Licensors of intellectual property often desire to protect their intellectual property from validity challenges by their licensees.

Licensors often request that licensees give up their right to challenge certain intellectual property’s validity in exchange for access to that intellectual property. However, a licensor’s ability to prevent such challenges is limited in some areas of law.

Licensee estoppel is the doctrine that if you contract with a patent holder for a license, you are barred from contesting the validity of the patent. Patent law has typically refused to enforce licensee estoppel.

A licensee should not be able to enjoy the benefits of an agreement and attack the validity of the intellectual property that comprises the foundation of the agreement at the same time.

Why Would I Want to Contest the Validity of a Patent That Is Licensed to Me?

In a licensing agreement, you agree to pay an inventor royalties for the right to manufacture and sell their product. Nevertheless, if the patent is not valid, the inventor has no right to prevent others from manufacturing and selling it. You should not have to pay royalties to the person who licensed you the invention if the patent is invalid.

Do Licensees Have the Right to Challenge the IP Rights of a Licensor?

A licensee’s ability to challenge the validity or enforceability of the intellectual property rights licensed to it depends on whether the rights are patents, trademarks, trade secrets, or copyrights, and in some cases, whether the license agreement includes a no-contest provision.

Is it Possible to Challenge the Validity of a Patent at Any Time?

A patent can be challenged at almost any time. In order to avoid paying a lot of money in royalties, you should challenge it as soon as possible.

There are, however, some limitations regarding when you can challenge a patent’s validity, including:

  • Before challenging the validity of a patent, you cannot stop paying royalties and wait for the patent holder to sue you.
  • When you sign a decree admitting the validity of a patent, you generally cannot challenge its validity.

How Do I Challenge the Validity of a Patent?

There are several options available to you if you decide to challenge the validity of the patent licensed to you:

  • If the patent is invalid, you can ask a court for a declaratory judgment.
  • If the patent holder sues you for infringement, you may raise patent invalidity as a defense.
  • The United States Patent & Trademark Office (USPTO) can reexamine the patent if you wish to avoid court action. To challenge the patent’s validity, you will have to submit a sizable fee and evidence of other patents or publications.

Do I Have to Keep Paying Royalties After I Challenge the Validity of the Patent?

While challenging patent validity, you will not be required to pay royalties. You have a variety of options for royalty payments once you challenge the validity of the patent:

  • It may be possible to stop royalty payments entirely.
  • The money can be held in an escrow account that will be refunded to you later if the patent is invalidated.
  • If the patent is declared invalid, you can continue paying royalties and then collect them from the patent holder. You may be protected from a breach of contract lawsuit.

Can I Recover Royalties That I Paid Before I Challenged the Validity of the Patent?

No. If you challenge the validity of the patent, you can only collect the royalties you paid.

In the case, Lear v. Atkins, 395 U.S. 653 (1969), the Supreme Court held that licensee estoppel does not apply to patent licenses.

According to the Court, invalidating improper patents to enable free competition is more important than preventing a licensee from attacking the rights it has been granted. Additionally, the United States Supreme Court permitted a licensee to challenge a patent without terminating or breaching the license in Medimmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007).

Some patent licensors have found ways to discourage licensees from asserting challenges, such as offering a heightened royalty rate, liquidated damages, reimbursement of the licensor’s legal fees, or requiring licensees to notify the licensor in advance so that the licensor can prepare for a challenge.

Trademarks

Courts, along with the Trademark Trial and Appeal Board (“TTAB”), have generally held that licensee estoppel applies to trademark licenses.

TTAB used licensee estoppel to dismiss a licensee’s claim that its licensor had given up its trademark in A & M Wings, Inc., v. Glenn Thompson. If facts arise after a trademark license term expires, the licensee may challenge the trademark’s validity just like any unrelated party.

In the case, Idaho Potato Comm’r v. M&M Produce Farm & Sales, 335 F.3d 130 (2d Cir. 2003), the Second Circuit refused to apply licensee estoppel to certification marks. Certification marks are compulsory licenses that must be granted to anyone meeting the relevant standards, so challenging certification marks is like challenging patents.

Trade Secrets

When a license includes a representation that the licensed matter is a trade secret, licensee estoppel appears not to have been raised and has not been applied. It might be because it is settled law that despite the secret becoming public, a trade secret licensor may continue to collect royalties.

Copyrights

The treatment of copyright licenses has been inconsistent.

After the licensee acknowledged the validity of the copyright but did not expressly agree not to challenge it, the California District Court in Twin Books Corp. v. Walt Disney Co., 877 F.Supp.496 (N.D. Cal. 1995), reversed on other grounds, 83 F.3d 1162 (9th Cir. 1996).

A no-contest clause in the license was enforced by the Seventh Circuit in Saturday Evening Post Co. v. Rumbleseat Press, Inc., 816 F2d 1191 (7th Cir. 1987).

The validity of a trademark license may still be challenged by entities affiliated with the licensee. It is important for a company that grants a trademark license to recognize that only licensees can challenge the validity of a licensed trademark.

Consequently, affiliates of the licensee who are not parties to the license agreement will not be restricted in this way. Licensors should also consider extending licenses to affiliates and related companies in this regard. It is also important that the licensor ensures that those entities are sufficiently bound by the terms of the contract to prevent a validity challenge.

The courts try to balance the public interest against the general policy of enforcing the terms of a contract when determining whether a licensee has the right to challenge IP rights.

Patents, certification marks, and copyrights are not subject to licensee estoppel unless they are licensed with no-challenge clauses. Even then, prospective licensees should look for contract provisions intended to discourage them from challenging the rights they are licensed to use.

Should I Contact a Patent Attorney?

Patent attorneys should definitely be contacted if you have questions about the validity of the patent that was licensed to you or if you are involved in a dispute over the license.

An experienced patent attorney can let you know if you should contest the validity of a patent and offer you guidance through the complicated and ever-changing patent law system. Use LegalMatch to find an expert patent attorney in your area today.