Troy & Schwartz Attorneys-At-Law

On April 5th, a federal judge in the U.S. District Court of Virginia heard summary judgment arguments on this very issue in Thaler v. Iancu.  Thaler brought this action to challenge the current legal definition of inventorship of patent applications after the United States Patent & Trademark Office had rejected two of his patent applications for failing to identify a person as inventor in non-compliance with the Patent Statute’s statutory requirements.  Instead, he had named an artificial intelligence (AI)-based system, DABUS, as the inventor and disavowed any notion of being named a sole or at least a joint inventor.  Thaler may well have brought as a test case given AI’s increasing role in R&D in industries ranging from the life sciences to chemistry to engineering.

The judge is expected to rule in favor of the USPTO on the basis of the patent statute’s definition of inventor which states:  “The term “inventor” means the individual or, if a joint invention, the individuals collectively who invented or discovered the subject matter of the invention.”  Any change in the definition of inventor to include AI will require intervention by Congress.

The issue is not, however, as simple as expanding the definition to include the AI.  For example, an Inventor must contribute to the conception of the invention.  As the Manual for the Procedure for Examining Patents (MPEP) states, “[t]he threshold question in determining inventorship is who conceived the invention.  Unless a person contributes to the conception of the invention, he is not an inventor.”  MPEP § 2019.

In understanding the legal definition of inventorship, it is important to understand that the inventor is not required to reduce the invention to practice.  “Difficulties arise in separating members of a team effort, where each member of the team has contributed something, into those members that actually contributed to the conception of the invention, such as the physical structure or operative steps, from those members that merely acted under the direction and supervision of the conceivers.”  MPEP § 2019 citing a 1991 case from the Board of Patent Appeals and Interferences.

Can AI spontaneously conceive of an invention without any human input or is it actually being directed to reduce a human-inputted concept to practice?  Under this scenario, AI cannot be an inventor even if the definition for inventor is expanded to include AI.

Additionally, assignment of patent rights is a common practice.  Generally, any scientist or engineer employed by a company is required to execute and assignment of any patent rights resulting from his or her endeavors to the company-employer.  The company generally files the patent application as the assignee wherein the inventors must always be named.  Another common patent assignment scenario is one where the inventor, as the patent owner, assigns another person, often a business entity, to commercialize the patent.   Patent licensing is another common business transaction surrounding issued patents.   These routine contractual business transactions will clearly become complicated if AI is allowed to be named as an inventor.  Why? Because the party to an agreement must have the requisite intent to enter into the agreement.   Can AI have that requisite invent to assign its patent rights or enter into a licensing agreement?

Other considerations include:  1) An AI machine’s ability to have standing to sue or be able to testify as the inventor in a patent infringement lawsuit; 2) Ownership rights in any resulting patentable invention if the AI machine was designed by an independent person and purchased by the inventor.  Here, any purchase contracts should unequivocally state that any resulting patentable technology resulting from the usage of the AI machine belongs to the purchaser of that machine.  But what if the AI machine is named as the inventor?  The point is that any such contracts involving AI must be carefully tailored to anticipate possible scenarios.

This commentator is not in favor of having AI named as an inventor perhaps because of a bias in favor of the human brain as the ultimate source of creativity and ingenuity.  Instead, Congress should first address the upheaval in intellectual property law caused by simply bad court decisions in U.S. patent law concerning patent eligibility under § 101 and just this month, the questionable application of the fair use doctrine in a copyright law case.  Click here for a link to the blog on the copyright case.  There is also no question that human ingenuity is what created AI in the first place and that AI is here to stay.

As an alternative to complicating the patent law business transactions that are so essential to acquiring investment funding and commercially exploiting patented inventions, a separate statute for thoughtfully addressing the unique aspects of AI-involved inventions is suggested.  This suggestion of a separate patent classification has precedent through plant patents and design patents – types of patents that are separate and distinct from utility patent applications, the very type of patent application at issue in the Thayer case.

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.

Intellectual property law is a complex area of the law.  Contact us at 305-279-4740 for a complimentary consultation on protecting your inventions, creative works, brands, and proprietary information through patents, copyrights, trademarks and trade secrets or our litigation services involving intellectual property disputes.   We represent both individuals and business entities.  Our mission is to serve innovators and creators in protecting the fruits of their hard work and ingenuity through our Client Services Creed:  Conscientious, Rigorous, Energic, Empathetic, and Diligent legal services. 

© 2021 by Troy & Schwartz, LLC

Posted by Susan Dierenfeldt-Troy, Esq.

Troy & Schwartz, LLC

Where Legal Meets Entrepreneurship™

Intellectual property assets may comprise as much as 70% of an average company’s value according to the Harvard Business Review.  Not surprisingly, businesses large and small are concerned about: 1) protecting their intellectual property from theft or infringement and potential creditors; and 2) reducing their income taxes as part of an overall IP asset management strategy.  Intellectual property holding companies (IPHCs) became a popular means through which companies sought to protect their IP assets and reduce taxes by establishing a wholly-owned subsidiary whose purpose was only to control and own IP assets such as patents, copyrights, trademarks, trade secrets, and other proprietary information in the 1990s.

The IPHC, established by the parent company, does not itself use the IP it owns (e.g., by manufacturing and distributing a patented product).   Instead, the holding company licenses its IP rights to affiliated operating companies that handle the day-to-day business activities but do not themselves own any of the IP assets.  The holding company as the licensor then receives royalties from its licensee(s).    For example, say ZYX, Inc. owns a U.S. patent for a product it manufactures and sells under a registered trademark.  It has decided to form a Delaware IPHC, CBA, Inc., for holding its patent and registered trademark.  CBA, Inc., now as the IPHC, licenses the patent and registered trademark to ZYC, Inc. in return for a two percent royalty on the patented and trademarked product’s sales.  For states such as Delaware which does not charge income tax on royalties, the tax savings can be substantial. Additionally, ZYX, Inc. can likely take the royalty payment as a tax expense write-off.

States eventually figured out that holding companies were costing them a lot of money and the majority of them have enacted different types of reporting requirements for IPHCs to recover tax monies:  a) mandatory combined reporting (requiring companies to file a single comprehensive tax return for all of their subsidiaries when they calculate their taxes); b) add back statues (requires companies to add back any tax deductions they have taken for royalties paid to their IPHC); and c) the economic nexus approach wherein courts are tasked with finding if an economic nexis (a/k/a/ the Geoffrey rule after a 1993 South Carolina case involving Geoffrey, Inc. as the IHPC for the Toys “R” Us trade name) exists.  As such, IPHCs are not used as much as they were over a decade as a tax “shelter.”  Delaware, however, still continues to be an IPHC tax haven.

What about Florida?  Florida does have a corporate income tax but remains one of a handful of “corporate income” tax states that hasn’t adopted an add-back or combined reporting statute to try and reclaim lost tax revenue attributable to Florida IPHCs.  Furthermore, Florida IPHC law is complicated by the fact that only mining companies, by statute, must count royalties when calculating their income taxes.  For an excellent discussion on the politics surrounding the issue of Florida IPHC taxation see Florida Tax Laws and Intellectual Property by Jason Garcia, Florida Trend Magazine.

Despite the fewer taxation benefits now afforded by most states to IPHCs, IPHCs can still offer IP asset-protection benefits, for example by allowing a company to quarantine its intellectual property from claims brought against the operating companies.  For instance, in the event the affiliated operating company is sued, the separation of IP assets from the affiliate to an IPHC may well protect that property from potential judgments in a lawsuit.

Any business entity, including an IPHC should be structured in a manner that best fits the business model.  All business entities, whether a C-Corp, S-Corp, or Limited Liability Company have their own considerations which should be discussed with in attorney knowledgeable in IP asset protection. Any such IP transfer needs to be in writing and is generally executed as an assignment of rights document.  The assignment of any issued patent and registered trademarks and copyrights should be recorded with the United States Patent and Trademark Office and/or the U.S. Copyright Office.

Anybody considering forming an IPHC should of course understand the taxation requirements of the state where the IPHC entity will be formed.  Additionally, any IPHC owner needs to understand that infringement actions involving the IP owned by an IPHC may result in unintended consequences for the unwary.  For example, whether or not a plaintiff has standing to sue is a threshold question in any lawsuit.  For a patent infringement action, only patent owners or exclusive licensees have standing to sue for infringement.  A typical exclusive licensing agreement may not be “exclusive” for patent infringement purposes. That is, absent a provision within the exclusive licensing agreement that the patent licensee has the right to sue, the exclusive licensee may be found to have no independent right to sue.

Why is this important to an IPHC?  Because the IPHC may be able to obtain an injunction as the patent owner, but will be limited in its ability to seek lost profits as damages.   For example, a patent-holding IPHC normally does not manufacture or sell a product itself.  The IPHC thus suffers no lost profits damages as a result of any infringement of its patent and any recovery will likely be limited to reasonable royalty damages which are generally substantially lower than lost profits.  Rite-Hite Corp. v. Kelly Co., 56 F.3d 1538, 1553 (Fed. Cir. 1995).

As for non-exclusive patent licenses, the IPHC cannot claim lost profits and will be limited to an award of reasonable royalty damages.  However, non-exclusive patent licenses may provide the IPHC with additional opportunities to exploit its IP beyond just one licensee.

In the context of trademark rights, the IPHC holding company must have sufficient quality control over the goods/services provided under the licensed trademarks.  Failure to exercise sufficient quality control may create what is known as “naked licensing”, resulting in potential cancellation of the registered marks.  Click here for a previous blog on the ramifications of naked licensing.

Take Home Points:

1. Before setting up an IPHC, understand the tax laws of the proposed entity-formation state by consulting with a knowledgeable CPA or tax attorney.
2. Before setting up an IPHC, determine the best type of business entity by consulting with a knowledgeable IP asset protection attorney.
3. Ensure that the assignment of IP assets to the IPHC is done via a formal assignment agreement.
4. Ensure that an exclusive patent licensing agreement includes appropriate provisions giving the exclusive licensee the right to sue for patent infringement. Utilize the services of a knowledgeable IP licensing attorney.
5. For trademark licensing, ensure that the licensing agreement includes appropriate provisions allowing the IPHC to monitor the quality and goodwill of the licensed marks. As with patent-licensing agreements, utilize the services of a knowledgeable IP licensing attorney.

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.

Call us for a complimentary consultation on IPHCs or IP-licensing or any of your IP legal needs at 305-279-4740.

May you and your loved ones stay safe & be well during these challenging times.

© 2020 by Troy & Schwartz, LLC

                The recent January 13, 2014 opinion by the U.S. Court of Appeals for the Federal Circuit in In Re Raymond Giannelli drives home the point that the burden of establishing a prima facia case of obviousness rests with he USPTO.  Conclusory statements about obviousness will generally be insufficient to establish obviousness.  Furthermore, a detailed, well-written description may well play a key role in allowing the applicant to overcome an obviousness rejection. 

                All page references in the following discussion are for the slip opinion.

                The patent application at issue (no. 10/378,261) (“the ’261 application”) in the Giannelli matter was for a rowing machine.  Initially the examiner rejected all 25 claims, finding them to be anticipated by previously issued patent number 5,997,447 (“the ’447 patent”) entitled “Chest Press Apparatus for Exercising Regions of the Upper Body.” 

               Giannelli amended the claims to add the following limitation” “by a pulling force exerted by a user on the first handle portion in a rowing motion” to try and overcome the rejection.  This time the examiner rejected the application under both anticipation and obviousness grounds and the rejection was made final.   

               Giannelli appealed to the Patent & Trial Appeal Board (“TTAB”) which sided with the examiner.  The Board’s grounds for rejection were based on an obviousness rejection; it did not decide the anticipation issue.  Giannelli at 6.  The TTAB’s opinion is instructive in understanding why the Court of Appeals subsequently reversed the Board’s decision.  In reaching its decision, the Board had characterized the dispositive issue as being whether the chest press machine of the ’447 patent was “ ‘capable of being used by exerting a pulling force on the handles in a rowing motion.’ ”  Our emphasis.  As such, Giannelli’s application simply recited the new intended use (i.e., rowing) for the ’447 patent chest press apparatus, thereby rendering Giannelli’s invention ineligible for patent protection.   Moreover, the TTAB further opined that “even though using the ’447 patent’s invention as a rowing machine “ ‘may not fully achieve the purpose of the ’447 apparatus,’ ” Giannelli had not shown that the chest press apparatus could not be used in such a manner.  

                Upon Giannelli’s appeal to the Federal Circuit, the USPTO contended that “Giannelli did not provide any persuasive argument or evidence to show that the chest press machine described in the ’447 patent could not be used to perform the rowing exercise.”  Giannelli at 6.   Our emphasis.    Giannelli argued that the TTAB incorrectly asserted that the chest press machine disclosed in the ’447 patent could be used as a rowing machine rather than considering how it actually could be used.   Giannelli at 6.

                In siding with Giannelli, the Court emphasized that the USPTO bears the initial burden of showing a prima facia case of obviousness.  Only when the USPTO establishes a prima facia case of obviousness does the burden shift to the applicant to provide evidence and/or argument supporting patentability.  Giannelli at 7.

                The Court’s analysis is a reminder just how important a written description can be in understanding the meaning of words used within a claim to either defeat that claim or to find that the claim is acceptable.  For example, the claims of the ’261 application required a “first handle portion adapted to be moved position to a second position by a pulling force . . .in a rowing motion.”  Giannelli at 7.  The examiner had interpreted the phrase ‘adapted to’ to mean “capable of.”  The Court noted, however, that in its jurisprudence it had found that the phrase “adapted to’ is frequently used to mean ‘made to,’ ‘designed to,” or ‘configured to.’  Giannelli at 7 citing Apex Eyewear, Inc. v. Marchon Eyewear, Inc. 672 F.3d 1335, 1349 (Fed. Cir. 2012).   Id.

                In reviewing the written description, the Giannelli Court found that the claimed invention is “designed or constructed to be used as a rowing machine whereby a pulling force is exerted on the handles.”  That is, the written description clearly provided support for the narrower meaning of the phrase  ‘adapted to.’   Therefore, what the Board should have determined was whether the apparatus  described in the ’447 patent was ‘made to,’ ‘designed to,’ or ‘configured to,’ to allow the user to perform a rowing exercise by pulling on the handles as claimed in the application.  In particular, the “location of the handles relative to the other components is one of their structural attributes that enables performance of a rowing motion against the machine’s selected resistance.”  Giannelli at 8.

              Relying on the ’447 patent’s own written description, the Court further emphasized that the ’447 patent “does not have handles that are adapted to be pulled in a rowing motion.”   The TTAB’s opinion had stated that the applicant was using the ’447 as a rowing machine with a new intended use.  In reaching its decision, the TTAB had “deemed it reasonable that a user could face the handles of the prior art chest press machine and exert a pulling force on its handles in a rowing motion.”  Giannelli at 5.  

              Yet, the written description for the ’447 patent described the chest press’s structure as allowing a very specific movement to both provide outward pushing motion while maintaining proper biomechanical alignment of the user’s joints.  It is the position of the machine and handles that allowed the user to maintain proper alignment of the joints, including the wrists according to the ’447 patent’s written description.   Giannelli at 8.

               The Court found the Board’s position untenable because “[i]n the context of the claimed rowing machine, the mere capability of pulling on handles is not the inquiry the Board should have made.”  The proper analysis was whether it would have been obvious to modify the prior art apparatus described in the ’447 patent to contain handles “adapted” to perform the rowing motion by pulling on them.  Giannelli at 8.   As such, the examiner had failed to met his initial burden of establishing a case of prima facia obviousness.

              The Court’s decision further included some “common sense” comments about the difference between a rowing machine type of exercise equipment as described in the the ’261 application versus a chest press piece of equipment as described in the ’447.  As the court said, “a chest press machine is not a rowing machine, nor has evidence been shown that it is.”  As the Court succinctly stated, “[p]hysical capability alone does not render obvious that which is contradicted . . .[A]nyone who has used exercise equipment machines knows that a sure-fire way to cause injury is to use a machine in a manner not intended by the manufacturer.”   Giannelli at 9. 

                In closing, it is important to emphasize that the examiner’s rejection contained no explanation why or how a person having ordinary skill in the art would modify a bench press to arrive at the apparatus described in the application.   The Court’s opinion is instructive because it emphasizes that conclusory statements about obviousness without more do not meet the USPTO’s initial burden of establishing a case of prima facia obviousness.  Saying something is so does not make it so.  

                Perhaps even more importantly, the opinion emphasizes the important role that the written description can play in overcoming a rejection of the claims.   Here the applicant prevailed because the patent application’s written description allowed the Court to establish the “true” meaning of the phrase ‘adapted to’ in the context of the rowing machine’s handle structure for use in performing a rowing motion against a selected resistance.  

                We note that the Court decision was based on pre-AIA § 103(a) since the application had been filed before March 16, 2013.   Although the AIA (America Invents Act) has changed the timing of the obviousness determination from “the subject matter as a whole that would have been obvious at the time the invention was made to a person having a ordinary skill” to the “obvious at the time the application was filed,” the USPTO still has the burden of proving a prima facia case for obviousness under the AIA for all applications filed since March 16, 2013.

THE FOREGOING IS NOT LEGAL ADVICE NOR SHOULD YOU CONSIDER IT IS SUCH.  IT IS FOR INFORMATIONAL PURPOSES ONLY.   IF YOU ARE CONTEMPLATING AN ACTION THAT HAS POTENTIAL LEGAL  CONSEQUENCES, YOU SHOULD CONSIDER CONSULTING WITH AN ATTORNEY OF YOUR CHOOSING.

© 2014 by Troy & Schwartz, LLC.  All rights reserved.

              Patent licensing agreements are often critical to the financial success of the patent owner (licensor).   Such agreements are generally lengthy and subject to extensive negotiation between the parties.   After all of the blood, sweat, and tears that went into just obtaining the patent, a patent licensor may think that any resulting patent licensing agreement is merely icing on the cake. 

             Yet a recent order on cross motions for summary judgment out of the U.S. District Court for the Northern District of California serves as a reminder that patent licensing agreements are the subject of complex contract law principles.  Thus where a patent licensing agreement is ambiguous and unclear, the courts may well rely on the infamous parole evidence rule every first year law student hears about in contracts class, but often doesn’t fully understand, to try and establish what the parties to the licensing agreement really intended.   The result may lead to unexpected surprises for either party to the licensing agreement as the resulting order shows.

           In Lotes Co., LTD. v. Hon Hai Precision Industry, Co., Ltd., et al., (N.D. Cal. 2012) the parties had previously entered into a patent licensing agreement (PLA) as part of a litigation settlement agreement involving Hon Hai’s patents.  The parties ended up in court again when the parties disputed whether the Settlement and PLA agreements had been followed and/or whether Lotes was infringing on several of Hon Hai’s patents.  The order is instructive because it discusses contract law principles in the context of patent licensing agreements and emphasizes the need for careful, unambiguous wording within the licensing agreement.  For organizational purposes, this blog is divided into the following three(3)  parts:

1. Federal Law Issue:  Is the Licensee Estopped from Challenging the Validity of the Licensed Patents ?
2. State Law Issues:   What Was the Intent of the Parties Regarding the Scope of the Covered Patents and the Burden of Proof in any Infringement Action?
3. Suggestions for Drafting Patent Licensing Agreements In General

 I.   Federal Law Issue:  Is the Licensee (Lotes) Estopped from Challenging the Validity of the Licensed Patents?

           Generally contracts are interpreted according to state law, but here the contract at issue involved the enforcement of patent rights.  The threshold issue for the Lotes Court was whether the PLA’s licensee had the right to contest the validity of the licensor’s patents under the PLA.   The PLA contained the following provision:

 Agreement Not to Challenge:  In return for the benefits under this Agreement and License Agreement, Lotes agrees that it will not directly or indirectly challenge, now or in a future proceeding regarding the Licensed Products, Hon Hai’s ownership or the validity or enforceability of the Licensed Products that are the subject of this Agreement.

 Lotes at 4.

             Licensee Lotes contended that the holding in Lear, Inc. v. Adkins, 395 U.S. 653, 670-671 (1969) supported its position that the foregoing waiver position was unenforceable.  In Lear, the U.S. Supreme Court eliminated the doctrine of “licensee estoppel” as it applied to licensing agreements, thereby allowing the licensee of a patent to challenge the validity of the licensed patent that is the subject of the license agreement.  In reaching its conclusion, the High Court cited the “ ‘ important public interest in permitting full and free competition in the use of ideas.’ ”  Lotes quoting Lear at 670-71.   Lotes should therefore be allowed to contest the validity of Hon Hai’s patents despite the waiver provision in the PLA. 

             The Lotes Court disagreed and distinguished the licensing agreement in Lear from the PLA by noting that the Lotes-Hon Hai Agreement was the result of a litigation settlement agreement.  It was not a licensing agreement originally contemplated between two (at the time) non-adversarial parties to promote commercialization and/or distribution of a patented product by the licensee.   Under such circumstances, Federal Circuit precedent governed and “ ’ [t]he Federal Circuit has clearly held that where there is a clear and unambiguous waiver of future challenges to the validity of a patent in settlement agreement, an accused infringer is contractually estopped from challenging the validity of the patent in any subsequent proceeding.’ “  Lotes Court citing Flex-Foot, Inc. v. CRP, INC., 238 F.3d 1362, 1370  (Fed. Cir. 2001).  Moreover, the licensing agreement at issue in Lear   “ ‘did not contain and was not accompanied by any promise by the licensee not to challenge the validity of the patent. ’ ” Lotes at 4 quoting Flex-Foot at 1368. 

             To further justify its position that the waiver provision was enforceable, the Lotes court opined that whether or not the Federal Circuit had too narrowly construed the Lear decision was of no consequence because the Federal Circuit’s precedent is binding on district courts absent any intervening Supreme Court decision that undermines existing precedent.  Lotes at 5 citing U.S. v. Mandel, 914 F.2d 1215, 1220-1221 (9th Cir. 1990).   Accordingly, the licensee (Lotes) could not challenge the validity of the patents at issue in the PLA because under Federal Circuit precedent, the clear and unambiguous covenant not to contest the validity of the patents was enforceable.   In Flex-Foot, the Federal Circuit had also stated that upholding licensing agreements entered into as the result of litigation settlement  “ ‘implicates the important policy of enforcing settlement agreements and res judicata. ’ ” Lotes at 4 quoting Flex-Foot at 1368.

 II.  State Law Issues:   What Was the Intent of the Parties Regarding the Scope of the Covered Patents and the Burden of Proof in any Infringement Action?

             Here’s where the case gets interesting from a contract law perspective.    The scope of the PLA, as it related to the licensed products covered by the PLA, was ambiguous because it was not clear whether the PLA was applying to product categories or product numbers.  Due to the wording of several key provisions of the PLA, different conclusions could be reached as to whether the licensed products were to be defined by product category or product number.   A product number definition would narrow the scope of the licensing agreement and was favored by Lotes while the broader product category definition was favored by Hon Hai.  Why?  A product category may have many associated product numbers as was evidently the case here.  If the contract did not list every associated product number with the product category but only certain product numbers, the scope of the PLA would be limited to the actual listed product numbers. 

             The poor wording of the PLA rendered it ambiguous as to the scope of the “patent-licensing” coverage.  Lotes argued that the PLA was intended to apply only to certain product numbers (narrow construction) while Hon Hai argued the parties had intended for the PLA to cover product categories.  

             Under state law, in this case California state law, ambiguous contracts will be interpreted by the courts to give effect to the mutual intention of the parties at the time the contract was formed.  Ideally, this intent can be inferred within the four corners of the contract.   Due to the ambiguous provisions governing the scope of the contract, the Lotes Court allowed the introduction of extrinsic evidence (parol evidence) to prove what the parties intended at the time of agreement.  The submitted evidence by the parties included communications between the parties discussing the Exhibit to the licensing agreement entitled “Licensed Patents, Licenses Products, and Applicable Royalty Rates.  The Lotes Court sided with Lotes that the parties intended the PLA to apply to actual specified product numbers based on the following two (2) communications between the parties:

1. In one of the communications between the parties discussing the above exhibit to the agreement, Hon Hai had written:  “ ‘If Lotes won’t agree to [listing by the product name instead of product number], we would need its help in listing each product number.’ ”  
2. Also, a draft of the PLA’s Exhibit had contained the following language after the description of the product categories and their respective royalty rates: “ ‘ We need to agree on the list of product that include those accused and exclude those not addressed by this agreement.’ ”

 Lotes at 7-8.

            The Lotes Court interpreted the foregoing communications and PLA draft to establish that the parties had intended PLA’s product scope to be defined by actual, specified  product numbers. 

             Finally, Hon Hai sought summary judgment on the issue of whether the PLA altered the burden of proof and shifted the burden to Lotes, as the licensee, to prove non-infringement.   Ordinarily patent owners who allege infringement bear the burden of proof on infringement.  Under contract law principles, however, and Federal Circuit case law, “ ‘parties are generally free to contract around the legal rules as long as their intent to do so is “clear and unambiguous. ’ ”  Lotes at 8 quoting Flex Foot at 1370. 

             Hon Hai argued that the PLA provision beginning with the words  “ ‘ [i]n the event that the Licensee establishes in accordance…. ’ ” meant that Lotes had the burden of proving non-infringement.   The Lotes Court found this assertion to be without merit because “establish” does not mean prove, but instead means that Hon Hai or a court of competent jurisdiction ultimately agreed with Lotes’ position.  The provision did not meet the clear and unambiguous requirement under Flex Foot for shifting the burden of proof from the patent owner to the alleged infringer.  Lotes at 9.

             The Lotes Court further noted that the parties were sophisticated with sophisticated patent attorneys.  As such, they knew that the patent owner bears the burden of proving infringement in an infringement action.  If they intended to contract around this well-known legal rule, they should have included a clear and unambiguous provision in the contract.  Lotes at 9.

             In summary, Hon Hai, as the patent licensor, prevailed on the issue of the enforceability of the waiver provision so that Lotes could not contest the validity of the patents covered by the PLA.  However, as it turned out, the PLA’s scope turned out to less than what perhaps Hon Hai had envisioned it would be.   Any settlement negotiation generally involves concessions from both sides, but the practitioner needs to ensure that his/her client understands  what exactly those concessions are going to be to arrive at a settlement agreement acceptable to and understood by both parties.

 III.   Suggestions for Drafting Patent Licensing Agreements In General

             The foregoing admonishment by the Lotes Court should serve as a take-home point for the patent licensing practioner:  take the time to get it right. 

             The Lotes decision is instructive because it illustrates the pitfalls that can occur when a patent licensing agreement is not particularly well written.   The order reinforces the importance of using clear and explicit language when drafting licensing agreements.   Also, the licensor should ensure that the licensing agreement being entered into as part of a litigation settlement agreement contains clear and unambiguous covenants not to challenge the validity of the patents.  Although the Supreme Court did eliminate the doctrine of licensee estoppel in Lear, the Federal Circuit has not extended this elimination to the type of licensing agreement at issue in Lotes.  Furthermore, the licensing agreement in Lear did not contain a waiver provision.  

             Moreover, for any patent licensing agreement, care must be taken to carefully define the scope of the licensing agreement.   Product numbers, product descriptions, and associated patents etc. should be clearly specified.  Counsel should carefully review the provided product numbers against existing catalog numbers and even consider including a provision that any change in the product number of a covered product must be communicated to the licensor.  In addition, if the licensing agreement is to cover products sold in different countries under different product numbers, the licensing agreement needs to specify as such.

             The Lotes decision also reminds us that a Court will look to extrinsic evidence to resolve any ambiguity in the contract.  Careful, detailed drafting can help ensure that the court will look only at the language contained within the licensing agreement in determining the intent of the parties.  

             Even negotiation discussions may serve as extrinsic evidence to determine the intent of the parties by the courts as happened in Lotes.  Ideally, at least all critical issues are unequivocally resolved at the negotiation stage so that “problematic” points during the negotiation stage will end up being clearly and explicitly presented in the final licensing agreement.  

 © by Troy & Schwartz, LLC. 

            Disclaimer.  The foregoing information is not legal advice, nor should you consider it as such.    It is for informational purposes only and your reading of this blog does not constitute an attorney-client relationship.  Should you be considering legal action, you should consider consulting with an attorney of your choosing.