Aon & RPX Unveil Non-Practicing Entity Patent Litigation Coverage

It is becoming more and more common for technology business owners to be faced with patent infringement suits filed by a non-practicing entity (NPE), an entity that does not manufacture or sell the product covered by the patent. Defending a patent infringement suit can be very expensive, and for a small company, can threaten its very existence. Historically, patent litigation insurance has not been readily available. But now, patent aggregator RPX and insurance company Aon Risk Solutions have teamed up to offer patent litigation insurance for suits brought by non-practicing entities.

Developed specifically with small-to-medium-sized businesses in mind, Aon Risk Solutions is offering the product to companies with $1 billion or less in annual revenue. Underwritten by RPX, this new line of patent litigation insurance will initially allow up to $2.5 million in coverage against legal action from NPEs. In implementing this service, Aon aims to limit severity risk and is complemented by RPX’s talents in identifying and clearing high-risk patents through their core defensive patent acquisition service.

According to a study by James Bessen and Michael Meurer of the Boston University School of law, the total cost for NPE litigation in 2011 was $29 billion, up over 400% from 2005. The study also found that 82% of the defendants sued by NPEs had less than $100 million in revenues.

The joinder provision of the America Invents Act, which went into effect on September 16, 2011, has decreased the number of defendants that are sued by NPEs, but suits are still filed by NPEs on an almost daily basis. This joinder provision, however, makes it more difficult to file large multi-defendant infringement cases.

Also worth keeping an eye on is H.R. 6245, the Saving High-Tech Innovators from Egregious Legal Disputes Act (SHIELD Act). If the Shield Act is passed, this could potentially allow the defendant in a patent suit over computer hardware of software to recover legal fees if a court rules the plaintiff does not have a reasonable possibility of succeeding. Introduced August 1, 2012, the bill is currently under review by the House subcommittee on Intellectual Property, Competition, and the Internet. But even if the Shield Act is passed, the defendants must still defend the suit and will likely have a difficult time in most cases having the court rule that there is no reasonable possibility of success by the plaintiff.
So even with new and pending legislation, the risk of patent litigation by a NPE is still present for technology companies. Patent litigation insurance may be a good solution for companies looking to minimize company exposure to such risk.

For more information, visit www.aon.com/ip or www.rpxcorp.com.

DBA IP Section Lands Dallas Patent Office

The United States Patent and Trademark Office (USPTO) and the Department of Commerce announced July 2, 2012 that a Dallas patent office would be one of four new regional offices of the United States Patent and Trademark Office. The creation of satellite offices marks the first time in the 200-plus year history of the USPTO that it will have operations outside of the Washington, D.C. area.

In selecting the sites for the satellite offices, the USPTO considered factors such as geographic diversity, economic impact, available workforce and the local intellectual property community. Dallas was a good candidate for an office to serve the South, but there were other attractive cities vying for an office as well, including Houston, Atlanta and Austin. With more than 50 metro areas under consideration nationwide, the selection process was highly competitive according to Acting U.S. Commerce Secretary Rebecca Blank.

But it was Dallas’s intellectual property community that was instrumental in putting Dallas at the top of the list. A proposal in support of the selection of Dallas prepared by the DBA IP Section highlighted Dallas’s strong university and research community, talented workforce and robust business community. Emphasis was also placed on the fact that Texas is second only to California in the number of patent applications filed each year. David Kappos, the Director of the USPTO reportedly said, “The DFW area sprang off the page at me.” He knew when he read the proposal that the USPTO had to select Dallas as one of the satellite offices.

Hilda Galvan, Chair of the DBA IP Section and a partner at Jones Day, reports that although the proposal in support of Dallas was a group effort, Lisa Evert, a founding partner of Hitchcock Evert, is the one who spearheaded the preparation of the proposal. Marc Hubbard, a partner at Gardere, and Wei Wei Jeang, a partner at Andrews Kurth, were also instrumental in refining the proposal and rallying community support. Max Ciccarelli, a partner at Thompson & Knight, is credited with bringing the opportunity to the attention of the IP Section after his assistant saw a post by the USPTO on Facebook inviting comments on the selection of the satellite offices.

The proposal was joined by the Center for American and International Law, the Dallas Regional Chamber, Southern Methodist University, the University of Texas at Dallas and the University of Texas at Arlington. Michael Pegues, a partner at Bracewell Giuliani, reached out to various organizations and local and national political leaders to garner support. Through the efforts of the IP Section members, local companies Research in Motion, Ericsson and MetroPCS wrote separate letters in support of the proposal, as did Dallas Mayor Mike Rawlings.

Although the deadline for establishing at least three of the offices is August 2014, the USPTO has already begun developing a “concept of operations” for the Dallas patent office. On July 11, just nine days after the announcement of the cities selected, Secretary Blank and Director Kappos met with local officials, attorneys, university representatives and company representatives in Dallas to discuss the opening of the new Dallas patent office. Vikram Aiyer, Special Advisor to the Under Secretary of Commerce, says that although he cannot commit to an exact timeframe for the opening of the Dallas patent office, the plan is to open the office “as quickly as we can,” noting that the Detroit patent office was opened well ahead of schedule. Aiyer reports that the USPTO “couldn’t be happier or more excited to come to Dallas.” The July 11 meeting he said “energized the USPTO to move even faster.” The Dallas Bar Association will play a key role in helping to develop the new office, and the USPTO looks forward to working with the DBA, according to Aiyer.

Aiyer could not comment specifically on the location, but Galvan, who attended the meeting with Director Kappos, says that the UPSTO will take into consideration the location of its client base, namely patent attorneys, as well as access to public transportation.

The Dallas patent office will have a significant local economic impact. The opening of the Detroit patent office will result in the creation of 125 new jobs in its first year, and it is expected that the Dallas patent office will create a similar number. Dallas area patent attorneys expect that they will be able to attract new clients, and in particular foreign clients, that might otherwise select a D.C. based firm because of proximity to the USPTO.

Roger Burleigh, Director of the U.S. Patent Department for Ericsson, noted that a local USPTO office will provide tremendous value through the ease of face-to-face meetings with Examiners, which has been at best a rare occurrence during his twelve-year tenure as a patent attorney for the company. Moreover, “The Office will provide a fantastic opportunity for new Texas engineering graduates and could serve as a breeding ground for new patent attorneys who could gain the necessary experience to go directly into in-house practice at the completion of law school.”

The DBA IP Section will post updates in the future on the USPTO’s progress on the Dallas patent office at www.dbaip.com.

Importance of Patent Protection

Our firm now has a You Tube channel with educational videos about IP law.  Copper Penny Films did a great job creating the videos for us.  Here is my first video on the importance of patent protection and consulting with your patent attorney prior to bringing a product to market.  My colleagues Colin Cahoon and Bobby Braxton also have videos on our channel as well.

 

America Invents Act Provides a New Tool to Influence the Prosecution of Patent Applications with New Third Party Submission Rules

Last week the Patent Office proposed a new rule for preissuance submissions to implement the new requirments of the America Invents Act enacted in September of last year.  Previously, third party submissions of prior art to the Patent Office were very limited in that there was a short deadline for filing the submission and the third party could not include any analysis of the prior art submitted. The new third party submission law established by the America Invents Act is effective September 16, 2012, retroactive for all applications filed before that date.

Under the new rule, preissuance submissions will become a power tool for those with an interest in the denial of a patent application because now the third party can provide analysis of the prior art.  For example, if applicant mischaracterizes the prior art in the application, the record can be set straight with a third party submission.  The deadline for the submission under the new rule will be the earlier of 1) the date of the notice of allowance or 2) six months after publication of the application or the date of first rejection of any claim by the examiner, whichever is later.  So generally speaking, the deadline for any such third party submissions will be the date of the first office action.  Under current rules, the submission must be made within two months of publication of the application, and no analysis can be provided.  Because of the short time frame and the inability to provide analysis to the examiner, the procedure is not currently deemed as very effective in most cases and could in fact be detrimental because the third party could no longer argue to the court in an infringement action that the reference was not considered by the examiner.

Under the rule proposed by the Patent Office, the documents submitted must be “of potential relevance to the examination of the application” and a concise description of the relevance of each document must be provided.  Moreover, it is not required that the documents be “prior art” under the new rule–any relevant documents can be submitted for consideration by the examiner.  Concise submissions are encouraged–the proposed rule allows for three “free” submissions.  If more than three documents are submitted, a fee of $180 for each ten documents is required.  Finally, there is no longer a requirement to serve the applicant with the submission, but the applicant will receive notice of any such submission in the first office action.

As a result of the new rules for third party submission, and in light of the post grant review procedure that will come into effect in the future, it will be ever more important for companies to exercise vigilance in the monitoring of published patent applications.  Otherwise, you will not be able to take advantage of these new rules designed to help companies avoid finding themselves on the receiving end of a patent infringement lawsuit asserting an invalid patent.  The tool could be particularly useful in patent litigation where a continuation application is pending that has been crafted to read more closely on the alleged infringing method or apparatus.

 

America Invents Act: A Sea Change in Patent Law

President Obama signed the Leahy-Smith America Invents Act (AIA) into law on September 16, 2011.  The AIA is the first major change in the U.S. patent law system since 1952 and probably the most far reaching statutory changes since the 1836 Patent Act established the Patent Office and the modern system of patent examination.  The changes include substantive changes to the standards of patentability as well as significant changes to the way the Patent Office handles challenges to the grant of a patent.

Some parts of the law went into effect upon enactment, but the more significant changes will go into effect at various times in the future.  It will be years before we are fully converted to the new system, and practitioners must keep track of both the current law and the new law in the interim.

Although the AIA did not include venue or damages reform that was in past versions of patent reform legislation, it did include an anti-joinder rule in patent cases.  The new anti-joinder rule prohibits the joinder of multiple defendants in the same patent case just because they have infringed the same patent(s).  Rather, joinder is now only proper if the defendants all allegedly infringe the patent with the same product or process.

The anti-joinder rule went into effect on September 16, 2011 and has resulted in a decrease in the number of defendants that are sued in a single case, particularly in the Eastern District of Texas.  Although the full effect of the new anti-joinder provision remains to be seen, it will likely result in more cases being filed in venues other than the Eastern District of Texas.  Delaware, for example, has seen an increase in the number of patent cases filed there given that many corporations are incorporated in Delaware.

Another significant change of the American Invents Act is the conversion from a “first to invent” to a “first to file” patent system that will go into effect for patent applications with an effective filing date on or after March 16, 2013.  Under the current system, the first person to invent is generally entitled to a patent even if another inventor files an application first.  The first to file rule is not absolute, however.  For example, a new “derivation proceeding” will allow a second filer to obtain a patent upon proof that the first filer derived the invention from the second filer.

A number of changes to patent office procedure will go into effect on September 16, 2012, including a new third party submission procedure, post-grant review, and inter partes review.  These new procedures will affect strategies for both obtaining patent protection and defending against the patents of others.

To avoid getting caught behind the curve, it is important for companies to plan for the changes in the law now and to implement strategies to take advantage of the new laws.  Without proper planning, valuable patent protection may be lost or the ability to operate freely may be impeded by the patents of others.

Willful Blindness: The New Standard for Knowledge in Active Inducement of Patent Infringement

In a decision earlier this year that will have ramifications in numerous areas of the law where “knowledge” must be proven, the U.S. Supreme Court applied the doctrine of willful blindness to satisfy the knowledge element for a claim of active inducement of patent infringement. Although the willful blindness doctrine has been well established in criminal law and adopted by every federal court of appeals but one, the Global-Tech Appliances decision marks the first time the Court has approved the doctrine.

In a dissenting opinion, Justice Kennedy noted that the Court appeared to endorse the willful blindness doctrine for all federal criminal cases without receiving briefing or argument on this important issue from the criminal defense bar.

Under the willful blindness standard, the plaintiff must prove 1) the defendant believed that there is a high probability that a fact exists and 2) that the defendant took deliberate actions to avoid learning of that fact.  Using this standard, the Court defined a willfully blind defendant as “one who takes deliberate actions to avoid confirming a high probability of wrong doing and who can almost be said to have actually known the critical facts.”

In the case at bar, Pentalpha copied one of SEB’s deep fryers that was made for sale in Hong Kong and thus lacked any U.S. patent markings. Although Pentalpha retained an attorney to perform a patent search, Pentalpha did not inform the attorney that that the design was a copy of SEB’s design.  The attorney did not find SEB’s patent and issued an opinion that Pentalpha’s deep fryer did not infringe on any of the patents he had found.

Subsequently, Pentalpha began selling the knock-off deep fryers to Sunbeam in Hong Kong.  Sunbeam then imported and sold the fryers in the United States.  SEB sued Sunbeam for patent infringement and Sunbeam notified Pentalpha of the claim.  After settling with Sunbeam, SEB then sued Pentalpha for infringing its U.S. patent by actively inducing Sunbeam and other purchasers of Pentalpha fryers to sell them in the U.S. in violation of SEB’s patent rights.

Pentalpha argued that it had no knowledge of the patent, and thus, SEB could not prove the knowledge required to recover for active inducement of infringement of the patent.  The Federal Circuit held that the knowledge element was satisfied because of Pentalpha’s deliberate indifference to a known risk that a patent existed covering SEB’s fryer.

The Supreme Court rejected the deliberate indifference standard because it does not require active efforts by an inducer to avoid knowing about the infringing nature of the activities.  The Court also criticized the standard because it permits the finding of knowledge where there is merely a “known risk” that the induced acts are infringing.

Instead, the Court applied the willful blindness standard to affirm the holding of the Federal Circuit that Pentalpha had actively induced infringement of the patent by Sunbeam.  In reaching its decision, the Court found it significant that Pentalpha knew of  SEB’s superior product and knew that SEB’s fryer embodied advanced technology that would be valuable in the U.S. market.  The Court also pointed out that Pentalpha decided to copy an overseas model, knowing that products made for overseas markets usually do not bear U.S. patent markings.  Even more significant, according to the Court, was Pentalpha’s decision not to inform its patent attorney that the Pentalpha fryer was a copy of SEB’s fryer.

The Court could not fathom any other motive that Pentalpha had for withholding this information “other than to manufacture a claim of plausible deniability in the event that his company would later be accused of patent infringement.” Thus, the Court held that the evidence was more than sufficient for the jury to decide that Pentalpha subjectively believed that there was a high probability that SEB’s fryer was patented, that Pentalpha took deliberate steps to avoid knowing that fact, and therefore, Pentalpha had willfully blinded itself to the infringing nature of Sunbeam’s sales.

Although the willful blindness standard adopted by the Court is more restrictive than the Federal Circuit’s deliberate indifference standard, it is still not necessary to prove that the alleged infringer had actual knowledge that the product was covered by a patent.  The Court’s approval of the willful blindness standard as an alternative to proving actual knowledge could have wide reaching consequences, even outside the context of patent infringement.  The decision has already been cited in criminal cases, bankruptcy cases and in cases involving the False Claims Act.

False Patent Marking: The New Gold Rush?

The Federal Circuit’s Bon Tool decision late last year dramatically increased the number of false patent marking cases filed this year.  Historically, the relatively obsure patent marking statute had been interpreted to allow for a penalty of up to $500 for each decision to mark an unpatented product.  Consequently, there were only a handful of false marking suits pending at any given time. 

Times have changed.  The Bon Tool decision opened the flood gates for false marking claims because of the dramatic increase in potential damages to the plaintiff.  A plaintiff in a false marking suit can now recover up to $500 per item sold. 

As many predicted, plaintiffs have rushed to this newly discovered gold.  Over 500 false marking cases have been filed this year alone.  The Eastern District of Texas is the venue of choice, home to more than 200 of those cases.  The second highest number of cases has been filed in the Northern District of Illinois, with over 60 cases.  The Northern District of Texas comes in fourth place with more than 20 cases.

The false marking statute provides that whoever, for the purpose of deceiving the public, labels an unpatented product or advertises the product in a way that suggests that the product is patented or that an application for a patent is pending on the product when no application has been made, “shall be fined not more than $500 for every such offense.”  Any person may sue for the penalty, but half of the fine must be paid to the United States. 

The vast majority of the cases filed stem from claims that products are marked with expired patent numbers.  In Solo Cup, the Federal Circuit held that marking of a product with an expired patent number is considered marking an “unpatented” product. 

However, the Federal Circuit found that Solo Cup did not violate the statue because the plaintiff had failed to provide any evidence contradicting Solo Cup’s evidence of lack of intent to deceive the public.  In particular, Solo Cup provided evidence that it relied on advice of counsel in continuing to mark products with expired patent numbers.  Solo Cup also offered evidence that it was costly to change the molds that were used to manufacture its cups, thus prompting its decision to continue selling cups labeled with expired patent numbers. 

The Federal Circuit pointed out that the bar for proving deceptive intent is particularly high because the false marking statute is a criminal statute although the punishment is in the form of a civil fine.  Yet, the court cautioned that blind assertions of good faith without evidence to support the lack of intent to deceive would be insufficient to overcome the presumption of intent to deceive where a product is knowingly marked with an expired patent number. 

Defendants have been busy seeking dismissal of false marking cases at the pleading stage.  For example, in Stauffer v. Brooks Brothers, Brooks Brothers filed a motion to dismiss claiming that the patent attorney who filed the suit did not have standing under the statute because he did not suffer an injury as a result of the marking of bow ties with expired patent numbers.  The Federal Circuit reversed a dismissal of the case by the trial court, holding that Stauffer had standing to sue because he simply stepped into the shoes of the government.  Thus, no injury to the plaintiff need be shown. 

The Federal Circuit remanded to the trial court for determination of Brook Brothers’ motion to dismiss for failure to adequately allege intent to deceive.  Thus, while any individual has standing to bring suit under the statute, it may prove difficult without discovery in many cases for the plaintiff to allege particular facts supporting intent to deceive.  If the Federal Circuit ultimately requires pleading of particular facts for false marking cases on the ground that it is a criminal statute, the gold rush may be curbed.

Legislation has also been introduced in Congress aimed at reducing the number of false marking cases.  But experts predict that patent reform will not pass anytime soon unless a bipartisan bill is introduced.

Nevertheless, companies should not rest on their laurels waiting for the Federal Circuit or Congress to reign in the false marking suits.  It is critical to take steps now to ensure accurate marking of products.  The existence of a compliance program will go a long way toward rebutting the presumption of intent to deceive the public in a false marking case. 

So while false marking claims may prove to be a gold rush of sorts, in any gold rush, there are always some who find the gold.  Make sure it is not your company or client whose gold is taken.

Therasense Makes No Sense–Federal Circuit Grants En Banc Review of Inequitable Conduct

The Federal Circuit issued an order granting en banc review of its decision in Therasense v. Becton Dickinson to revisit the standard for proving inequitable conduct.  Inequitable conduct is used by defendants to invalidate a patent.  To prove inequitable conduct, a defendant must prove that the patentee (1)  made an affirmative misrepresentation of a material fact, or (2) failed to disclose material information, or (3) submitted false material information.  In the past, inequitable conduct has generally focused on a failure to disclose pertinent prior art known by the applicant.  However, the recent panel decision by the Federal Circuit in Therasense held that an applicant has a duty to disclose to the USPTO any contradictory attorney argument made in any related application anywhere in the world.

The decision has received much criticism because of the draconian effects of such a rule.  The en banc review will focus on the standard for proving materiality and intent to deceive by the applicant.  One of the questions is whether causation should be required.  In other words, should the test be whether the claim would have issued had the applicant disclosed the inconsistent attorney argument in a related foreign application to the U.S. examiner.  The answer should be obvious unless our goal is to simply reduce the number of valid patents.

In practice, requiring patent attorneys to disclose any contradictory arguments made in any related patent application is unduly burdensome on applicants.  While we certainly do not want to invite applicants to make contradictory arguments, invalidating a patent due to a contradictory attorney argument is a harsh result, particularly if there is no direct evidence of intent to deceive or if the failure to disclose would have made no difference in the examiner’s decision to allow the application.  Thus, the Federal Circuit’s decision in Therasense makes no sense and should be brought in line with the realities of everyday patent prosecution by requiring proof of causation.

Promises Not to Challenge the Validity of a Patent after MedImmune: Are they Enforceable?

In MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764 (2007), the Supreme Court held that a licensee had standing to challenge the validity of the licensed patent, despite the licensee’s failure to breach the agreement by refusing to pay royalties.  In the wake of this opinion, there was much debate about the effect that it would have in future cases.  For example, many observers predicted that there would be a wave of licensees rushing to the courthouse to file declaratory judgment actions to challenge the validity of the underlying patents, while incurring no risks because they continued to comply with their contractual obligations.  Patent licensors expressed concern over the possibility that licensees would now seek to “have their cake and eat it, too.”

Contrary to the speculation immediately after MedImmune was decided, there has been no wave of DJ actions filed by licensees trying to challenge patent validity while continuing to pay royalties.  In fact, there appear to have been very few actions filed by licensees at all.

The primary reason for this lack of activity is likely that patent litigation remains expensive, and licensees and licensors alike prefer to avoid the expense and uncertainty inherent in patent litigation if possible.  While MedImmune made it clear that a licensee need not repudiate the license agreement prior to challenging the validity of a patent in a declaratory judgment action, the Court did not eliminate any of the confusion surrounding the status of the doctrine of licensee estoppel.

Consequently, while there is no question that a licensee can now sue without repudiating the agreement, questions regarding whether certain contractual provisions designed to deter a licensee from challenging the validity of a patent are enforceable remain open.  Provisions such as increased royalty rates or the option of termination by the licensor in the event of a challenge by the licensee or other punitive measures may deter licensees from even considering filing suit in the first place.  Moreover, even if a licensee believed that these provisions in the contract would not be enforced, there still remains the question whether the licensee will prevail on an invalidity challenge, one that does not have an obvious answer in the vast majority of cases.  In cases where the licensee is convinced that there is a high likelihood of invalidating the patent, it may be more likely that the licensee would choose to stop paying royalties.

To understand what the state of the law is and whether punitive provisions for challenging the validity of a patent  would be enforced, the MedImmune decision should be considered in light of Lear v. Adkins and its progeny.  The holding of MedImmune was limited to the determination of whether a justiciable controversy exists in a declaratory judgment action by a licensee that had not repudiated the license agreement.  See MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 135-36 (2007).

Although the Court could have addressed the confusion spawned by its 1969 Lear v. Adkins decision, it did not, instead choosing to focus on whether the district court had declaratory judgment jurisdiction:   “We express no opinion on whether a nonrepudiating licensee is similarly relieved of its contract obligation during a successful challenge to a patent’s validity–that is, on the applicability of licensee estoppel under these circumstances.”  Id. at 124.

Prior to the Supreme Court’s decision in Lear, the doctrine of licensee estoppel prevented a licensee from challenging the validity of the licensed patent.  Lear v. Adkins, 395 U.S. 653, 656 (1969).  The rationale behind the doctrine is that a licensee should not be permitted to enjoy the benefits of the license agreement only to argue later that the patent that forms the basis of the agreement is void.  Id.

In Lear, the Court held that a licensee who had repudiated the license agreement should not be precluded from challenging the validity of the licensed patent.  Id. at 670-71.  The Court recognized that while it is important that parties be bound by their contracts, the public interest in eliminating invalid patents is paramount.  Id. According to the Court, challenges to invalid patents would be best accomplished by “the only individuals with enough economic incentive” to do so, and therefore, ruled that provisions prohibiting the licensee from challenging the validity of the patent or requiring the licensee to pay royalties during a challenge are unenforceable.  Id. at 670-74.

While Lear has been characterized as the death of licensee estoppel, see, e.g., Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220, 1223 (Fed. Cir. 1988), the effect of the decision has been limited in subsequent decisions by lower courts to prevent the inequities that would arise in the event of an unqualified rule allowing the owner of a patent to prevent a challenge to the validity of the patent in every case.  For example, the Federal Circuit has held that the policy of Lear does not apply in the case of an assignment of a patent.  Mentor Graphics Corp. v. Quickturn Design Systems, Inc., 150 F.3d 1374, 1377 (Fed. Cir. 1998); Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220, 1224 (Fed. Cir 1988).

Similarly, the policy of providing finality to litigation settlements and consent decrees has won out over the policy of eliminating invalid patents.  See, e.g., Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1368 (Fed. Cir. 2001); Diversey Lever, Inc. v. Ecolab, Inc., 191 F.3d 1350, 1352 (Fed. Cir. 1999); Hemstreet v. Spiegel, Inc., 851 F.2d 348, 350 (Fed. Cir. 1988); Foster v. Hallco Mfg. Co., 947 F.2d 469, 483 (Fed. Cir. 1991).

The Federal Circuit has also looked in disfavor on the argument that under Lear a licensee does not owe royalties under the license agreement prior to the date the validity of the patent is challenged even though the patent is declared invalid.  In Shell Oil, the licensee continued to account for royalties under the agreement except with regard to one process of which it never informed the licensor; the court distinguished Lear because the licensee in Lear had stopped the payment of royalties prior to its challenge of the licensed patent and had given notice of the challenge of invalidity.  Studiengesellschaft Kohle m.b.H. v. Shell Oil Co., 112 F.3d 1561, 1568 (Fed. Cir. 1997).  Quoting its Diamond Scientific decision, the court noted that the policy of Lear should be balanced with the equities of the contractual relationship between the parties:

To allow the assignor to make that representation [of the worth of the patent] at the time of the assignment (to his advantage) and later to repudiate it (again to his advantage) could work an injustice against the assignee…. Despite the public policy encouraging people to challenge potentially invalid patents, there are still circumstances in which the equities of the contractual relationships between the parties should deprive one party … of the right to bring that challenge.

Id. at 1567.  Interestingly, in discussing the policy behind the Court’s decision in Lear, the Federal Circuit noted the fears of the Supreme Court were expressed “[i]n tones that echo from a past era of skepticism over intellectual property principles.”  Id. Some would say the same skepticism is apparent in today’s Supreme Court.

In Shell Oil, the Federal Circuit refused to apply Lear because there was no frustration of federal patent policy in enforcing a license agreement to allow the licensor to recover royalties until the date the licensee first challenged the validity of the patent.  Id. The licensee received the benefits of using a licensed process while being insulated from competition, insulated from investigations of infringement, and even insulated from paying royalties until the discovery of the process at issue by the licensor.  Id. The court reasoned that the licensee should be required to pay the back royalties to prevent the injustice of allowing the licensee to exploit the protection of contract and patent rights for a number of years only to later abandon its obligations under those rights.  Id. Thus, a licensee that has not stopped paying royalties has not repudiated the license agreement and is therefore not entitled to invoke the protection of LearId. Consequently, to invoke Lear, a licensee must (1) stop paying royalties under the license agreement and (2) give notice to the licensor of the challenge to the invalidity of the patent.  Id.

Although the Federal Circuit requires a licensee to stop paying royalties under a license agreement before the protection of Lear can be invoked, this rule no longer prevents a licensee from filing a declaratory judgment action to challenge the validity of a patent under the Supreme Court’s decision in MedImmune.  It only prevents the licensee from later claiming that royalties are not due or that royalties must be paid back if in fact the licensee continues to pay royalties while challenging the patent.  Prior to MedImmune, the Federal Circuit had effectively precluded a licensee from challenging the validity of a patent while taking advantage of the protections of the license agreement by holding that there is no case or controversy until the licensee stops paying royalties under the license agreement.  See, e.g., Gen-probe, Inc. v. Vysis, Inc., 359 F.3d 1376, 1381-82 (Fed. Cir. 2004)(holding no Article III standing absent breach).

The question then is whether policy considerations dictate that a promise by the licensee not to challenge the validity of the patent should be enforced when the licensee continues to pay royalties under the agreement while challenging the validity of the patent.  A blanket rule allowing the enforcement of a licensee’s agreement not to challenge the validity of the licensed would be contrary to the public policy of encouraging licensees to challenge invalid patents.  However, failure to enforce such a provision in situations where the licensee has not repudiated the license agreement would allow a licensee to challenge the validity of the patent with impunity while still reaping the benefits of the license during the challenge and after the challenge if unsuccessful.  Enforcement of an agreement not to challenge the validity of the patent should not be an absolute bar to challenging the validity of the patent.  The appropriate policy balance is to allow enforcement of such provisions where the licensee has not repudiated the license agreement.

It should be noted, as discussed above, that the rush to the courthouse by licensees that some predicted after MedImmune has not occurred.  In fact, I have been unable to find a single case after MedImmune of a licensee challenging the validity of a licensed patent while continuing to pay royalties under the license agreement.

The Court’s decision in MedImmune did nothing to ameliorate the uncertainty that exists as a result of Lear and progeny.  Because of the uncertainty that exists in the law at present, licensors and licensees alike cannot be sure whether provisions that seek to prevent a licensee from challenging the validity of a licensed patent will be enforced.  Uncertainty leads to greater costs for both sides, particularly where litigation ensues.  Enforcing a covenant not to challenge the validity of a licensed patent where the licensee has not repudiated the license agreement should be permitted and would not frustrate the policies behind federal patent law.

Indeed, under such a rule, a licensee could still challenge the validity of a patent by discontinuing royalty payments and giving notice to the licensor of the challenge.  The rule would also provide more certainty in the law in that a licensor can be assured that a licensee will not be allowed to take a license only to later challenge the validity of the patent while taking advantage of the benefits of the license agreement.  This will lead to lower costs for the licensee ultimately because presently the licensor must build into the price of the license the possibility that the licensee might challenge the validity of the patent. This is typically accomplished by either requiring a larger up-front royalty payment or a higher ongoing royalty rate.

Moreover, preventing a licensee from challenging the license agreement with impunity will result in challenges to the patent only where the licensee has a good faith basis for doing so.  Most importantly, enforcing agreements not to challenge the validity of the patents where the licensee fails to repudiate the agreement will increase certainty in the negotiation and enforcement of license agreements, something that was requested by the Licensing Executives Society in an amicus brief “In Support of Neither Party” in the appeal of MedImmune to the Supreme Court.  The brief of the Licensing Executives Society requested that the Court ask the Supreme Court for guidance on behalf of licensors and licensees alike and noted:

Licensees and licensors now often do not know prior to entering into a license agreement whether, when, or how licensees will be permitted to challenge patent validity. Similarly, licensees and licensors often do not know to what extent licensors can prevent, hinder, or ameliorate the impact of such validity challenges.

Brief of Licensing Executives Society (U.S.A. & Canada), Inc. as Amici Curiae Supporting Neither Party at 2, MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007).  Unfortunately, the Supreme Court did not clarify any of the confusion spawned by Lear and progeny.

How to Pay Me Less Money for a Patent Application

The cost driver for any patent application is the attorney’s fees associated with preparing the application.  For individuals and companies alike, money can be saved by giving the patent attorney a well written detailed disclosure of the invention.  Otherwise, the attorney is forced to draw out the details of the invention through a series of meetings, calls, or emails.  Minutes turn into hours, driving up the cost of the application. 

The inventor typically has a much better understanding of the invention than the patent attorney and is better suited to taking a first crack at a detailed description.  The description should be supported with drawings, even if crude, that will allow the attorney to understand the essence of the invention without asking many additional questions.  The fewer questions the patent attorney must ask, the lower the bill will be for the patent application.

For additional suggestions about how to save money on a patent application, see Mark Bergner’s suggestions on PatentlyO.  While Bergner’s suggestions are geared toward the independent inventor, the tips apply equally as well to corporations looking to cut the cost of filing patent applications in these tough economic times. 

This is particularly true when it is difficult for the patent attorney to reach busy inventors within the corporation.  Providing a detailed description up front may eliminate the need for subsequent communications with the inventor and can lead to a more timely filing of the patent application.