On May 19, 2016, in JP Morgan Chase Bank, N.A. v. DataTreasury Corp., the US Court of Appeals for the Fifth Circuit held that a most favored licensee (MFL) clause allowed a patent licensee to recover the difference between the upfront lump sum it paid for its license and a lesser amount agreed to in a later third-party license agreement ( (5th Cir. May 19, 2016)).

DataTreasury Corporation owns patents applicable to electronic check-processing systems, which it had asserted against a number of banks, including J.P. Morgan Chase. To settle potential liability for infringement, JPMC entered into a license agreement with DTC that gave JPMC unlimited use of DTC's patented technology in return for a total payment of $70 million, payable in installments, which JPMC was required to pay in full to keep the license. The license also included an MFL clause stating that if DTC granted any other entity a license to any of its licensed patents, it would:

DTC later entered into other lump-sum license agreements for the same patents with third parties, including Cathay General Bancorp for a lump-sum $250,000 payment (Cathay license). The Cathay license was entered into after JPMC had finished paying DTC the total $70 million license fee. DTC did not notify JPMC of the Cathay license or any of the other license agreements.

JPMC sued DTC for breach of contract for failure to notify it of the other licenses and to gain the benefit of the more favorable license terms. The US District Court for the Eastern District of Texas granted summary judgment in favor of JPMC, finding that it was entitled to the benefit of the more favorable license terms in the Cathay license. It awarded JPMC a retroactive refund of the $69 million it had paid in excess of the more-favorable terms.

On appeal, the Fifth Circuit affirmed. The court found the distinction between running royalties and paid up royalties central to the case, noting that a licensee invoking an MFL clause cannot get a refund of amounts paid under a previously applicable running royalty. However, the court noted that it was an issue of first impression as to whether that rule applied when switching from a paid-up lump-license to a more favorable paid-up lump-sum license.

The Fifth Circuit compared JPMC's license with the Cathay's subsequent license, finding them functionally identical. Like the Cathay license, the JPMC license was all-or-nothing concerning both the payment owed and the right to use DTC’s patents, and specifically:

The court concluded that the only differences in payment terms were that:

The court rejected DTC's argument that the MFL clause only applied to future payments still owed by JPMC under the license at the time the MFL clause is invoked, finding that it would make the MFL clause effectively meaningless. The court also rejected DTC's argument that the MFL clause tied the total cost of the JPMC license to a per-transaction royalty estimate, finding that contract did not contain any language limiting the MFL clause.

Therefore, under the plain language of the MFL clause, JPMC was entitled to Cathay's more favorable payment terms and was entitled to a refund of $69 million, the lump sum amount it had paid in excess of the amounts required to be paid under the Cathay terms.

Dissenting-in-part, Judge Higginson would have found that the MFL clause's language was prospective only and therefore JPMC could not recover retroactively. He argued that the contract's payment structure, allowing JPMC to make payments over a number of years, functioned similarly to a running royalty in that it would have allowed a recovery during that period if DTC entered into a more favorable license.

The decision serves as a useful reminder to counsel of the potential pitfalls of MFL clauses. If possible, licensors typically aim to avoid MFL clauses altogether. Where an MFL must be included, the licensor should ensure that the only payments it applies to are running royalties.

In addition, as the court's opinion notes, the potential problems with a broadly worded and open-ended MFL clause mostly affect the licensor and could be avoided by including specific restrictions, for example:

Procedurally, licensors granting MFL status to a licensee should set up appropriate internal systems set up to monitor the terms of each license entered into concerning the same patent to ensure that they minimize risk concerning the MFL clause.