Imagine this: you become aware of a patent that might cover your products, so you reach out to the patentee to secure a license agreement. After negotiating and entering the agreement, you later decide you’d like to pay less or no royalties. So you threaten to file some IPR and PGR petitions, and when that fails to secure more favorable terms, you breach the contract. If you find yourself sued for patent infringement you protest to the court that as the agent of public interest, you must be allowed to simultaneously challenge the validity of the patents not only before that court, but also before the PTAB. On the same grounds. At the same time. This is what at least one licensee is trying, and the Federal Circuit may soon provide guidance on the viability of this double-adjudication-for-the-public-good-tactic.
In mid-2016, MerchSource contacted Dodocase about licensing Dodocase’s US 9,420,075. The parties entered into a license agreement (“MLA”) in October 2016, agreeing amongst other things that (1) MerchSource would license the ’075 patent and any continuation or divisional patents thereof, (2) MerchSource would pay specified royalties, and (3) disputes arising out of the MLA will be governed by the California law and litigated before the courts in San Francisco County or Orange County, CA. Fast-forward to June 2017, MerchSource informs Dodocase that it is unhappy with the MLA because Dodocase was not sufficiently enforcing its patent rights against third parties. A quick review of the now-public MLA shows that Dodocase had no affirmative duty to enforce its patent rights against MerchSource’s competitors. Nonetheless, through various threats including assertions of patent invalidity, MerchSource breached the MLA. Dodocase then filed suit in the Northern District of California.
While perhaps not up to Eagle Scout standards, the facts up to this point are not too surprising, especially post-MedImmune. But then things get more interesting. On December 22, 2017, MerchSource moved for an extension of time to answer the complaint, citing the holidays and counsels’ need to further investigate the claims. The Court granted an extension to February 2. But it appears that the time what not spent sipping eggnog. Instead, MerchSource used the most wonderful time of the year to threaten Dodocase with the filing of three IPR and PGR petitions. When these stocking stuffers failed to corner Dodocase into settlement, MerchSource filed its petitions with the PTO on January 15. And when MerchSource finally filed its answer in February, it asserted counterclaims of invalidity, incorporating by reference the arguments set forth in its IPR and PGR petitions and nothing more. Dodocase moved for injunctive relief, asking the court to enforce the MLA forum selection clause – after all, MerchSource had agreed to litigate disputes in California – and to order MerchSource to withdraw its petitions at the PTAB.
Surely there is no need to have two different adjudicators in two different forums addressing the very same invalidity arguments. That the AIA included a time bar as well as estoppel provisions strongly suggests that such dual adjudication would be undesirable and probably an absurd waste of resources. The drain on resources only increases when one considers that the Federal Circuit could ultimately hear the appeals from both forums, also an undesirable outcome for our system.
For its part, MerchSource disagrees, arguing in large part that it is acting in the public interest and is shocked, shocked that it should be limited to just one forum.
It appears MerchSource informed the court that it would be “denied its day in court” if MerchSource had to withdraw its PTAB petitions. As you might imagine, the district court, i.e., the only one of the two forums that is an actual court, was perplexed by this argument, patiently having to break the news that a district court is an adequate forum to adjudicate claims of patent validity. But that did not stop MerchSource from arguing to yet another court – the Federal Circuit – that one cannot possibly accept the notion that a district court is a proper place to address a validity challenge.
We are left to wonder what policy could possibly support MerchSource’s position, particularly given its voluntary acceptance of a forum selection clause that, not for nothing, it entered well after AIA post-issuance proceedings came into effect. All that policy should demand is that a party wanting to challenge the validity of patents allegedly covering its products has an adequate and just forum to do so. A ruling disregarding the forum selection clause on public policy grounds in this case could only mean that we have reached a point where we are comfortable saying that double adjudication is good, and that no patent is really valid until it has been blessed in a PTO post-issuance proceeding, regardless of what our district courts have to say. Perhaps that is what MerchSource was alluding to when it argued that the PTO has a strong policy interest in deciding the validity of these patents – apparently a strong interest in second guessing or correcting the decisions of our district courts.
And it seems we must also be willing to believe that private agreements between entities ordering their business must inevitably surrender to allegations of the public interest in rooting out “weak” patents, but only if invalidity is decided at the PTAB. As MerchSource put it: “Private contractual provisions must yield to the significant public interest in the patent system and ensuring valid patents.” Just not in our Article III courts, apparently.
It also is notable that MerchSource is arguing that public policy would be undermined if patent owners “could so easily circumvent PTO review of patents through a forum selection clause.” Let’s remember, MerchSource sought this license, not Dodocase. Other unrelated entities are still free to challenge Dodocase’s patents at the PTAB if they see fit. The only party who shouldn’t be allowed to do so is MerchSource, who in seeking a business arrangement with Dodocase negotiated for certain benefits while surrendering certain rights.
While the district court sided with Dodocase, the Federal Circuit has stayed the district court’s injunction, ordering expedited briefing. Presumably the stay was granted out of an abundance of caution given the tight timelines of the district court’s order. But soon enough we will hear what the appeals court thinks. Let us remember that it was not too long ago that defendants were shouting from the rooftops about the harms of forum shopping. This case squarely presents not only the opportunity to decide whether we countenance infringer forum shopping, but whether we endorse the PTAB as the superior forum.
To read the documents see:
Dodocase VR, Inc. v. MerchSource, LLC et al., No. 17cv7088 (N.D. Cal.)
MerchSource, LLC v. Dodocase VR, Inc., No. 2018-1724 (Fed. Cir.)