INTELLECTUAL PROPERTY LEGAL ALERT
ABILITY OF LICENSEES TO
CHALLENGE PATENT VALIDITY
Intellectual property rights, such as patent
rights, are presumed valid but may prove to
be invalid and unenforceable. Section 43(2)
of the Patent Act 1 codifies this presumption
of validity and places the burden of proof of
invalidity upon the person challenging the
validity, whether by way of defence to an
infringement action, or in an impeachment
proceeding. 2
Licensee Estoppel
Outside of any contractual obligations, a
licensee may be estopped from attacking
the licensor’s intellectual property rights or
validity. At common law in Canada, a licensee
is estopped from disputing the validity of the
intellectual property being licensed for the
duration of the term of the license. 3 This is
commonly referred to as licensee estoppel and
it typically arises where a licensor brings legal
proceedings for enforcement of the license
against the licensee. This commonly arises
when royalty payments are in arrears.
In the absence of an agreement to the
contrary, the licensee is likely entitled to
dispute the validity of the intellectual property
rights once the license agreement has been
terminated. If it is the intention of the parties
that the licensee will not have the right to
dispute the validity of the intellectual property
right after termination, an express term or
clause to this effect must be included in the
license agreement.
Limitations
As with most established principles, there are
some limitations that may apply. For example,
licensee estoppel may not be successfully
invoked where the licensor has included a
covenant for the validity of the patent right
or where the right to dispute the validity
of the patent right is reserved. 4 Licensee
estoppel will also usually not operate to
preclude a defence regarding the scope of the
license. 5 For example, if the license is limited
in its geographical scope and the patentee
brings an action not under the license, but
for infringement of the patent in respect of
acts done outside the licensed area, then
the licensee would not be estopped from
disputing the validity of the patent.
Nevertheless, the rationale for licensee
estoppel is that one may not enter into a
license and therefore obtain immunity from
a claim by the patentee for infringement, use
the claimed invention and yet still seek to
deny the licensor’s/patentee’s rights and avoid
paying royalties.
1 RSC 1985, c P-4.
2 Diversified Products Corp v Tye-Sil Corp-Federal Court of Appeal, [1991] FCJ No. 124, 35 CPR (3d) 350.
3 Bayer Aktiengesellschaft v Apotex Inc. 1995 CanLII 7317 (ONSC).
4 Curtiss-Wright Corporation v The Queen, [1969] SCR 527.
5 Barclay v McAvity, (1894) 1 NB Eq 1 (NBSC).
AUGUST 2013
INTELLECTUAL PROPERTY & INNOVATION (TECHCOUNSEL®) LEGAL ALERT
Recommendations for licensors
and licensees
Canadian licensors will often include license
provisions that prohibit licensees from
challenging licensed patents. These provisions
may be valid under Canadian law but there
can be difficulties with such terms in respect
of certain types of intellectual property in the
United States, Europe, and Japan.
Limitations to the common law doctrine
of licensee estoppel may lead licensors to
consider introducing explicit contractual
provisions in the license agreement to account
for the increased likelihood of such validity
challenges.
It may be useful to a licensor to obtain an
acknowledgment from the licensee that it will
not, either during the term of the license or
following termination, attack the intellectual
property validity and it will not assist any third
parties in doing so.
Conversely, licensees would be well-advised
to expressly retain the right to challenge the
validity of the licensed patent. It may prove
difficult to dispute the enforceability of a
signed “no-challenge” clause by the licensee
especially where they exercised due diligence
prior to finalizing the agreement. Such clauses
however, may attract larger upfront license
fees, increased royalty rates or licensor’s right
to terminate upon a licensee’s challenge of the
intellectual property rights as well as a right to
receive advance notice of the licensee’s claims.
2
There are also some contractual clauses short
of prohibiting challenges to the licensed
patent that licensors can stipulate as part of
the license agreement. Licensors may include
a right to reduce the scope of the license if
the licensee challenges the patent’s validity.
For example, an exclusive license could be
converted to a non-exclusive license, or
reductions in the field of use may be applied.
Further, licensors may be well-advised to
require licensees to conduct pre-licensing due
diligence on the licensor’s patent and recite in
the agreement the licensee’s conclusion that
the patent is valid and that the licensee found
no basis to invalidate it.
The enforceability of these contractual clauses
is yet to be established, but courts will likely
adopt a factual analysis in determining
their practical and legal consequences. Their
enforceability may also depend upon their
position on the “disincentive-to-challenge”
spectrum. The more drastic the consequences
of the deterring contractual clauses, the
more probable these terms will be held
unenforceable.
For more information please contact
Michael Sharp
780.423.8697
msharp@parlee.com
Practice Group Chair: Bruce D. Hirsche, Q.C.
780.423.8540
bhirsche@parlee.com
Or any member of our Intellectual Property & Innovation
(TechCounsel®) Practice Group
Disclaimer
This legal alert is intended to provide general information
concerning developments in the law and is not intended to
provide legal advice in respect of any particular situation.
Edmonton
Calgary
www.parlee.com