Recent patent cases have changed important aspects of the law surrounding patent licensing. These changes will impact the preparation and interpretation of license agreements and license negotiation strategies in general. If your organization licenses patents, either as the licensor or the licensee, it is imperative that your organization and your legal counsel become aware of these significant changes in the law and how they will impact your organization's licensing strategies.

Three federal court decisions, MedImmune v. Genentech, KSR v. Teleflex, and Sandisk v. STMicroelectronics, have (individually and when analyzed together) made it easier for a patent licensee to challenge a licensor's patents and to potentially invalidate those patents.

* In MedImmune, the U.S. Supreme Court ruled that a licensee may challenge the validity, enforceability, and non-infringement of a licensor's patent without first breaching its license agreement, as previously required. Now a licensee may continue to pay royalties to the licensor "under protest" or with "reservation of rights" and still challenge the licensor's patent without being in breach of the license agreement and without facing possible infringement damages.
* In KSR, the U.S. Supreme Court altered the "obviousness" standard for determining the patentability of an invention. This decision arguably narrows the scope of patentable subject matter and makes it easier for a patent to be found invalid because of "obviousness." Patent holders whose claims combine prior art are especially vulnerable to these patent challenges. Moreover, thousands of existing patents whose validity was secure under the old standard might be susceptible to invalidation.
* In SanDisk, the U.S. Court of Appeals for the Federal Circuit held that the actual controversy needed to support a declaratory judgment action seeking to invalidate a patent was satisfied when two parties (e.g. potential licensor and potential licensee) reached adverse legal positions regarding potentially infringing activities, even if the patent owner expressly disclaimed any intention to sue.

Restructuring Future Patent Licenses and Altering Negotiation Strategy

In view of these cases, a patent holder (i.e. licensor) should negotiate more cautiously with a potential licensee and structure the potential license agreement to include new provisions that create economic disincentives to discourage a licensee from challenging the licensor's patent.

Conversely, a licensee should be aware that patent holders may begin negotiating more aggressively to include these types of provisions and should consider provisions that may help to preserve some of the pro-licensee impact of these recent cases.

The following are some pro-licensor strategies and provisions that should be considered in view of these recent cases:

* Termination Right if Licensee Challenges: Grant licensor the right (exercisable at licensor's sole election) to terminate the license if licensee challenges the validity, enforceability, or scope of the licensed patent in any claim, cross-claim, counterclaim or defense before any court, arbitrator, or administrative agency in any jurisdiction (even outside the license territory). Grant licensor the right to terminate if the licensee pays a royalty "under protest" or with a "reservation of rights."
* Notification Prior to Challenge: Require licensee to provide licensor with written notice explaining the basis for challenging the validity, enforceability, or scope of licensed patent. Also require a "grace period" to allow licensor to evaluate assertions, and a mandatory period for renegotiating the license agreement with licensor prior to filing the challenge.
* Forum Selection Provision: Licensors may now want greater control over the selection of the courts in which licensee may seek any challenge. Thus, specify the courts where a licensee must bring any challenge to the validity, enforceability, or scope of the patent and provide the licensee's consent to personal jurisdiction.
* Right to Raise Royalty Rate During Challenge: Grant licensor the right (exercisable at licensor's sole election) to raise the royalty rate during pendency of any challenge or if the licensee loses a challenge. Also grant licensor the right to recover costs and attorneys fees related to a challenge.
* Seek More Royalty Payments Upfront: Licensors may now want to obtain more upfront royalty payments from licensee and specify that these payments are non-refundable.
* Avoid Declaring Adverse Positions: Licensors must be more mindful of their tactics and statements in attempting to leverage negotiating posture. During negotiations, try to avoid referring to the potential licensee's activities as "infringing," and try to avoid offering patent claims, elements, and/or infringement analyses that suggest the potential licensee's current activities are already covered by licensor's patents.

The following are some pro-licensee strategies and provisions that should be considered in view of these recent cases:

* Awareness of Licensor's Reaction to Recent Cases: Licensees should expect that licensors will increasingly seek some or all of the above contract provisions during license negotiations as licensors become more aware of the potential implications of these recent patent cases on the licensor's patent rights.
* Place Royalties in Escrow During Challenge: A Licensee should try to include a provision that requires the placement of some (or possibly all) royalty payments into an escrow account during the pendency of a challenge, particularly a challenge concerning a fundamental patent right.
* Require Licensor to Disclose Additional Prior Art: Licensees should try to require a licensor to disclose to the licensee all additional prior art that is discovered during the term of the license agreement. Such information could assist the licensee in evaluating the ongoing strength of the licensor's patent rights.
* Require Licensor to Pay Attorneys Fees and Cost if Challenge is Successful: A Licensee should also try to include a provision that requires the licensor to pay the licensee's attorneys fees and other reasonable costs upon completion of a successful patent challenge.

Ultimately, the decisions in MedImmune, KSR, and SanDisk should alert patent holders of the potential risk for increased challenges to their patents from licensees and may provide licensees with increased rights during the license term. These cases will also require both parties to re-evaluate their negotiation strategies and the structure of all future patent license agreements.

Please feel free to contact any of the following attorneys in Jennings, Strouss & Salmon's Intellectual Property practice group to discuss the impact that these cases may have on your existing or future patent license agreements or patent rights in general.