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Monday, january 19, 2009
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intellectual property
Rule Changed, But is Game Different? Licensing of Patents
and Other Intellectual Property Following MedImmune
‘MedImmune’ may not
have had the seismic
impact once predicted.
By Bruce Goldner
and Joseph Sozzani
Special to The National Law Journal
In early 2007, the U.S. Supreme Court issued its
decision in MedImmune Inc. v. Genentech Inc., 127
S. Ct. 764 (2007). The decision, which rejected the
U.S. Court of Appeals for the Federal Circuit’s test
for whether a licensee has standing under the
Declaratory Judgment Act to challenge the validity
of a patent that it has licensed, immediately raised
concerns among legal practitioners and
­commentators that intellectual property licensing
would never be the same. ­Specifically, the decision
was decried by many commentators as potentially
changing the balance of power in intellectual
property law, by providing licensees a safe haven
within the licensing ­ relationship
to attempt to avoid (or
renegotiate) royalty and other
obligations by challenging the
validity, enforceability or scope of the intellectual
property subject to the license agreement. See e.g.,
Linda Greenhouse, “Ruling Seen as Giving an Edge
to Challengers of Patents,” N.Y. Times, Jan. 10,
2007, at C3. MedImmune thus was perceived as
discouraging intellectual property owners from
licensing their rights.
It is undeniable that the court’s holding in
MedImmune has shifted some power to the
licensee—by permitting it to bring suit against the
licensor seeking a declaration that it need not make
royalty payments or honor certain other contractual
obligations or that it no longer needs a license
whatsoever. The MedImmune decision, however,
may not have had the seismic impact initially
predicted by some, and the benefit of even the
limited hindsight now available helps confirm
this.
Indeed, there are compelling reasons why
MedImmune may not have a significant effect on
the large majority of intellectual property licenses.
First, the doctrine of licensee estoppel arguably
continues to apply to most nonpatent licensees,
potentially precluding licensees of trademarks,
copyrights, trade secrets and rights of publicity from
challenging the validity of the underlying
intellectual property. Second, there are practical
reasons why a patent licensee, particularly an
exclusive patent licensee, may not seek to annul or
limit the intellectual property on which its
exclusivity is based. Finally, there are provisions
that can be (and post-MedImmune increasingly are)
included by licensors in license agreements to
discourage licensees from commencing and pursuing
such challenges. To that end, included below are
some tips to help licensing practitioners limit
MedImmune’s effect.
Licensee estoppel is an equitable doctrine
prohibiting a licensee from challenging the
intellectual property rights that it
licenses. As with most doctrines,
however, there are exceptions.
The principal exception to
licensee estoppel applies to patents, and was first
fully enunciated in Lear Inc. v. Adkins, 395 U.S.
653 (1969).
In Lear, the Supreme Court held that, although
a patent licensee in good standing was estopped
from challenging the validity of the licensed patent,
a licensee could stop paying royalties at any time
and then challenge the validity of the patent. The
court reasoned that patent licensees should not be
precluded from challenging the rights of a patent
licensor altogether, as doing so would undermine
the public policy favoring the full and free use of
ideas and inventions in the public domain.
Underlying the Lear doctrine is the notion,
grounded in antitrust principles, that a patent by its
very nature provides market exclusivity.
Accordingly, a binding agreement not to challenge
a patent is unlawfully anti-competitive.
MedImmune extended the exception provided
to patent licensees in Lear, holding that a licensee
has standing to challenge the validity of a patent
patent
Bruce Goldner is a partner, and Joseph Sozzani is an
associate, in the intellectual property and technology
group of New York-based Skadden, Arps, Slate,
Meagher & Flom.
under the Declaratory Judgment Act even if the
licensee has not first breached its license agreement
by failing to pay royalties. As a result of MedImmune,
an actual “case or controversy” now can exist
within an ongoing licensing relationship. It is this
implicit invitation to licensees to “have their cake
and eat it too” that has raised the greatest concerns
among intellectual property licensors in the wake
of MedImmune.
Nonpatent licensing
Notably, the MedImmune court did not address
situations in which a licensee is estopped by
contract from challenging the intellectual property
that is licensed. Justice Antonin Scalia, writing for
the majority, pointed out that the license agreement
at issue did not provide any “prohibition against
challenging the validity of the patents.”
MedImmune, 127 S. Ct. at 776. And other than
with respect to patents, there are a number of
contractual and common law grounds that may
prevent a licensee from pursuing a challenge.
For example, courts generally have rejected
licensee challenges to trademarks, copyrights, trade
secrets and rights of publicity, on the ground that
the public interest in accessing these types of
intellectual property generally is not as great as
with respect to patents. See MWS Wire Industries
Inc. v. California Fine Wire Co. Inc., 797 F.2d 799,
803 (9th Cir. 1986) (estopping trademark licensee);
Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 486
(1974) (distinguishing trade secrets from patents);
Saturday Evening Post Co. v. Rumbleseat Press Inc.,
816 F.2d 1191, 1200 (7th Cir. 1987) (distinguishing
copyrights from patents).
Specifically, courts have held that, unlike
patents, such types of intellectual property do not
threaten free competition, given their inherently
more limited scope of protection. For example,
trademark owners have been held not to hold sway
on a market, as others (even former licensees) are
free to compete simply by adopting a mark that is
not confusingly similar. Beer Nuts Inc. v. King Nut
Co., 477 F.2d 326, 329 (6th Cir. 1073) (holding
that the public interest does not weigh in favor of
allowing licensee’s challenge of trademark’s
validity). As Judge Richard Posner observed in the
context of a copyright license, “[t]he danger is not
so great…as to justify a rule of federal common law
The National Law Journal
outlawing no-contest clauses without evidence of
any monopolistic danger or effect.” Saturday Evening
Post, 816 F.2d at 1199.
Consequently, contractual provisions and
common law doctrines prohibiting or limiting
challenges from licensees of intellectual property
other than patents routinely have been upheld and
it does not appear that MedImmune has undermined
this precedent. But see Nasalok Coating Corp. v.
Nylok Corp., 522 F.3d 1320, 1327-8 (Fed. Cir.
2008) (Federal Circuit still not in full agreement as
to applicability of the Lear doctrine in trademark
licensing disputes).
To the extent that a licensee is not barred from
challenging licensed intellectual property, however,
the application of MedImmune facilitates such a
challenge, and courts have been increasingly
establishing additional exceptions to licensee
estoppel. The 2d and 9th circuits in the past several
years have held that certification marks—
trademarks that certify that all goods and services
have met a specific set of standards and conditions
established by the trademark owner (e.g., “The
Good Housekeeping Seal of Approval”)—may be
challenged by a licensee. State of Idaho Potato
Commission v. G&T Terminal Packaging Inc., 425
F.3d 708, 716 (9th Cir. 2005); State of Idaho Potato
Courts have mostly
rejected nonpatent
licensee challenges.
Commission v. M&M Produce Farm & Sales, 335
F.3d 130, 139 (2nd Cir. 2003). Certification marks
are distinguishable from other types of trademarks
in that, by statute, the owners of certification marks
cannot refuse to license their mark on any ground
other than that the product fails to meet preestablished performance or composition criteria. 15
U.S.C. 1064(5). A mix of public policy and freemarket considerations accordingly have led courts
to find licensee challenges to certification marks
permissible. G&T Terminal Packaging Inc., 425 F.3d
at 716.
More recently, a district court in Missouri, in
C.B.C. Distribution and Marketing Inc. v. Major
League Baseball Advanced Media (MLB) L.P., 443 F.
Supp. 2d 1077 (E.D. Mo. 2006) aff’d, 505 F.3d 818,
825 (8th Cir. 2007), extended Lear to a right of
publicity claim, and held that the Major League
Baseball Players Association could not enforce a
no-use and no-challenge provision in a contract
prohibiting a former licensee from using the names
of Major League Baseball players in a fantasy
baseball league. Specifically, the court held that
“the strong federal policy favoring the full and free
use of ideas in the public domain as manifested in
the laws of intellectual property prevails over [such]
contractual provisions.” Id. at 1106. On appeal,
however, the 8th Circuit side-stepped the issue “of
Monday, january 19, 2009
whether Lear is applicable” to rights of publicity
and affirmed on other grounds. Major League
Baseball, 505 F.3d at 825.
This recent case law, however, may not have a
major practical impact. Certification marks
constitute a small minority of the types of marks
used and licensed, and it remains to be seen
whether the decision of the district court in
Missouri will be followed by any other courts. But
to the extent that these additional exceptions are
embraced by courts, or that courts find additional
exceptions to licensee estoppel for other types of
intellectual property, the reach of MedImmune
likely correspondingly will so extend.
Impact on patent licensing
Even with respect to patents, there are reasons
why MedImmune may be less daunting to potential
licensors than initially anticipated. First, a licensee
generally will not challenge a patent unless there is
a strong incentive and likelihood of success in
doing so. The cost and uncertainty of litigation,
and the harm to the relationship with the licensor,
will deter many licensees from contesting their
licensed patents.
Second, many exclusive licensees may be
disinclined to challenge patents, as such licensees
generally enjoy a market exclusivity that could be
destroyed in the absence of the patent. In this
connection, the circumstances in MedImmune
arguably were unusual in that the challenge
concerned a patent application that had been
licensed which, upon issuance, the licensor alleged
covered approximately 80% of MedImmune’s
product sales. MedImmune, 127 S. Ct. at 766, 768.
Third, even certain nonexclusive licensees may
face limited gains in engaging a licensor in
expensive patent litigation, as even if successful in
asserting invalidity or noninfringement, the
nonexclusive licensee still will have to contend
with competitors in the marketplace, perhaps on an
even broader scale. Of course, a MedImmune-type
challenge may make eminent sense to a licensee
that believes it is paying too much to its licensor
(particularly when such amount appreciably
exceeds the cost of a successful litigation), even if
such a challenge is settled through a renegotiation
of financial or other arrangements with the licensor
Front-loading fees
may reduce risk of a
challenge by licensee.
rather than a final adjudication.
MedImmune nonetheless serves as a powerful
reminder to licensors and their attorneys to attempt,
during license negotiations, to clearly define
whether, and under what circumstances, a licensee
may challenge the licensor’s intellectual property
rights and the consequences of such a challenge.
The following are several strategies for practitioners
to consider that may lessen the impact of
MedImmune.
n Increased or full up-front payment. Frontloading licensing fees may reduce the risk that a
licensee will challenge a licensor’s intellectual
property rights later. When a licensee is required to
pay a substantial percentage of the licensing fee up
front, a licensor will be ensured of collecting such
amounts prior to any challenge by the licensee and
the economic incentive in challenging the licensor’s
right to collect future royalties is reduced.
n Shorter license terms with available renewals.
Reducing the term of a license may serve as a
disincentive to licensees who might otherwise
challenge the licensed intellectual property while
taking shelter under the license.
n Termination clauses. Inclusion of a termination
clause in which the licensor has the right to
terminate the license immediately upon a licensee
challenge may deter such a challenge.
n Bundling licenses. When several licenses are
bundled together under the same licensing
agreement, termination clauses may have greater
force. A licensee who might otherwise challenge a
license agreement providing an individual
intellectual property right may not want to risk
jeopardizing its license to other rights.
n No-contest clauses. No-contest clauses (i.e.,
contractually agreeing not to challenge the validity
or enforceability of the licensor’s intellectual
property rights) can provide an effective means of
guarding against challenges from a licensee.
However, the enforceability of no-contest clauses
may be limited, particularly with respect to
patents.
n Liquidated damages and/or attorney fees. A
licensor should consider requiring that a challenging
licensee compensate the licensor for the licensor’s
attorney fees incurred in defending such challenge,
and, possibly, liquidated damages with respect to a
challenge. Another possible monetary disincentive
is a royalty ramp-up clause providing for an increase
in the royalty rate immediately upon a licensee
challenge.
n Arbitration. An arbitration clause in the
license may mitigate the impact of a license
challenge, given that arbitrations generally are
confidential and not binding with respect to
subsequent third-party challenges.
In drafting provisions intended to reduce the
risks posed by MedImmune, it is important to be
aware that a court may limit or invalidate such provisions, particularly on antitrust or public policy
grounds. Accordingly, to the extent possible, such
provisions should be drafted in a manner that does
not contradict underlying policy goals in establishing the specific intellectual property right. nlj
Reprinted with permission from the January 19, 2008 edition
of the National law journal © 2008 Incisive US
Properties, LLC. All rights reserved. Further duplication
without permission is prohibited. For information, contact
877-257-3382 or [email protected].
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