Courts have a general policy prohibiting licensees from challenging patent validity (even though the licensee may have voluntarily agreed to forego challenges as a part of the negotiation).  In Lear, Inc. v. Atkins, the Supreme Court held that any contractual provision preventing the licensee from challenging the validity or enforceability of a licensed patent is unenforceable because such provisions frustrate federal policy. 395 U.S. 653 (1969).  The Lear doctrine also has been applied to trademark licenses because of the public interest in ensuring trademark validity.

An exception to the holding in Lear is that clauses preventing the challenge of patent validity in settlement agreements or consent decrees are enforceable, a recognition that federal policy strongly favors the settlement of disputes.  Flex–Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1369-70 (Fed. Cir. 2001).  To be enforceable, however, the settlement must generally occur after litigation has commenced. Rates Technology Inc. v. Speakeasy, Inc., 685 F.3d 163 (2d Cir. 2012).

The general policy encouraging patent challenges was in effect extended to the institution of inter partes review before the Patent Trial and Appeal Board (“PTAB”). The Federal Circuit Court of Appeals has held that licensor estoppel does not prevent a licensee from challenging a patent’s validity in an inter partes review proceeding.  Arista Networks, Inc. v. Cisco Systems, Inc.908 F.3d 792 (Fed. Cir. 2018). The PTAB also held that no-challenge clauses cannot prevent institution of an inter partes review, even when the clause resulted from a settlement. Dot Hill Systems Corp. v. Crossroads Systems, IPR2015-00822; Dot Hill Systems and Oracle Corporation v. Crossroads Systems, IPR2015-00825.  Recently, the Federal Circuit also held that assignor estoppel does not prevent the patent challenger from relying on a PTAB decision that an asserted patent is invalid in federal court litigation.  Hologic, Inc. v. Minerva Surgical, Inc. 957 F.3d 1256 (Fed. Cir. 2020). In other words, a patent licensee may seek inter partes review to challenge the validity of the patent it has licensed and use the outcome of that review in district court litigation (where the patent will be held void ab initio) even though it could not directly assert an invalidity defense in federal court.

Are there ways for licensors to protect their investment short of litigation?  Possibly.  In a non-precedential opinion, the Federal Circuit affirmed a preliminary injunction barring PTAB proceedings in light of a forum selection clause.  Dodocase VR, Inc. v. MerchSource, LLC, Fed. App’x (Fed. Cir. 2019).  In a case decided this year, the Central District of California held that a forum selection clause barred a patent challenger’s institution of IPR proceedings.  See Nomadix, Inc. v. Guest-Tek Interactive Entertainment Ltd., Case 2:19-cv-04980-AB-FFM (C.D. Cal. January 23, 2020).  The court held that, by its terms, the forum selection clause, which applied to any disputes “arising out of or in connection with” the license agreement, covered any dispute that had some logical connection to the agreement.  The invalidation of the patents in PTAB proceedings, which would provide a defense to the breach of license claim, had a logical or causal connection to the license agreement. The district court entered a judgment requiring the patent challenger to join the patent owner’s motion to terminate the proceedings, which the PTAB granted.

While the Federal Circuit has not issued a precedential opinion on this issue, a prudent course of action would be to include a forum selection clause in license or settlement agreements, and be prepare to raise the issue if litigation is commenced with the other party to the license or settlement.  The forum selection clause should apply to “all disputes arising out of or in connection with” the license or agreement.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.