After the Supreme Court decision in MedImmune, Inc. v. Genentech, Inc., et al. (S.Ct. No. 05–608) , licensees would now seem to have a chance to get out of bad license deals by challenging the validity of the underlying patents. This case asked whether companies can sue to invalidate another’s patent even when they don’t face an infringement suit, a case that may affect thousands of drug and biotechnology licenses.
Previously, a company had to stop paying royalties on a patent license to challenge the validity of the patent. In an 8-to-1 decision, the Supreme Court ruled that a licensee could sue to challenge the validity of the underlying patent even while it continues to pay fees to use the disputed technology.
In light of these developments, I think it is important to deal with the impact and decide where to go from here. Below, I have outlined a few points that should be considered in future licensing agreements.
Venue
There can be an issue where a big company licensee takes the license to remove the threat of treble (triple) damages for willful infringement and then turn around and sues in their hometown jurisdiction. The ability to select the venue is quite powerful, especially if the licensee is a small company that cannot afford higher legal bills to defend the suit. Plus, you do not want the other side to have a “hometown advantage” where all the potential jurors have a natural bias to “their” company. Therefore, a licensor may want to insist on a venue clause such as:
Jurisdiction. Licensee consents to the exclusive jurisdiction and venue of the federal and state courts located in Hamilton County, Ohio, United States of America, in any action arising out of or relating to this Agreement. Licensee hereby explicitly waives the rights to any other venue to which it might be entitled by cause of action, domicile or otherwise.
No Contest Clause
Licensors must take into account that if they agreed to license out their technology, especially to a large company or other deep pocket, they may have to spend millions just to defend their patent, all the while being prevented from suing for infringement or terminating the agreement — this is a huge risk for a small company without the resources to defend itself. Therefore, a licensor may want to include a clause that the licensee agrees not to contest the patent. This may not hold up but one could include a clause that the license terminates immediately upon any action taken against the patent. That way, the licensee at least has to think twice since, if they are unsuccessful, they’ll be left hanging without a license and you can bet any second license agreement will not be very favorable.
No Contest Clause. Licensee agrees not to directly or indirectly challenge or cause to be challenged the validity or enforceability of any Licensed Patent, or Licensor’s ownership of any Licensed Patent, before any court, agency or tribunal, unless Licensee is charged with infringement of any Licensed Patent by Licensor or its affiliates. Licensee acknowledges that any breach of this clause will be cause for immediate termination of this Agreement.
While agreements not to contest the validity of a patent have generally been held to be unenforceable, they have not been held to constitute an antitrust violation or misuse. Therefore, the best bet is a termination upon challenge.
Front Load Fees
A licensor may want to try to get as much money as possible up-front or early in a license so that in the event of a challenge and loss of patent, they have as much money in hand before the challenge. A licensor may want to ask for a large upfront payment coupled with lower royalty rates or yearly fees. The licensee will have less incentive to challenge if it has already paid a substantial fee and remaining fees are not a burden. Also, keep in mind that a license agreement with more modest terms overall may be less likely to be challenged. The more onerous the license terms, the more likely the licensor will have an incentive to challenge the validity of the patent.
Get Your Ducks in a Row
I can’t say it enough, the best, overall strategy is to not give the licensee a good reason to challenge the patent in the first place. If the stakes are high, you can be sure that the licensee will seek out any weaknesses in the patent prosecution history or any clouds on the title. Before you even get to the licensing stage, make sure to follow these critical rules to plug gaps that could occur in your IP protective armor:
1. Make sure you have all your agreements in place to ensure that your ownership rights are in place. The first questions is always “Who owns the IP?“, it is important to nail down ownership in writing. Look at the ownership of materials from outside entities and if a license is required for commercial use.
2. Make sure you know who the true inventors are of any patent. In the U.S., improper inventorship may invalidate the patent so make sure there are written records of who invented what, when and where. Be especially careful of IP arising during collaborations with people outside your organization and look for any avenues someone could claim to be a co-inventor.
3. Keep very good records. Since inventorship is dictated in the united states by the first to invent rule (invention is conception coupled with reduction to practice), invention is proven by due diligence and good record keeping. Make sure all development records are permanent + complete + continuous.
4. Check compliance with regulatory procedures, e.g., government reporting for inventions made with government funds.
Let’s be careful out there.
