New York Law Journal Intellectual Property Special Report
March 2018

I recently overheard one of my colleagues make the following observation: “Well, with AIA being so challenger friendly, quick, and relatively inexpensive I am not sure how important arbitration clauses are anymore in patent license agreements.” Contrary to the thoughts expressed by my brethren, in my view the benefits of arbitration provisions in a patent license are enhanced, not diminished under the American Invents Act (AIA).

Both prior to the passage of the America Invents Act and after its enactment, the seminal advantages in arbitrating patent disputes remain unchanged. These include:

• Reduced costs;

• More rapid and final resolution of disputes having both domestic and international implications;

• The ability of the parties to narrow the scope of the issues;

• The confidentiality of the proceedings;

• The generally less antagonistic nature of the proceeding making it less likely to rupture a commercial relationship; and

• The benefit of having experts with legal and technical backgrounds acting as arbitrators.

Although a patent’s validity can be the subject matter of an arbitration proceeding, AIA provides an additional forum for a validity challenge within the Patent Office via an administrative proceeding. The proceeding is brought before a panel of 3 administrative law judges with patent law and technical expertise. The proceedings are limited to only validity challenges. There is no monetary award or injunctive relief possible and whether an accused device is or is not an infringement cannot be addressed.

Particularly when examined in the context of typical non-patent challenge provisions found in well-drafted licenses, the interplay between AIA validity challenges and these contractual provisions provides a licensee with a strategy not previously available to it. Because an AIA validity challenge can be deferred until after the conclusion of an arbitration, a licensee can now choose to avoid many of the adverse consequences that are typically triggered in patent licenses when a patent validity challenge is initiated.

To put the issue into context, validity challenges under AIA have time restrictions. A Post Grant Review (PGR) proceeding only applies to patents examined under post AIA filings and must be brought within 9 months after grant. Another available validity challenge is an Inter Partes Review (IPR). Subject to an important exception, IPR filing is available for any patent regardless of the date of solicitation and can generally be initiated at any time. The exception relates to the filing of litigation. If litigation is initiated there is a one (1) year post litigation restriction for seeking the institution of an IPR.

IPR has become the most used patent validity challenge procedure and often runs parallel to court proceedings. Indeed, 80% of IPRs are filed where there is a co-pending litigation. The Patent Office decisions have been significantly more favorable to patent challenges. Therefore, as my colleagues corrected alluded to, if a dispute arises under a patent license between a patent owner and its licensee, an IPR challenge is a strategy that the licensee should now consider as an alternative to or as a parallel proceeding. Importantly, there is greater flexibility about when the IPR challenge needs to be initiated. The Federal Circuit has held that the one (1) year post litigation filing time period to file an IPR is not triggered by the notice to arbitrate.

This exemption from the one (1) year IPR filing provision can be used strategically by a licensee. If it chooses to do so, the licensee can defer the IPR validity challenge until after the arbitration on other issues is completed. Thus, the licensee can have it both ways — i.e., arbitrate non-validity issues and only challenge validity if the arbitration decision is unsatisfactory. There are important benefits to a licensee who chooses to refrain from the immediate IPR filing. These are best understood in the context of typical patent license agreement provisions that are triggered if a validity challenge is initiated.

There are a myriad of potential disputes between licensors and licensees that can result in the initiation of an arbitrative proceeding. However, the one that tends to be raised most often is where the licensee has taken a license for certain products but later takes the position that a new product falls outside the scope of the patent and is therefore not subject to the royalty payments. As is well known to patent practitioners, even though the licensee has agreed to a license, contract estoppel provisions are not applicable and the licensee remains free to assert a validity challenge.

Prior to 1969, under well-established precedent, a licensee having entered into a patent license was estopped from challenging validity. However, in 1969 the Supreme Court decision in Lear Inc. v Adkins held there to be a strong public policy favoring validity challenge. Therefore, a licensee as a matter of public policy was not subject to a licensee estoppel defense against a validity challenges. For many years this was thought to mean that although a challenge was permitted, the licensee could not have it both ways. The license had to be abrogated before the licensee could bring the challenge. In 2007, the Supreme Court stepped in again and in MedImmune LLC v. Genentech permitted patent licensees the right to seek declaratory judgments of invalidity, unenforceability or noninfringement without first terminating or breaching in the license agreement.

Licensors responded by devising contractual provisions which broadly define what qualifies as a challenge so as to include both court actions and administrative proceedings. Therefore, the initiation of an administrative challenge such as an IPR will, under the terms of most well-drafted licenses, trigger certain licensor protective contractual provisions. These typically include provisions which:

(i) permit the licensor to terminate the license if a patent challenge is initiated;

(ii) and/or increases the royalty rate during and after the pendency of a patent challenge proceeding;

(iii) and/or requires a licensee to reimburse the patent owner if the challenge is unsuccessful;

(iv) and/or requires prior written notice by the licensee to the patent holder if the licensee is considering a patent challenge.

Therefore, under a well-drafted patent license the licensee can challenge validity, but there is a price to pay. Herein lies the benefit to a licensee if it chooses to defer initiating an IPR. Because the Federal Circuit has decided that the notice to arbitrate does not start the one-year IPR filing clock, the licensee does not have to use it or lose. By not raising it in the arbitration, the right to bring the IPR later is not forfeited. The licensee therefore can maintain the benefit of being able to file the IPR, but refrain from threatening to do so and avoid the consequences of challenging validity.

It is important to note that petitioning to have the Patent Office institute an IPR does not assure that the petition will be granted. However, even if the licensee’s petition is denied, the “non-challenge” contract provisions will have been triggered. Thus, there is much to be lost with no guarantee that the challenge will even be accepted by the Patent Office.

Forestalling a validity challenge permits the parties to arbitrate in a non-public forum, maintain confidentiality and retain all advantages of arbitration discussed at the outset. Should the licensee lose on its principal position that its product is outside the scope of the licensed patent and then chooses to challenge validity, the licensor’s imposition of a higher royalty rate only becomes effective after the arbitration has been concluded. Moreover, the potential consequences of a licensor exercising its right of termination can be better assessed.

At bottom, although no single strategy is applicable to all situations, a deferral of an IPR validity challenge should be considered and contrary to what some may be espousing, arbitration provisions are not only beneficial and important in patent license agreements, under AIA they may be more important than they have ever been.

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Reprinted with permission from the March 26, 2018 issue of The New York Law Journal © 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.