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August 2, 2019

Forum Selection Clauses in IP Licensing: New Impact on IP

In a recent, non-precedential decision in Dodocase VR, Inc. v. MerchSource, LLC, 767 F. App’x 930, 935 (Fed. Cir. 2019), the Court of Appeals for the Federal Circuit held that a forum selection clause in a license agreement barred the licensee from pursuing patent office proceedings (e.g., inter partes reviews, post-grant reviews, covered business method proceedings, reexaminations, etc.) challenging the validity of the licensed patents. Dodocase reiterates the principle the Federal Circuit set forth in its Tex. Instruments, Inc. v. Tessera, Inc., 231 F.3d 1325, 1327 (Fed. Cir. 2000) decision. The Dodocase decision underscores the need to carefully analyze and draft forum selection clauses. The use of standard boilerplate language could have unanticipated consequences for licensors and licensees.

Ordinarily, a licensee may challenge the validity of a patent in court or at the patent office through patent office proceedings, including those before the Patent Trial and Appeal Board (PTAB). These patent office proceedings can result in invalidity much faster and less costly than court litigation. Therefore, the opportunity to challenge patents through patent office proceedings is a valuable tool often favored by licensees. On the other side, licensors often implement contractual clauses aiming to prohibit or discourage licensees from pursuing patent office proceedings. In view of the Dodocase decision, licensors can draft forum selection clauses to head off the pursuit of patent office proceedings by licensees, and licensees can draft forum selection clauses to preserve their right to pursue patent office proceedings

Dodocase Decision

In this case, Dodocase BR, Inc. entered into a master license agreement (MLA) with MerchSource, LLC. Under the MLA, Dodocase licensed several patents to MerchSource related to virtual reality headsets.

The MLA included the following no-challenge clause:

MerchSource shall not (a) attempt to challenge the validity or enforceability of the licensed IP or (b), directly or indirectly, knowingly assist any third party in an attempt to challenge the validity or enforceability of the licensed IP except to comply with any court order or subpoena.

The MLA also included the following forum selection clause:

The laws of the state of California shall govern any dispute arising out of or under this agreement, notwithstanding the conflict of laws principles of the state of California . . . THE PARTIES AGREE THAT THE SUBJECT MATTER AND PERSONAL JURISDICTION ARE PROPER IN THE COURTS LOCATED IN SAN FRANCISCO COUNTY OR ORANGE COUNTY, CALIFORNIA, AND THAT DISPUTES SHALL BE LITIGATED BEFORE THE COURTS IN SAN FRANCISCO COUNTY OR ORANGE COUNTY, CALIFORNIA.

After entering into the MLA, MerchSource stopped its royalty payment under the MLA, asserting the patent claims were invalid. In response, Dodocase terminated the MLA and filed a complaint against MerchSource in the Northern District of California, alleging breach of the MLA and patent infringement.

MerchSource then filed petitions with the PTAB, requesting inter partes and post-grant reviews of the patents. Dodocase filed an amended complaint with the district court, alleging MerchSource breached the MLA’s forum selection clause by filing the PTAB petitions. Thereafter, Dodocase filed a motion for a preliminary injunction, requesting that the district court order MerchSource to withdraw the PTAB petitions. The district court granted the motion, and MerchSource appealed to the Federal Circuit.

Notably, although finding that MerchSource breached the forum selection clause, the district court found the no-challenge clause to be unenforceable. The unenforceability of the no-challenge clause follows the established common law of Lear, Inc. v. Adkins, 395 U.S. 653, 89 S. Ct. 1902, 23 L. Ed. 2d 610 (1969), which, as the district court explained, sets forth the US Supreme Court’s principle that “a licensee who repudiates a patent license agreement has the right to challenge the validity of any licensed patent, rendering ‘no-challenge’ clauses unenforceable” (Dodocase VR, Inc. v. MerchSource, LLC, No. 17-cv-07088-EDL, 2018 U.S. Dist. LEXIS 48654, at *12 (N.D. Cal. Mar. 23, 2018)). In further support, the District Court referenced the more recent Medimmune, Inc. v. Genentech, Inc., 549 U.S. 118, 135, 127 S. Ct. 764, 166 L. Ed. 2d 604 (2007) decision, which stated that “. . . the Supreme Court held that a licensee can challenge the validity of a licensed patent without repudiating the contract when it continues to fulfill its contractual duty to pay royalties.

On the appeal regarding the forum selection clause, MerchSource argued the PTAB challenges did not arise out of or under the MLA, and, consequently, the forum selection clause did not apply to the PTAB petitions. In its analysis, the Federal Circuit referred to the Tex. Instruments, 231 F.3d at 1331 decision. In Tex. Instruments, the Federal Circuit pointed out the governing law clause listed “disputes, controversies, claims, or difference[s] which may arise from, under, out of, or in connection with this agreement.” On that basis, the Federal Circuit found the forum selection clause encompassed proceedings at the International Trade Commission (ITC). Applying that precedent to Dodocase, the Federal Circuit held the district court did not err in finding that the forum selection clause in the MLA encompassed the PTAB petitions. In reaching this conclusion, the Federal Circuit relied on the MLA’s language of “arising out of or under this agreement.” Accordingly, the Federal Circuit affirmed the district court’s holding on the preliminary injunction requirement that Dodocase was likely to succeed on its claim that MerchSource violated the MLA by filing the PTAB petitions.

Tool for Licensors

For licensors, Dodocase highlights an additional tool that can reduce the ways licensees can attack the licensed intellectual property. The protection can apply to challenges to patents through the PTAB. This protection could also apply to challenges to trademark registrations through the Trademark Trial and Appeal Board (TTAB). To deter licensees from challenging patents and trademark registrations through PTAB and TTAB proceedings, a forum selection clause should be broadly drafted. For example, depending on the particular circumstances, the clause may provide that:

  • The disputes encompass any controversy, claim, difference, lawsuit, legal action, or administrative, legal, or other proceeding arising from, under, out of, relating to, or in connection with: (i) the agreement and its interpretation or the breach, termination, applicability, or validity of the agreement; (ii) the intellectual property licensed under the agreement; (iii) the products or services that are the subject of the agreement; or (iv) any other dispute arising out of or relating to the parties’ relationship or either party’s property or assets. The governing law for these disputes shall be the laws of a designated state, excluding its conflict-of-law principles.
  • The state and federal courts located in a designated county in the state shall have sole and exclusive jurisdiction over all these disputes.
  • The sole and exclusive venue for these disputes shall be in such designated county.
  • The licensor shall have the right and option to select jurisdiction and venue at the location where any infringement of the licensor’s intellectual property occurs.

Tool for Licensees

In the wake of the Dodocase decision, licensees should pay special attention to the language of forum selection clauses. In particular, licensees should include language that preserves their right to carry out legal proceedings consistent with the principles and public policy of the Lear and Medimmune decisions. The following sets forth an example that depends on the particular circumstances:

"Notwithstanding anything to the contrary in this Agreement, nothing in this Article X shall prohibit or restrict a licensee from petitioning for, initiating, or participating in legal or administrative proceedings (including, without limitation, patent office proceedings, inter partes reviews, post-grant reviews, covered business method proceedings, reexaminations, interferences, oppositions, derivation proceedings, and other proceedings) related to the intellectual property licensed under this Agreement within the jurisdictions, offices, venues, and forums of governmental bodies, agencies, and entities, including, without limitation, the US Patent and Trademark Office, the US Patent Trial and Appeal Board, the US Trademark Trial and Appeal Board, the US International Trade Commission and comparable offices, bodies, boards, and agencies throughout the world.”

The Dodocase decision has key takeaways for drafting and negotiating intellectual property license agreements. Barclay Damon provides counseling, drafting, and negotiation with respect to license agreements, leveraging our in-depth experience in patents, trademarks, intellectual property, and corporate law. The example language provided above is not necessarily suitable for a specific agreement. The language for an actual agreement should be tailored and customized for the particular facts, objectives, and circumstances of the parties.

If you have any questions regarding the content of this alert, please contact Renato Smith, partner, at rsmith@barclaydamon.com or another member of the firm’s Corporate or Branding, Trademarks, & Copyrights Practice Areas.

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