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Patent licensing: For enforcing companies, the rules have changed

Many patent owners enforce their patent rights against potential infringers by licensing the patent rather than going to court to stop the infringing activity. Thanks to a recent Federal Circuit Court ruling, that could become an expensive practice.

Typically, the patent owner would do this by sending out a carefully worded letter asking that a party agree to pay for a license and then negotiating the terms. These unsolicited licensing proposals carried little risk of triggering unwanted litigation about whether the patent was infringed or invalid.

This was because the Federal Circuit, the court that hears appeals in patent cases, had decided a long line of cases to the effect that a party receiving an unsolicited demand for a paid license had to have a “reasonable apprehension” of being sued to file its own court action.

The result was that a patent owner could both demand licenses and effectively restrict challenges to its patents through carefully worded letters and communications.

That is no longer true after Sandisk v. ST Microelectronics, where the Federal Circuit recognized that the U.S. Supreme Court had recently rejected its “reasonable apprehension” test. While the exact contours of the law remain unclear, it would appear that under the new standard any demand that a party pay for a license is sufficient to allow that party to file suit seeking a declaration that it does not infringe or that the patent is invalid.
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In other words, it is now easier for prospective licensees to file a lawsuit in the forum of their choice rather than negotiate a license.

20 letters, 20 lawsuits

A patentee risks 20 lawsuits if it sends letters to 20 different parties asking that they pay for a license. Any run of the mill negotiation over a patent license can now turn into litigation.

As a result, patentees must change their tactics when approaching a potential “target” for licensing the patent. While tactics will differ based the facts of the case, two general strategies patentees should consider are as follows:

• Enter into a confidentiality agreement with the target that nothing either side says during the negotiation will be used as the basis for a lawsuit. This can be accomplished by sending the patent to the prospective licensee, without any discussion of infringement or licensing, and then offering to have continued discussions pursuant to the terms of a written agreement that any communications remain confidential.

Patentees should be aware that while the rules of evidence prohibit using statements made during licensing negotiations to prove liability in a subsequent lawsuit, no evidentiary rule bars using such statements to establish jurisdiction for filing suit. Put otherwise, unless the parties agree in advance that anything said during licensing negotiations cannot be used as the basis for a lawsuit, any statements and assertions a patentee makes during negotiations can be used for that purpose.

• If there is a proper basis for so doing, file a lawsuit before sending out the letter and negotiating a license. As a general rule, a plaintiff has 120 days to serve the lawsuit after filing; thus, if you refrain from serving the complaint, you have 120 days to allow the licensing negotiations to either succeed or fail. The benefit of this approach is that the patentee, not the prospective licensee, controls the forum for any litigation. It has the further benefit of demonstrating that you are serious about licensing and willing to enforce your patent.

Litigation trap

Recent changes in the law demand that patentees making unsolicited licensing proposals change tactics and plan their strategy before sending out demand letters and making statements. A company or person that fails to consider these issues risks finding itself in unwanted and expensive litigation.

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Charles Crueger is a partner in the Milwaukee office of Michael Best & Friedrich. His primary areas of practice are intellectual property litigation (focusing on patent litigation) and business litigation. He has also worked as a special prosecutor and has handled criminal appeals for indigent defendants before the Seventh Circuit, and was a trial attorney with the United States Department of Justice in Washington, D.C.

Comments

J. Matthew Buchanan responded 6 years ago: #1

Charles -

Thanks for this great note about the SanDisk case. Anyone wondering about or doubting the practical effect of the decision should read Judge Bryson's concurring opinion. He states it fairly plainly: “The rule adopted by the court in this case will effect a sweeping change in our law regarding declaratory judgment jurisdiction.”

Most patent attorneys have spent years carefully refining their pre-license (and pre-lawsuit) communications to avoid tripping the 'reasonable apprehension of suit' wire. Now, all of these communications should be carefully reviewed in light of SanDisk, and particularly in light of Judge Bryson's thoughts on the practical effect of the decision.

Great article!

Chane Smith responded 4 years ago: #2

A patent grants its owner the right to exclude others from practicing the patented invention, and it does not give the patent owner the right to practice the patented invention. Licenses should be understood in this context. Patent Licensing

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