Today’s No Patent Challenge Provisions in License Agreements

Author: John Vassiliades

In the years and days leading up to the seminal U.S. Supreme Court decision in MedImmune, Inc. v. Genetech, Inc., 549 U.S. 118 (2007), it was common for licensors of patents to include a “no patent challenge” clause in the license that prohibited the licensee from challenging the validity of the patents that were the subject of the license. The U.S. Supreme Court put an end to that practice by holding in MedImmune that licensees have the legal right to challenge the validity and enforceability of the patents that are being licensed without first having to breach or otherwise terminate their license agreement. Under this ground-breaking decision, a licensee can successfully challenge the validity of the licensed patents after receiving immunity from infringement by the licensor. The decision seemed to encourage infringing parties to enter into license agreements in order to obtain immunity from infringement, then challenge the validity of the licensed patents without fear of being sued for infringement.

Prior to the MedImmune decision, licensors held the upper hand over licensees because the law permitted licensors the right to require that a licensee contractually waive its right to legally challenge the licensed patents, thereby locking in a licensee to pay royalties for the full term of the agreement which often amounted to the end of the last to expired licensed patent. This prior practice essentially forced a licensee to make the difficult choice between paying royalties for the term of the license or risk termination of the license and the filing of an infringement lawsuit if it did anything that sought to challenge the patents of the licensor.

In the years following MedImmune, sophisticated licensors have pivoted around the decision and have since deployed licensing strategies that place the licensor back in the driver’s seat. Savvy licensors are no longer requiring that their licensee contractually waive their patent challenge rights since to do so is illegal. Instead, they simply require that if you want to be a licensee, you must agree to a contract provision that says that if you or anyone on your behalf seeks to challenge the licensed patents, your license immediately terminates thereby making the licensee a target for an infringement claim by its former licensor. This strategy provides enough of an obstacle to the licensee to not want to challenge the validity of the licensed patents for fear of being sued for infringement by its former licensor once the license is terminated.

Interestingly enough, this licensing strategy has yet to be legally challenged by a licensee in court and while some commentators believe this contract strategy still violates the spirit behind MedImmune because it essentially discourages licensees from asserting their patent challenge rights, other commentators believe that the strategy is an enforceable effective tool for upholding the validity of patents during a time when the legal standards of what is patentable have become less certain, making it generally easier for infringers to challenge the validity of patents. These commentators instead say that this licensing strategy should be legal because unlike the old no challenge clauses (which are now illegal), a simple termination of license clause does not prevent the licensee from being able to challenge the validity or enforceability of a licensed patent if it ever wanted to. That is, under this licensing strategy, the licensee has to be willing to give up its infringement immunity by terminating the license before it seeks to challenge the validity of the licensed patents, something that the Court in MedImmune did not expressly say was illegal.

In any event, licensors of patents are well advised to include such a termination of license provision in their license agreements whether the license is a freedom to operate license, a technology transfer license, or a patent license negotiated in connection with a patent infringement litigation. That said, this basic licensing strategy has taken on many new forms and variations. For example, in some instances, the clause might be drafted in a way that triggers termination of the license if the licensee does anything to oppose the licensed patent even if the action in question is uttering an opposing or threatening statement that does not amount to the filing of a legal proceeding. In addition, the provision may state that a “challenge” includes more than a challenge to the validity or enforceability of the licensed patents but also to any claim that what the licensee may be doing no longer infringes a claim of the licensed patents. Still other variations include a requirement that the licensee give advance notice of any intent to challenge the licensed patents, an automatic increase in royalty rates, or other compensation, which may be in lieu of a termination or in addition to a termination should the licensee wish to resume its license after an unsuccessful challenge. Moreover, it is common for a challenge termination provision to state that termination is triggered not only if the licensee challenges, but also if anyone on behalf of the licensee, such as a sublicensee, a successor of the licensee (in connection with a merger or acquisition transaction involving the licensee), or even a third party working on behalf of the licensee, seeks to challenge.

All of these variations, whether used singly or in tandem, can offer an effective licensing strategy that mitigates the risk of potential future patent challenges by licensees. Since none of these strategies have been challenged in court, licensors are strongly recommended to implement them for all of their patent licensing deals.

About the author: John Vassiliades is registered patent attorney and partner in the firm’s Intellectual Property Practice Group, specializing in high-technology business transactions for the development and monetization of intellectual property rights. He regularly advises clients on patent, trademark, copyright, and trade secret licensing, and R&D, M&A, IT, software, and E-Commerce transactions in a variety of industries. He holds a master’s degree in Biotechnology from Johns Hopkins University.