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Patent "No-challenge" Provisions in Patent License Agreements
Practical Law Legal Update 8-533-1265 (Approx. 5 pages)
Patent "No-challenge" Provisions in Patent License Agreements
by Practical Law Intellectual Property & Technology
| Published on 23 Jul 2013 • USA (National/Federal) |
A discussion of key issues that counsel should consider when negotiating and drafting patent license agreement provisions concerning licensed patent challenges. This Legal Update includes links to relevant resources concerning this topic.
In many patent licensing situations, the licensee may seek to continually maintain the licensed patent portfolio to provide the licensee with a competitive advantage. However, there may be certain situations, such as where the licensee obtains information that may invalidate one or more licensed patents, where the licensee may wish to challenge these patents. However, the licensor typically seeks to lawfully prevent any licensee challenge to the licensed patent portfolio. Therefore, the parties to a patent license agreement should consider including a provision that addresses licensee challenges to the licensed patents.
This Legal Update identifies various provisions that the parties may consider including in a patent license agreement to address the licensee's desire to later challenge a licensed patent's validity. Counsel should note that not all of the example provisions set out in this update have been subject to judicial scrutiny and therefore it is possible that some provisions could later be determined to be unenforceable.
For summaries and samples of actual patent license agreements, see What's Market Summaries: "License Agreements".
For a discussion of the legal nature of patent license agreements generally, see Practice Note, Patent License Agreements.
For sample patent license agreements drafted in favor of the licensor and the licensee, see Standard Documents, Patent and Know-how License Agreement (Pro-licensor) and Patent License Agreement (Pro-licensee).
Legal Basis Concerning Licensed Patent Challenges
Prior to Lear, Inc. v. Adkins, the licensee estoppel doctrine prevented a patent licensee from challenging the validity of the licensed patent. However, in Lear, the Supreme Court rejected the patent licensee estoppel doctrine holding that a licensee that repudiates the patent license agreement has the right to challenge the validity of any licensed patent and generally rendering strict "no-challenge" clauses unenforceable (395 U.S. 653 (1969)).
Later cases held that Lear requires the licensee to stop paying royalties before it can challenge a licensed patent's validity (see Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376, 1382 (Fed. Cir. 2001)). However, in MedImmune, Inc. v. Genetech Inc., the Supreme Court overturned this rule and held that even if the licensee does not repudiate the license agreement, it has standing to challenge any licensed patent's validity while continuing to operate under the patent license agreement (549 U.S. 118 (2007)).
After the Supreme Court's MedImmune decision, patent licensors have sought different ways to minimize the risks of licensee patent challenges after the parties sign a patent license agreement.
License Provisions Concerning Licensed Patent Challenges
Common provisions addressing a patent licensee challenge to the validity of a licensed patent typically center on provisions affecting either:
- The ongoing patent license agreement.
- The licensor's and licensee's litigation concerning the challenged licensed patent.
The licensor's ability to include any of these provisions in the patent license agreement, or for the licensee to prevent any of these provisions from being included in the patent license agreement, depend on the relative bargaining positions of the parties.
Provisions Affecting the Patent License Agreement
Provisions that affect the ongoing patent license agreement and potentially minimize the risk for the licensor that the licensee will actually challenge a licensed patent include those that do any of the following, if the licensee challenges a licensed patent:
- Allow the licensor to terminate the patent license agreement. Parties to a patent license agreement should note that the case law is not clear on whether this type of provision is enforceable (see Rates Technology Inc. v. Speakeasy, Inc., 685 F.3d 163 (2012)). For examples of this type of provision, see:
- Convert the license to a non-exclusive license where the license is originally exclusive. For example, see What's Market Summary, SK Holdings Co., Ltd and Neuronex, Inc. patent and know-how license agreement.
Other provisions that may minimize the risk to the licensor by a licensee patent challenge are include provisions that:
- Concentrate royalty payments at the beginning of the license term to maximize revenue or other payments before any potential licensed patent challenge.
- Provide for a renewable license term of less than the full life of the licensed patents with the payment of license renewal fees.
Patent Challenge Provisions Affecting the Ensuing Litigation
In addition to employing provisions that may affect the ongoing license, licensors sometimes include provisions that provide procedural advantages in the patent litigation concerning the challenged licensed patent. For example, this type of provision includes those that require:
- The licensee to pay the licensor's litigation costs and attorney fees if the licensed patent challenge is unsuccessful. For example, see What's Market Summary, Martin J., Stacey R. Chuck and Tour Striker-TGA, LLC patent and trademark license agreement.
- The licensee to provide the licensor with advance written notice of the licensee's intent to challenge a licensed patent. For example, see Standard Document, Patent and Know-how License Agreement (Pro-licensor): 9.1. License Termination
- The litigation to be held in a forum favorable to the licensor.
- A licensee representation that it has conducted a reasonable search before entering the license and has determined that the licensed patents are valid.
No-Challenge Provisions in Settlement Agreements
The US Court of Appeals for the Federal Circuit (Federal Circuit) has enforced no-challenge provisions in settlement agreements because the strong public interest in enforcing settlement agreements outweighs other considerations. For example, in Flex-Foot Inc. v. CRP, Inc., the Federal Circuit held that an accused patent infringer may be contractually prohibited from challenging patent validity in any later proceeding where the accused infringer:
- Challenged patent validity in litigation.
- Had an opportunity to conduct discovery on validity issues.
- Elected to voluntarily dismiss the litigation with prejudice under a settlement where it agreed not to challenge the patent's validity or enforceability.
However, in Rates Technology Inc. v. Speakeasy, Inc., the Second Circuit held that no-challenge clauses in putative settlement agreements between patent licensors and licensees that have not at least attempted to litigate the validity of the licensed patent are not enforceable (685 F.3d 163 (2d Cir. 2012)). For more information concerning this case, see Legal Update, Patent No-challenge Clauses in Pre-litigation Settlements are Unenforceable: Second Circuit.
For an example of a settlement agreement containing a no-challenge provision, see What's Market Summary, Armstrong Medical Limited and Allied Healthcare Products, Inc. patent license agreement.