This past year, the U.S. Supreme Court issued a considerable number of opinions that will likely have a significant impact on intellectual property law. Several of these opinions relate to the relationship between a patent licensor and a patent licensee. Unlike other corporate transactions, patent licensing does not end at closing since the life of the underlying patent typically continues on for several years. Given such an inherently long-term relationship between patent licensors and licensees, it is worthwhile to consider how these recent U.S. Supreme Court opinions impact current and future licensing relationships.
Medtronic: Ability of Licensee to Challenge Underlying Licensed Patent
Even though a patent license agreement is often valuable to a licensee, there are still some instances when a licensee may want to initiate a legal proceeding concerning a licensed patent. For example, a licensee may want to establish that a patent does not cover the manufacture of certain products—such as new products, product improvements and extension product lines—in order to avoid paying royalties. As such, the licensee may want to seek a declaratory judgment of noninfringement. Prior to the U.S. Supreme Court’s opinion in Medtronic v. Mirowski Family Ventures, 134 S. Ct. 843 (2014), there was some uncertainty as to who had the burden of persuasion with respect to whether the manufacture of a product would infringe a patent in such a scenario—the licensee or the licensor/patent holder.
In Medtronic, the licensee filed a declaratory judgment in order to establish that a number of its new products did not give rise to royalty obligations. Specifically, the licensor and licensee agreed that if the licensee’s products were covered by the claims of the licensed patent—e.g., if the manufacture of products qualified as infringement of the patent—the licensee would have to pay royalties. In its declaratory judgment action, the licensee sought a declaration that its products did not infringe the licensed patents and that the licensed patents were invalid.
The principal issue before the U.S. Supreme Court was whether the licensee had the burden of persuasion with respect to establishing that it does not infringe a patent in a declaratory judgment action. Ultimately, the U.S. Supreme Court explained that in a declaratory judgment action brought by a patent licensee, the burden of persuasion with respect to infringement remains with the patent holder. In effect, the U.S. Supreme Court clarified that a patent holder will have to establish that certain actions qualify as infringement in a declaratory judgment suit even if it did not initiate an infringement proceeding. Therefore, a licensee may file a declaratory judgment action for noninfringement without facing the burden of discerning all aspects of the patent holder’s infringement theory. Instead, the patent holder/licensor is faced with presenting its case for patent infringement when challenged by a licensee in a declaratory judgment action for noninfringement.
Obligation to Pay Opponent’s Attorney Fees
In light of Medtronic, a licensee may believe that a declaratory judgment action of noninfringement is not as complex as it once seemed. And, it may believe that such a course of action presents little or no risk. However, this is not the case. At the very least, even if a licensee decides that it is worthwhile to initiate a legal proceeding, such as a declaratory judgment action, the licensee must still consider several risks, including the possibility that it may be compelled to pay its opponent’s attorney fees.
In recent years, the prevailing opinion by many practitioners was that it was difficult to obtain an award of attorney fees in patent litigations even though a patent statute explicitly provides for an award of attorney fees to a prevailing party in “exceptional cases.” See 35 U.S.C. §285. However, in two opinions that issued following the Medtronic case, the U.S. Supreme Court appeared to lower the bar for proving that a patent litigation proceeding is exceptional and that a prevailing party should be able to obtain its attorney fees.
Specifically, in Octane Fitness v. ICON Health & Fitness, 134 S. Ct. 1749 (2014), the U.S. Supreme Court relaxed the standard for what qualifies as an “exceptional case” for an award of attorney fees. In Octane Fitness, the patent owner sued a competitor for infringement of a patent that concerned exercise equipment. At the district court level, the court granted the competitor’s motion for summary judgment and concluded that the competitor did not infringe the patent. The competitor then moved for attorney fees under 35 U.S.C. §285, but the district court denied the competitor’s request. The district court believed that the patent infringement allegations were neither “objectively baseless” nor “brought…in subjective bad faith.” On appeal, the Federal Circuit affirmed the denial of attorney fees.
The U.S. Supreme Court reversed the denial of attorney fees and remanded the case for further proceedings. As the U.S. Supreme Court explained, “an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” 134 S. Ct. at 1756. In determining whether a case is exceptional, a district court should exercise its discretion on a case-by-case basis and consider “the totality of the circumstances.”
It is incorrect to only deem a case “exceptional” if either “litigation-related misconduct [is] of an independently sanctionable magnitude” or “the litigation was both ‘brought in subjective bad faith’ and ‘objectively baseless.'” Rather, a “district court may award fees in the rare case in which a party’s unreasonable conduct—while not necessarily independently sanctionable—is nonetheless so ‘exceptional’ as to justify an award of fees.” Furthermore, “a case presenting either subjective bad faith or exceptionally meritless claims” may warrant an award of fees. 134 S. Ct. at 1757 (emphasis added).
The U.S. Supreme Court also rejected the Federal Circuit’s requirement that a party establish its entitlement to fees under §285 by “clear and convincing evidence.” The U.S. Supreme Court explained that §285 “demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.” 134 S. Ct. at 1758.
In an opinion issued on the same day as Octane Fitness, the U.S. Supreme Court explained that an appellate court should review a district court’s §285 determination for abuse of discretion. See Highmark v. Allcare Health Management System, 134 S. Ct. 1744, 1747 (2014). In Highmark, the party accused of infringement prevailed on summary judgment and was awarded attorney fees. The Federal Circuit reversed the district court’s exceptional case determination in part. However, upon review, the U.S. Supreme Court noted that—in view of its Octane Fitness opinion—more deference should be given to the district court’s determination as to whether a case is exceptional. Accordingly, the U.S. Supreme Court vacated the Federal Circuit’s judgment and remanded the case for further proceedings.
In light of the Octane Fitness and Highmark opinions, it is now even more important that a litigant consider whether a party may obtain an award for attorney fees. It may be more difficult to obtain a reversal of an award of attorney fees at the district court level on appeal. Therefore, any party considering engaging in patent infringement litigation—both licensor and licensee—should evaluate whether it may obtain attorney fees or be compelled to pay the attorney fees of its opponent.
Although the U.S. Supreme Court opinions addressed above relate to litigation proceedings, they should still be considered when drafting a patent license agreement. For example, both a licensor and licensee should appreciate that the patent holder—i.e., the licensor—will have the burden of persuasion with respect to infringement proceedings. The parties should take this principle into account when developing dispute resolution provisions, patent litigation provisions, product improvement clauses and other licensing provisions.
Furthermore, the parties should consider that it may be easier for a prevailing party in a patent infringement action to obtain attorney fees if a disagreement arising out of the licensing agreement leads to patent litigation. Licensing parties may want to give even more attention to licensing clauses that relate to litigation costs and attorney fees regarding patent infringement disputes between the parties concerning the underlying licensed patent or patents.
The U.S. Supreme Court has taken a special interest in intellectual property law in recent years. Indeed, this past year the Supreme Court issued a host of opinions that touch upon a variety of intellectual property matters, including patent licenses. Those involved in patent licensing should consider these opinions when entering into licensing agreements and should continue to monitor U.S. Supreme Court opinions while evaluating the impact they may have on intellectual property transactions.
Reprinted with permission from the September 12, 2014 issue of the New Jersey Law Journal. © 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.