope of particular patent claims.
38
Nevertheless, a
patent provides the right to exclude others from practicing each
claim in the patent, even if the scope of the claims might be
somewhat elastic or malleable.
When a patentee enters a license agreement, it is giving
up that right to exclude with respect to a particular entity, thus
removing a stick (or right) from the bundle of rights to exclude.
But a patentee may not conversely add sticks to the bundle
through such actions. Allowing a patentee, through a pri vate in
personam agreement, to add to the in rem bundle of property
rights granted by the USPTO would impose significant
information costs on society, as such in rem rights are “against
the world” and thus impose correlative duties on everyone
36
See Berger, supra note 21, at 222 (“[T]he burden of a covenant to pay rent
runs with the land to the assignee of the tenant and the benefit runs to the successor in
ownership of the landlord’s reversion.”).
37
Cf. In re Particle Drilling Techs., No. 09-33744, 2009 Bankr. LEXIS 2151,
at *8 (S.D. Tex. July 29, 2009) (“[A] royalty interest in a patent cannot be considered a
covenant that runs with the land.”) (citing Jones v. Cooper Indus. Inc., 938 S.W.2d 118,
123 (Tex. App. 1996)); infra Section II.B.
38
See Jason Rantanen, The Malleability of Patent Rights, 2015 MICH. ST. L.
REV. 895, 927 (2016).
942 BROOKLYN LAW REVIEW [Vol. 83:3
else.
39
In part for this reason, as explained by Thomas Merrill
and Henry Smith in their article on The Property/Contract
Interface, there are limits on the extent to which individuals
can customize in rem property rights:
[W]here we find legal relations that are purely in rem, we also
consistently find that the doctrine adopts the form characteristic of
property law—immutable bright-line rules. . . . [W]e find a tendency
for protective and even notice rules to become more difficult to
contract around—more standardized—as duty holders become more
numerous and indefinite and so closer to the true in rem situation.
40
Such limitations on the customization of in rem rights
are related to the idea of numerus clausus, that property
should take a li mited number of forms.
41
Christina Mulligan
has explained that “[a] property right system without a
numerus clausus principle would likely impose significant costs
on parties trying to purchase or use property . . . . in the form
of mistakes made from understanding what a party was
buying.”
42
Professor Mulligan finds that
[t]he justifications for the numerus clausus principle in real property
law are even more pers uasive in the intellectual property context
because the scope of intellectual property rights is more difficult to
delineate than the scope of real property rights. [That is,] [t]he
metaphysical nature of intellectual property prevents protected objects
from being clearly identifiable, particularly in a patent context, where
inventions can be independently created by multiple parties.
43
The numerus clausus principle would seem to counsel,
in close cases, for erring on the side of keeping aspects of the
license agreement in personam so as to avoid unduly imposing
39
See Thomas W. Merrill & Henry E. Smith, The Property/Contract
Interface, 101 COLUM. L. REV. 773, 795 (2001) (“The disadvantages of the exclusion
strategy are largely a function of the limitations on such rights imposed by the need to
minimize the unit costs of processing information. In order to keep these costs low, it is
simply not possible to make these duties very complex or detailed.”); cf. Michael
Goodman, What’s So Special About Patent Law? , 26 FORDHAM INTELL. PROP. MEDIA &
ENT. L.J. 797, 852 (2016) (“Because a patent grant is a monopoly issued from the
government, a patent’s validity raises issues of public policy and is of legitimate
interest to members of the public, includin g many who may be uninvolved in any
particular infringement suit.”).
40
Merrill & Smith, supra note 39, at 850.
41
Merrill & Smith, supra note 20, at 8 (“The existence of unusual property
rights increases the cost of processing information about all property rights. Those
creating or transferring idiosyncratic property rights cannot always be expected to take
these increases in measurement costs fully into account, making them a true
externality. Standardization of property rights reduces these measurement costs.”); see
also Christina Mulligan, A Numerus Clausus Principle for Intellectual Property, 80
TENN. L. REV. 235, 235 (2013).
42
Mulligan, supra note 41, at 256.
43
Id. at 235.
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 943
information costs by multiplying the number of forms (or
modules) that an in rem patent right could take.
44
To use the terminology of Professors Merrill and Smith,
license agreements can be thought of as lying along the
interface of property and contract.
45
The license agreements
themselves are in personam contracts, but they may have the
effect of diminishing the underlying bundles of in rem patent
rights. While the parties have great freedom to make in
personam agreements, there are information costs associated
with allowing such agreements to change the underlying in
rem property rights and affect the rights of subsequent owners
of the property. Such costs are relatively unproblematic when
the in rem patent rights are diminished, but would be more
troublesome if the in rem rights were to be enlarged, thereby
increasing the correlative duties owed by the public. And given
that a patent right is granted by the USPTO, how could such a
right be created through a private license agreement?
The relative clarity of the bundle theory is
advantageous, as compared with importing wholesale the
convoluted law of covenants running with land.
46
In a patent
transfer situation, the parties (transferor and transferee) are
already dealing and negotiating the transfer of the patent.
Where royalties are concerned, the relevant analysis is
primarily between the patent transferor and transferee, and
the question is just, as a default rule, who will the licensee be
paying? If the royalties do not run, the transferor continues to
get paid. If the royalties do run, the payments go to the patent
transferee (the new owner) instead. As such, it matters not so
much where the entitlement is placed, but it is important to be
clear about where the entitlement lies.
47
If the entitlements are
44
See He nry E. Smith, Property as the Law of Things, 125 HARV. L. REV.
1691, 1706 (2012) (“The special in rem character of property forms the basis of an
information-cost explanation of the numerus clausus and standardization in property.
In rem rights are directed at a wide and indefinite audience of duty holders and other
affected parties, who would incur high information costs in dealing with idiosyncratic
property rights and would have to process more types of information than they would
in the absence of the absence of the numerus clausus. . . . Modu les help contain third-
party information costs.” (citing Merrill & Smith, supra note 20, at 26–34)).
45
See Merrill & Smith, su pra not e 39, at 849 (“Each of the four institutions
we have examined involves some combination of in personam and in rem relations.”).
46
Cf. Berger, supra note 21, at 234 (“The rules of law about covenants
running with the land are so complex that only a very few specialists understand them.
Sometimes co mplexity in the law is necessary. In this particular case, it is not.”).
47
Cf. Guido Calabresi & Douglas Melamed, Property Rules, Liability Rules,
and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1094 (1972)
(“Recently it has been argued that on certain assumptions, usually termed the absence of
transaction costs, Pareto optimality or economic efficiency will occur regardless of the
initial entitlement.”); R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 8 (1960)
944 BROOKLYN LAW REVIEW [Vol. 83:3
clear, the parties will more easily be able to be tak e them into
account in negotiating the price of the patent transfer, or
(essentially) “contract around the default rule” and agree to
transfer (through contract, rather than automatically through
property) additional aspects of any license agreements (such as
royalty rights).
48
As Robert Cooter and Thomas Ulen explain in
Law and Economics:
[B]argainers are more likely to cooperate when their rights are clear
and less likely to agree when their rights are ambiguous. . . . One
implication of this finding is that property law ought to favor criteria
for determining ownership that are clear and simple.
49
Uncertainty in where the entitlements lie can only serve
to complicate matters, creating costs related to confusion in
negotiation, and potentially even future disputes leading to
litigation. In furtherance of greater clarity regarding the
separation of property and contract in license agreements,
unpacking the legal rights and duties at play in a patent
transfer situation using Hohfeld’s framework of jural
relations
50
can be helpful.
C. Hohfeld’s Jural Relations
As a general matter, the work of Wesley Newcomb
Hohfeld is concerned with precision in terminology, leading to
greater precision in analysis. The bundle of rights picture of
property has strong roots in Hohfeld’s work on fundamental
jural relations.
51
The lack of precis ion in court decisions as to
what runs with the patent stems in part from failure to
distinguish between “license” as pure change in jural relation,
and the “license agreement” which, inter alia, effects that
change.
52
Indeed, this is precisely the type of looseness of
(“[T]he ultimate result (which maximizes the value of production) is independent of the
legal position if the pricing system is assumed to work without cost.”).
48
Kesan & Hayes, supra note 21, at 303 (“[M]arkets require contracting or
exchange, and uncertainty threatens exchange.”); see also JULES L. COLEMAN, RISKS
AND WRONGS 68 (1992).
49
ROBERT COO TER AND THO MA S ULE N, LAW AND ECONOMICS 89 (6th ed. 2012).
50
See generally Hohfeld, supra note 16.
51
See Merrill & Smith, supra note 39, at 783 (explaining that Hohfeld’s work
“directly anticipates the adoption of the bundle-of-rights metaphor favored by the Legal
Realists”); J.E. Penner, The “Bundle of Rights” Picture of Property, 43 U.C.L.A. L. REV.
711, 729 (1996) (“Hohfeld’s contribution to the bundle of rights picture is quite
understandable, since in a sign ificant sense, he devised it, although he did not fully
elaborate its contours.”).
52
Wesley Newcomb Hohfeld, Faulty Analysis in Easement and License Cases,
27 YALE L.J. 66, 92, 92 n.49 (1917) (explaining that the “chameleon-hued term,
‘license,’” “is rapidly shifted about by lawyers and courts,—usually even by the more
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 945
language that motivated Hohfeld’s articulation of the jural
relations, and for which they can serve as useful tools for
analysis.
53
In short, a patent is often said to provide a “right to
exclude,”
54
and as such, using Hohfeld’s platform, correspondingly
provides by definition that others have a “duty” not to infringe.
55
So if each right held by the patentee is a stick in the bundle, the
license agreement diminishes the size of the patent bundle when
the patentee gives up a right to exclude.
The first thing to grasp about Hohfeld’s jural relations
is that they are merely a platform for analysis; the jural
relations are sui generis creations, and Hohfeld explicitly
declined to provide formal definitions.
56
The jural relations are
a device for fostering precision in legal analysis. They do not
themselves purport to make normative prescriptions about
what the law should be.
57
careful writers,—so as to cover not only more complex groups of operative facts, but
also the jural relations flowing either from a ‘mere permission’ or from more complex
sets of facts.” (emphasis in original)); see also Hohfeld, supra note 16, at 24 (“Passing to
the field of contracts, we soon discover a similar inveterate tendency to confuse and
blur legal discussions by failing to discriminate between the mental and physical facts
involved in the so-called ‘agreements’ of the parties, and the legal ‘contractual
obligation’ to which those facts give rise.”).
53
Hohfeld, supra note 16, at 20 (“At the very outset it seems necessary to
emphasize the importance of differentiating purely legal relations from the physical
and mental facts that call such relations into being.”); see also Pierre Schlag, How to Do
Things with Hohfeld, 78 L. & CONTEMP. PROBS. 185, 192 (2015) (“Consider the term
‘contract.’ Sometimes it refers to the mental agreement reached by the parties (e.g., the
mental state); at other times to the physical embodiment of that agreement, (e.g., the
document); and, at other times, to the various rights, duties, and powers brought into
being in virtue of reaching the agreement (e.g., the legal relations).”).
54
See, e.g., Lexmark Int’l, Inc. v. Impression Prods., Inc., 816 F.3d 721, 740
(Fed. Cir. 2016) (en banc), rev’d and remanded 137 S. Ct. 1523 (2017) (“[T]he right to
use did not come from the patent statute, which grants only rights to exclude, not
rights to practice.”); Bio-Tech. Gen. Corp. v. Gen entech, Inc., 80 F.3d 1553, 1559 (Fed.
Cir. 1996) (“A patent grants only the right to exclude others and confers no right on its
holder to make, use, or sell.” (quoting Vaupel Textilmaschinen KG v. Meccanica Euro
Italia S.P.A. 944 F.2d 870, 879 n.4 (Fed. Cir. 19 91))); 5 DONALD S. CHISUM, CHISUM ON
PATENTS § 16.02[1] (2017) (“A patent grants to the patentee and his assigns the right to
exclude others from making, using, and selling the invention.”); Henry E. Smith,
Intellectual Property as Property: Delineating Entitlements in Information, 116 YALE
L.J. 1742, 1806 (2007) (“Although it is sometimes overlooked, patent law is explicitly
based on exclusion rather than on rights to use . . . .”).
55
See Hohfeld, supra note 16, at 33 (“[T]he correlative of X’s right that Y
shall not enter on the land is Y’s duty not to enter.”).
56
Id. at 30 (“The strictly fundamental legal relations are, after all, sui
generis; and thus it is that attempts at formal definition are always unsatisfact ory, if
not altogether useless.”).
57
See Schlag, supra note 53, at 189–90 (“Hohfeld’s work might best be read
as a contribution about how to think, not what to think. . . . Hohfeld does not offer a
substantive theory of law or entitlements or property or contracts or anything of the
sort. All he offers is an analytical method.” (emphasis in original) (footnotes omitted)).
946 BROOKLYN LAW REVIEW [Vol. 83:3
The motivation for this framework is, as Hohfeld puts it,
“the ambiguity and looseness of our legal terminology.”
58
Hohfeld offers the term “property” as a “striking example,” as
sometimes it is used to refer to the physical object that is the
property, but sometimes it is “used to denote the legal interest
(or agg regate of legal relations) appertaining to such physical
object.”
59
As Hohfeld explains, confusion can arise because
“[f]requently there is a rapid and fallacious shift from the one
meaning to the other,” and at times, the term “is used in such a
‘blended’ sense as to convey no definite meaning whatever.”
60
The term “license” is a perfect example of the type of
ambiguous language that could benefit from Hohfeldian
analysis.
61
“License” might refer to the license agreement, the
contract, between the licensor and the licensee. Or it might
refer to the legal relations that arise from the license
agreement, such as the privilege to infringe a particular
patent.
62
The distinction matters because while transfer of a
patent is generally held not to affect the licensee’s privilege to
infringe, that does not mean that the entire license agreement
runs with the patent.
Hohfeld was concerned with a similar issue regarding the
term “contract,” in that “[o]ne moment the word may mean the
agreement of the parties; and then, with a rapid and unexpected
shift, the writer or speaker may use the term to indicate the
contractual obligation created by law as a result of the
agreement.”
63
Charles Clark also recognized this problem and
argued for distinguishing between the “license” as such, and the
acts of agreement which create the license.
64
Similarly, Christop her
M. Newman explains that to “discuss clearly the relationship
between license and contract, we must also distinguish between
58
Hohfeld, supra note 16, at 21.
59
Id.
60
Id. at 21–22.
61
See Charles E. Clark, Licenses in Re al Property Law, 21 COLUM. L. REV.
757, 757 (1921) (“Here courts tend inveterately to confuse acts and the legal relations
which result therefrom and the battle begun over words terminates in a result shaped
by those words.”).
62
Indeed, Hohfeld stated that the “chameleon-hued term, ‘license,’” is
“rapidly shifted about by lawyers and courts,” but did not go much further in this
regard because “dealing at all adequately with the intricate and confused subject,
would, in and of itself, require a long article.” Hohfeld, supra note 52, at 92, 92 n.49.
See, e.g., Datatreasury Corp. v. Wells Fargo & Co., 522 F.3d 1368, 1372–73 (Fed. Cir.
2008); see also discussion infra Section II.A.
63
Hohfeld, supra note 16, at 25 (emphasis in original); see also Schlag, supra
note 53, at 19 2.
64
Clark, supra note 61, at 760–61 (“The use of the one term ‘license’ to
describe a privilege accompanied by an immunity from revocation and a privilege not
so accompanied creates an illusion of certainty and an erroneous belief in identity.”).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 947
acts that signify assent to binding agreements, documents in which
those agreements are memorialized, and various legal
consequences that follow from them.”
65
Hohfeld developed the jural relations as a terminology
for the purely legal relations, so as to avoid confusing them
with the physical or mental facts that give rise to those legal
relations. It is helpful to break the jural relations into two sets,
here is the first set in terms of “correlatives”:
Right
Duty
Privilege
No Right
And here is the first set again but in terms of
“opposites”:
RightXNo Right
Privilege XDuty
66
Rights and Duties are “correlatives,” in that if A has a
Right against B, then B owes a corresponding Duty to A.
67
This
is not any type of a normative or prescriptiv e statement, this is
just how Hohfeld’s analytical method works, by definition. So if
A has a Right that B stay off of Whiteacre, then B has a Duty
to stay off Whiteacre, because that is precisely what it means
to say that A has such a Right, under Hohfeld’s framework.
68
But if B has a Privilege to enter Whiteacre, then A has a No
Right that B Stay off Whiteacre, as No Rights are the
correlatives of Privileges just as Rights are the correlatives of
Duties.
69
The correlatives are represented by two-way arrows
above because where one is present (on one side of a relation)
the other is also present (on the other side).
“Rights” and “No Rights” are “opposites” in that one
cannot have both a Right and a No Right to the same thing.
65
Newman, supra note 9, at 1129. Professor Newman goes on to add: “Not all
legal consequences that are triggered by acts of contracting flow from contract law.” Id.
Indeed, as explored in this article, a license agreement or contract, may be seen as
diminishing underlying intellectual property rights.
66
Hohfeld, supra note 16, at 30.
67
Id. at 32 (“[I]f X has a right against Y that he shall stay off the former’s land,
the correlative (and equivalent) is that Y is under a duty toward X to stay off the place.”).
68
Schlag, supra note 53, at 201 (“It is not so much that rights ‘imply’ or ‘give
rise’ to duties. Rather, one’s rights are duties in someone else just as one’s duties are
rights in someone else. As Karl Llewellyn observed, rights and duties are simply
different ways of talking about the same legal relation.” (emphasis in original)
(footnotes omitted)).
69
Hohfeld, supra note 16, at 33 (“[T]he correlative of X’s privilege of entering
himself is manifestly Y’s ‘no-right’ that X shall not enter.”).
948 BROOKLYN LAW REVIEW [Vol. 83:3
The No Right is the negation of a Right. Similarly, Privileges
and Duties are opposites. As Hohfeld explains, “[t]he privilege
of entering is the negation of a duty to stay off.”
70
One cannot
have both a Privilege to enter and a Duty to stay off. As such,
the opposites are represented by X’s above because where one
is present on one side of a relation, the other is absent on the
same side.
The primary difference between calling something a
Right and calling it a Privilege, is that a Right forms the
predicate basis for an affirmative legal claim , whereas a
Privilege is a defense to a legal claim, or the freedom from such
a claim. As explained by Hohfeld: “A right is one’s affirmative
claim against another, and a privilege is one’s freedom from the
right or claim of another.”
71
Once this is understood, the
seemingly odd terminology of a “No Right” begins to make
sense. A violation of a Duty opens one up to a legal claim under
the correlative Right. By contrast, the exercise of a Privilege
does not subject one to a legal claim, as the correlative is a “No
Right.” But a Privilege does not imply an affirmative claim
against one who interferes with the exercise of the Privilege.
72
The second set of jural relations functions similarly to
the first set, here is the second set in terms of correlatives:
Power
Liability
Immunity
Disability
Here is the second set again but in terms of opposites:
Power X Disability
Immunity XLiability
73
A Power is similar to a Right, a Liability is similar to a
Duty, a Disability (or “No Power”) is similar to a No Right, and an
Immunity is similar to a Privilege.
74
The difference is that, unlike
a Right which represents the potential for an affirmat ive claim
70
Id. at 32.
71
Id. at 55; see also Wendy J. Gordon, An Inquiry into the Merits of Copyright:
The Challenges of Consistency, Consent, and Encouragement Theory, 41 STAN. L. REV. 1343,
1355 (1989) (“In the Hohfeldian lexicon, a right is an entitlement to have th e government
interfere on one’s behalf.” (emphasis in original) (footnote omitted)).
72
Schlag, supra note 53, at 201 (“This gets us to the crux of the matter with
regard to the difference between rights and privileges. The former establishes the
predicate for a legal remedy, namely a duty in B.”).
73
Hohfeld, supra note 16, at 30.
74
Id. at 55 (“[A] power bears the same general contrast to an immunity that
a right does to a privilege.”).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 949
against another, a “power is one’s affirmative ‘control’ over a given
legal relation as against another.”
75
For example, if A makes a
contractual offer to B, B now has the Power to accept that offer,
and A is Liable in the sense that A would be bound if B chooses to
accept.
76
Upon expiration of the offer, B’s Power becomes a
Disability, and A’s Liability becom es an Immunity.
The first se t of jural relations tracks the patent license
situation rather well. A patent holder has the Right to exclude
others from practicing the claimed invention; as such, others
have a Duty to refrain from infringing the patent. When a
patent holder grants a non-exclusive license, the licensee can
be said to have been granted a Privilege to infringe the
patent.
77
The patent owner licensor now has a “No Right” in
that she has given up the Right to exclude the licensee. She has
given up that stick in the bundle of sticks that is the pate nt.
The licensee is thereby freed from his Duty to refrain from
infringing, but is not granted any affirmative Right to practice
the invention.
78
As the United States Court of Appeals for the
Federal Circuit has explained:
Even if couched in terms of “licensee is given the right to make, use,
or sell X,” the [license] agreement cannot convey that absolute right
because not even the patentee of X is given that right. His right is
merely one to exclude others from ma king, using or selling X . . . .
79
As such, the license agreement, in the form of a
contract, can be said to affect the following purely legal change:
the relationship between the licensor and the licensee, with
respect to the patent, flips from one of Right / Duty, to one of
No Right / Privilege. The flip, or the granting of the license,
could be called an exercise of t he patent holder’s Power to give
up or waive the Right to exclude.
75
Id.
76
Id. at 49.
77
See Ortho Pharm. Corp. v. Genetics Inst., Inc., 52 F.3d 1026, 1031 (Fed.
Cir. 1995) (“In its simplest form, a license means only leave to do a thing which the
licensor would otherwise have a right to prevent. Such a license grants to the licensee
merely a privi lege that protects him from a claim of infringement by the owner of the
patent monopoly.” (quoting Western Elec. Co. v. Pacent Reproducer Corp., 42 F.2d 116,
118 (2d Cir.), cert. den ied, 282 U.S. 873 (1930)) (emphasis added)); Innovus Prime, LLC
v. Panasonic Corp., No. C-12-00660-RMW, 2013 U.S. Dist. LEXIS 93820, at *1 3 (N.D.
Cal. July 2, 2013) (“A patent license is nothing more than a promise by the patent
owner not to sue the licensee.”).
78
See Kesan & Hayes, supra note 21, at 289 (“If a patent licensee has a
privilege to use the licensed patent, this indicates that the licensee has no duty to
refrain from us ing the patent.”).
79
Spindelfabrik Suessen-Schurr Stahlecker & Grill GmbH v. Schubert &
Salzer Maschinenfabrik Aktiengesellschaft, 829 F.2d 1075, 1081 (Fed. Cir. 1987) (citing
35 U.S.C. § 154 (1982)).
950 BROOKLYN LAW REVIEW [Vol. 83:3
Under the bundle theory, when a patent is transferred,
while the license agreement (the contract) will remain between
the original two parties, this flip in jural relation will travel
with the patent, remaining between the patentee and the
licensee. The distinction between that which travels with the
patent and that which does not thus tracks Hohfeld’s
distinction between the “purely legal relations” and the
“physical and mental facts that call such relations into being.”
80
In place of the Right to exclude the licensee, the tran sferred
bundle contains a No Right to exclude, and the licensee thus
maintains its Privilege to infringe the patent.
In this article, the term “licensee” generally refers to a
non-exclusive licensee unless otherwise specified, which as just
explained would have only a Hohfeldian Priv ile ge to infringe.
But an exclusive licensee could have standing to bring an
infringement claim,
81
and as such would have a bundle of
Rights to exclude potential infringers in much the same way as
a patent owner.
82
A non-exclusive licensee does not acquire a
property interest, however, because the No Right / Privilege
relation is the same as if there were no patent at all.
83
D. In Rem (Multital) Versus In Personam (Paucital)
Another important point to understand is that in
Hohfeld’s scheme, all rights are between human beings, rather
than things. As Hohfeld explains, “since the purpose of the law is
to regulate the conduct of human beings, all jural relations must,
in order to be clear and direct in their meaning, be predicated of
such human beings.”
84
Similarly, at the dawn of the twentieth
century, Oliver Wendell Holmes stated: “All proceedings, like all
rights, are really against persons. Whether they are proceedings
or rights in rem depends on the number of persons affected.”
85
80
Hohfeld, supra note 16, at 20.
81
See infra notes 93–96 and accompanying text.
82
Cf. Madeline Morris, The Structure of Entitlements, 78 CORNELL L. REV.
822, 831 (1993) (“If I have a reserved-space pas s to parking space X, then I have a
Hohfeldian right to that space; you have a corresponding duty not to park in that
space. If on the other hand, I have a general monthly parking pass, then I have a
Hohfeldian privilege to park in space X; I may park in space X if it is empty, but I am
not guaranteed access to it.” (emphasis in original)).
83
This is arguably a difference from copyright licenses, because copyright
infringement requires actual copying, so a copyright infringer (or licensee) is
necessarily making use of the copyright. See 17 U.S.C. § 501(a) (2012).
84
Wesley Newcomb Hohfeld, Fundamental Legal Conceptions as Applied in
Judicial Reasoning, 26 YALE L.J. 710, 721 (1917). This second Hohfeld article is
somewhat of a continuation of or sequel to his first (1913) article on the jural
relationsof the same title.
85
Tyler v. Court of Registration, 55 N.E. 812, 814 (Mass. 1900).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 951
The notion that all rights are between people, not things,
is in tension with the terminology of “in rem,” which “literally
means ‘against or about a thing.’”
86
This bothered Hohfeld. Again
in the name of precision and avoidance of confusion, Hohfeld was
insistent that “[a] right in rem is not a right ‘against a thing.’”
87
Hohfeld was of the view that “because of the unfortunate
terminology involved, the expression ‘right in rem’ is all too
frequently misconceived, and meanings attributed to it that could
not fail to blur and befog legal thought and argument.”
88
Thus
Hohfeld proposed the alternative terminology (which never really
caught on) of “mult ital” (instead of in rem) and “paucital” (instead
of in personam).
89
According to Hohfeld, the real difference between a
right in rem and a right in personam is not that the former is
against a thing and the latter is against a person. They are
both against people. The difference is one of quantity; the in
rem right is held against many other people (it is multital),
whereas the in personam right is held against one person, or a
few people (it is paucital). Or as Hohfeld put it, “a right in
personam is one having few, if any, ‘companions’; whereas a
right in rem always has many such ‘companions.’”
90
Although
Hohfeld himself did not use the term “bundle of rights,” once
we conceive of an in rem right as a multitude of “companion”
rights, we are well on our way towards the bundle theory.
91
There are a couple of other general characteristics of in
rem rights that are worth mentioning. One is that in rem
rights are generally negative in character in that they require
that persons abstain from doing something (i.e., the duty not to
infringe a patent).
92
This makes sense as it would be rather
onerous if an in rem right required its many subjects to all
affirmatively do something. Another is that the class of duty
holders subject to an in rem right is not only large, but also
86
Merrill & Smith, supra note 39, at 782 n.28 (quoting B LACK’S LAW
DICTIONARY 797 (7th ed. 1999)).
87
Hohfeld, supra note 84, at 720; see also id. at 733 (“[T]he attempt to
conceive of a right in rem as a right against a thing should be abandoned as
intrinsically unsound, as thoroughly discredited according to good usage, and, finally,
as all too likely to confuse and mislead.” (emphasis in original)).
88
Id. at 720.
89
Id. at 712.
90
Id. at 723.
91
See id. at 743 (“[T]he supposed single right in rem correlating with ‘a duty’
on ‘all’ persons really involves as many separate and distinct ‘right-duty’ relations as
there are persons subject to a duty.”).
92
Merrill & Smith , supra note 39, at 788; see also A.M. Honoré, Rights of
Exclusion and Immunities Against Divesting, 34 TUL. L. REV. 453, 458–59 (1960).
952 BROOKLYN LAW REVIEW [Vol. 83:3
indefinite with respect to identity.
93
For example, a patent
owner would not be able to name every person subject to the
duty to refrain from infringement.
As with his framework of jural relations, Hohfeld’s
multital / paucital framework maps well onto the patent license
situation.
94
A patent owner has a multital bundle of rights to
exclude against ot her persons. The license agreement is a paucital
contract that serves to negate or eliminate one of those rights,
with respect to the licensee.
95
The patent owner retains the
bundle of rights, but there is one less right in the bundle. The
bundle does not revert to its original size upon transfer.
96
But the
license agreement, the in personam contract, nev ertheless
remains between the patent transferor and the licensee.
Because a patent is not a tangible thing and does not
provide a “right to use,” it is particularly well suited to the bundle
of rights conception. Perhaps the strongest critique of the bundle of
rights theory of property is that it fails to sufficiently reflect the fact
that ownership often provides the right to use and control a
discrete physical thing.
97
For example, Henry Smith has argued
against theorizing property as a bundle of rights to exclude, in part
because “[r]ights to exclude are a means to an end, and the ends in
property relate to people’s interests in using things.”
98
It is true
that in the case of physical things like land, it is sometimes much
simpler to conceive of ownership as dominion over the tangible
parcel of land, rather than as an abstract bundle of legal relations
93
Merrill & Smith, supra note 39, at 783–84; see also Albert Kocourek,
Rights in Rem, 68 U. PA. L. REV. 322, 335 (1920).
94
See Hohfeld, supra note 84, at 719 (“A’s right against B is a multital right,
or right in rem, for it is simply one of A’s class of similar, though separate, rights,
actual and potential, agai nst very many persons. The same points apply as
regards . . . A’s right that B shall not manufacture a certain article as to which A has a
so-called patent.” (emphasis in original)).
95
Penner, supra note 51, at 745 (“Licenses do not affect all holders of the
general duty to exclude themselves from the property of others; only those party to the
license are relieved of the duty.”).
96
Cf., Merrill & Smith, supra note 39, at 787 (“[I]f A sells Blackacre to B, tbis
[sic] does not result in any change in the duties of third parties W, X, Y or Z toward
Blackacre. Those duties shift silently from A to B without any requirement that W, X,
Y, or Z be aware of the transfer, or even the identities of A or B.” (citation omitted)).
97
See Penner, supra note 51, at 743 (“The right to property is a right of
exclusion which is grounded by the interest we have in the use of things.”); see also
Merrill & Smith, supra note 39, at 787 (“In personam rights attach directly to speci fic
persons, whereas in rem rights attach to persons only because of their relationship to a
particular ‘thing.’”); id. at 783 (“[I]n rem rights . . . attach to persons through their
relationship to particular things.”); Schlag, supra note 53, at 223 (“From a conceptual
perspective, James Penner objected that Hohfeldian decomposition effectively
liquidates the conceptual architecture of law and thus provides no theory of property.”
(emphasis in original)).
98
Smith, supra note 44, at 1704.
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 953
against the world.
99
But this critique would seem to have less force
as applied to patents, which are more abstract and intangible by
their very nature.
100
The counterpart of the right to use land might
be the patent right to a particular market position—a monopoly on
the patented invention—but the monopoly is intangible and is
provided by virtue of the bundle of rights to exclude others from
infringing.
101
Also, although a patent is sometimes conceptualized
as a government-sanctioned monopoly, that characterization is not
always correct in economic terms.
102
II. PATENT LICENSES ON TRANSFER
The bundle of rights is often discussed in the context of
whether an exclusive patent licensee has standing to sue. The
Federal Circuit has stated that “[t]o have co-plaintiff standing
in an infringement suit, a licensee must hold some of the
proprietary sticks from the bundle of patent rights.”
103
These
“proprietary rights granted by any patent are the rights to
exclude others from making, using or selling the invention in
the United States.”
104
While a non-exclusive, or “bare” license
would not transfer any rights to exclude and thus would not
transfer standing, an exclusive licensee owns some of the
proprietary sticks and may have standing.
105
99
Cf. James Y. Stern, What Is the Right to Exclude and Why Does It Matter,
PROPERTY THEORY: LEGAL AND POLITICAL PERSPECTIVES (M.H. Otsuka & J.E. Penner
eds., Cambridge University Press) (forthcoming).
100
Cf. Smith, supra note 54, at 1795 (“In the case of intellectual property, the
‘things’ that are the objects of the right to exclude need to be constructed . . . .”).
101
See Penner, su pra note 51, at 816 (“[O]ne is inexorably led into a realm of
interminable abstract confusion if one regards the ownership of a patent as really the
ownership of an idea, rather than a monopoly on action whose scope is defined by an
extremely important expression of what actions are monopolized, i.e., the patent
specification and claims.”); see also Biotech. Indus. Org. v. District of Columbia, 505
F.3d 1343, 1346 (Fed. Cir. 2007) (Gajarsa, J., concurring) (“[T]he primary mechanism
by which the right to exclude promotes such innovation is by providing the patentee
with the opportunity to obtain greater profits than it could have obtained without such
a right to exclude.”); King Instruments Corp. v. Perego, 65 F.3d 941, 950 (Fed. Cir.
1995) (“The Act supplies a carrot in the form of economic rewards resulting from the
right to exclude.”).
102
David J. Teece & Edward F. Sherry, On Patent “Monopolies”: An Economic
Re-Appraisal, COMPETITION POL’Y INT’L ANTITRUST CHRONICLE, April 2017, at 19, 20
(“In most situations, a patent holder does not hold a ‘monopoly’ over a relevant
technology market.”).
103
Ortho Pharm. Corp. v. Genet ics Inst., Inc ., 52 F.3d 1026, 1031 (Fed. Cir. 1995).
104
Id. at 1031–32; see also Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1552
(Fed. Cir. 1995) (en banc).
105
Ortho Pharm. Corp., 52 F.3d at 1032 (“[A] licensee with proprietary rights
in the patent is generally called an ‘exclusive’ licensee.”); see also Christopher M.
Newman, An Exclusive License Is Not an Assignment: Disentangling Divisibility and
Transferability of Ownership in Copyright, 74 LA. L. REV. 59, 79 (2013) (“A bare license,
however, is nothing more than a privilege.”).
954 BROOKLYN LAW REVIEW [Vol. 83:3
Thus, a patent can be thought of as a bundle of rights to
exclude, for it is the right to ex clude that is “at the very heart
of patent law.”
106
Accordingly, royalty rights arising from a
license agreement have been held not to confer standing, as the
royalty rights are “merely a me ans of compensation under the
agreement,” rather than a part of the patent right itself.
107
The
United States District Court for the Eastern District of Texas
has stated: “A patentee’s right to royalty payments or
infringement damages does not limit or detract from the
assignment of a patent or substantial rights thereunder.”
108
The patent right to exclude could be broken down further:
exclude from making, exclude from using, etc., but as a shorthand,
it can be thought of as the right to exclude others from infringing
the patent. As explained in the previous Part, it is still a bundle in
the sense that it is in rem, not just a right to exclude one party
from infringing, but rather a right to exclude (in the bundle) for
each potential infringer. With the patent conceptualized as a
bundle of rights to exclude, this article now looks at the effect of
patent transfer on various aspects of patent licenses.
A. Arbitration Clauses
The coexistence of the encumbrance theory alongside
elements of the bundle theory is well demonstrated in the
following paragraph from the Federal Circuit’s decision in
Datatreasury Corp. v. Wells Fargo & Co.:
Appellants rely on cases standing for the general proposition that
because the owner of a patent cannot transfer an interest greater
than that which it possesses, an assignee takes a patent subject to
the legal encumbrances thereon. . . . However, the legal
encumbrances deemed to “run with the patent” in these cases
involved the right to use the patented product, not a duty to
arbitrate. The cases do not support a conclusion that procedural
terms of a licensing agreement unrelated to the actual use of the
patent (e.g. an arbitration clause) are binding on a subsequent owner
of the patent.
109
106
Penril Datacomm Networks, Inc. v. Rockwell Int’l Corp., 934 F. Supp. 708,
712 (D. Md. 1996).
107
Chan v. Time Warner Entm’t Co., No. SA-03-CA-0087-RF, 2003 U.S. Dist.
LEXIS 16390, at *19 (W.D. Tex. July 23, 2003).
108
Dexas Int’l, Ltd. v. Tung Yung Int’l (USA) Inc., No. 6:07cv334, 2009 U.S.
Dist. LEXIS 34766, at *28 (E.D. Tex. Feb. 25, 2009) (citing Vaupel Textilmaschinen KG
v. Meccanica Euro Italia S.P.A., 944 F.2d 870, 875 (Fed. Cir. 1991)).
109
Datatreasury Corp. v. Wells Fargo & Co., 522 F.3d 1368, 1372–73 (Fed.
Cir. 2008).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 955
The beginning of this paragraph is in some accord with
the bundle theory in invoking nemo dat, the principle that the
owner of a patent cannot transfer an interest greater than that
which it possesses. However, the court quickly transitions to
the encumbrance theory and the notion that only
encumbrances related to the “actual use of the patent” run with
the patent.
In Datatreasury, the agreement at issue was between
Wells Fargo Services Corp. (WFSC) and WMR e-Pin LLC
(WMR). The agreement, inter alia, provided a license to U.S.
Patent No. 5,265,007 (the 007 Patent) as well as “all
applications and patent disclosures related thereto,” and also
included an arbitration clause which provided: “Any dispute or
disagreement arising between WMR and Wells Fargo
concerning the applicability or interpretation of this License
Agreement shall be resolved in accordance with the dispute
resolution procedures . . . .”
110
After entering into the agreement
with WFSC, WMR assigned the 007 Patent to Datatreasury,
along with three other patents. Datatreasury then fi led a
complaint in the Eastern District of Texas accusing Wells
Fargo of infringing the three other patents. There was a
dispute as to whether the three patents in suit were “related”
to the 007 Patent within the meaning of the WFSC / WMR
agreement.
111
Wells Fargo argued that this dispute should be
submitted to arbitration in accordance with the agreement. But
the court held that Datatreasury was not bound by the
arbitration clause because it was not a signatory of the contract
and did not participate in “negotiating any of its terms,” and
that the arbitration clause did not run with the 007 Patent as
it was “unrelated to the actual use of the patent.”
112
Although this result seems correct, the reasoning is
suspect. One could question whether the arbitration clause is
really unrelated to the use of the patent. If a patent is a right
to exclude that is enforced through litigation, then one of the
primary uses of a patent might be to bring a suit for
infringement. As such, a clause specifying the forum in which
such a suit would take place—as an arbitration clause does—
could be said to relate to the use of the patent.
The bundle theory provides more clarity in explaining
the result of Datatreasury. The arbitration clause provides the
Power to move an infringement suit to arbitration. If both
110
Id. at 1370–71.
111
See id. at 1372 n.2.
112
Id. at 1372–73.
956 BROOKLYN LAW REVIEW [Vol. 83:3
parties hold this Power, then both parties are subject to the
correlative Liability of having the case moved to arbitration.
This Power arose from the WFSC / WMR agreement, which
was an in personam contract between those two parties, and
that contract remained between those two parties when the
007 Patent was transferred. The Power to move the case to
arbitration was not granted by the USPTO and was never part
of the patent bundle, so the contract did not operate to add that
Power to the bundle. Nor was the correlative Liability added to
the patent bundle. The arbitration clause remains a feature of
the license agreement, the contract, and thus remains between
the two contracting parties.
The theory that a license is an encumbrance that “runs
with” a patent has apparent roots in the law of covenants that run
with land. Under the common law deriving from Spencer’s Case,
113
for a covenant to run with land, one requirement has been that
the covenant “touch or concern” the land.
114
This requirement is
similar to the Federal Circuit’s ruling that only encumbr ances
that are not “unrelated to the actual use of the patent” will “run
with the patent.”
115
It is also in some accord with the common
law’s refusal to allow easements “in gross”—unrelated to a
particular parcel of land—to run with the land.
116
When
easements in gross have been allowed to bind “future owners of
the servient parcel,” they have been “clearly defined, limited
interests, af fecting only a portion of the servient land.”
117
This
requirement of limited complexity and clear definition in
easements or covenants that run with the land is in accord with
the numerus clausus principle, in that in rem alterations of
property interests cannot be infinitely complex.
As demonstrated by the arbitration clause at issue in
Datatreasury, one problem with the encumbrance formulation is
that it is rather indeter minate. This has been true even with
113
Spencer’s Case, 5 Co. 16a, 77 Eng. Rep. 72 (K.B. 1583).
114
See CLARK, supra note 28, at 96; Berger, supra note 21, at 207 (“Spencer’s
Case established that the burden of a covenant does not run to an assignee unless it
‘touches and concerns’ the leased property and is not merely ‘collateral.’”).
115
Datatreasury Corp. v. Wells Fargo & Co., 522 F.3d 1368, 1372 (Fed. Cir. 2008).
116
See Loch Sheldrake Assocs. v. Evans, 118 N.E.2d 444, 447 (N.Y. 1954) (“If
we are to speak with strictest accuracy, there is no such thing as an ‘easement in
gross’ . . . since an easement presupposes two distinct tenements, one dominant, the
other servient.”); Molly Shaffer Van Houweling, The New Servitudes, 96 GEO. L.J. 885,
894 (2008) (“The English courts . . . refused to enforce easements ‘in gross,’ which
benefit a person or entity without regard to land ownership.”); Newman, supra note
105, at 86 (“One line of doctrin e held that easements were permissible only if made
appurtenant to an adjacent tenement.”).
117
Gerald Korngold, Privately Held Conservation Servitudes : A Policy
Analysis in the Context of in Gross Real Covenants and Easement, 63 TEX. L. REV. 433,
476–77 (1984).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 957
respect to the common law “touches and concerns” rule for land.
118
But given that patent rights are intangible with no physical thing
or land to “touch,” the problem is even worse for patents.
119
What
exactly is “use of the patent,” and how related is related enough?
This indeterminacy is exacerbated (or demonstrated) by the fact
that in addition to “use of the patent,” the rule has also been
alternatively formulated in terms of “use of the patented product,”
and “use of the invention.”
120
B. Royalty Rights
When a la ndowner leases land, and then transfers the
leased land, the benefit of rent is said to run with the land to the
new landowner.
121
The patent law analogue of the rent a
landowner receives is the royalties that a patent owner might
receive under a license agreement. Applying the “actual use” test,
one would think that just as the rent paid by a tenant runs with
the land, royalty rights paid by the licensee should run with the
patent, for it would be hard to argue that such royalty rights do
not relate to the use of the patent or use of the invention.
But in this regard, the case law has reached the
opposite conclusion, further demonstrating the inadequacy and
inconsistency of the encumbrance theory. In Jones v. Cooper
Industries, Inc., the Texas Court of Appeals stated that
“‘royalties,’ . . . would not ‘run with’ title to the patents and be
binding upon subsequent assignees,” invoking the pri nciple
that “[s]ince a patent is [by statute] to be treated as personal
property, there can be no covenants that ‘run with’ the
118
CLARK, supra note 28, at 96 (“ It has been found impossible to state any
absolute tests to determine what covenants touch and concern land and what do not.”).
119
Cf. Peter S. Menell, The Property Rights Movement’s Embrace of
Intellectual Property: True Love or Doomed Relationship?, 34 ECOLOGY L.Q. 713, 739
(2007) (“[E]xtrapolating from real property law to intellectual property law overlooks
important distinctions between the underlying resources at issue.”); Gordon, supra note
71, at 1368 (“Intellectual property is concerned not with entry or physical interference
but with forbidding specified uses of the work that may be quite independent of
physical touching.”); Smith, supra note 54, at 1795; Smith, supra note 44, at 1703
(“Many important features of property follow from the semitransparent boundaries
between things.”).
120
Compare Paice LLC v. Hyundai Motor Co., Civ. No. WDQ-12-499, 2014
U.S. Dist. LEXIS 95042, at *32 (D. Md. July 7, 2014) (“licensing terms not tied to the
right to use a patented invention do not encumber” (emphasis added)), with
Datatreasury, 522 F.2d at 1372–73 (“[T]he legal encumbrances deemed to ‘run with the
patent’ in these cases involved the right to use the patented product, not a duty to
arbitrate. The cases do not support a conclusion that procedural terms of a licensing
agreement unrelated to the actual use of the patent (e.g. an arbitration clause) are
binding on a subsequent owner of the patent.” (emphasis added)).
121
Berger, supra note 21, at 222.
958 BROOKLYN LAW REVIEW [Vol. 83:3
patent.”
122
Similarly, in In re Particle Drilling Techs., the court
found that a “royalty interest in a patent cannot be considered
a covenant that runs with the land,” again invokin g the notion
that patents are, under 35 U.S.C. § 261, to have the attributes
of personal pr operty, and the common law principle that “[r]eal
property concepts (such as covenants running with the land) do
not apply to personal property.”
123
The notion that royalty rights should not automatically
run with a patent seems reasonable, in part because royalty
rights will not often correspond directly to the use of a single
patent in the way that rent corresponds to the use of single
tract of land. The license agreement may cover an entire
portfolio of patents relating to the same products or even
different types of products. If only one or some of these patents
are transferred, it might be difficult to apportion how much of
the royalty rights should transfer. Of course, when transferring
the patent, the transferor and transferee could contract around
the default rule and agree that some royalties will pass to the
transferee along with the patent. But keeping the royalties
with the transferor seems to provide the clearest and most
coherent default rule, thereby lowering bargaining (or
transaction) costs.
124
Furthermore, some of the consideration for a license
agreement may be in the form of a cross-license to the
licensee’s patents.
125
Would the cross license also run with the
patent in the way an easement to use an adjoining tract of land
runs with a parcel of land? Thi s would seem problematic.
Returning to the hypothetical illustration from Part I, the
patent transferor (A) and the transferee (C) may not be
similarly situated (cross) licensees from the perspective of B.
That is, C may be a much larger company and as such B may
have been able to gain much more from granti ng a license to C
122
Jones v. Cooper Indus., Inc., 938 S.W.2d 118, 122–23 (Tex. App. 1996); see
also 35 U.S.C. § 261 (2012) (“[P]atents shall ha ve the attributes of personal property.”);
Pressure Sys. Int’l v. Airgo IP, LLC, Civ. Action H-08-245, 2010 U.S. Dist. LEXIS
90166, at *16 (S.D. Tex. 2010) (“Agreements about patent rights do not run with the
patents; they are also personal.”).
123
In re Particle Drilling Techs., No. 09-33830 , 2009 Bankr. LEXIS 2151, at
*7 (S.D. Tex. 2009).
124
See Jeremy Kidd, Kindergarten Coase, 17 GREEN BAG 2D. 141, 155 (2014)
(“[E]stablish rules that are clear and predictable, so that the costs of bargaining post-
intervention are lower. Bargaining can be difficult enough without having to spend
time and money determining where everyone stands.”).
125
See, e.g., Innovus Prime, LLC v. Panasonic Corp., No. C-12-00660-RMW,
2013 U.S. Dist. LEXIS 93820, at *3 (N.D. Cal. 2013) (“Phillips entered into an
agreement with Panasonic whereby each party agreed not to assert against the other
any patents relevant to ‘audio and video products.’”).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 959
as compared with A.
126
With respect to cross-licenses as well,
there is again the recurrent problem of apportionment if A
transfers only some of the relevant patents to C.
The principle invoked by the Jones and In re Particle
Drilling courts in hol ding that royalties do not run with
patents—that patents are personal pro perty with which
covenants cannot run—is overbroad and proves too much, in
that this principle could similarly prevent lic ense rights from
running with patents, but it cannot be that the mere transfer of
a patent wipes the patent clean of all licenses. And so the
courts have held; “[i]t is a longstanding principle that an
assignee of a patent takes the patent subject to prior
licenses.”
127
Thus courts seem to invoke the notion that
covenants cannot run with personal property only selectively
and inconsistently, with no acknowledgement of the
inconsistency and no sufficient guidance on when the principle
should be invoked.
Unlike the encumbrance theory, the bundle theory
provides an explanation for why a covenant not to sue runs
with a patent but royalty rights do not. The royalty right was
never a part of the bundle of rights granted by the USPTO. The
patent can be thought of as a bundle of right s to exclude.
128
A
patentee that grants a license essentially sells one of the sticks
in the bundle, the one that provides the right to exclude the
licensee. That stick is no longer in the bundle. Perhaps ro yalty
rights are received in exchange, but that does not make the
royalty rights part of the patent bundle. When the patent is
transferred, what is transferred is the group of sticks that
remain in the bundle. Thus, the transferee of the patent takes
the patent “diminished by [the licensee’s] right to use the
patented process within the scope of [the] license,”
129
even
though the transferee does not become a party to the license
agreement. The bundle theory thus accords with the principle
that “the owner of a patent cannot transfer an interest greater
than that which it possesses.”
130
126
Cf. UNIF. COMPUT. INFO. TRANSACTIONS ACT § 503(1)(B) (2002) (transfer of
a contractual interest prohibited when the transfer “would materially change the duty
of the other party”).
127
Innovus Prime, LLC, 2013 U.S. Dist. LEXIS 93820, at *14 (citing Keystone
Type Foundry v. Fastpress Co. , 272 F. 242, 245 (2d Cir. 1921)).
128
See, e.g., Lexmark Int’l, Inc. v. Impression Prods., Inc., 816 F.3d 721, 746
(Fed. Cir. 2016) (en banc), rev’d and remanded 137 S. Ct. 1523 (2017) (“A patentee
exercises its congressionally granted rights only when it invokes its power to exclude
others, not when it sells its product.”).
129
L.L. Brown Paper Co. v. Hydroiloid, Inc., 118 F. 2d 674, 677 (2d Cir. 1941).
130
Datatreasury Corp. v. Wells Fargo & Co., 522 F.3d 1368, 1372 (Fed. Cir.
2008); see also Innovus Prime, LLC, 2013 U.S. Dist. LEXIS 93820, at *15 (“Patent
960 BROOKLYN LAW REVIEW [Vol. 83:3
The discussion of royalty rights highlights an important
feature of the bundle approach. Under the bundle approach,
only the burdens of a license agreement may run with the
patent—the benefits do not run as a default matter—though a
patent transferor could agree to transfer them in the sale. The
burdens run to the extent that they are conceived as lessening
or diminishing the bundle of patent rights, but the bundle of
patent rights cannot be enlarged by a license agreement.
C. Confidentiality Provisions
Contractual obligations to keep confidential the terms of
a patent license agreement have also been held not to bind
subsequent owners of a licensed patent. In Paice LLC v.
Hyundai Motor Co., the plaintiff, Paice, LLC, had previously
sued Toyota for infringement of certain patents, which
litigation in the District of Maryland settled.
131
Subsequently,
Abell, a non-profit organization, became a co-owner of the
patents, which related to hybrid electric technology and fuel
efficiency.
132
Paice and Abell then sued Hyundai on the same
patents, and sought to disclose the Paice-Toyota settlement
agreement in the Hyundai litigation as evidence of reasonable
royalties for purposes of damages.
133
Toyota intervened to
prevent the disclosure of the settlement agreement, invoking a
confidentiality provision in the agreement, which stated that
“[t]he terms of this Agreement are confidential and shall not be
disclosed unless required by law.”
134
The court granted Toyota’s
motion to prevent disclosure of the settlement agreement with
respect to Paice, but not with respect to co-plaintiff Abell,
because Abell was not a party to the settlement agr eement.
135
Applying Datatreasury, the Paice court held that the
confidentiality prov isi on did not run with the patents, because
it was “clearly a procedural term unrelated to the right to use
Paice’s (and now Abell’s) patents.”
136
Toyota argued that “use”
within the meaning of Datatreasury “contemplates use of the
license agreement in a patent infringement trial,” but the court
owners cannot transfer an interest greater than what they possess.” (citing
Datatreasury Corp. 522 F.3d at 1372)).
131
Paice LLC v. Hyundai Motor Co., Civ. No. WDQ-12-0499, 2014 U.S. Dist.
LEXIS 154254, at *8–9 (D. Md. Oct. 29, 2014).
132
Id. at *2–3.
133
Id. at *10, 19.
134
Id. at *9–10.
135
Id. at *11.
136
Paice, LLC v. Hyundai Motor Co., CIVIL NO. WDQ-12-499, 2014 U.S. Dist.
LEXIS 95042, at *33 (magistrate memorandum opinion).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 961
disagreed.
137
The court recognized the “potential problem” of “a
patent owner, in bad faith, transferring interest in the patent
for the sole purpose of circumventing a confidentiality
provision,” but noted that this problem did not apply in the
present case and that “a future court may create an exception”
for such a situation.
138
The confidentiality provision is an in personam
agreement between the two signatories to the contrac t. It
cannot prevent third parties from attempting to compel
disclosure of the agreement. There is no sense in which
confidentiality obligations can be thought of as changing the
bundle of patent rights, so under the bundle theory it does not
run with the patent, and the result is the same as that reached
by the courts.
However, courts may have to watch ou t for bad faith or
sham transactions on the part of patent owners; that is,
transferring a patent merely to get around a confidentiality
provision (or other covenants such as an arbitration clause). On
the other hand, given that the covenant not to sue does not run
with the patent, the bad faith issue is avoided on that score.
The avoidance of an incentive for and need to consider possible
bad faith is a major reason for conceptualizing certain
agreements as in rem, running with the patent, and a
countervailing force to the numerus clausus and information
cost policy considerations.
139
D. Termination
The power to terminate the license presents som e more
difficult questions. At common law, if a lease gives a landowner
the right to terminate the lease that ben efi t would generally
run with the land.
140
This would seem to be the case under the
encumbrance theory as well, as it seems that the right to
terminate the license relates to the “actual use” of the patent,
because termination of the license would allow for use of the
patent unencumbered by the license.
But there are good reasons why a termination right
should not run. Presumably, the thing stopping the patent
137
Id.
138
Paice, 2014 U.S. Dist. LEXIS 154254, at *17–18.
139
Cf. Merrill & Smith, supra note 20, at 39 (“The number of forms of
property is subject to a tradeoff between measurement and error costs on the one hand
and frustration costs on the other.”).
140
Berger, supra note 21, at 233 (“[I]t has been held that the benefit of a
covenant allowing the landowner to terminate the lease under certain described
conditions runs to the landlord’s successor in interest.”).
962 BROOKLYN LAW REVIEW [Vol. 83:3
owner from exercising the right to terminate is the benefit (e.g.,
royalty rights or cr oss-license rights) that the patent owner is
receiving under the license agreement, which would cease upon
termination. If these benefits do not run with the patent, then
there would be nothing stopping a subsequent patent owner
from exercising the right to terminate. Thus, if termination
power runs with the patent, this could in some cases eviscerate
the general rule that patent assignees must respect pre-
existing licenses. Note that this problem does not exist in the
land situation because the tenant would be paying rent to the
new owner of the land.
141
Applying the bundle theory, a patentee’s Power to
terminate the license agreement does not run with a
transferred patent, if the Power to terminate is viewed as a
Power to terminate the entire license agreement, rather than
only the license to one patent. The licensee thus has a Liability
to termination of the entire contract. The Power to terminate is
a feature of the contract, which remains between the original
two parties, it does not affect the bundle of patent rights.
The Power to terminate arises from the license
agreement, as the Power was not part of the bundle granted by
the USPTO. Under the bundle theory, the license agreement
cannot add the termination power to the patent bundle. This
comports with nemo dat and the idea that in close cases such
as this, we should err on the side of giving the patent
transferee less rather than more, so as to protect the rights of
the licensee, who is not a party to the patent transfer
transaction. It also comports with the numerus clausus
principle, in that, in close cases we should err on the side of
leaving features of the license agreement in personam, so as to
cut information costs, as compared with creating undue
variation the underlying in rem IP rights.
Because termination options are an in personam feature
of the contract, the licensee (and the original licensor / patent
transferee) maintain their options to terminate the license but
the patent transferee does not acquire any such option. If the
licensee or original licensor terminates the license agreement,
the patent transferee’s No Right to sue the licensee would
revert back to a Right. That is, the patent bundle acquired by
the patent transferee did not entirely lack the Right to sue the
licensee, it lacked that right only while the license agreement
is in effect.
141
See id. at 222.
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 963
Where an agreement specifies that a licens e is granted
only for a certain amount of time, say five years, the patentee
has given up the Right to exclude only within that period. The
patent is diminished in that it no longer includes the Right to
exclude the licensee for the five years specified in the license
agreement. Under the theory of this article, if such a patent
were to be transferred during the five-year period the new
owner would not obtai n a Right to exclude the licensee during
that time period, but could potentially exclude the licensee
after that period, (assuming of course that the patent has not
already expired).
E. LOT Revisited
This article now returns to the LOT agreement
discussed in the introduction. The LOT is an agreement
entered into by a group of companies that is supposed to
effectively prevent any of them from transferring their patents
to a patent troll, or Patent Assertion Entity (PAE), by granting
a license which becomes active only upon transfer of the patent
to a troll.
Section 1.1 of the LOT agreement—License Grant and
Release—provides to every Licensee a “fully vested and
irrevocable . . . license to make, have made . . . Products and
Services at any time on or after any Transfer of the respective
Subject Patent to an Assertion Entity.”
142
Section 1.2 states:
With respect to each Subject Patent of the Licensor, the Licens e
constitutes a present, fully vested and irrevocable (except as provided in
Section 2 below) waiver of the right under the respective Subject Patent
for any Assertion Entity to make any Patent Assertion of the respective
Subject Patent against any Licensee . . . .
143
Thus Section 1.2 is structured as a “present” waiver. But what
exactly is being presently waived? It is the potential future
right of an “Assertion Entity”—not a party to the agreement—
to enforce the patent.
A paper by one of the LOT founders implies that the
LOT is an encumbrance that run s with the patent, though the
paper contains no analysis on this point.
144
But it cannot be
142
LOT Agreement, supra note 8, § 1.1.
143
Id. § 1.2.
144
See C. Eri c Schulman, How Scalable Private-Ordering Solutions Improve
IP Law: Lessons Learned from My Founding of the License on Transfer (LOT) Network
2 (Working Draft, 2016) https://ssrn.com/abstract=2827904 [https://perma.cc/RT7C-
7R4W] (“This structure protects LOT members from being attacked when a PAE
acquires a LOT-encumbered patent.”).
964 BROOKLYN LAW REVIEW [Vol. 83:3
that the entire LOT agreement is an encumbrance, as it
contains many provisions not directly relate d to the actual use
of the patent, including provisions relating to withdrawal,
third-party benefic iar ie s, bankruptcy, co sts , governing law, and
other issues.
145
The LOT agreement also attempts to declare that:
All Licenses granted in this Agreement are intended to and shall run
with the Subject Patents to which they pertain for the full duration
of such Subject Patents and be binding on subsequent owners and
licensees. Any transfer or grant of rights in or to a Licensor’s Subject
Patent(s), whether by such Licensor or any subsequent transferee,
shall be subject to the Licenses and continuing obligations of this
Agreement with respect to such Subject Patent(s).
146
But the enforceability of this provision is questionable,
at least in certain situations. If a PAE were to purchase one of
the patents in question, the PAE would not be a party to the
LOT agreement, as the PAE would not have signed the
agreement. One cannot be bound by a contract to which one is
not a party.
147
Significant information costs would be imposed if
a patent buyer could be bound (potentially without notice) by
the complex provisions of any license agreement entered into
by any prior owner.
148
The LOT agreement is full of such complexities. The
license of Section 1.1 becomes active upon “Transfer” to an
“Assertion Entity,” as noted above. Section 6.18 of the
agreement defines Transfer to Assertion Entity as:
(i) the assignment, sale, exclusive license, or transfer, in whole or in
part, of such Patent to an Assertion Entity, whether by Licensor or
any subsequent transferee or exclusive licensee of the Subject Patent,
145
See LOT Agreement, supra not e 8, §§ 2.3, 5.3, 5.5, 5.6, 5.11.
146
Id. § 1.5.
147
See, e.g., Reuben v. U.S. Air, Civ. Action No. 11-1235, 2012 U.S. Dist.
LEXIS 84038, at *19 (W.D. Pa. June 18, 2012) (“It is fundamental contract law that
one cannot be liable for a breach of contract unless one is a party to that contract.”
(citing Pa. Chiro practic Ass’n v. Indep. Blue Cross, 2001 Phila. Ct. Com. Pl. LEXIS 112,
at *16 (Pa. Commw. Ct. July 16, 2001))).
148
Merrill & Smith, supra note 39, at 793 (“The unique advantage of in rem
rights—the strategy of exclusion—is that they conserve on information costs relative to
in personam rights in situations where the number of potential claimants to resources
is large, and the resource in question can be defined at relatively low cost.”); see also
Merrill & Smith, supra note 20, at 31–34. Even where the purchaser has notice, the
information costs are not eliminated, as such costs are borne by market participants
generally. Se e id. at 32 (“A and B may have subjective reasons for creating prope rty
rights based on days of the week. But, the possible existence of such rights will cause
information costs for others—such as E, F, G, H, I, and J—to rise. Those considering
whether to purchase property rights in watches will have more to investigate: They
will have to assure themselves that they are getting all the days of the week that they
want. . . . An indefinite set of types of rights will raise the cost of preventing violations
through investigation of rights.”).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 965
or (ii) acquisition of ownership or control of the Subject Patent by an
Assertion Entity (including any circumstance in which Licensor or
any subs equent transferee owning or controlling the Subject Patent
is or becomes an Assertion Entity . . .), with the earliest date any
Entity owning or controlling such Patent is or becomes an Assertion
Entity or Controlled by an Assertion Entity being deemed to be the
effective date of such Transfer.
149
Thus, even if a patent is initially transferred to a
regular operating company that is not a party to the LOT
agreement and if that company then transfers the patent to an
Assertion Entity (or becomes an Assertion Entity), the LOT
license is supposedly activated. Assertion Entity is defined in
Section 6.2 as “an Entity and each one of its Affiliates if such
Entity and all of its Affiliates collectively derived from Patent
Assertion more than half of their total consolidated gross
revenue measured over the full twelve (12) months preceding a
particular date . . . .”
150
As such, in order for the LOT
agreement to be fully enforceable, the definitions of Transfer
and of Assertion Entity must be part of the “e ncumbrance” that
“runs with the patent.” But it is certainly questionable whether
these complex definitions relate to the “actual use of the
patent” any more than the arbitration clause that the Federal
Circuit held not to run with the patent in Datatreasury, or the
royalty rights and confidentiality provisions that have also
been held not to run.
151
Something like the LOT agreement could potentially be
conceptualized as a license granted immediately prior to
transfer from the party that agreed to the LOT agreement. The
LOT member could give up the sticks corre sponding to the
rights to exclude the other LOT members immediately prior to
transferring the patent to a PAE, and the PAE would thus
receive a diminished bundle of sticks without the rights to
exclude the LOT members. This would be in some accord with
the LOT’s name—a license granted “on” (or immediately prior
to) the transfer of a patent from a LOT member.
But the problem for the LOT agreement is that the
agreement is not actually structured this way; it purports to
also apply even where the patent is not transferred directly
from a LOT member to a PAE. For example where the patent is
first transferred to a non-LOT operating company, wh ich then
transfers it to a PAE, the full bundle must be transferred to the
non-LOT operating company, and then the bundle must
149
LOT Agreement, supra note 8, § 6.18 (emphasis added).
150
Id. § 6.2.
151
See supra Section II.A (discussing Datatreasury); supra Sections II.B–C.
966 BROOKLYN LAW REVIEW [Vol. 83:3
somehow be diminished upon transfer from the non-LOT
operating company to the PAE, even if neither is a party to the
LOT agreement.
152
Similarly, if the patent is transferred to a
non-LOT operating company, which then becomes a PAE, the
bundle must somehow be diminished at the moment the
company turns into a PAE (as defined by the LOT agreement)
even though the company is not a party to the LOT agreement.
Furthermore, Section 1.2 purports to presently waive
the “right under the respective Subject Patent for any
Assertion Entity to make any Patent Assertion of the
respective Subject Patent against any Licensee . . . .”
153
But can
a patent owner waive the right of someone else to assert the
patent without waiving its own right to assert the patent? This
would conceptually require multiplying the bundle of patent
rights to include the inchoate rights of anyone who might
potentially later own the patent, which would seem to be a
convoluted and problematic notion of property. It would also
run counter to the numerus clausus principle, which holds that
property should be kept within one of a limited number of
standardized forms, so as to limit information costs. If the LOT
agreement were entirely enforceable as written, it would
impose significant information costs, as one trying to figure out
the scope of a patent would need to know the (potentially
confidential) complex details of license agreements entered into
by previous owners of the patent. Thus, a prohibition on
diminishing the patent bundle in ways that depend on the
identity of the subsequent owner of the patent might be a
reasonable place to draw a numerus clausus line.
Such information costs counsel in favor of viewing such
complex details as part of the license agreement (contract) module,
rather than as running with the underlying property rights. This
sort of “[m]odularity is a method for dealing with complexity in
systems,” and is efficient because “[i]nformation is blocked across
modules, and this allows economization on information and the
substitution of structures without massive ripple effects.”
154
One of
the purposes of modularity is to “make information irrelevant;”
155
keeping the overly complex details of license agreements in
personam effectively makes such details—and their potentially
litigious interpretation—irrelevant to non-signatories. Of course,
drawing the lines of modularity may be difficult, but “the numerus
152
See LOT Agreement, supra note 8, § 6.18, 6.2.
153
Id. § 1.2.
154
Smith, supra note 54, at 1759, 1761.
155
Id. at 1759.
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 967
clausus principle under which the law limits in rem rights to a
fixed and finite menu of forms,”
156
counsels in favor of keeping some
amount of complexity in personam.
The enforceability of the LOT agreement is thus
questionable, particula rly where the patent is not transferred
directly from a LOT member to a PAE. One of the LOT founders
apparently likens the LOT to an Open Source copyright
license.
157
In the case of an Open Source license, users of a
copyrighted work are granted a license free of charge provided
they agree to the terms of the license.
158
But this does not involve
a transfer of the copyright itself (i.e., the government issued
rights to exclude) or terms of the license agreement running
with such a transfer. In other words, the Open Source license
restricts licensees, whereas the LOT agreement purports to
restrict future owners of the patent.
159
Because the Open Source
licensee has agreed to the license,
160
the notice and information
cost concerns are not as great as in the case of the LOT
attempting to bind future patent acquirers to the complex terms
of a contract to which they have not agreed.
To be sure, the terms of the original license agreement,
to the extent that they altered the rights in the patent bundle,
are in some cases important to the new patent owner. For
example, through a license agreement, a patentee might agree
not only to refrain from suing the licensee, but also to refrain
from suing the licensee’s customers.
161
In such a case, the
bundle could be diminished by not only the stick corresponding
to right to exclude the licensee, but also by the sticks
corresponding to the rights to exclude the licensee’s customers.
But on the other hand, the numerus clausus principle
would seem to counsel in favor of viewing as in personam the
156
Id. at 1780.
157
Schulman, supra note 144, at 1 (“Open Source is one example of a POS in the
copyright context. This paper uses the License On Transfer (LOT) Network (the largest
networked patent cross license by number of patents) as a case study of a POS.”).
158
See, e.g., Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008).
159
However, the bundle approach and the numerus clausus principle may still
be relevant in determining whether a failure to abide by the terms of an Open Source
license gives rise to a claim for copyright infringement or is actionable only as a breach
of contract. See infra Section III.D.
160
See, e.g., Jacobsen, 535 F.3d at 1379 (“By requiring that users copy and
restate the license and attribution information, a copyright holder can ensure that
recipients of the redistributed computer code know the identity of the owner as well as
the scope of the license granted by the original owner.”).
161
See, e.g., Telefonaktiebolaget LM Ericsson v. Wi-LAN USA, Inc., No. 14-
21854-CV-MIDDLEBROOKS, 2015 WL 11233112, at *1 (S.D. Fla. Aug. 14, 2015)
(“Ericsson maintains that pursuant to the Siemens License, LME and Siemens
provided each other, their related companies, and their customers with protection from
the other’s patents.”).
968 BROOKLYN LAW REVIEW [Vol. 83:3
agreement not to sue the licensee’s customers, in that it would
be a rather indefinite and complex diminishment of the patent
right. Wha t counts as a customer? Customers at what time?
That is, if patents as property rights should have a limited
number of forms, it would seem that a patentee should not be
able to ca rve out the right to sue a licensee’s customers, (unless
perhaps those customers are specifically defined and named in
the license agreement). Professor Mulligan finds that “[o]ver
the past few decades, intellectual property licensing
agreements have become more complex,” and this complexity
suggests that “the measurement costs created by intellectual
property licenses may outweigh frustration costs and other
harms that potentially result from the introduction of a
numerus clausus principle.”
162
It is important to remember that the subsequent patent
owner still is not a party to the contracts agreed to by prior
owners of the patent. It is one thing to diminish the patent
bundle by giving up the rights to exclude certain other entities.
But it is another thing for a patent owner to purport to give up
the rights of others who might potentially own the patent in
the future, while purportedly keeping those rights for itself in
the present.
In general, the bundle analysis in this Part suggests
that relatively discrete covenants not to sue a licensee or
specific customers of the licensee diminish the bundle of rights
and thus run with the patent, by preventing subsequent patent
owners from suing those whom the previous patent owner gave
up the right to sue. On the other hand, agreements that do not
diminish the underlying bundle of patent rights, such as
royalty rights, or do so only in overly idiosyncratic ways, such
as aspects of the LOT agreement, do not run with the patent.
The next Part demonstrates how this same analysis can
be useful outside of the license context, such as when a
patentee gives up the right to sue with regard to certain
products (via patent exhaustion), or the right to demand an
injunction without offering a reasonable royalty license (via
FRAND commitments).
III. BROADER IMPLICATIONS
The bundle theory and the encumbrance theory are
different ways of thinking about the effect of patent transfer on
aspects of license agreements. Sometimes these different
162
Mulligan, supra note 41, at 289–90.
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 969
theories lead to significantly different results. Having
determined that the bundle theory more elegantly and
coherently explains the license on transfer situation, this
article now explores the application of the bundle theory to
other areas of patent law.
Various doctrines in patent law deal with the alteration
of patent rights due to actions by the patentee or others
interacting with the patent.
163
As it is with patent licenses, the
bundle theory can be useful in conceptualizing the extent to
which such alterations travel with the patent upon its transfer.
A. Patent Exhaustion
The Federal Circuit en banc majority opinion in
Lexmark International Inc. v. Impression Products, Inc.,
included an application of the bundle of sticks conception in the
area of patent exhaustion.
164
The plaintiff, Lexmark, made and
sold printers as well as toner cartridges, and “own[ed] a
number of patents covering the cartridges and their use.”
165
The
relevant cartrid ges were sold domestically and “at a discount”
but “subject to an express single-use/no-resale restriction.”
166
The defendant, Impression, later acquired the cartridges, not
directly from Lexmark, but rather after a third party had
“physically modified them [so as] to enable re-use, in violation
of the . . . restriction.”
167
Impression then resold the cartridges,
and Lexmark sued for patent infringement.
168
Impression
attempted to assert a defense under the doctrine of patent
exhaustion, arguing that by selling the cartridges, Lexmark
had exhausted its patent rights in those cartridges and could
no longer sue for infringement.
169
The court’s en banc majority
however found no exhaustion, and in so holding, noted that “[i]t
has long been a familiar feature of our legal landscape that
property rights in a particular thing—like the separate
interests in making, selling, using, etc., an invention—are
163
Cf. Rantanen, supra note 38, at 919 (“[W]hen I say that patent rights are
malleable, I mean that their scope and strength can be altered by actors interacting
with those rights even after the government has issued that right.”).
164
Lexmark Int’l, Inc. v. Impression Prods., Inc., 816 F.3d 721 (Fed. Cir. 2016)
(en banc), rev’d and remanded 137 S. Ct. 1523 (2017).
165
Id. at 727.
166
Id.
167
Id.
168
Id.
169
Id.
970 BROOKLYN LAW REVIEW [Vol. 83:3
viewed as a ‘bundle’ of rights (or sticks) that can genera ll y be
transferred separately.”
170
The Lexmark dissent was of the view that an authorized
sale of a patented article exhausts the patentee’s property
rights in that article, regardless of any contractual conditions
placed on the sale.
171
In urging the Supreme Court to grant the
petition for certiorari, the U.S. Solicitor General argued in part
that the Federal Circuit majority had been guilty of a “failure
to distinguish between the rights which are given to the
inventor by the patent law and which he may assert against
the world through an infringement proceeding and rights
which he may create for himself by private contract.”
172
The
distinction drawn by the government is not unlike the
distinction between the license agreement and its effect on the
underlying patent rights, precisely the sort of the distinction
that Hohfeld’s framework can help to flesh out.
173
Normally, a patentee making an unrestricted sale of a
patented article would be giving up the Right to exclude with
respect to that article. Whoever own s that article has a
Privilege (or “authority”) to infringe the patent with that
article.
174
This Privilege would be unaffected by any subsequent
transfer of the patent, because the patent owner would transfer
the bundle of patent rights appropriately diminished, including
the “No Rights” correlative to the Privileges of those who had
purchased patented articles from the previous patentee. But
according to the Federal Circuit majority in Lexmark, when a
patentee explicitly places conditions on the sale (e.g., single
use, no resale), the patentee is only giving up the Right to
exclude provided that the article is used in accordance with
those condition s. Thus, the patent bundle is diminished to a
lesser extent than it would be in the case of an unrestricted or
unconditional sale of a patented article.
170
Id. at 741.
171
Id. at 781 (Dyk J., dissenting) (“The right to exclude expires (or is
‘exhausted’) by an authorized sale.”).
172
Brief for the United States as Amicus Curiae, at 8, Impression Prods., Inc.,
v. Lexmark Int’l, Inc., 137 S. Ct. 1523 (2017) (No. 15-1189) [hereinafter Brief for the
United States] (quoting Motion Picture Patents Co. v. Universal Film Mfg. Co., 243
U.S. 502, 514 (1917)).
173
See supra Section I.C.
174
Lexmark, 816 F.3d at 734 (“[S]ome sales confer authority on the purchaser
to take certain actions—such as selling or using the purchased article in the United
States or importing it into the Unite d States—that would otherwise be infringing
acts.”); cf. Christopher M. Newman, Vested Use-Privileges in Property and Copyright,
30 HARV. J.L. & TECH. 75, 78 (2017) (“Title to a thing includes the privilege to engage,
or to refrain from engaging, in any use of which the thing is susceptible.”).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 971
The question then is whether restrictions placed on an
authorized sale should be allowed to lessen the extent to which a
patentee parts with its in rem patent rights corresponding to the
article sold, or whether such restrictions are mere in personam
agreements between the buyer and the seller. One advantage of
the bright-line rule urge d by th e Solicitor General and by the
dissent would be lower information costs on downstream
purchasers of patented articles.
175
Indeed, patent law’s exhaus tion
doctrine has origins in common law rules limiting servitudes on
personal property, which in part serve to ensure that the
purchaser of a product may use it as would be expected.
176
The Lexmark case also seems to raise what J.E. Penner
called “the question of individuation.” That is, whether
property can be divided any which way (like slicing a cake) or
whether it is comprised of certain indivisible base units (like a
club is comprised of individual people).
177
Penner, skeptical of
the bundle approach, seemed to think that property is more
like the cake.
178
As Christopher Newman explains, a more
divisible approach serves “to increase the amount of value
people can get from joint or independent use of resources,” but
“[a]t the same time, the law must be careful to guard against
excessive fragmentation of ownership, which has both systemic
and particular costs.”
179
The Lexmark majority would allow
patentees to control the extent to which they part with their
175
See supra Section I.B; see also Lexmark, 816 F.3d at 779 (Dyk J.,
dissenting) (“Post-sale restraints would ‘cast a cloud of uncertainty over every sale.’”
(quoting Tessera, Inc. v. Int’l Trade Comm’n, 646 F.3d 1357, 1370 (Fed. Cir. 2011)));
Brief For The United States, supra note 172, at 14 (“This Court long ago recognized
that ‘[t]he inconvenience and annoyance to the public’ if patent rights are not
exhausted by the first authorized sale are ‘too obvious to require illustration.’” (quoting
Keeler v. Standard Folding Bed Co., 157 U.S. 659, 667 (1895))).
176
See Helferich Patent Licensing, LLC v. N.Y. Times Co., 778 F.3d 1293,
1305 (Fed. Cir. 2015); LifeScan Scot., Ltd. v. Shasta Techs., LLC, 734 F.3d 1361, 1373
(Fed. Cir. 2013) (“The basic principle underlying the Supreme Court’s exhaustion cases
is that the authorized transfer of ownership in a product embodying a patent carries
with it the right to engage in the product’s contemplated use.”); see also Glen O.
Robinson, Personal Property Servitudes, 71 U. CHI. L. REV. 1449, 1464 (2004) (“[W]e
naturally assume that the purchaser of a patented article is buying the physical
machine as well as the license to use it pursuant to the patent.”).
177
Penner, supra note 51, at 754–55.
178
Id. (“If we are to take the bundle of rights analysis of property seriously we
have to believe that the individual rights are like member s of a club . . . . However, as the
analysis will show, they are merely like slices of a cake, no more than momentary functional
descriptions made with a particular legal concern in mind.”).
179
Newman, supra note 105, at 82–83; see also Smith, supra note 54, at 1780
(“Intellectual pr operty exhibits the numerus clausus, albeit in somewhat attenuated
form outside the core of intellectual property.”); cf. ROBERT P. MERGES, JUSTIFYING
INTELLECTUAL PROPERTY 5 (2011) (“The most important core principle of the
institution of private property is this: it assigns to individual people control over
individual assets. It creates a one-to-one mapping between owners and assets.”).
972 BROOKLYN LAW REVIEW [Vol. 83:3
patent rights upon sale,
180
whereas the dissent and the
government take more of an all-or-nothing approach to sales of
patented articles.
181
The Supreme Court ultimately sided with the latter
view, holding that “a patentee’s decision to sell a product
exhausts all of its patent rights in that item, regardless of any
restrictions the patentee purports to impose or the location of
the sale.”
182
The Court reasoned that “when an item passes into
commerce, it should not be shaded by a legal cloud on title as it
moves through the marketplace.”
183
This reasoning could be
seen as implicitly invoking the numerus clausus principle;
184
a
patentee may not sell an item and still retain part of the right
to exclude. Rather, the patentee that decides to sell an item
must give up the entire right to ex clude with respect to the use
of that item. Having already given up that right, a patentee
would not be able to transfer it, so a subsequent owner of a
patent would not seem to acquire the right to exclude with
respect to items sold (while owning the patent) by previous
patent owners, that right having been exhausted upon patentee
sale of the item by the previous owner.
At oral argument before the Supreme Court in Lexmark,
the petitioner began by arguing that “by exhausting the
patentee’s monopoly on that item, the sale confers on the
purchaser, or any subsequent owner, the right to use or sell.”
185
Similarly, the respondent spoke of the “right to use,” and ho w
“patent rights are conveyed with a product,” despite invoking
the nemo dat principle that “nobody can convey more than they
180
See Lexmark., 816 F.3d at 736 (“[T]he patent grant of § 154 is a ‘right to
exclude,’ which ‘may be waived in whole or in part . . . .’” (quoting Mallinckrodt, Inc. v.
Medipart, Inc., 976 F.2d 700, 703 (Fed. Cir. 1992))).
181
See Brief For the United States, supra note 172, at 17 n.3 (“[A] patentee
can only reserve his U.S. rights in full; he cannot divide the U.S. rights and retain
some but not all.”); see also Brief For Professors John F. Duffy And Richard M. Hynes
as Amicus Curiae in Support of Neither Party at 18, Impression Prods., Inc. v.
Lexmark, Int’l, Inc., 137 S. Ct. 1523 (No. 15-1189) (“By limiting the scope of rights so
that patent law cannot be used to enforce any such re strictions, the patent exhaustion
doctrine eliminates the possibility that patent law could interfere with the complex
regulation [such as UCC Article 9] of post-sale restrictions and encumbrances that can
be placed on sold goods.”).
182
Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1529 (2017).
183
Id. at 1534.
184
See supra Sections I.B, II.E; see also Mulligan, supra note 41, at 238
(“Generally, common law courts have not explicitly recognized the numerus clausus,
although in practice, courts ‘treat previously-recognized forms of property as a closed
list that can be modified only by the legisla ture,’ despite the absence of any such
instruction to that effect from the legislatures themselves.” (quoting Merrill & Smith,
supra note 20, at 9–11)).
185
Transcript of Oral Argument at 3, Impression Prods., Inc. v. Lexmark Int’l,
Inc., 137 S. Ct. 1523 (2017) (No. 15-1189) [hereinafter Transcript of Oral Argument]
(emphasis added).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 973
have.”
186
These arguments show precisely the sort of
imprecision that Hohfeld sought to combat, and further
demonstrate the truth of Pierre Schlag’s statement that “[o]ne
of the most striking aspects of Hohfeld’s work is how much its
architecture and arguments remain relevant—even bitingly
so—today.”
187
The nemo dat principle is inconsistent with the
idea that the patentee somehow conveys any patent Right (in
the Hohfeldian sense) to use the patented product, for under
prevailing law, the patent does not grant rights to use, only
rights to exclude.
188
It would be more precise then, to say that
the patentee seller gives up the Right to exclude (replacing it
with a No Right) with respect to a particular article, such that
the owner of the article has a Privilege (rather than a Right) to
infringe the patentee’s patent. This would also be more
consistent with the notion that patent exhaustion provides a
defense rather than any affirmative right or claim.
189
Thinking of the patent as a bundle of rights to use
logically seems to imply that when a patentee sells a patented
article under normal unrestricted circumstances, the patentee
must give a right to use that article, a stick in the patent
bundle, to the purchaser of the patented article. The
respondent in Lexmark argued that normal transfer of a
patented article includes “both . . . the physical material, and
the bundle of rights that go with it.”
190
But it seems strange to
say that the purchaser of the patented article acquires a
portion of the patent right, whic h then travels downstream
with the article to subsequent purchasers. Could a downstream
purchaser pass the article along without passing along the
patent right? Or are the right and the article somehow
inextricably bound together after they leave the hands of the
patentee and seller?
186
Id. at 30–31, 37 (emphasis added).
187
Schlag, supra note 53, at 187.
188
See, e.g., Bloomer v. McQuewan, 55 U.S. 539, 549 (1852) (“The franchise which
the patent grants, consists altogether in the right to exclude every one from making, using,
or vending the thing patented . . . .”) Bio-Tech. Gen. Corp. v. Gen etech, Inc., 80 F.3d 1553,
1559 (Fed. Cir. 1996); CHISUM, supra note 54, at § 16.02[1]. But see Adam Mossoff,
Exclusion and Exclusive Use in Patent Law, 22 HARV. J.L. & TECH. 321 (2009).
189
See Excelstor Tech., Inc. v. Papst Licensing GmbH & Co. KG, 541 F.3d
1373, 1376 (Fed. Cir. 2008) (“[E]xhaustio n is a defense to patent infringement, not a
cause of action.”).
190
Transcript of Oral Argument, supra note 185, at 34–35; cf. Lexmark, Inc. v.
Impression Prods., Inc., 816 F.3d 721, 741 (Fed. Cir. 2016) (en banc), rev’d and
remanded 137 S. Ct. 1523 (2017) (“It has long been a familiar feature of our legal
landscape that property rights in a particular thing—like the separate interests in
making, selling, using, etc., an invention—are view ed as a ‘bundle’ of rights (or sticks)
that can generally be transferred separately.”).
974 BROOKLYN LAW REVIEW [Vol. 83:3
It seems much cleaner to think of the patent as a bundle
of rights to exclude, in accordance with the prevailing law. A
patentee gives up the Right to exclude with respect to a
particular article upon selling that article under normal
unrestricted circumstances. The stick (or Right) in the bundle
is destroyed (replaced with a No Right). As such, the owner of
the article has a Privilege. The Privilege is not something that
has to be passed along downstream with the article, it is simply
the natural consequence of the patentee having given up its
Right to exclude regarding that article.
Some of the imprecision in language from oral argument
seems to have made its way into the Court’s Imp ression
Products, Inc. v. Lexmark International, Inc. decision, which
states: “[a]llowing patent rights to stick remora-like to [an]
item [sold by a patentee] as it flows through the market would
violate the principle against restraints on alienation.”
191
In
strict Hohfeldian terms, it is fundamentally incorrect to speak
of patent rights sticking to an item; patent rights remain with
the patentee (if not exhausted) and only the correlative duties
would flow with the item.
192
But perhaps more importantly, the
Court’s reasoning is overbroad. It is logic ally fallacious in that
it “proves too much; an item initially purchased from an
unauthorized seller, flowing through commerce, would remain
subject to ‘remora-like’ patent rights,” as would “an item
purchased directly from a patentee, if other patents held by
other entities also covered the item (or a component of it).”
193
The Court fails to fully grapple with this in that it “does not
explain why such rights do not also violate the principle
against restraints on alienation.”
194
B. FRAND Commitments
Technology companies sometimes seek to have their
patented inventions incorpor ated into the guidelines promulgated
by standard setting organizations (SSOs). In doing so, such
companies often pr omise that if their invention is adopted into the
standard, they will license the patent rights on fair, reasonable,
and non-discriminatory (FRAND) terms to anyone who infringes
191
Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1538 (2017).
192
See supra Section I.C.
193
Id.
194
See Andrew C. Michaels, Response, Impression Products, Inc. v. Lexmark
International, Inc.: A Glib Rebuke of the Federal Circuit, GEO. WASH. L. REV. ON THE
DOCKET (June 11, 2017), http://www.gwlr.org/impression-products-v-lexmark/ [https://
perma.cc/U4E6-B5F5].
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 975
due to compliance with the standard.
195
But what happens if the
company that made the FRAND commitment then transfers the
patent? Is the subsequent patent owner bound by the FRAND
commitment? For much the same reasons that subsequent patent
owners are generally held to be bound by a commitment not to
sue made by a previous owner of the patent, it seems that the
answer should be yes. As Jay Kesan and Carol Hayes explain, “if
a patentee could extinguish the benefits of a FRAND commitment
by transferring the patent to a third party, this would lead to
inequitable results.”
196
That is, if an SSO were induced by a FRAND
commitment to adopt a particular invention into the standard,
it would be inequitable if the FRAND commitment could then
be shirked through a transfer of the patent. But as with patent
licenses, there is some uncertainty as to the theory or
mechanism by which a subsequent patent owner would be
bound by a previous owner’s FRAND commitment. Kesan and
Hayes primarily adopt the encumbrance theory, arguing in
favor of “conceptualiz[ing] the FRAND commitment as an
encumbrance that runs with the patent, similar to a servitude
under real property law.”
197
They explain that “it is fairly
uncontroversial to conclude that a FRAND commitment relates
to the use of the patent,” and moreover, that subsequent
owners should be considered to be on notice because the
“standards documents are publicly available, and many SSOs
also make FRAND commitments publicly available.”
198
They
note that “[t]he primary hurdle to analogizing to servitudes is
that patents are treated as having the attributes of personal
property, and serv itudes on personal property are generally
disfavored in the law,” but sidestep this hurdle by pointing out
that the “law of servi tudes has become more liberalized over
the years.”
199
Practically the entire FRAND commitment relates to the
patent, and as Kesan and Hayes note, the commitments are
generally publicly available, so it is relatively unproblematic to
think of the entire FRAND commitment as an encumbrance
running with the patent. By contrast, as discussed earlier, license
privileges often arise from broad confidentia l license agreements
195
See, e.g., Kesan & Hayes, supra note 21, at 238 (“[T]o facilitate the
adoption of standards, SSOs often require patent holders to agree to license essential
patents on FRAND terms.” (citation omitted)).
196
Id. at 304.
197
Id. at 313.
198
Id. at 295.
199
Id.at 295–96.
976 BROOKLYN LAW REVIEW [Vol. 83:3
with many different types of in personam commitments. But the
FRAND commitment could also be conceptualized using the
bundle approach. The patent owner trades certain aspects of the
bundle of rights in exchange for adoption of the invention into the
standard. The FRAND commi tment can be said to qualify th e
right to exclude with respect to those who use the standard, in
that “the patent owner cannot play the patent holdout game.”
200
That is, a patent owner seeking to enforce must be willing to
negotiate a FRAND license with the potential infringer. And the
bundle theory still accords better with the treatment of patents as
personal property and the law’s disfavoring of servitudes on
personal property.
Indeed, Kesan and Hayes also attempt to apply Hohfeld to
the FRAND scenario, albeit in a different manner, stating that
“[t]he FRAND commitment may be understood as imposing on
the patent owner a duty to negotiate in good faith, and through a
Hohfeldian analysis, this means that there is a correlative right to
good faith negotiation that is held by the potential licensee.”
201
If
such a duty travels with the patent, this would mean that all
potential infringers would have an affirmative claim (e.g., breach
of contract) against a subsequent patentee who did not comply
with the duty to negotiate in good faith. This seems questionable.
For support, Kesan and Hayes cite Apple, Inc. v. Samsung
Electronics Co., where the court stated that under French law,
“Samsung’s contractual obligation arising from its FRAND
declarations to ETSI at the very least created a duty to negotiate
in good faith with Apple regarding FRAND terms.”
202
But that
case did not involve a patent transfer; Samsung was the plaintiff
and the party that made the commitment to the SSO (ETSI).
Samsung thus had a duty to comply with its own contractual
obligations, but that does not mean that such contractual
obligations necessarily entirely travel with the patent.
The FRAND commitment can be better conceptualized as
the patentee giving up or qualifying its Rights to exclude, instead
of as creating affirmative Rights in each of the SSO members.
Thus, the SSO members have a Privilege to a negotiated license
on FRAND terms, rather than a Right to negotiation. The
important thing to the SSO members is not negotiation for its
own sake, rather it is freedom from holdout pressure. The
Privilege is not an affirmative claim, but if a subsequent patent
200
Id. at 297.
201
Id. at 290 (emphasis omitted) (citation omitted).
202
Apple, Inc. v. Samsung Elecs. Co., No. 11-CV-01846, 2012 U.S. Dist. LEXIS
67102, at *43 (N.D. Cal. May 14, 2012).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 977
owner attempts to “play the holdout game” or sue an SSO
member without negotiating, the SSO member may invok e the
Privilege as a defense, thereby relieving the SSO member of
holdout pressure.
203
As such, the FRAND obligations on patent
owners are better thought of as No Rights instead of Duties, as
the patent owner has no right to play the holdout game. With
respect to the numerus clausus principle, it seems worth
recognizing and allowing this particular form of diminishment of
the patent bundle, so as to protect the viability of FRAND
commitments and avoid the inequitable results that could result
if the FRAND commitments had only in personam effec ts.
C. Prior User Rights
Although a patent generally provides only a right to
exclude and not a right to use, some use rights may arise
irrespective of the patent by virtue of invention or prior use.
The Supreme Court has stated that the right of an inventor to
use its own creation “existed before and without the passage of
law and was always th e right of an inventor.”
204
As explained in
the classic textbook by Albert H. Walker:
A patentee has two kinds of rights in his invention. He has a right to
make, use, and sell specimens of the invented thing; and he has a
right to prevent all other persons from doing either of those acts. The
first of these rights is wholly independent of the patent laws; while
the second exists by virtue of those laws alone.
205
Given that subsequent independent creation is not a
modern-day defense to a claim of patent infringement, it seems
that the inventor’s independent use right is no longer in full
effect.
206
But the notion of use rights for inventors carries
203
The specifics of the FRAND commitment will delineate the precise extent
to which the underlying intellectual property rights are diminished. Cf. Jorge L.
Contreras, A Market Reliance Theory for FRAND Commitments and Other Patent
Pledges, 2015 UTAH L. REV. 479, 492 (2015) (“The legal mechanisms by which FRAND
commitments are made vary considerably.”).
204
Bauer v. O’Donnell, 229 U.S. 1, 10 (1913); see also Pennock v. Dialogue, 27
U.S. 1, 23 (1829) (e xplaining that the Patent Act of 1800 “may well be deemed merely
affirmative of what would be the result from the general principles of law,” in that “[i]t
gives the right to the first and true inventor and to him only” (emphasis omitted)).
205
ALBERT H. WALKER, TEXT-BOOK OF THE LAW OF PATENTS FOR INVENTIONS
§ 155, (John H. Hilliard & Eugene Eblé eds., Baker, Voorhis & Co., 5th ed. 1917) (citing
United States v. Am. Bell Tel. Co., 167 U.S. 224 (1897); Bloomer v. McQuewan, 55 U.S.
539 (1852); Victor Talking Mach. Co. v. The Fair, 123 F. 424 (7th Cir. 1903); Jewett v.
Atwood Suspender Co., 10 0 F. 647 (Cir. Ct. D. Vt.1900)); see also ROBINSON, supra note
23, § 420 (“The right created by the letters-patent is collateral to the right to the
invention . . . .”).
206
See, e.g., Smith, supra note 54, at 1810 (“Patent law, but not copyright law,
gives a right against independent inventors . . . .”).
978 BROOKLYN LAW REVIEW [Vol. 83:3
forward to present day patent law to some extent in the form of
prior user rights. The America Invents Act (AIA) provides a
defense to infringement “based on prior commercial use,”
207
and
before the AIA, a “prior user who did not abandon, suppress, or
conceal the invention,” was able to use Section 102(g)(2) to
“invalidate the later patent of another and thereby escape
liability for infringement.”
208
If use rights inhere by virtue of invention and are
separate from the patent, they should not travel with the
patent. Practicing one patent (A) might require the practice of
another blocking patent (B).
209
The inventor of patent A could
have a prior user right to practice patent B. But the prior user
right is not granted by the USPTO, it is separate from the
patent. That is, the inventor of patent A would have had the
prior user right with respect to patent B even if she had never
applied for patent A. Thus, the prior use “right” to practice
patent B is personal to the inventor of patent A (the prior user
of the invention claimed in patent B), and would not run with
patent A if the patent were transferred.
In Hohfeld’s terms, the prior use “right” is a misnomer,
as it is really more of a prior use Privilege, providing a defense
to infringement rather than any affirmative claim. As such,
patent bundle B would not include a Right to exclude the
inventor of patent A (the prior user of patent B), instead it
would include a No Right correlative to the prior user’s
Privilege to infringe patent B.
D. End User License Agreements
Copyright software end user licenses have presented
issues similar to those discussed above with regard to patent
licenses.
210
The United States Court of Appeals for the Ninth
Circuit was tasked with determining whether a breach of a
207
35 U.S.C. § 27 3 (2012).
208
U.S. PAT. & TRADEMARK OFF., REPORT ON THE PRIO R USER RIGHTS
DEFENSE 48 (2012) (footnote omitted); see also Leahy-Smith American Invents Act of
2011, Pub. L. No. 112-29, § 3(b) 125 Stat. 284, 285–87 (codified as amended at 35
U.S.C. § 102(d)(2)).
209
See, e.g., Lex mark Int’l, Inc. v. Impression Prods. Inc., 816 F.3d 721, 745–
46 (Fed. Cir. 2016) (en banc), rev’d and remanded 137 S. Ct. 1523 (2017) (“Patent rights
are only rights to exclude, not rights to practice. . . . It is for that reason, for example,
that a patentee may be prevented from practicing its own patent by another’s patent.”
(citing Cantrell v. Wallick, 117 U.S. 689, 694 (1886); Blake v. Robertson, 94 U.S. 728,
733 (1877); Smith v. Nichols, 88 U.S. 112, 118–19 (1875))).
210
See generally Christina Mulligan, Licenses and the Property/Contract
Interface, 93 IND. L.J. _ (forthcoming) (Brook. L. Sch. Legal Studies Res. Paper No. 544,
http://ssrn.com/abstract=2987325 [https://perma.cc/36E8-7WFJ]).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 979
copyright license was actionable as copyright infringement, or
merely breach of contract, in the case of MDY Industries, LLC
v. Blizzard Entertainment, Inc.
211
In doing so, the court
attempted to determine which ter ms of the license agreement
limited the scope of the license so that they were “conditions,”
actionable under copyright law, and distinguish those from
mere “covenants,” actionable only under contract law. In a test
somewhat reminiscent of the Federal Circuit’s “actual use” test
for patent licenses, the Ninth Circuit held that the clause at
issue—a prohibition on the use of “bots” while playing the
game World of Warcraft—was a mere covenant because there
was no “nexus between the condition and the licensor’s
exclusive rights of copyright.”
212
Similar issues could arise, for
example, in determining wheth er a franchisee breach of a
franchise agreement necessarily gives rise to a claim for
trademark infringement or trade secret misappropriation, as
opposed to merely a claim for breach of contract, (which might
matter from a remedies perspective).
213
But like the actual use test in patent law, this “nexus”
test in copyright has not necessarily been consistently
applied.
214
In Jacobsen v. Katzer, the Federal Circuit “found
that several terms in a publicly-licensed work were enforceable
copyright conditions, even though those terms did not directly
implicate copyright-infringing behavior.”
215
The terms at issue
related to what materials to distribute along with the Artistic
public license; the Federal Circuit reasoned that the license
was expressly conditioned on compliance with such terms, and
that public licensing would be less effective if such terms
sounded only in contract.
216
In attempting to distinguish
Jacobsen from Blizzard, Professor Mulligan suggests that “the
terms in Jacobsen were appropriately understood as
consideration for receiving the software in the first place,
whereas the terms in Blizzard are not easily or realistically
characterized that way.”
217
211
MDY Indus., LLC v. Blizzard Entm’t Inc., 629 F.3d 928, 939 (9th Cir. 2010).
212
Id. at 941.
213
Cf. La Quinta Corp. v. Heartland Props. LLC, 603 F.3d 327, 345 (6th Cir.
2010) (“[T]he liquidated damages award fell short of the $430,000 in lost royalties that
Baymond would have received over the remainder of the license term . . . .”). Similar
sorts of issues may arise in trade secret law as well. Deepa Varadarajan, The Trade
Secret-Contract Interface, 103 IOWA L. REV. _ (forthcoming 2018).
214
Mulligan, supra note 210, at 41 (comparing the Blizzard case with
Jacobsen v. Katzer, 535 F.3d 1373, 1379 (Fed. Cir. 2008)).
215
Mulligan, supra note 210, at 41.
216
Jacobsen, 535 F.3d at 1381.
217
Mulligan, supra note 210, at *42.
980 BROOKLYN LAW REVIEW [Vol. 83:3
Although developed in the context of patent licenses, the
framework of this article could also be applied to these sorts of
issues as well. For example, the end user license agreement in
Blizzard could be seen as diminishing the underlying copyright
exclusive rights, in that it no longer contains the right to exclude
the software licensee. The question then becomes whethe r the
license terms prohibiting the use of bots were effective to allow
the copyright holder to retain the right to exclude a user who is
playing the game using bots. The Ninth Circuit in Blizzard held
that it was not, and one might rationalize this using the
numerus clausus principle, in that it would unduly multiply the
forms of copyright if one could grant a licensee the privilege to
use the software without the use of bots, while retaining the
right to exclude with the use of bots. On the other hand,
Jacobsen could be explained by the notion that open source or
public licenses are a somewhat defined form of copyright that is
worth recognizing for reasons of public policy.
218
CONCLUSION
The “actual use” doctrinal test being employed in the
courts is not up to the task of clearly and consistently
delineating the extent to which a patent license agreement runs
with transferred patents. The question is one of separating an in
personam license agreement from the agreement’s effects on
underlying in rem intellectual property rights.
In answering such questions, it can be helpfu l to think
of the patent as a bundle of Hohfeldian rights granted by the
USPTO. The patent owner, through a license agreement, may
diminish the bundle by exchanging sticks in the bundle for
other forms of value, but may not enlarge the in rem bundle.
When a patent is transferred, what is transferred is whatever
remains in the bundle. The in personam contract, that is, the
license agreement, remains between the two signatories. In
close cases, the numerus clausus principle counsels in favor of
keeping agreements in personam, but this principle must be
balanced against the need to avoid creating incentives for sham
transactions or bad faith transfers of patents.
218
See Jacobsen, 535 F.3d at 1378 (“Public licenses, often referred to as ‘open
source’ licenses, are used by ar tist s, authors, educators, software developers, and
scientists who wish to create collaborative projects and to dedicate certain works to the
public.”); id. at 1382 (“Indeed, because a calculation of damages is inherently
speculative, these types of license restrictions might well be rendered meaningless
absent the ability to enforce through injunctive relief.”).
2018] PATENT TRANSFER AND THE BUNDLE OF RIGHTS 981
Conceptualizing patent transfers in this way could add
some degree of precision and clarity to the analysis of the effect
of prior license agreements on transferred patents, and
hopefully facilitate more coherent development of the law going
forward. Beyond the context of license agreements, the bundle
of sticks conceptualization can also be useful more generally in
assessing the extent to which other actions by a prior owner,
such as selling patented articles or making FRAND
commitments, run with a transferred patent and affect the
rights of subsequent owners of the patent.
