Case Law Developments Impacting License Law Practice

Presented to MNCLE January 31, 2020: Unlike patent infringement cases that funnel into the Federal Circuit on appeal, license appeals are heard in state and federal appeals courts all over the country. The result is that license cases are more varied, and outcomes can be highly dependent on venue and choice of law. This paper will sort through the variable landscape to highlight recent decisions that impact license practice, including how licenses are drafted and enforced.

1. All good things must come to an end, particularly patent royalties.

Kimble v. Marvel Entertainment, LLC, 135 S. Ct. 2401 (2015).

Kimble evaluates whether a patent owner can collect any kind of patent royalty (e.g., royalty under a license or royalty for an assignment) for activity occurring after a patent expires. The question puts Brulotte v. Thys Co., 379 U.S. 29 (1964) on trial.

Brulotte ruled that a patent owner cannot collect license royalties for activity occurring after a licensed patent expires. Has the world changed so much in the past 55 years that Brulotte should now be overruled? Should parties be able to enter a mutually desirable deal where one party willingly agrees to pay patent royalties for activity occurring after a patent expires?

Kimble invented and patented (1990) a Spiderman toy that mimics how Spiderman shoots webs from his hands. Kimble approached Marvel to see if they would do a deal with him. Marvel initially declined, instead introducing its own web mimic toy. Kimble sued Marvel for patent infringement in 1997. The parties settled the patent dispute under a settlement deal where Marvel bought the asserted patent. Marvel paid Kimble an initial fee of just over $500,000 and agreed to pay a 3% royalty. The agreement never set an end date on the royalty obligation, appearing to set up a scheme under which Marvel would pay the patent royalty as long as Marvel sold the product.

Neither Kimble nor Marvel was aware of the Brulotte doctrine when they placed their settlement agreement. Marvel discovered the doctrine circa 2006 and promptly brought a declaratory judgment action in federal district court to confirm that its royalty obligations would end in 2010 when the patent expired. The district court granted Marvel the declaratory relief it requested, and Kimble appealed to the Ninth Circuit Court of appeals. The Ninth Circuit expressly announced disdain for the Brulotte doctrine but felt compelled to follow it. The appellate court affirmed that Marvel could stop paying royalty in 2010.

Kimble next appealed to the Supreme Court, requesting that Brulotte should be overruled. In practical effect, Kimble wanted Supreme Court permission to charge Marvel a royalty forever on the Spiderman toy.

The Supreme Court upheld Brulotte, ruling that a patent owner may not collect any royalty for any post-expiration activity. It did not matter to the Court whether the royalty was based on a patent license or a patent assignment. This meant that Marvel could stop paying patent royalty to Kimble in 2010. Justice Kagan, no relation by the way, wrote the decision for the Court.

The key to the Kimble decision is the fundamental principle underlying U.S. patent law. In exchange for describing and enabling an invention in a patent, the patent owner gets exclusivity to the invention for the patent term. But part of the bargain is that the invention passes to the public when the patent expires or is found to be invalid or unenforceable. The Court indicated that it carefully guards this bargain.

The Court further explained that its new decision here, and the original Brulotte doctrine, only limit the ability of a patent owner to collect patent royalty for post-expiration activity. Parties, according to the court, have legitimate ways to work around the Brulotte rule. As one example, license parties could agree that only activity that occurs during the patent term is subject to royalty, but a licensee can still be obligated to submit payment for that activity after the patent term expires. In other words, payments can occur at any time, pre- or post-expiration, so long as only activity inside the term is subject to royalty. The Court also noted that non-patent royalties are allowed without being tied to a patent term. An example includes a trade secret or know how royalty, either of which can go on indefinitely. Although the court did not cite a case example for such trade secret or know how royalties, these are within the doctrine of Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979) and its more recent case law progeny.

In upholding Brulotte, the Court devoted many passages to the sanctity of stare decisis. The court explained that Supreme Court cases should not be overruled too easily and that Kimble failed to provide important enough reasons to set stare decisis aside. The Court observed that Congress has not overruled Brulotte by statute notwithstanding multiple opportunities to do so over the years as Congress continually reworked the patent laws. The Court believed that the hands off treatment by Congress is another factor that supported leaving the Brulotte decision in place. The Court also observed that the statutory and doctrinal underpinnings of Brulotte have stood the test of time.

Kimble tried to argue that the Brulotte test is unworkable as another basis to avoid stare decisis, but the Court disagreed. Justice Kagan wrote that Brulotte creates a bright line test that is easy to use in contrast to the totality of circumstances standard proposed by Kimble.

Kimble tried two more arguments to knock Brulotte down. First, Kimble argued that Brulotte is anticompetitive. Justice Kagan rejected this argument. Justice Kagan wrote that Brulotte was not based on anticompetitive principles, but rather on the fundamental patent law principle that patented subject matter must enter the public domain when the patent term expires. At its core, in other words, Brulotte is a patent case, not an antitrust case.

Second, Kimble and many amici argued that Brulotte stifles innovation. Justice Kagan rejected this argument as well. Kimble and many amici supporting Kimble failed to present any empirical evidence of this stifling effect.

Kimble and Brulotte are important cases. Royalty payments are a crucial aspect of technology deals, and these two cases set an important limitation on patent royalty strategies. The lesson for patent owners is to capture what you can during the patent term and to use other revenue harvesting strategies outside the term.

Did Kimble miss a crucial argument that could have protected his royalty stream? Recall that Kimble and Marvel agreed to their royalty scheme in a settlement agreement for a patent infringement suit. Might the Kimble royalty clause be enforceable due to its presence in a settlement agreement? Kimble failed to present any argument that would balance policies of patent law with the judicial policy associated with settling disputes. Yet, judicial policy involving settlement agreements prevails over patent policy when these are at odds. Favoring judicial policy allows otherwise unenforceable clauses to be enforced if the clauses are in a settlement agreement.

For example, settlement policy prevailed over patent policy in Hemstreet v. Spiegel, Inc., 851 F.2d (Fed. Cir. 1988). To end an earlier patent infringement dispute, Hemstreet and Spiegel entered into a settlement agreement under which Spiegel contractually agreed to a “no challenge” clause. Pursuant to this no challenge clause, Spiegel agreed that it would not thereafter challenge patent validity. However, no challenge clauses generally are unenforceable under Lear v. Adkins, 89 S. Ct. 1902 (1969). The Lear Court ruled that licenses cannot block a licensee from challenging patent validity in view of the strong patent policy that unpatentable or invalid subject matter should be in the public domain.

In the subsequent 1988 dispute between Hemstreet and Spiegel, Spiegel pointed to the Lear policy, arguing that Spiegel must be allowed to challenge patent validity notwithstanding the no challenge clause in the earlier settlement agreement. Hemstreet countered that the strong judicial interest in settling disputes prevails over the Lear patent policy, making the no challenge clause enforceable in the context of a settlement agreement.

The Federal Circuit agreed with Hemstreet. In a competition between patent policy and judicial policy, judicial policy wins. Therefore, as an exception to Lear, a no challenge clause in a settlement agreement is binding and enforceable. Subsequent cases fairly consistently follow this ruling unless the no challenge clause in the settlement agreement is ambiguous or too narrow. See e.g., Flex-Foot, Inc. v. CRP, Inc., 57 USPQ2d 1635 (Fed. Cir. 2001)(enforceable no challenge clause in settlement agreement); Foster v. Hallco Mfg. Co., Inc., 20 USPQ2d 1241 (Fed. Cir. 1991) (enforceable no challenge clause in settlement agreement); Compare Baseload Energy Inc. v. Roberts, 96 USPQ2d 1521 (Fed. Cir. 2010) (no challenge clause in settlement agreement not enforceable); Ecolab, Inc. v. Paraclipse, Inc., 62 USPQ2d 1349 (Fed. Cir. 2002) (no challenge clause in settlement agreement not enforceable); Diversey Lever, Inc. v. Ecolab, Inc., 52 USPQ2d 1062 (Fed. Cir. 1999) (no challenge clause in settlement agreement not enforceable); Howmedica Osteonics Corp. v. Wright Medical Technology, Inc., 88 USPQ2d 1129 (Fed. Cir. 2008) (no challenge clause in settlement agreement not enforceable).

Like the agreement clause at issue in Hemstreet, the royalty clause at issue in Kimble also was in a settlement agreement. Did not Kimble have a similar argument that its royalty clause would be enforceable as a matter of judicial policy? The very same patent policy (patents should not usurp subject matter that belongs to the public) was at issue against the very same judicial policy (settlement commitments further the policy of expedient and orderly settlement of disputes to foster judicial economy), and so the same balance should have resulted. Would the Court have qualified its Kimble ruling if the patent owner had thought to apply the principles of Hemstreet?

What else could Kimble have done to protect its royalty stream? Kimble should have thought of a way to incorporate know-how grants into the original settlement agreement with Marvel. Further, even without the benefit of hindsight, Kimble had plenty of time to fix his situation. Marvel brought its DJ action in 2006, which was about four years before the patent expired in 2010. Kimble could have worked on improving his toy product in a way in which updated patent or know-how rights could have been additionally licensed to Marvel or another interested licensee. The market had to be profitable or else Marvel would not have fought so hard for nine years to cancel its royalty obligation.

Licensors generally can benefit from working on technology improvements even if the twilight hour for royalties and patent term expiration is far off. In fact, licensors should start to think of improvements on the day the most current embodiment is finalized. This renewed development effort may even start before license discussions begin or are contemplated. Many companies use technology improvements to stay competitive. Some companies fail because they sit still.

2. License negotiations breaking down? You’ve got homework.

Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016).

The Halo decision created a new regime that has made it easier for patent owners to get enhanced damages against accused infringers under 35 USC 284. The Halo decision directly impacts license practice in the event that license negotiations break down. If a licensee plans to walk away from license negotiations, Halo makes it crucial for the licensee to kick the tires of the rejected patent properties, so to speak, and then to document its analysis of noninfringement, invalidity, and/or unenforceability in a written opinion. Halo implies that the exiting licensee has an increased risk of paying enhanced damages as a willful infringer if the licensee fails to do its homework.

Section 35 USC 284 of the patent statute provides courts with discretion to award enhanced damages, with treble damages being the upper limit. Section 284 reads as follows (emphasis added):

35 U.S.C. 284 DAMAGES.
Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under section 154(d).

The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

Although providing statutory authority for enhanced damages, the statute itself fails to instruct when enhanced damages should be awarded. The courts took on this responsibility and have developed standards for awarding enhanced damages in “egregious cases.” Enhanced damages have not been awarded in ordinary cases where bad behavior is absent. In essence, a party that acts egregiously, such as by willfully infringing a patent, risks having to pay up to treble damages when called to task.

The modern era of patent law began with the creation of the Federal Circuit in 1982. Several milestones have occurred in the modern era that guide the award of enhanced damage awards under Section 284. Major milestones occurred in 1983, 2007, 2012, 2016, and then post-2016.

In 1983, the Federal Circuit established the standard that competent opinions regarding patent infringement, validity, enforceability, etc. could avoid willful infringement and the associated enhanced damages. The court announced this standard in Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983). In ensuing years, several nuances of the Underwater Devices standard evolved, creating traps and pitfalls for the unwary. Some principles remained generally clear, though. First, the opinion had to be obtained around the same time as the alleged willful infringement. Second, raising a defense at trial, even a rock solid one, could not avoid willful infringement if the proper homework was not done earlier at the right time. Commentators referred to Underwater Devices as a “full employment act” for patent attorneys, as the demand for written opinions soared.

The willful infringement standards flipped in 2007, when the Federal Circuit decided In re Seagate Technology LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc), cert. denied, 129 S. Ct. 1917 (Feb. 25, 2008). The Seagate decision set forth a new “objectively reckless” standard that made it much easier for accused infringers to avoid enhanced damages. In contrast to standards under Underwater Devices, written opinions at the time of the conduct at issue were much less important, although still beneficial from time to time. Also in contrast to standards under Underwater

Devices, raising a reasonable defense for the first time at trial was good enough to avoid willful infringement.

The AIA was enacted in 2012, another milestone. The new statute section at 35 USC 298 appeared to make it even clearer that opinions were much less important in the Seagate regime. Section 298 reads as follows (emphasis added):

35 U.S.C. 298. ADVICE OF COUNSEL
The failure of an infringer to obtain the advice of counsel with respect to any allegedly infringed patent, or the failure of the infringer to present such advice to the court or jury, may not be used to prove that the accused infringer willfully infringed the patent or that the infringer intended to induce infringement of the patent.

The statute very clearly diminishes the role of opinions in any willful infringement analysis. Or does it?

Apparently the statute does not mean what it says. The Supreme Court gutted Section 298 when the Supreme Court issued its Halo decision in 2016, another milestone. The gutting effect is shown in the Halo aftermath, described below, where securing opinions at the time of the conduct at issue has become paramount again. The pendulum of the role of opinions has swung away from relative obscurity under the Seagate (2007) test back towards the opinion world of Underwater Devices (1983).

Halo actually involved two disputes: Halo Electronics, Inc. v. Pulse Electronics, Inc. (electronics) and Stryker Corp. v. Zimmer, Inc. (orthopedics). Of the two, Halo v. Pulse related to a license dispute. Halo suggested that Pulse take a license, but Pulse declined. Pulse had an opinion from an engineer that the Pulse product did not infringe the Halo patent claims. After Pulse exited the license negotiations without taking a license, Halo sued Pulse for patent infringement, also alleging willful infringement. Stryker v. Zimmer followed a different path, as a license was not involved. Ultimately, both cases ended up in the Supreme Court, where the standard for evaluating enhanced damages under Section 284 was at issue.

The Supreme Court agreed with prior rulings under the Seagate regime that willful infringement and enhanced damages should only target egregious conduct. But, the Supreme Court felt the Seagate test was too rigid and allowed bad actors to avoid willful infringement too easily. Per the Supreme Court, the Seagate test ignored bad conduct when it occurred, allowing bad actors to escape via reasonable defenses raised at trial. The Supreme Court instructed that bad conduct must be judged when it occurs and should not correlate to whether good defenses are raised later at trial. The Supreme Court then gutted Section 298 with a somewhat circular argument as to why opinions are still important. Both disputes at issue in Halo were remanded for adjudication under the revised principles.

After shredding Seagate and gutting Section 298, what willful infringement test did the Supreme Court put on the table? None. It was left to lower courts in the Halo aftermath to fashion standards compatible with the Supreme Court decision.

The Halo aftermath shows that opinions once again are crucial to avoid enhanced damages for egregious conduct such as willful infringement. District Courts and the Federal Circuit currently evaluate willful infringement in the context of the nine “Read factors” per Read Corp. v. Portec, Inc., 970 F.2d 816 (Fed. Cir. 1992). Among the nine factors, the second factor turns on whether the accused infringer did any due diligence or obtained an opinion. The failure to obtain opinions were significant factors leading to willful infringement and enhanced damages in WBIP, LLC v. Kohler Co., 829 F.3d 1317 (Fed. Cir. 2016); Georgetown Rail Equip. Co. v. Holland L.P., 867 F.3d 1229 (Fed. Cir. 2017); and Barry v. Medtronic, Inc., 250 F. Supp. 3d 107 (E.D. Tex. 2017).

The Halo decision and its aftermath provide important licenses for potential licensees who want to exit license negotiations. If a potential licensee intends to exit negotiations while remaining in the market with a competitive product, the potential licensee must do its homework to avoid willful infringement and enhanced damages. The party should do due diligence to evaluate noninfringement, invalidity, and/or unenforceability of the rejected patents. Timing is important, as the evaluation should occur at the time of the conduct in question. A written opinion should document the evaluation. While some cases allow non-attorneys to render opinions, counsel is best positioned to render these opinions. The opinion needs to be properly communicated and properly relied upon. The process should be carried out with strategies to protect attorney client communications and attorney work product at all stages.

3. If you weren’t exhausted before, you will be now.

Impression Products, Inc. v. Lexmark, Intl., Inc., 137 S. Ct. 1523 (2017)

Some patent owners sell products in fields in which there is strong demand for used products or the servicing/repair of used products. Patent owners in these fields are vulnerable to competition from refurbishers who buy used items at deep discounts and then re-sell the refurbished goods more cheaply than the patent owner sells new products. The result is that refurbishers take market share away from the patent owner.

Patent exhaustion is one of the doctrines that enable refurbishers to compete with the patent owner in this way. Patent exhaustion allows used items to be re-sold, used down the chain of distribution, and repaired even if those items are patented. Patent owners, therefore, try to implement sales strategies that reduce the impact of patent exhaustion in order to preserve patent protections against refurbishers.

The patent owner in Impression tried to use sale restrictions to avoid patent exhaustion, but found that its sales restrictions were powerless to stop a savvy refurbisher. The Supreme Court made the exhaustion doctrine even more potent, ruling that sales restrictions imposed on customers do not thwart exhaustion. The Supreme Court rubbed even more salt in the wounds of patent owners, ruling that a sale anywhere in the world exhausts the U.S. patent rights for the item sold. Sales restrictions might not do the job, but license strategies remain available to avoid exhaustion, so long as courts in the future do not further expand the exhaustion doctrine to encompass even license transactions. Current law allows a patent holder to avoid exhaustion, and thereby exercise more downstream control over using, selling, offering to sell, and importing, when a patented item or method is supplied via license or lease instead of via a title transfer.

Some background is helpful to understand Impression better. Suppliers of patented goods can sue customers and other parties under not just patent infringement, but under many other theories as well These other theories might include breach of contract, unjust enrichment, unfair competition, antitrust, tort, and the like. Exhaustion knocks out patent infringement claims, but other claims under other theories remain.

This is important to appreciate, as the Impression decision expands the exhaustion doctrine but does not limit or restrict other claims. This appreciation is still problematic, because a patentee might not be in contract with or have other claims against third parties. Hence, exhausted patent rights remain a serious problem.

Under 35 USC 271, a patent holder has the right to stop another party from making, using, selling, offering to sell, or important a patented item or method. Exhaustion limits these rights. Once a patented item is sold, or its title is otherwise transferred by the patent holder or under the authority of the patent holder (such as by a licensee), the using, selling, offering to sell, and importing of the particular item sold are exhausted. This means that the patent holder cannot stop others from using, selling, offering to sell, or important the particular item that the patent holder placed into commerce.

Note that the making right generally is not exhausted. Purchasing a patented item does not generally give the acquirer any right to make further embodiments of that item. This implicates the repair v. reconstruction doctrine, where people can repair patented items freely (unless contractually restricted), but may not reconstruct them. Practically, reconstruction is tantamount to making a whole new patented item.

For exhaustion to apply, a key aspect is that an authorized sale or title transfer takes place. Up until the Impression decision, it also was the case that the authorized sale must have occurred under the U.S. patent at issue. Sale in a foreign territory did not trigger exhaustion. See Ninestar Technology Co. v. ITC, 667 F.3d 1373, 101 USPQ2d (Fed. Cir. 2012).

Impression was decided against this background. Lexmark the patent owner battled Impression the refurbisher. Lexmark sells ink cartridges for printers. Lexmark sells both in the US and internationally. Lexmark is vulnerable to refurbishers like Impression, because used ink cartridges can be re-filled, re-sold, and used again.

Lexmark implemented a sales strategy to protect itself from Impression and other refurbishers. Lexmark implemented a two-tier pricing strategy with post-sale restrictions. A customer can buy new Lexmark cartridges at a higher price ($$$$$$$) or at a lower price ($$$$). If the customer pays the higher price, the customer has no re-sale restrictions and is free to sell used up cartridges to refurbishers such as Impression. On the other hand, if the customer pays the lower price, the used cartridge must be returned to Lexmark. Lexmark implemented this strategy in its supply contracts around the world.

Unfortunately, in disregard of contract obligations, Lexmark customers would buy the Lexmark cartridges from Lexmark at the discount price. But rather than return the used up cartridges to Lexmark per the contract, the customers instead would sell the used cartridges to Impression. The thinking could have been, contract obligations aside, why return the used cartridges to Lexmark for free when Impression will pay for them?

Impression bought used Lexmark cartridges in the US and outside the US, refilled them, and then re-sold them for a discount much cheaper than the Lexmark pricing. Lexmark sued Impression for patent infringement. Lexmark did not have a direct contract with Impression and, therefore, could not sue Impression for breach of the contractual post-sale restrictions in its customer contracts. Impression defended that the patent rights in the used cartridges were exhausted, allowing Impression to refurbish and re-sell without patent infringement.

Lexmark countered that exhaustion is not available as a defense to Impression. First, both the US and international cartridges were subject to post-sale restrictions. With those sales restrictions being violated, no authorized sale occurred that could trigger exhaustion. Further, acquisition of used cartridges outside the US cannot trigger exhaustion of U.S. patent rights per Federal Circuit case law.

Lexmark made solid arguments. This is shown by the fact that the Federal Circuit agreed with Lexmark and ordered Impression to pay patent infringement damages. The Federal Circuit agreed that lawful post-sale restrictions avoid exhaustion.

Hence, Impression could not rely on patent exhaustion to negate Lexmark patent rights covering the used cartridges acquired by Impression. The Federal Circuit also reaffirmed that sales outside the US are unable to trigger exhaustion as a matter of law. Hence, to the extent Impression bought used cartridges outside the U.S., re-selling them in the U.S. would be infringement of the U.S. patent.

Impression appealed to the Supreme Court who agreed to decide (1) whether lawful post-sale restrictions avoid exhaustion; and (2) whether international sales exhaust US patent rights. Impression, the refurbisher, won on both issues. The Supreme Court held that patent rights are exhausted even when the patented item is sold under lawful post-sale restrictions. The Supreme Court also held that an authorized sale of a patented item anywhere in the world exhausts US patent rights. Hence, Impression could rely on patent exhaustion to buy used cartridges from the Lexmark customers. Further, Impression could rely on patent exhaustion when buying used cartridges internationally and then re-selling them in the U.S.

The Supreme Court expressly noted that exhaustion only impacted patent infringement. Other causes of action, such as breach of contract, remained. It follows, therefore, that Lexmark could sue its customers for breach of contract, if Lexmark were of a mind to sue its customers. Of course Lexmark could not sue Impression for breach of contract, as Impression was not in contract with Lexmark. It also follows that Lexmark could have sued Lexmark under non-patent theories, to the extent any would have been available. The opinion does not show that Lexmark asserted any other causes of action against Impression, putting all of its eggs into the same patent infringement basket.

When the dust settles, Lexmark weakens patent rights in markets in which used products can be repaired and returned to service. Therefore, solid protection against refurbishers is needed in markets where new sales compete with used goods and repair/refurbishing services. One strategy is to stop exhaustion from happening so that patents can still protect. Recall that under current case law, exhaustion is triggered by title transfer, not by license transfer. This suggests that products or services in these vulnerable markets should be transferred to customers by license or lease, not by sale or other title transfer, to leave patent rights available for protection.

Hence, license practice is implicated. In such instances, this would not be a classic license where the licensee is given a menu of making, using, selling, offering to sell, and/or importing rights. Rather, the item is already manufactured and in existence at the time supplied to the customer, but the transfer occurs via a license or lease, not a title transfer. This is analogous to leasing a car rather than buying it or leasing software rather than buying it.

4. The Government is inhuman. I’m not paranoid. The Supreme Court says so.

Return Mail, Inc. v. Postal Service, 139 S. Ct. 1853 (2019)

Is a federal agency such as the U.S. Postal Service a person? And what does this have to do with license practice? It turns out, plenty.

Return Mail patented a method to process undeliverable mail. After the United States Postal Service (USPS), a federal agency, introduced a service that processed undeliverable mail, Return Mail sued the USPS for patent infringement under a patent including business method claims. The USPS countered by filing a post grant CBM (covered business method) review of the patent and succeeded in invalidating the patent claims. Section 101 issues dominated the CBM proceeding, and the business method claims were determined to be ineligible for patent protection. The Federal Circuit affirmed. The asserted patent appeared to be dead.

Undaunted, Return Mail sought Supreme Court review. Since Section 101 (patent eligibility) issues dominated in the CBM proceeding, would it not be most likely that Return Mail would seek Supreme Court review on those Section 101 issues? Commentators widely criticize Section 101 jurisprudence as a mess that needs fixing, so an appeal based on Section 101 seemed likely.

As it turned out, the main issue on appeal was nothing what you would expect. Instead of seeking Supreme Court review on one of the scholarly, expected challenges to Section 101, Return Mail asked the Supreme Court to consider whether the USPS or any other federal agency is a person. At first blush, this might not appear to be an issue worthy of Supreme Court attention, but the Supreme Court took the appeal. The statutes that authorize post grant review proceedings only allow a statutory “person” to bring these actions. Any entity that is not a statutory “person” has no standing to bring a CBM or any other post grand proceeding.

The post grant statutes used “person” without ever defining the term. In the absence of a statutory definition, does “person” include a federal agency such as the USPS?

The Supreme Court determined that the USPS and other federal agencies are not “persons” under the post grant review statutes. Hence, the USPS had no standing to bring the CBM action. The USPTO and Federal Circuit determinations of invalidity of the Return Mail patent under Section 101 were reversed. The patent remained valid.

The Supreme Court relied on a couple of factors to determine that the USPS is not a “person” under the post grant review statutes. Case law precedent indicates a presumption that a federal agency is not a “person” when the statute offers no definition. The Supreme Court also perceived a conflict of interest where the USPTO (a federal agency) adjudicated a dispute with another federal agency as a party. This would be like the other side’s lawyer also being the judge. Ironically, perhaps, the Court did not perceive a similar conflict in the present case where the federal judiciary is asked to adjudicate disputes with another federal agency as a party. Somehow, the legislative tribunal in the USPTO is vulnerable to being tainted by such a conflict, but not the federal judiciary.

What is the lesson for license practice? Statistics show that patent challengers still have an advantage in post grant proceedings. In other words, post grant proceedings favor patent challengers in view of statistics. This means that post grant proceedings are a potent tool for patent challengers, but a bane for patent owners.

Because federal agencies are denied access to post grant proceedings as petitioners as a result of Return Mail, patents are somewhat stronger in terms of validity against federal agencies than against “persons.” In effect, federal agencies are denied access to potent weapons used to invalidate patents. This increases the probabilities of doing economically reasonable license deals with federal agencies, as the agencies can only attack patents now in ex parte reexamination or federal court.

Possibly, the post grant statutes could be amended so that “person” encompasses federal agencies. Perhaps no such amendment will be seen, as this would not resolve the conflict of interest perceived by the Supreme Court. For now, unless and until the law is changed, federal agencies may be more willing to consider economically reasonable deals to avoid the expense and possible outcomes of claims court battles.

5. The hidden risk of joint research and other agreements.

Helsinn Healthcare S. A. v. Teva Pharms. United States, Inc., 139 S. Ct. 628 (2019)

This decision addresses the question of whether secret sales trigger the on sale bar under the new Section 102(a)(1) of the AIA. The lesson is that activities under a technology license or joint research agreement can unknowingly trigger the on sale bar and its one year deadline by which patent applications need to be filed to avoid forfeiting patent rights.

Helsinn developed the “Aloxi” pharmaceutical product, a drug used to treat vomiting and nausea in the course of chemotherapy treatments. During Phase III clinical trials, Helsinn entered into both a license agreement and a supply agreement with MGI Pharma (a Minnesota company, by the way). Under these, Helsinn would supply 0.25 mg and 0.75 mg dosage products, respectively, to MGI Pharma, and MGI Pharma would market and distribute the products. The parties announced their agreements in joint press releases, so that the existence of the relationship became publicly known. The press releases did not disclose the dosage forms at issue, though. MGI Pharma was obligated to maintain the confidentiality of the Helsinn information and materials. Hence, any material that Helsinn sold to MGI Pharma during the clinical trials was done secretly. Two years after entering the agreements with MGI Pharma, Helsinn filed the priority patent application for the 0.25 mg dosage form. A family of patents issued from this priority application in due course. One of these was the ‘219 patent at issue, which included claims protecting the 0.25 mg product.

Many years later, TEVA sought FDA approval for a generic 0.25 mg form of the Aloxi product. Helsinn promptly sued TEVA for infringing the ‘219 patent. TEVA defended on grounds that secret sales from Helsinn to MGI Pharma occurred under the license and supply agreements more than one year prior to the filing of the priority application. According to TEVA, the secret sales triggered the one-year on sale bar, which ran before the Helsinn priority application was filed.

Section 102 enacted under the AIA in 2012 controlled. Prior to the AIA, secret sales could trigger the on sale bar of the old Section 102. Did the newer Section 102 enacted under the AIA change this? The potential for a shift in the law arose due to the use of the phrase “otherwise available to the public” in the new statute (emphasis added):

35 U.S.C. 102(A) NOVELTY; PRIOR ART.
A person shall be entitled to a patent unless— (1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention;

Section 102(a)(1) does not authorize a one year grace period, and on its face indicates that patent rights are immediately lost if one of the listed events occurs. However, Section 102(b) establishes the one-year grace period with respect to events in Section 102(a), such as an on sale event.

Does the phrase “otherwise available to the public” mean that all the events in the 102(a)(1) list, including the on sale event, necessarily must incorporate a public aspect in order to trigger the one year deadline? This is a tough question to answer, indeed, as the different courts developed different answers first in the District Court, then on appeal to the Federal Circuit, and then on appeal to the U.S. Supreme Court.

The District Court decided that only public sales could trigger the on sale bar of the new Section 102(a)(1). Because the joint press releases issued by Helsinn and MGI Pharma did not disclose the invention but rather disclosed only the existence of the relationship, the secret sales to MGI Pharma did not trigger the on sale bar. The Federal Circuit agreed with the District Court that secret sales would not trigger the on sale bar of the new Section 102(a)(1). This initially suggests that the Federal Circuit would affirm the decision of the district court. This is not what happened.

The Federal Circuit still reversed, ruling that the on sale bar had been triggered and ran out before the priority application had been filed. The Federal Circuit determined that the on sale bar had been triggered because the existence of the sales had been made public (via the press releases). With the sales being publicly known, it did not matter that the invention details remained secret.

The district court and the Federal Circuit applied two, completely different viewpoints and reached opposite results. The Supreme Court next applied a third judicial viewpoint, which of course controls how this issue is interpreted. The Supreme Court determined that the phrase “otherwise available to the public” in the new statute is too vague to have incorporated a public aspect into all the events listed in the statute. Hence, according to the Court, the old law with regard to secret sales and the on sale bar remained intact after passage of the AIA. This meant that secret sales trigger the on sale bar of Section 102(1)(a), just as was the case under the old law. Helsinn lost its patent to these secret sales, opening the way for TEVA to enter the market with a competing, generic product.

Many technology licenses, joint research agreements, supply agreements, material transfer agreements, and even ubiquitous nondisclosure agreements involve either transfers of products or obligations to supply product to one or more other parties. If these transaction involve a sale or any kind of title transfer (e.g., a company might give away a tool for free in order to create a market for a proprietary consumable), Helsinn teaches that the transfer or undertaking the obligation to supply will trigger the on sale bar, even if the transfer or obligations are secret.

Public knowledge of the transactions might have been relevant to the Federal Circuit, but not to the Supreme Court. This means that secret sales whose existence is secret still trigger the on sale bar under Helsinn.

The result is that any technology-related agreement can unknowingly trigger the on sale bar during pre-commercialization phases of the relationship. This can be particularly problematic under joint research relationships when a product might not exist at the outset, but then is developed and ready for patenting at some intermediate time long before commercialization to third parties occurs. Parties need to stay on top of this issue by either closely monitoring progress and promptly patenting to avoid the running of the one year grace period and/or by placing agreements that do not prematurely setup supply obligations and or material transfers that trigger the on sale bar.

6. Are your patent claims a mousetrap with no cheese?

Life Techs. Corp. v. Promega Corp., 137 S. Ct. 734 (2017)

Licensing multi-component inventions sourced only in part in the U.S. creates ample risk that a licensee can avoid paying any patent royalty outside the U.S. The Life Techs. decision explains why this happens.

Promega controlled a patent whose claims protected a kit used for genetic testing. The kit included five components, and the patent claims correspondingly claimed a kit including these five components. One of the components, an enzyme, was technologically special. The other four components were commercially available from sources outside the U.S. Even though, so to speak, only one component of the kit was special while the others were ordinary, all five components were needed for the kit to work.

Promega licensed Life Technologies under the patent rights to make and sell the kit in the law enforcement field. The license grant was worldwide.

Life Technologies procured the enzyme from the U.S., where the patent rights were in force, but then procured the other four kit components from international sources. Life Technologies assembled the kits outside the US and then sold them not only outside the US but also outside the authorized field of use. The license grant authorized sales in the law enforcement field, but Life Technologies sold these to clinical and research customers as well. Not only did Life Technologies makes sales outside its licensed field, Life Technologies did not pay royalty on these sales.

Clearly, Promega was not happy with these licensee tactics inasmuch as Promega sued Life Technologies for patent infringement. Ordinarily, one expects U.S. patents to protect infringing acts occurring in U.S. territories, not outside the U.S. So, what could have been the basis for Promega to disapprove of what the licensee was doing internationally outside the U.S.? The answer is that Promega turned to 35 USC 271 (f)(1) for protection. Section 271(f)(1) is an interesting piece, as it gives U.S. patent claims some international scope (emphasis added):

35 U.S. CODE § 271.INFRINGEMENT OF PATENT
(f) (1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

In other words, assembling a combination of components outside the U.S. can still infringe a U.S. patent if a substantial portion of the components were obtained from source(s) in the U.S. Promega sought to ensnare Life Technologies in the combination trap provided by Section 271(f)(1). But Life Technologies procured only the enzyme from the U.S. The other four kit components came from international sources. Was the enzyme that Life Technologies procured in the U.S. a substantial portion of the claimed combination because the other four components were technologically mundane? This seems like a sound proposal, somewhat akin to how the Supreme Court evaluated when components embody essential features of an invention under patent exhaustion law as explained in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). Promega should go home a winner, right?

Sorry, no. Using a somewhat strange, quantitative analysis, the Supreme Court ruled that a single component could never constitute a substantial portion of the components of a multi-component invention. This is unlike its qualitative approach in Quanta and could be confusing to apply in situations where a combination might only include two components. Can a single component ever be a substantial part of a combination including only two components if the Supreme Court analysis is to be taken at its word?

Promega lost the battle, which allowed Life Technologies to do international business in any desired field without incurring any royalty obligation or risk of patent infringement.

What could Promega have done differently to better protect its technology in the U.S. and internationally. Both patenting strategies and agreement strategies could be available, and similar strategies could benefit any patent licensor whose invention involves multiple components:

• The reach and limitations of Section 271(f)(1) should be kept in mind when drafting claims for these kinds of inventions. A patentee could pursue not only combination claims but also methods of using one or more key components. Individual components should be patented if novel and nonobvious.
• Contractual know how is powerful intellectual property. A patentee like Promega could have crafted a technology deal under which both patent rights and know how were licensed. In contrast to the relative ease by which patent rights can be avoided, often it is much more difficult for the licensee to avoid contractual know how. If you are licensor, please do not forget the power of know how in technology deals. For example, rather than sell the enzyme to the Life Technologies, the enzyme could have been licensed, triggering a worldwide royalty obligation independent of patent rights. The Aronson doctrine and its progeny are of interest in this regard. See Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979); see also Universal Gym Equipment, Inc. v. Erwa Exercise Equipment Limited.
• A licensor might also look to international protections that might be provided under 35 USC 271(f)(2).
• Although no case law is on point, a licensor could argue that the “having made” right of the U.S. patent is being exercised in the U.S., as the directing actor(s) are in the U.S., and the monies from the accused activity flow into the U.S.
  
  

7. Are you getting submarined by your sublicenses?

Fraunhofer-Gesellschaft v. Sirius XM Radio Inc., No. 2018-2400 (Fed. Cir. Oct. 17, 2019).

This case presents many important lessons for sublicense strategies.

Fraunhofer exclusively licensed Worldspace under patent rights protecting technology to stream data via multiple data streams. The license was irrevocable and worldwide. Worldspace had the right to sublicense. Worldspace was obligated to pay a $1 million license fee in installments. Worldspace gave an irrevocable sub-license to Sirius XM.

Worldspace went bankrupt without having completed all of its installment payments. In bankruptcy, independent of the licensor Fraunhofer, the trustee and sublicensee Sirius XM reached a settlement under which Sirius XM paid licensee Worldspace a lump sum, with the result that Sirius XM kept its sublicense, now paid up as far as Worldspace and Sirius XM were concerned.

Worldspace and its bankruptcy trustee might have been happy, but not Fraunhofer. Fraunhofer sued Sirius on grounds that the Worldspace bankruptcy compromised the Sirius XM sublicense. Consequently, Sirius no longer had rights under the Fraunhofer patents. Basically, Fraunhofer was looking to Sirius XM to be made whole, or even more than whole based on the alleged damages, due to the impact of the Worldspace bankruptcy.

So many sublicense issues were raised, some guidance was given, but ultimately the Federal Circuit made no rulings. The Federal Circuit remanded the case to the lower court for further proceedings consistent with the guidance put on the table by the Federal Circuit.

Many lessons are identified:

• It is a bad idea for a licensor to give an irrevocable license when licensee performance is so executory and substantial money is at risk. If an irrevocable license is to be granted, it should not be irrevocable until all material obligations, such as payment of all money owed, have been met.
• When a master license is breached or terminated, the parties can control the resultant impact on any sublicenses. The parties failed to address this in any way in their master license. The Federal Circuit had some polite words to identify this shortcoming, but reading between the lines it is clear that the Federal Circuit criticized Fraunhofer for its folly in failing to address this issue.
• The master agreement can provide that a sublicensee must cure any breaches by the sub-licensor or risk losing its sublicense.
• The master agreement can require sublicenses to provide performance to the main licensor of all obligations in the master license and sublicense in order to keep its sublicense.
• A master agreement can specify that termination or breach of the master license causes any sublicense to be correspondingly terminated or breached.
• A choice of law provision will be respected, but it can be waived. Here a choice of Swiss law was waived when the parties applied U.S. law all the way through the Federal Circuit proceedings and did not raise the possible application of Swiss law until getting to the Supreme Court.
• Having a termination right with respect to a triggering event does not mean the termination occurs when the event occurs. The right must be exercised.
• Rejection of a license in bankruptcy is a breach, not a termination.
• Bankruptcy of the licensee gives licensor a right of termination against the licensee.
• When a master license terminates, and the agreement is silent on the impact on sublicenses, different venues treat the impact on sublicenses differently. Some have held that the sublicenses terminate, too. The Federal Circuit states that sublicenses do not terminate by default upon master license termination when the master license is silent.

8. Is your patent license a ticket into federal court?

Inspired Development Group v. Inspired Products Group, LLC, No. 18-1616 (Fed. Cir. 2019)

This case involved an exclusive patent license dispute. The already strained relationship between the licensor and licensee became even worse after a third party investor got involved with the licensee. Litigation erupted. All kinds of state law-based claims were asserted by both sides. No federal claims were asserted by anybody, but patent infringement would be in issue to resolve the state law claims. The parties were from the same state, so diversity of citizenship was lacking. At issue is whether a federal court has jurisdiction to adjudicate this license dispute.

Federal courts have authority to adjudicate disputes either where there is diversity of citizenship or where a federal question is involved. Does the fact that the Inspired court will evaluate patent infringement create a federal question?

The Federal Circuit ruled that this dispute could not be heard in federal court. Even though patent infringement would be evaluated, infringement would not be dispositive of the outcome. There was not enough here to create a sufficient “federal question” for purposes of federal jurisdiction. The result is that patent license disputes do not get a free ticket into federal court when only state law claims are involved.

The court expressly indicated that a federal question would have been involved if the accused infringer counterclaimed seeking a federal declaratory judgment regarding noninfringement or invalidity, but no such DJ claim was asserted. The court suggested other circumstances under which the state law claims might have raised a federal question. Based on the court’s reasoning, it remains possible that a sufficient federal question could have been raised if the outcome of one or more claims necessarily depended on the infringement question. The court’s reasoning also indicates that a federal question could have been involved if validity were to have been at issue.

Different strategies can be used at the drafting and negotiation stage to increase the chances of having a federal court ticket down the road if a license dispute were to erupt. Recall the power of know how. Remember to include know how in the agreement and a federal trade secret claim might be available to assert under the Federal Trade Secret Act. Perhaps the breach at issue or surrounding conduct creates a federal claim under other federal laws such as unfair competition under

Section 43(a) of the Lanham Act or a federal antitrust claim. Perhaps a license can be crafted so that federal warranty claims arise under the Magnuson-Moss Act. A conventional or reverse declaratory judgment action involving infringement or validity issues also may be available. For example, it would be mainstream for the accused infringer to file a validity challenge via a federal declaratory judgment claim. Could patent owner file a reverse, federal declaratory judgment that its patent is valid to create a federal question? Inventor issues also may create a federal question. If all else fails, it often is the case that diversity of citizenship may exist in many license disputes, and the amount in dispute often is sufficient to meet the dollar threshold to access federal court. Sometimes, it may be the case that licensor’s home state court system provides a favorable venue so that state court is the place to be.

Note that the parties may not contract to consent to and thereby create federal jurisdiction. Federal jurisdiction is a limitation imposed by the U.S. Constitution. The parties cannot contractually create this authority out of thin air.

9. Standing room only.

Spin Master, Ltd. v. E. Mishan & Sons, Inc., No. 1:2019cv09035 (S.D.N.Y. 2019)

Does a licensee have standing to bring an infringement action against an accused infringer, or does the patent owner have to be involved somehow?

The provisions of 35 USC 281 only allow a “patentee” to bring a civil action for patent infringement. In some fact-dependent scenarios, a licensee who has “all substantial rights” under a patent qualifies as a patentee for purposes of Section 218. A “mere licensee” without all substantial rights is not a patentee. Hence, it almost always would be the case that a nonexclusive licensee lacks standing to bring a patent infringement action. Note that there has been at least one case in the area of the common interest doctrine where a nonexclusive licensee was deemed to be an exclusive licensee with sufficient rights to support protecting privilege for communications exchanged between licensor and licensee. It is conceivable that such a “de facto” exclusive licensee could be a patentee under Section 281. It remains to be seen whether a wider range of parties might have standing to bring “non-civil” patent infringement actions, such as by acting as a private attorney general.

It is possible, but not a given, that an exclusive licensee qualifies as a patentee and has standing under Section 281 to bring a civil action for patent infringement. For example, the exclusive licensee in this case brought an infringement action against an accused infringer without involving the patent owner. The accused infringer argued that the exclusive license was not a patentee and, therefore, did not have standing to bring the action. The accused infringer requested that the court throw the action to the curb.

The exclusive licensee, though, held an exclusive license without any field restrictions. The licensee had the power to sublicense. The licensee had the exclusive right to sue infringers with full control over any litigation. The district court from the Southern District of New York ruled that this exclusive licensee had all substantial rights under the asserted patent rights and, therefore, had standing as a patentee under Section 281. The litigation could proceed with the licensee as plaintiff. The patent owner was not a necessary party.

License parties do have the ability to avoid standing issues. The parties can use contract language that allocates litigation control to the licensee while obligating the patent owner to be named as a party to support standing. Even nonexclusive licensees can fight infringement battles in these circumstances.

10. Who wears the boxing gloves?

Alexsam, Inc. v. Mastercard, Inc., No. 1:2015cv02799 (E.D.N.Y. 2019)

Litigating parties can be surprisingly creative in creating and defending against causes of action in license disputes. No matter how straightforward the issues appear to be from your own perspective, the other party will have a different perspective of the issues. You must wear the shoes of both parties to optimize your own moves and to predict the moves of the other party.

License parties in disputes can display surprising creativity . . . but not always in a good way (a.k.a, What the heck were you thinking when you came up with this litigation strategy?). Sometimes, creative application of law and fact shines with brilliance. Other times, not so much.

Alexsam is a “not so much” example where a desperate licensor advanced an agreement construction that, even being polite, was foolish and doomed. Yet, licensor stuck with the argument all the way through trial, which licensor lost soundly. One can speculate that licensor’s initial litigation strategy might have been mainly a strong expectation that the accused infringer would surely settle somewhere in the discovery phase and that a trial would never happen. But, trials happen. Not all cases settle. While it is reasonable to speculate that your own dispute might settle inasmuch as most cases do in fact settle before trial, this kind of expectation cannot be the foundation of your litigation strategy. In contrast to what the plaintiff-licensor appears to have done in Alexsam, heading into litigation with an excellent strategy well grounded in fact and law is paramount, particularly when you are plaintiff as Alexsam was here!

In Alexsam, the patent owner Alexsam licensed patent rights to Mastercard. The license grant authorized Mastercard to practice card transactions “covered by” one of the licensed patents. Mastercard agreed to pay a royalty for each card transaction “covered by” the licensed patents.

Mastercard did not pay royalty on a large volume of card transactions on grounds that no patent claim of the licensed patents covered the transactions. Accordingly, no royalty contractually was due under the license, and there was no infringement.

It does not appear from the court’s opinion that Alexsam challenged that its patent claims covered any of the card transactions at issue. It appears that Alexsam conceded to non-infringement. Was there anything in the license that might have caused Mastercard to have a contract obligation to pay royalty on the accused transactions anyway?

The licensor desperately wanted to capture royalty for the Mastercard card transactions outside its claim scope, yet somehow within the scope of the license anyway. Licensor did in fact cook up an agreement construction to serve its desperate objective. Although arguably a creative concoction, it was not the brilliant kind. It was the other kind. Licensor argued that the terminology “covered by” in the license grant and royalty clauses was ambiguous so that “covered by” meant both subject matter that infringes a patent claim as well as subject matter that does not infringe any patent claim. The practical effect is that licensor argued that “covered by” meant both “covered by” and “not covered by.”

The court had no trouble rejecting the proposed construction. In contrast to the licensor proposal, the court explained that the language “covered by” has a straightforward meaning in the patent world, and licensor presented no other precedent or other evidence that a different meaning should prevail. Licensor exited trial with its royalty pockets empty.

Certainly, when a patent license collects royalty under patent rights, there is always a risk that licensee will design around the patent claims, invalidate the patent claims, or otherwise attempt to avoid its royalty obligation. Mastercard implemented a successful design around here. What could Alexsam or any other patent licensor have done differently?

Many strategies are available. Here are a few. Alexsam could have used the power of know-how. If Alexsam had licensed both patent rights and know-how, it is less likely that Mastercard could have avoided both the patent rights and the know-how rights. Perhaps Mastercard could have collected more of its royalty up front as an initial fee so that less royalty would be at risk. If its bargaining power allowed, it could have contracted to receive a minimum royalty each year to keep the license in force and have charged an early exit fee if Mastercard chose to terminate early. With a pending application in the family, and if supported by the written description, Alexsam could have tuned its claim coverage to keep Mastercard in the license. Alexsam could have kept up with research and development, creating new commercially desirable patent rights or new know-how to incorporate into the license via amendment. If there were confidentiality obligations in the license, Alexsam could have investigated whether any of the Mastercard design arounds were improperly developed from Alexsam Confidential Information in violation of confidentiality or use restrictions.

The Alexsam license likely had another problem. Alexsam sought production of documents relating to the license, but Mastercard refused to provide these. Apparently, nothing in the agreement required that such documents be disclosed as a matter of a contract obligation, as the opinion did not mention the contract as a basis to authorize or refuse the discovery request. This suggests that the audit clause in the Alexsam license might have been deficient, as document access most likely would have been handled there.

Audit clauses are glossed over too often. They might seem to be merely background boilerplate at the time of drafting and negotiation. But audit clauses are very useful and powerful tools in license disputes that could erupt down the road. The audit clause in Alexsam easily could have been written to encompass access to the kinds of documents that Alexsam sought through discovery. Mastercard would have had to produce these as a matter of contract obligation. Alexsam and any other patent licensor can benefit from a powerful, well-crafted audit clause.

Crazy did not work for the licensor in Alexsam. Sometimes, though, crazy works. Recall our discussion of the Return Mail case above. There, Section 101 confounded the patent owner, who initially lost its patent rights as being patent ineligible.

Rather than pursue Federal Circuit and then Supreme Court review on re-thinking Section 101, which would be a mainstream approach, patent owner creatively propounded the theory that a federal agency such as the U.S. postal service is not a statutory person. Not being a statutory person, the federal agency has no standing to initiate post grant CBM review of the patent rights.

Put yourself into the shoes of the client in the very first meeting with counsel where this “person” theory is proposed. Maybe, as that client, you were expecting a brash and brilliant 101 argument rather than a theory as to who is a person and who is not. Initially, as the client, might you be nervous thinking your whole appeal is based on a “person” hanging by such a thin thread? Would you be reviewing your contact list for other counsel perhaps?

Regardless of what those initial impressions might have been, counsel and client courageously forged ahead with this “person” theory. They stepped into the first ring with the District Court as referee and got knocked down soundly. They staggered into the second ring with the Federal Circuit as referee and again got knocked down soundly on that first appeal. Getting knocked down twice by two different tribunals is close to a complete knock-out. Both the district court and the Federal Circuit indicated that the “person” theory had no punch or legs of its own.

Did this team concede and go home to battle a different fight on a different day? No, they kept fighting, taking their “person” theory up another level of judicial review to the Supreme Court, where ultimately they emerged triumphant. This was Rocky beating Apollo Creed in the final bout.

Who wears the boxing gloves in a license? Litigants who are creative in the good way, that’s who.

11. Is your agreement structure too complex? Simple is better …most of the time.

Amgen, Inc. v. Amneal Pharmaceuticals LLC, Civ. No. 16-853-MSG (D. Del., September 19, 2019)

Amgen shows solid, creative thinking of the good kind by both parties in a very complex dispute involving a settlement agreement with patent license aspects. The final result of this dispute is still open, as the appeal to the Federal Circuit is pending.

There are multiple ways to structure any technology agreement, although the choices seem to increase geometrically in increasingly complex relationships. Most of the time, if the choice is between a simple agreement architecture that covers all the bases and one that is more complex, simple is better. Once the architecture is pinned down, a simple agreement is easier to draft, easier to negotiate, easier to live under, less likely to cause disputes, and generally easier to enforce.

But getting to a simple architecture that does the job is hard in complex deals. Often, initial thinking provides a structure with too much complexity, and then it takes hard work to fix that complexity with something that is still complete but simpler. Unfortunately, sometimes a draftsperson moves forward with drafting without exploring if the agreement architecture can be improved. The result is a too complex final agreement that is hard for the parties and judges to understand. Joint development agreements are particularly notorious for complex architecture issues, as some of these have more unnecessary layers than the most layered onion.

Complex agreements can catalyze disputes. Perhaps the parties might never really had a meeting of the minds but could not tell that, or down the road, after memories and personnel have changed, the meaning of the agreement is hard to divine. Complex agreements also give one party an ability down the road to change the meaning of the original agreement because the complexity makes the agreement provisions hard to pin down one way or the other. Complex architecture might only be an advantage to a party who needs to creatively manipulate the agreement meaning to secure some advantage.

Amgen is case involving an agreement whose architecture was much more complex than needed. One way to tell this agreement suffered from too much complexity is that one of the most important aspects of the agreement could not be understood from a single section. Its meaning had to be divined from how many different sections of the agreement interacted with each other. The key issue being litigated was an important aspect known to the parties at the time the agreement was negotiated and signed, so this is not a circumstance under which a later, unforeseeable circumstance surprised the parties. The parties could have done better with a simpler agreement structure, although the complexity of the agreement did give the conditional licensee an opportunity to attempt to seize its coveted license through creative interpretation.

This dispute centers on a settlement agreement made in a Hatch-Waxman patent infringement case. Amgen originally brought claims against several defendants in the Sun pharmaceutical family (Sun) in response to an ANDA filing by Sun. The parties settled that dispute under terms where Sun would stay out of the market. However, the agreement provided that Sun would have a patent license if a third party enters the market and Amgen did nothing about it. This conditional license is one of the main aspects of the settlement agreement and a main focus of the case.

Unfortunately, the agreement obscured the conditional license with too much complexity. This made it hard prior to the litigation for Amgen to convince Sun that the conditions for the license had not yet occurred. The complexity also gave Sun a chance to weave together several agreement provisions in an attempt to show why its license materialized.

After the settlement agreement had been placed, third parties TEVA/Watson launched a competitive product. In line with expectations under the settlement agreement with Sun, Amgen stopped TEVA/Watson quite quickly. However, TEVA/Watson were able to distribute substantial amounts of product to distributors before TEVA/Watson exited the market. Amgen never pursued any of the TEVA/Watson distributors after shutting down TEVA/Watson.

As a consequence of the product being in the hands of TEVA/Watson distributors, Sun believed it now had a patent license and could enter the market. Sun believed the distributors were third parties in the market with Amgen doing nothing about it. Amgen disagreed, not wanting Sun to have the license. This litigation resulted to determine if Sun’s license existed or not.

Does Sun get a license? The district court determined that Sun does not get any license under “the plain meaning of the terms as used in the Agreement.” But, understanding the agreement was not as simple as portrayed in the Court’s conclusion. It is a bit ironic that the court relied on the “plain meaning” rubric in its ruling, because the agreement construction could not be resolved by looking at only one passage of the agreement. The court had to evaluate a complex web of many agreement sections from the settlement agreement in order to figure out whether Sun had a license. Both parties and the court had to dig deep to interpret the agreements. Both parties were creative, but in the good way unlike the licensor in Alexsam.

This case is a good example of where simpler agreement architecture should have been available and would have been better. This case is a good example to show how too much agreement complexity catalyzes downstream disputes. The lesson is that a practitioner should not settle on a given agreement architecture too soon in the drafting process. Invest the time to determine if the initial construction can be simplified or otherwise made better. Clues that you have a problem include one or more of the following: you are unable to outline your structure easily;, the agreement is hard to understand even though you wrote it; some definitions seem to be doing very little for the agreement much like unnecessary middle managers in an overstaffed corporation; it is hard to follow key provisions without flipping back and forth to several other provisions; the answers to key objectives have to be divined from multiple passages; etc.