In a non-precedential opinion, the US Court of Appeals for the Federal Circuit affirmed a district court’s grant of preliminary injunction requiring a licensee to withdraw its inter partes review (IPR) and post grant review (PGR) petitions because they violated a forum selection clause requiring all disputes between the licensee and licensor to occur in California. Dodocase VR, Inc. v. MerchSource, LLC, Case No. 18-1724 (Fed. Cir. Apr. 18, 2019) (Prost CJ).
MerchSource is a distributor of consumer products, including virtual reality headsets. In 2016, Dodocase and MerchSource entered into a master license agreement (MLA) covering three patents, which included a no-challenge clause and a forum selection clause. The no-challenge clause prohibited MerchSource from challenging the validity or enforceability of the three patents, and the forum selection clause required that any disputes under the MLA be litigated in San Francisco County or Orange County, California.
In September 2017, MerchSource informed Dodocase that it would no longer pay royalties under the MLA, because it believed that the relevant claims of Dodocase’s patents were invalid. In response, Dodocase filed a complaint against MerchSource for patent infringement and sought an injunction preventing MerchSource from breaching the MLA. In January 2018, MerchSource filed an IPR petition challenging one of the patents and PGR petitions on the remaining two. Shortly thereafter, Dodocase filed a motion for a preliminary injunction requesting that the district court order MerchSource to withdraw the IPR and PGR petitions because they violated the no-challenge and forum selection clauses of the MLA.
On March 23, 2018, the district court issued an order granting Dodocase’s motion for a preliminary injunction, finding that Dodocase was likely to succeed on its claim that MerchSource breached the forum selection clause by filing the IPR and PGR petitions. The Court ordered MerchSource (1) to send an email to the Patent Trial and Appeal Board (PTAB) by March 25, 2018, requesting a conference call to facilitate the withdrawal of the IPR and PGR petitions, and (2) if the PTAB granted permission to file motions to dismiss the petitions, to file the motions by noon on April 3, 2018. MerchSource appealed.
After filing the appeal, MerchSource filed an emergency motion for stay of the preliminary injunction order. The Federal Circuit granted the emergency motion for stay, and the PTAB proceedings were allowed to continue during the pendency of the appeal.
Turning to the merits of the appeal, the Federal Circuit affirmed the district court’s order issuing the preliminary injunction. On appeal, MerchSource argued that validity challenges in an IPR are not “disputes” governed by the MLA, since they do not depend on the MLA or require any analysis, construction, interpretation or enforcement of the MLA. The Court rejected this argument, finding that the forum selection clause in the MLA included any disputes “arising out of or under” the MLA, and that this language would include validity challenges to the patents licensed under the MLA. The Court thus found that the forum selection clause of the MLA encompassed IPR and PGR proceedings.
The Federal Circuit also found that since Dodocase was a small company, it would be irreparably harmed if it had to defend the challenged patents on multiple fronts at the same time. The Court further found that the district court did not abuse its discretion in determining that the balance of hardships tipped in favor of Dodocase, even though MerchSource would face the one-year time bar under 35 USC § 315(b) to file IPR and PGR petitions. Finally, the Court found that the district court did not abuse its discretion in determining that the public interest in enforcing contractual rights and obligations fell in favor of Dodocase, particularly since MerchSource could still test the validity of the patents in federal court, while other third parties could still initiate separate IPR and PGR proceedings. The Court thus affirmed the grant of the preliminary injunction and remanded for the district court to provide new deadlines for MerchSource to withdraw the petitions.
Practice Note: Licensees should carefully review the forum selection clause and ensure that they can challenge patent validity before the PTAB.