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The Validity of a Patent License Contract after the Claims of the Licensed Patents are Found to be Partially Invalid
How would the validity of a patent license contract be affected if the licensed patents or claims are partially revoked or substantially restricted, after the execution of the patent license contract? For example, could the licensee refuse to pay the royalties or request a reduction in royalties? Could the licensee terminate the license contract? The Supreme Court's 107-Tai-Shun-Zi No. 755 Judgement made on August 8th, 2018 may be used as a reference.
In this case, the patentee and the licensee signed a patent license contract (hereinafter referred to as the “Contract”) for the USA Patents A, B and C (hereinafter referred to collectively as the “Patents in dispute”), which granted the licensee the right to “manufacture, use, import, offer for sale, sell, lease or dispose (distribute) the licensed products by any other means.” The “licensed products” refer to those “including, but not limited to, all the products distributed under the brand of the licensee itself or its customers, and any product with the brand of the licensee itself or its customers that would infringe upon at least one claim of the licensed patent,” as stated in the annex to the Contract. The licensee shall periodically submit sales reports on the sales information of the licensed products, and pay royalties. The Contract also stipulates for the invalidation of the claims, that is, should “all the claims of the licensed patent be substantially restricted or invalidated” as provided in Article 4 of the Contract, the licensee would be entitled to be exempted from all the obligations under the Contract.
The patentee filed a lawsuit, claiming that the licensee did not pay the royalties or deliver the sales report, and have failed to perform such obligations within the period notified. Therefore, the patentee terminated the Contract and filed a lawsuit to require the licensee to submit the sales record and pay the royalties for the period prior to the termination. The licensee contended that “payment of royalties by the licensee” and that the “patentee guarantees that each Patent in dispute is valid and exercisable” should constitute the performance and counter-performance under the Contract, and the technology licensed by the patentee should be that used in the licensed product. However, after the execution of the Contract, partial claims of Patent A was revoked by the United States Patent and Trademark Office (USPTO), with only Claims 5 and 7 remaining valid, and the restrictive construction of the scopes of Patent B and Patent C were made by the United States District Court for the Central District of California (C.D. Cal). After the removal of the foregoing defects, all of the remaining claims of the Patents in dispute were of no interest to the licensee, and the remaining claims were not used in the disputed product. Therefore, the licensee, in accordance with Articles 226 and 256 of the Civil Code, rescinded the Contract, and refused the performance of the license of the remaining parts, and claimed compensation for the injury arising from complete non-performance.
On the basis of the following reasons, the judgment of the second instance of the Intellectual Property Court (104-Min-Chun-Shun-Zi No. 20, dated April 28th, 2016, hereinafter referred to as "the second-instance judgment"), upheld the first instance decision that demanded the licensee to submit the relevant sales record, but reduced the amount of royalties payable by the licensee:
• The license scope of the Contract shall be construed as that any licensed product of the licensee shall be in the license scope of the Contract if such licensed product falls into any claim of the Patents in dispute. As Patent A still has the remaining Claims 5 and 7, and Patents B and C have not been invalidated, this case does not fall into the situation of “all the claims of the licensed patents are substantively restricted or invalidated” as provided in Article 4 of the Contract. The licensee has no right to be exempted from all contractual obligations.
• In the event that the remaining claims of the Patents in dispute are still valid, although the disputed products of the licensee did not use the remaining claims of the Patents in dispute, it was the licensee's choice not to use the usable valid claims of the Patents in dispute, and the licensee may not claim that it was of no interest to the licensee on such grounds. Therefore, the licensee shall not rely on Articles 226 and 256 of the Civil Code in this case.
• As for the amount of the royalties, the second-instance judgment held that the licensee may not be exempted from all the payment obligations in accordance with the provisions of Article 4 of the Contract. However, after the execution of the Contract, the claims of Patent A were partially invalidated, which was a change of circumstances that could not be predicted by the licensee at the time of execution. Therefore, it would be unfair to perform the Contract according to its original effect. The licensee shall be allowed to request a reduction of the payment of the royalties according to Article 227-2 of the Civil Code.
Both parties refused to accept the second-instance judgment, so they appealed to the Supreme Court respectively. Upon consideration of the case, the Supreme Court held that the second-instance judgment had the following violations in the "payment of royalties" part. Therefore, it reversed said part and remanded the case to the Intellectual Property Court. As for the part where the patentee requested the licensee to submit their sales record, the Supreme Court considered that the second-instance judgment was of no error, and therefore rejected the licensee's appeal against such part:
• Since the second-instance judgement has determined that the disputed products did not use the remaining claims of the Patents in dispute, the disputed product seemed not to be in the scope of “licensed products” under the Contract. The second-instance judgment, which held that the royalties of the disputed product should be calculated by the sales amount, and constituted an unfavorable judgment to the licensee, shall be considered illegal.
• Furthermore, according to Article 4 of the Contract, if all claims of the Patents in dispute are substantially restricted or invalidated, the licensee shall be entitled to exemption from all the obligations of the Contract. Apparently, the licensee has considered the situation of invalidation of any claim of the Patents in dispute. In other words, this case does not exceed the assessed risk under the original effect of the Contract, which is bearable by both parties, and therefore, it shall not be considered as a change of circumstances. It is illegal for the second-instance judgment to reduce the payable royalties in accordance with Article 227-2 of the Civil Code.
In this case, it can be found that before the execution of a patent license contract, the parties should consider how to clearly and specifically define the scope of the license. The dispute under this case lies in that the Contract linked the licensed product (scope of license) with "infringement of at least one claim of the licensed patents," as when the claims of the patent are partially invalidated, the licensed product (scope of license) may change accordingly, and therefore cause confusion. In addition, when claims of the patent are partially invalidated, whether and how the royalties shall be adjusted may also be agreed upon in advance, in the patent license contract. If there is no agreement for this, it may go back to the relevant provisions of the applicable law (e.g. the provisions regarding warranty of defects in right, or partial impossibility of performance in the Taiwan Civil Code, etc.), which increase the uncertainty in the application of the contract.