Generic forum selection clauses in patent license agreements can prevent licensees from trying to invalidate licensed patents at the United States Patent and Trademark Office (USPTO). A recent Federal Circuit Opinion, Dodocase VR, Inc. v. Merchsource, LLC, affirmed a District Court Order finding that a forum selection clause prohibited a licensee from challenging patents through USPTO Inter Partes Review (IPR) or post-grant review (PGR) proceedings. This article discusses that decision and provides guidance on forum selection clauses in patent license agreements.
Patent license agreements often have “forum selection clauses” to provide certainty about where—which forum—future disputes concerning the agreement may be initiated. These clauses often designate a specific state or court as an exclusive forum in which disputes may be initiated. The purpose for such agreements is to provide greater certainty about the law that will be applied to the agreement, how the agreement will be interpreted, and, potentially, the cost of future disputes.
An IPR proceeding is an effective procedure for invalidating a competitor’s patent whereby a patent challenger cites other patents and printed publications (i.e., “prior art”) to argue that a patented invention is not new or obvious. PGR proceedings are another effective USPTO procedure for invalidation, but they can be based on additional issues, such as invention enablement and patent subject matter eligibility.
Importantly, both of these methods for invalidation are typically faster and less expensive than proceedings in U.S. District Courts. The USPTO proceedings are also conducted in front of administrative law judges that exclusively work with intellectual property cases, and their relatively greater IP expertise could be helpful to patent challengers.
In a recent opinion, the Federal Circuit considered a forum selection clause and found that a licensee could not litigate patent validity before the USPTO, but only in courts in California. By way of background, Dodocase licensed three patents related to VR technology to MerchSource in return for an ongoing royalty. MerchSource became frustrated with the agreement, alleging that Dodocase was not enforcing its patents enough to exclude others from selling goods covered by the license. MerchSource stopped paying royalties, so Dodocase filed a lawsuit in the Northern District of California. After the lawsuit was filed, MerchSource filed three petitions with the USPTO—one IPR and two PGRs—to invalidate the licensed patents.
Dodocase moved for a preliminary injunction in the California Court to prohibit the USPTO petitions. Dodocase cited a forum selection clause of the parties’ patent license agreement as prohibiting the initiation of any dispute outside of California. The clause is below:
13.4 The laws of the State of California shall govern any dispute arising out of or under this Agreement, notwithstanding the conflict of laws principles of the State of California . . . THE PARTIES AGREE THAT THE SUBJECT MATTER AND PERSONAL JURISDICTION ARE PROPER IN THE COURTS LOCATED IN SAN FRANCISCO COUNTY OR ORANGE COUNTY, CALIFORNIA AND THAT DISPUTES SHALL BE LITIGATED BEFORE THE COURTS IN SAN FRANCISCO COUNTY OR ORANGE COUNTY, CALIFORNIA.
(Emphasis added.) MerchSource in response argued that (1) the provision could not restrict its ability to challenge the validity of the patents, and (2) this provision does not apply to USPTO petitions because the petitions do not arise “out of or under” the agreement.
The District Court agreed with MerchSource about its right to challenge the validity of the licensed patents. Citing the principles of equity and Supreme Court precedent, the District Court reaffirmed the policy against “no-challenge” provisions in part because “[l]icensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery.” Lear, Inc. v. Adkins, 395 U.S. 653, 670 (1969). Indeed, “[i]f [licensees] are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification.” Id.
However, regarding the selection of California courts for future disputes, the District Court held that the validity of the patents arose “out of or under” the license agreement. Reconciling the two holdings above, the District Court further found that MerchSource was free to litigate the validity of the licensed patents but had to do so in the California Court rather than before the USPTO.
The District Court’s ruling on the forum limitation clause was appealed and the Federal Circuit affirmed. The Appeals Court cited a previous holding that considered similar language that was determined to exclude an action before the International Trade Commission (ITC). The ITC is another administrative body which handles patent disputes and in which the validity of a patent can be challenged. The Federal Circuit’s decision against MerchSource thus re-affirms that patent license agreements, if not carefully worded, can limit the forum of patent challenges to U.S. District Courts.
For Patent Owners: IP holders often have greater bargaining power in extracting patent licenses because of their ability to threaten a lawsuit for infringement. Patent owners should use their position to demand future disputes be conducted in (1) U.S. District Court, and (2) a forum that is convenient for them, such as the district in the owner’s state of incorporation. Such an agreement will make future challenges to the patent more expensive and burdensome for the challenger and thus less likely to occur.
For Patent Licensees: As shown above, patent licensees are generally entitled to challenge the validity of patents regardless of whether the contract contains a “no-challenge” clause. Thus, licensees should leverage this entitlement to bargain for the right to initiate future proceedings in front of intellectual property administrative agencies, including the USPTO and the ITC.
WHIPgroup is leading counsel for U.S. and international technology companies. We specialize in patent and trademark law.
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