“The Federal Circuit found that the forum selection clause of the companies’ licensing agreement did limit the ability to file an AIA challenge, which took place in a different forum.”
If you are a patent owner asserting and licensing your patent, chances are you want to avoid an America Invents Act (AIA) proceeding, whether that proceeding is an Inter Partes Review (IPR), Post Grant Review (PGR) or Covered Business Method Review (CBM). This is separate from any belief about the fairness of the proceedings or about whether you believe your patent would survive; simply because of the added cost, it is likely that you do not want to be involved in one. All that said, the question is whether you can avoid it. The answer to that is “sometimes, yes.” No patent owner can be immune from AIA proceedings in the absolute. You cannot stop all routes of attack on your patent, but there is a chance that you can limit your exposure.
In 2019, one of those routes out of an AIA proceeding was confirmed, albeit with a non-precedential decision (and as will be explained later in possibly, at least partially, a hollow victory), by the Federal Circuit. In Dodocase Vr, Inc. v. MerchSource, LLC, the Federal Circuit addressed whether it is possible through a license to contract away the right to bring an AIA challenge at the U.S. Patent and Trademark Office (USPTO). Case No. 2018-1724. The case had its genesis in 2016, when Dodocase and MerchSource executed a license agreement for three of Dodocase’s patents. These patents broadly covered virtual reality headsets, and MerchSource (d/b/a Sharper Image) is a retailer of various consumer products, including virtual reality headsets. The license agreement included two clauses: a release of challenging the patents and a forum selection clause:
6.4 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.
13.4 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.
Id. at 2-3.
The two companies kept their business relationship for another year, until late 2017, when MerchSource told Dodocase that it would no longer pay royalties. In December 2017, Dodocase sued MerchSource in the Northern District of California to enforce the license agreement and to affirm the validity and infringement of the patents by the products MerchSource was selling. By January 2018, MerchSource had filed two PGRs and an IPR against the three patents covered by the license agreement and subject to the lawsuit. In February 2018, Dodocase responded by amending its Complaint to include accusations that MerchSource’s AIA petitions were an additional breach of the licensee’s forum selection and no challenge clauses.
AIA Trial Successfully Circumvented
Dodocase’s theory was that the forum selection clause prevented AIA challenges because challenging the validity of the patents in that forum was still a dispute arising out of the license agreement. Dodocase also moved for a preliminary injunction to force MerchSource to withdraw the AIA petitions. The District Court granted the preliminary injunction. MerchSource promptly appealed and the injunction was stayed pending the Federal Circuit decision. During that Federal Circuit briefing, all AIA challenges were instituted and proceeded.
In April 2019, the Federal Circuit panel affirmed the District Court’s finding. The Federal Circuit found that the forum selection clause did limit the ability to file an AIA challenge, which took place in a different forum. The Federal Circuit found that the broad “arising out of” language of the forum selection clause included disputes about the validity of the licensed patents. It did so while finding that a prior case, Texas Instruments, which dealt with a choice of law provision with similar language, had a similar result and that the same result should occur in the present case. The Federal Circuit also found that irreparable harm would occur if Dodocase had to defend the validity on two fronts: the district court and PTAB. The Federal Circuit went on to find that equities and public interest also favored an injunction. On the public interest, the Federal Circuit specifically found that the public interest of eliminating invalid patents could be adequately accomplished by a District Court. It thus ordered MerchSource to comply with the injunction and file a request with PTAB to terminate all AIA proceedings. MerchSource requested en banc review, which was denied in July 2019 after multiple amici also weighed in. The amici included multiple companies that were all recipients of patent licenses with allegedly similar clauses that believed the opinion altered their rights.
In the end, MerchSource complied with the injunction and requested termination of the AIA actions. The irony of the Federal Circuit’s decision was that, because it had stayed the injunction, the irreparable harm discussed had already substantially occurred by the time the Federal Circuit issued its decision, so it could not be avoided. For instance, in the IPR, there had already been a Preliminary Response, an institution, full discovery from the challenger and patent owner, a Response, a Reply and a request for oral argument. See PTAB-IPR2018-00494. Despite the advance state of the AIA proceedings, the PTAB did terminate the proceedings without final opinions.
One of the questions moving forward is, if you are a patent owner, how do you avoid the harm that befell Dodocase? How do you avoid substantively having to defend AIA proceedings even after an injunction saying you should not have to (and a possible roadmap laid out for other challengers not subject to a forum selection clause such as potential future licensees)? There is no clear answer. One possible solution would be to make the license more explicit, or try to bargain away any appeal rights, or at least rights to stay pending appeal. However, the enforceability of such clauses would be in question and explicitly putting them in may be a roadblock to completing a deal.
As a licensee, the lesson to be learned is be careful about forum selection or choice of law clauses (and indeed all clauses of a license). If you want to preserve all challenges, perhaps put in a specific clause preserving your AIA challenge rights or exempting those challenges in the case a lawsuit is filed against you. In that case, the question would be what type of lawsuit? Licensees would prefer any lawsuit, but possibly a compromise would be accusations of infringement. That would pose an interesting choice for licensors. Dodocase’s lawsuit was styled as a declaratory judgment against potential breach and for validity, but if Dodocase had waited until an actual breach and only sued for breach even a compromise provision might be impacted.
The answer is a lesson many have learned on both sides. Be careful about all the clauses in license agreements and then carefully consider the claims that arise out of a breach.