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Revisit Your Patent Licensing Practices Now

Tue, 12/10/2013 - 1:58pm
Orion Armon, Partner, Cooley LLP

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If your company licenses patented technology (in or out), it is time to revisit your licensing practices in light of recent (and anticipated) changes in patent law.

In 2007, the U.S. Supreme Court held in MedImmune, Inc. v. Genentech, Inc. that a patent licensee could maintain its license and simultaneously attempt to avoid paying future royalties by suing for a declaration that licensed patents are invalid or not infringed. After MedImmune, an accused infringer could end patent litigation by taking a license to patents-in-suit (to avoid the costs and burdens of litigation and the risk of a permanent injunction) and then initiate a new lawsuit to prove that a license was unnecessary in the first place.

Now, by summer 2014, the U.S. Supreme Court will decide a new case, Medtronic, Inc. v. Boston Scientific Corp., which raises a related question: when a licensee sues its licensor for a declaration that licensed patents are not infringed, who bears the burden of proof on infringement? The U.S. Court of Appeals for the Federal Circuit concluded that the licensee bears the burden of proving non-infringement when it files a declaratory judgment action seeking a declaration that it does not infringe licensed patents. But longstanding rules governing declaratory judgments place the burden of proving infringement on the patent owner, and it seems likely that the Supreme Court will place the burden of proving infringement back on the patent owner.

After MedImmune, and likely to an even greater degree after Medtronic, patent license agreements have less finality than in the past. The ability of patent licensees to effectively reopen and renegotiate licensing transactions involving important technologies has far-reaching implications for parties’ willingness to enter into licenses, and on the deal terms that are included with a license. Including the following considerations in your next patent license negotiation will help ensure that you obtain an agreement that achieves your business goals and minimizes the risk of unwelcome surprises. These recommendations assume that both the patent owner and licensee want to avoid (or end) the cost, business disruption, and time required to fully litigate issues of patent infringement, validity, and damages. If that is not the case, these recommendations will help uncover and illuminate the parties’ positions:

  1. Prohibit challenges to patent validity. It remains unclear whether prohibitions on challenging patent validity survive MedImmune, but the clauses are widely used and rarely questioned.
  2. Negotiate a fully paid-up, lump-sum royalty. A fully paid-up, lump-sum royalty is non-refundable, so there is no incentive to challenge the agreement after it is executed.
  3. Define licensed products by name or type. A licensee can only avoid paying royalties by obtaining a declaration that licensed products do not infringe if licensed products are defined in terms of whether they infringe licensed patents.
  4. Prohibit the licensee from filing a lawsuit to challenge whether licensed products infringe. Bar the licensee from initiating a lawsuit or any other type of legal proceeding to test infringement.
  5. Impose a higher royalty rate on a licensee who challenges infringement or validity. If a higher royalty rate is specified, it should not be characterized as a penalty.
  6. Shift attorney’s fees and costs to the victor of a licensee-initiated declaratory judgment lawsuit.
  7. Contractually shift the burden of proof on infringement to the licensee.
  8. Stipulate that the licensed patents are infringed and valid. A stipulated judgment could be filed if the license ends patent litigation or reps and warranties could specify that the licensee has investigated and agrees that the licensed patents are infringed and valid.

These deal points are rarely discussed or considered. Even if you are unable to reach agreement on these issues, you will find that exploring them with counter-parties will place you in a better, more-informed position that helps avoid surprises and ensures that you obtain license terms that protect your interests.

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