UNITED STATES: IP LICENSING
Litigation planning for licensors
IP licensing is a key tool in any company’s belt. But several recent Supreme Court decisions could
make the process trickier, say Edward E Vassallo and Swatee Jasoria
C
ompanies seeking to monetize their intellectual property assets often turn to
licensing. A licensing agreement can be beneficial to both parties – it allows the
licensor to collect royalties and the licensee to reap the benefits of someone else’s
intellectual property. This relationship, however, can become adversarial when a licensee attempts to circumvent the terms of the licensed intellectual property agreement.
The licence agreement becomes a critical document that governs the relationship
between two parties who often have vast sums of money at stake. The task of drafting and negotiating an intellectual property licence agreement has never been simple. The objective is to reach a written document acceptable to all which adequately expresses the intent of the parties, is clear as to that intent and is enforceable
under US law, including the antitrust laws.
A new era in licensing
From the perspective of licensors, this task has become more arduous in light of two
recent Supreme Court decisions: MedImmune Inc v Genentech, Inc and Quanta
Computer, Inc v LG Electronics, Inc. Before 1969, a licensee was estopped from
challenging the validity of a licensed patent. Having taken a licence, the licensee was
thought to have implicitly acknowledged the validity of the patent. However, in
1969, the Supreme Court, in the seminal Lear v Adkins case, abolished the doctrine
of licensee estoppel and held that a licensee was not estopped from contesting the
validity of a licensed patent when defending a breach of contract or patent infringement action. Essentially, the case and its progeny took a dim view of the prospect
that a licence could prevent a licensee from challenging the validity of a patent at
all, finding any such prohibition to be unenforceable on public-policy grounds stating that “the important public interest in permitting full and free competition in the
use of ideas which are in reality a part of the public domain” trumps “the technical
requirements of contract doctrine”.
MedImmune and Quanta have both further limited a licensor’s ability to protect
itself through contract after Lear. In MedImmune, the Supreme Court essentially
removed the licensor’s greatest weapon in suppressing a challenge to its intellectual
property by a licensee: the requirement that a licensee be in “reasonable apprehension
of suit” before it could avail itself of the courts to challenge the validity of the licensor’s IP rights. The Supreme Court removed this barrier by holding that the licensee
need not breach its obligation to pay royalties in order to challenge the licensed patent.
Indeed, the case substantially changed the law as developed by the Federal Circuit and
altered the delicate power balance that existed between licensors and licensees.
In Quanta, the Supreme Court weakened the licensor’s ability to control the
licensed article post-sale. In that case, the licensor attempted to limit the rights of
purchasers of the licensee’s product. The licence authorized the licensee to manufacture and sell components covered by the licensor’s patents. The licensor and
licensee agreed that the licensee would notify its customers that they were not
authorized to combine the licensee’s patented component with non-patented product other than those of the licensee. The Supreme Court held that the authorized sale
of an article that substantially embodies a patent exhausts the patent holder’s rights
and prevents the patent holder from invoking patent law to control post-sale use of
the article. Also, it reversed longstanding Federal Circuit law and held that patent
exhaustion does apply to method claims.
One-minute read
In today’s business environment, a company’s
intellectual property is one
of its most significant
assets. Licensing agreements have become common vehicles through which companies can
generate revenue and also protect their valuable IP assets. But, in light of recent Supreme
Court jurisprudence, the licensor should take
additional pre-licensing steps to fully protect
its rights and minimize loss. In theory, with
carefully drafted provisions in IP licences and
settlement agreements, uncertainties and
problems can be effectively addressed and litigation can be avoided. However, in the event
that litigation does become necessary, it is
important that parties keep these Supreme
Court decisions in mind when drafting licensing provisions.
www.managingip.com
July/August 2008
1
UNITED STATES: IP LICENSING
The trend in Supreme Court jurisprudence has continued to
fundamentally alter the licensor/licensee dynamic in favour of
the licensee: licensors are the clear losers in light of Lear,
MedImmune, and Quanta. Thus, licensors should take prelicensing steps to fully protect their rights and minimize loss,
since, even with careful drafting, litigation is not always avoidable. Through careful drafting of the licence agreement, vigilant pre-licence negotiations and an adjustment of the licensors’ objectives, prospective licensors can improve their position should a dispute arise.
a patentee might, at the outset of negotiation, require a
prospective licensee to execute a confidentiality agreement.
Even better, a patentee might insist that the negotiation be conducted pursuant to Federal Rule of Evidence 408, which may
render evidence generated in connection with settlement negotiations inadmissible in court. These steps will serve to minimize the risk that during negotiations, disagreements that
occur will establish declaratory judgment jurisdiction, and that
the concessions made by the patentee will be admissible
“admissions” in litigation.
Lear may not extend to other forms of IP
Do your due diligence; adjust your negotiations strategy
Historically, licensors have attempted to contract away the
licensee’s ability to challenge the validity of the underlying
intellectual property through the use of “no contest” clauses.
Although Lear and its progeny eliminated this possibility in
licences of US patents, it does not necessarily extend to other
forms of intellectual property. Judicial enforcement of the “no
contest” clauses differs depending on the type of intellectual
property.
Since MedImmune and SanDisk make it clear that a potential
patent licensor may be sued if negotiations fail, the licensor
should do pre-suit due diligence before commencing negotiations. Also, a potential patent licensor may wish to consider
these:
1) Acknowledgement of need: the prospective licensor should
consider insisting that the prospective licensee acknowledge, in the agreement, the validity of the patent, and its
infringement but for a licence. While these provisions will
not prevent a licensee from challenging the licensed intellectual property, they may serve as powerful admissions at
trial.
2) Pre-emptive litigation: while this approach is hardly conducive to non-adversarial negotiations, prospective
licensees will begin to understand why a licensor opts for
this approach. The licensor will have secured its choice of
venue, and can delay service of the complaint for 120 days
to delay commencement of the litigation process, while the
parties negotiate a licence. Moreover, if agreement is
reached, the licensor may want to treat it as a settlement
agreement or a part of a consent judgment, so that principles of res judicata and collateral estoppel, principles that
prevent re-litigation between the same parties, may
“trump” the Lear doctrine.
3) Risky royalties: the prospective licensor may want to
request a royalty rate increase if the licensee does challenge
the licensed intellectual property, but fails in the challenge.
Also, the licensor may want a provision that the prevailing
party in such a suit shall receive its attorneys’ fees from the
other.
Copyright licences
Courts have held that a “no contest” clause in a copyright
licence agreement is valid unless the agreement is shown to
violate antitrust law. They have stated that if a particular
clause is used to confer monopoly power beyond the “small
amount” that the copyright laws authorize, then the clause can
be attacked under Section 1 of the Sherman Act as a restraint
of trade. This result is different from the per se prohibition in
Lear because a copyright empowers its owner to prevent others from copying only the particular verbal, pictorial, or aural
pattern in which the owner chooses to express himself. In
other words, the economic power conferred by copyright protection is smaller.
Trade mark licences
Generally, a “no contest” clause in a trade mark licence agreement has been determined to be enforceable. Courts have held
that a party to an agreement with respect to a trade mark will
be held to its contract unless enforcement would result in
injury to the public through confusion. There is however a
split as to whether a licensee can challenge the validity of a
licensed trade mark due to licensor’s alleged failure to adequately monitor quality of other licensee’s goods.
Strategies post-MedImmune
Avoid infringement accusations
The most obvious strategy for circumventing MedImmune is
for the licensor to avoid the possibility of being sued. The licensor’s approach should be vague: he should use language that
focuses on the freedom, competitive advantage and enhanced
value a licence will confer and avoid asserting that any particular activity or product of the prospective licensee requires a
licence. By being vague, the licensor may avoid generating a
justiciable controversy between the parties, thereby depriving
courts of jurisdiction should negotiations prove unsuccessful.
Keep it confidential
The Federal Circuit recently suggested in SanDisk Corp v
STMicroelectronics, a case which followed MedImmune, that
2
www.managingip.com
July/August 2008
Strategies post-Quanta
The Quanta decision suggests that a patent licensor should
consider larger up-front royalties in exchange for broader
licences, as downstream revenue opportunities may be barred
by patent exhaustion. If downstream revenue is the preferred
route, then the patent licence must set express conditions limiting the sale by the licensee, as opposed to mere “notice” to
customers of the licensee as to what they may or may not do
with licensee’s products. Similarly, the patentee can no longer
rely on the presence of method claims in the licensed patent to
control downstream royalties.
Edward E Vassallo
Swatee Jasoria
© Edward E Vassallo and Swatee Jasoria 2008. Vasallo is a partner
and Jasoria is an associate at Fitzpatrick Cella Harper & Scinto