Licensee Avoids Royalty Payments by Filing Reexamination

Scott Daniels | September 22, 2010

Under Lear, Inc. v. Adkins, 395 U.S. 653 (1969), a patent licensee is free to challenge the validity of the licensor’s patent.  If the licensee’s challenge is successful, the licensee is not obligated to pay any royalties that accrue under the license, including royalties that accrue from the date of the challenge.  Normally, a licensee makes such a challenge by filing a declaratory judgment action.  The Fifth Circuit Court of Appeals’ ruling in DuVal Wiedmann, LLC v. InfoRocket.com, Inc. last Friday proved that reexamination may be just as effective as declaratory judgment.

In that case, the licensee filed a reexamination request against the licensed patent and refused to pay the annual royalty.  The PTO granted the reexamination, and the licensor sued the licensee for breach of the license agreement. Ultimately, the PTO issued a reexamination certificate, but only after amendment of the all the remaining patent claims.

The Fifth Circuit ruled in the breach of contract action that the licensee, because of the reexamination, owed no royalty to the licensor. The license agreement required the licensee to pay royalties for “Licensed Services” which were defined as services that would, in the absence of a license, infringe the licensed patent.  Accordingly, “unless the amended claims are identical to those in the original patent, their use could not infringe the Licensed Patent and therefore could not constitute Licensed Services,” the Court explained.

The licensor argued that Lear did not apply because the patent emerged from reexamination with amended claims and therefore licensee’s challenge to the patent had been unsuccessful.  The Court wasn’t buying – clearly, the licensee’s reexamination challenge was successful because “the patentee has no right to recover infringement damages for periods prior to the date that the reexamination certificate issued.”

Interestingly, the Court did not elaborately analyze the question of whether amended claims were substantively identical to the original claims.  Instead, it merely cited Laitram v. NEC Corp., 163 F.3d 1342, 1348 (Fed. Cir. 1998) for the proposition that it is “difficult to conceive” how a claim amended to avoid prior art could be substantively identical to an original claim.

After Wiedmann a licensee considering a declaratory judgment challenge to the licensed patent must ask itself whether it might be better served by requesting reexamination.

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