A California court recently held that a forum selection clause of a license agreement was effective in preventing the licensee from challenging the validity of the licensed patents through inter partes review proceedings at the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office and ordered the licensee to move to dismiss the proceedings.
Patent license agreements may specify a forum for litigating disputes that arise under the license. A California court recently considered whether such a provision prevented a patent licensee from challenging the validity of the licensed patents at the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office.
Dodocase granted MerchSource a license to three Dodocase patents on virtual reality smartphone viewer technology. The license agreement provided that “MerchSource shall not (a) attempt to challenge the validity or enforceability of the Licensed IP; or (b) directly or indirectly, knowingly assist any Third Party in an attempt to challenge the validity or enforceability of the Licensed IP except to comply with any court order or subpoena.” The license agreement also contained a forum selection provision: “THE PARTIES AGREE . . . THAT DISPUTES SHALL BE LITIGATED BEFORE THE COURTS IN SAN FRANCISCO COUNTY OR ORANGE COUNTY, CALIFORNIA,” and that ”[t]he laws of the State of California shall govern any dispute arising out of or under this Agreement . . .” (emphasis in original).
MerchSource subsequently became dissatisfied with the license agreement, claiming that Dodocase was not adequately enforcing the licensed patents and that it did not intend to pay any royalties because the patent claims were invalid. Dodocase responded by filing litigation seeking a declaration that the licensed patents were valid and enforceable and also seeking an injunction against MerchSource from breaching the license agreement.
After Dodocase filed suit, MerchSource filed three inter partes review petitions at the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office challenging the validity of the licensed patents based on three prior art references. Dodocase responded by filing a motion for temporary restraining order or preliminary injunction, requesting the court order MerchSource to withdraw the PTAB petitions because the filing of the PTAB petitions violated the “no-challenge” and forum selection clauses of the license agreement.
The MerchSource Decision
The court first found that the “no-challenge” clause of the license agreement was not enforceable. In the seminal case Lear v. Adkins, the U.S. Supreme Court held that there was a strong public policy interest in encouraging challenges to invalid patents and that licensees might often have the greatest incentive to bring such a challenge and thus, should not be prevented from doing so. Therefore, under the Lear doctrine, a clause in a license prohibiting licensees from challenging the validity of patents, even if freely agreed to, is generally not enforceable. Moreover, the Supreme Court’s decision in Medimmune, Inc. v. Genentech, Inc. provided that a licensee can challenge the validity of a licensed patent without repudiating the contract when it continues to fulfill its contractual duty to pay royalties.
Choices of Forum for Resolving Disputes
The court found that the validity challenges at the Patent Office violated the forum selection clause of the license agreement. The “shall be litigated” wording of the forum selection clause rendered the courts of San Francisco and Orange County the exclusive jurisdictions for litigating disputes, and not merely locations where jurisdiction could not be challenged. The clause specifically applied to “any dispute arising out of or under”the license agreement, and the PTAB proceedings challenging the validity of the licensed patents after Dodocase sought to enforce the license constitutes a dispute that arises out of or under the license agreement.
MerchSource had argued that the forum selection clause does not apply to PTAB proceedings challenging validity at the Patent Office because they have nothing to do with the license agreement. The court disagreed, pointing to the fact that MerchSource filed counterclaims in the case seeking a declaratory judgment that the licensed patents are invalid on the same grounds as set forth in their PTAB petitions and noting that a “claim of invalidity is impossible to disentangle from the question of whether Defendants may be liable in this case” because MerchSource breached its obligations under the license agreement.
MerchSource also had argued that the forum selection clause should not be enforced because of a strong public policy permitting the U.S. Patent and Trademark Office to correct its mistakes. The court again disagreed, finding that the public interest would not be compromised by enforcing the forum selection clause because other third parties may still challenge the validity of the licensed patents through the PTAB, even if MerchSource bargained away the opportunity to do so.
The court also criticized MerchSource for arguing that being forced to litigate in district court rather than before the U.S. Patent and Trademark Office, an agency, would deny MerchSource its “day in court.” Any procedural advantages of the PTAB to MerchSource did not warrant disregarding the parties’ agreed-upon choice of forum.
Injunction to Prevent Validity Challenge at the Patent Office
Finally, the court found that an injunction ordering MerchSource to move to dismiss the PTAB proceedings was warranted in view of the balance of the equities and consideration of the public interest. Irreparable harm would result without an injunction because Dodocase is a small business that could face financial hardship if the PTAB proceedings continue. PTAB proceedings would also materially disrupt Dodocase’s business because it would prevent it from effectively enforcing its patent rights. Notably, however, the court did not order the PTAB to actually dismiss the proceedings. So, it remains an open question as to what would happen if the PTAB refused to dismiss the proceedings.
Strategy and Conclusion
Forum selection clauses may be used to prevent licensees from challenging the validity of licensed patents at the Patent Office and requiring such challenges to be made in court.
Further Information The MerchSource decision can be found here.