Factoring Recent U.S. Case Law into your Collaboration
Strategy
Pharma & Biotech Collaborative Agreements
26-27 January 2009
London
Robert H. Fischer
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Quanta Computer v. LG Electronics: Background
 What is Patent Exhaustion in U.S. Law?
 The authorized sale of a patented item exhausts the patent rights
attaching to that item.
 So the sale of a patented item from the patentee, or its authorized
licensee, means that the purchaser cannot be subject to liability to
the patentee under the U.S. patent laws.
 Application of the doctrine has been fact dependent.
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Quanta Computer v. LG Electronics: The Facts
 License Agreement: LGE broadly licensed Intel under patents to make,
use and sell chips.
 License Agreement separately said that no license was granted to any
third party to combine licensed chips with non-Intel parts.
 Master Agreement made Intel tell its customers that Intel’s license did
not extend to combinations of Intel and non-Intel parts.
 Quanta bought Intel chips, combined them with non-Intel parts, and
sold the combinations in computers.
 LGE sued Quanta for patent infringement.
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Quanta Computer v. LG Electronics: The Decision (9-0)
 Patent Exhaustion applies to method patents.
 Sales of an article “substantially embodying” the patent presents the
patentee from invoking patent laws to control post-sale use.
 “Nothing in the License Agreement limited Intel’s ability to sell its
products practicing the LGE Patents.”
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Quanta Computer v. LG Electronics: The Ramifications
 Court did not limit the ability of licensor to restrict expressly the scope
of its license grant.

License Agreement granted Intel a license to “make, use, sell (directly
or indirectly), offer to sell, import or otherwise dispose of” Intel products
practicing the LGE patents.
 Instead, suppose LGE had granted Intel a field of use license: to
“make and sell only to purchasers for combination with Intel parts”?
 Using same facts as in case, would Intel be an infringer? Would
Quanta?
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Quanta Computer v. LG Electronics: The Ramifications
The problem with splitting up patent rights between different levels of
utilization:
 differences in benefit;
 differences in patent damages;
 differences in bargaining power;
 result in manufacturers seeking to shift risk to customers.
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Quanta Computer v. LG Electronics: The Ramifications
 What were the interests of the parties?
 What are the consequences for license renewals?
 What are the consequences for drafting new license agreements?
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Quanta Computer v. LG Electronics: The Ramifications
 Note that for patent exhaustion to apply, the article must substantially
embody the patent.
 Why?
 When does an article substantially embody a patent?
 When it has “no reasonable noninfringing use” and includes “all the
inventive aspects” of the patent claim.
 First portion -- reasonable noninfringing use – apparently calls for a
factual assessment.
 Second portion -- when does an article include all “inventive
aspects”?
 Implications for licensing.
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Medimmune, Inc. v. Genentech, Inc.: Background
 Lear, Inc. v. Adkins (1969)
 In their license agreement, Lear agreed to pay Adkins royalties; but if
the patent were held invalid, Lear had a right to terminate.
 Lear, asserting the patent was invalid, ceased paying royalties. Adkins
sued for breach of contract. Lear sought to assert patent invalidity as a
contract defense.
 Held, licensee was not barred from contesting validity (no doctrine of
“licensee estoppel”).
 Why? 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.”
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Medimmune, Inc. v. Genentech, Inc.: Background
 Suppose the license had said, “Licensee shall not contest the validity of
the licensed patents”?
 Conventional wisdom was (and remains) that this no-contest
clause is probably not enforceable, per Bendix Corp. v. Balax, Inc.,
471 F.2d 149 (7th Cir. 1972).
 Then suppose licensee wanted to invalidate patent? Did it have to
repudiate the license?
 Yes, said Federal Circuit in Gen-Probe, Inc. v. Vysis, Inc., 359 F.3d
1376 (Fed. Cir. 2004).
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Medimmune, Inc. v. Genentech, Inc.: The Facts
 Genentech granted a royalty-bearing license to Medimmune under a
patent.
 Genentech wrote Medimmune a letter, saying that royalties were
payable for its Synagis product.
 Medimmune did not repudiate the license and paid the royalties, but
brought suit (a declaratory judgment action) to invalidate the patent.
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Medimmune, Inc. v. Genentech, Inc.: The Decision (8-1)

“We hold that petitioner [Medimmune] was not required . . . to break or
terminate its 1997 license agreement before seeking a declaratory
judgment in federal court that the underlying patent is invalid,
unenforceable, or not infringed.”
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The Post-Medimmune Options
 Repudiate license, and sue for invalidity, unenforceability and/or
non-infringement.
 If Licensee wins, nothing due.
 If licensee loses, patent damages, plus risk of increased damages,
and attorney fees.
 Don’t repudiate license, but sue for invalidity, unenforceability
and/or non-infringement anyway.
 If Licensee wins, nothing due after judgment, but pre-judgment
contract obligations may remain payable.
 If Licensee loses, pre-judgment and post-judgment contract
obligations remain payable.
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The Post-Medimmune Options

Does this give the licensee an advantage?

Licensee may carefully develop the prior art defenses, and in view of
same, negotiate best deal available from Licensor.

Licensee then goes to Court to seek a better deal.

So licensor cannot sue, but licensee can?

Does license then act as a ceiling for payment obligations?
 But licensee presumably could already have sought reexamination
in U.S. Patent Office.

Can licensor claim anticipatory breach and repudiate?
 Medimmune left this possibility open.
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What Quanta and Medimmune May Have in Common
 “Nothing in the License Agreement limited Intel’s ability to sell its
products practicing the LGE Patents.” -- Quanta
 Court in Medimmune noted that license did not prevent the challenge.
 Themes that Quanta and Medimmune may share.
 Are Quanta and Medimmune anti-patent?
 Are they anti-activist judiciary (at least in the patent context)?
 Are they pro-“parties are free to make their own deal”?
 Implications for patent licensing.
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Possible License Provisions
 “Licensee shall not contest the licensed patent’s validity.”
 Enforceability issue?
 “Licensee shall not contest the licensed patent’s validity, except based
on references more pertinent than the Considered Patents.”
 “Licensee shall not contest the licensed patent’s validity, except by
instituting a reexamination proceeding in the U.S. Patent Office.”
 “Licensee shall not contest the licensed patent’s validity prior to
termination.”
 “Either party may terminate in the event of a challenge to the licensed
patent.”
 “Licensee shall not contest the licensed patent’s coverage of product
X.”
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Possible License Provisions
 Payment and Indemnification Terms
 Use license fees in lieu of royalties?
 Alter payment terms if (a) licensee challenges, or (b) challenges
and loses.
 Royalty goes up in the event validity upheld (treble royalties?)
 Require licensee/losing party to reimburse other party for fees and
costs.
 Pre-Suit Notification and Discussion Clauses
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Possible License Provisions
 Mediation and Arbitration Clauses
 U.S. Patent Law permits arbitration of patent validity and
infringement disputes. (35 U.S.C. § 294)
 Recital Clauses
 In appropriate situations, use recitals to enhance the licensed
patent’s validity.
 “Whereas, Licensee has carefully evaluated the state and
content of the prior art, and the level of ordinary skill in the art,
and has concluded that the claimed subject matter of the
Licensed Patent is novel, nonobvious and otherwise valid in all
respects under the U.S. Patent Laws.”
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KSR International v. Teleflex
 Rejects CAFC TSM test as litmus for obviousness.
 “[T]he analysis need not seek out precise teachings directed to the
specific subject matter of the challenged claim, for a court may
take account of the inferences and creative steps that a person of
ordinary skill in the art would employ.
• Reiterated the need for “caution in granting a patent based on the
combination of elements found in the prior art.”
• Said that showing “obvious to try” may indicate invalidating
obviousness under the US patent statute.
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Has KSR heightened the U.S. Patentability Standard?
 Patent and Trademark Office
 Allowance rate may have dropped.
 Questionable whether this is because of KSR.
 The Federal Courts
 Impact may be felt in software, system patents.
 Perhaps less in pharma and biotech.
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Thank you.
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