shutterstock_309625781The Patent Trial and Appeals Board (“PTAB”) recently ruled in IPR2015-00822 (“the ‘822 IPR”) that contractual estoppel, wherein the petitioner has signed a settlement agreement including a “no challenge” clause, cannot be asserted to preclude the institution of an inter partes review where the potential prejudice to the patent owner does not outweigh the prejudice to the petitioner of losing an opportunity to challenge the claims of a patent before the office.1

The legal landscape of contractual estoppel for license agreements has transformed over the years from enforcing a purely contractual legal agreement to fit federal policy “favoring free competition in ideas which do not merit patent protection.”2

Licensee Estoppel Background

Historically, licensee estoppel was the principle that “the licensee under a patent license agreement could not challenge the validity of the licensed patent in a suit for royalties due under the contract.” This rule was set forth by the Supreme Court in 1950.3 Nearly two decades later, in 1969, the Supreme Court overruled the doctrine of licensee estoppel in favor of the commonly named Lear Doctrine, the principle that a licensee is not estopped from challenging the validity of a licensed patent in response to an infringement or contractual claim.4 The Court in Lear did not, however, discuss whether a licensee had as a matter of right, the ability to unilaterally challenge the validity of a licensed patent while complying with the license agreement. The Federal Circuit in Gen-Probe clarified this matter when it held that a licensee must first breach the license agreement in order to have Article III standing.5 The Federal Circuit noted that this placed the licensee in a position of paying not only royalty fess but also treble damages and attorney fees. The Supreme Court in Medimmune v. Genentech, overruled Gen-Probe.6 The Supreme Court’s holding in Medimmune, which stands today, confirmed that a licensee can challenge the validity of a licensed patent while still fulfilling its contractual duty under a license agreement by paying contractually required royalty fees.

PTAB Decision

In the ‘822 IPR, Dot Hill Systems Corp. (“Dot Hill”) filed a petition requesting institution of an inter partes review of U.S. Patent No. 6,425,035 B2 (“the ‘035 patent”) and requesting joinder with instituted proceeding IPR2014-01197 (“the ‘1197 proceeding”). Dot Hill’s petition presented identical challenges and relied on the same prior art and expert testimony as the ‘1197 proceeding.

Prior to filing the IPR petition, Dot Hill and Crossroads Systems, Inc. (“Crossroads”), the ‘035 patent owner, were parties to multiple district court proceedings involving the ‘035 patent. These proceedings culminated in a settlement agreement that included a “no challenge” clause. The parties agreed in the no challenges clause that Dot Hill would not challenge or participate or aid in challenging the validity of the ‘035 patent unless legally required to do so.7

In its preliminary response, Crossroads argued, inter alia, that Dot Hill was contractually estopped from challenging the validity of the ‘035 patent and the PTAB should thus deny the petition. Dot Hill argued that the PTAB does not have jurisdiction to consider contractual estoppel citing PTAB rulings that determined assignor estoppel does not prevent institution of inter partes review.8 In contrast, Crossroads argued that assignor estoppel is distinguishable and that contractual estoppel is rooted in public interest.

The PTAB noted that PTAB case law concluded that “no explicit [statutory] provision provides for affirmative estoppel-based defenses, such as assignor estoppel, precluding institution of inter partes review.”9 The PTAB thus applied the same statutory analysis in concluding that contractual estoppel does not preclude Dot Hill from challenging the validity of the ‘035 at the patent office.

In deciding to grant Dot Hill’s petition for institution, the PTAB weighed any prejudice to each party. The PTAB noted that Crossroads would not be prejudiced with any extra burden as the ‘0822 IPR would be joined with the ‘1197 proceeding with the same challenges and relying on the same prior art and that Dot Hill would take an “understudy role.” In contrast, the PTAB emphasized that Dot Hill would be prejudiced by losing its opportunity to challenge the validity of claims of the ‘035 patent before the office.

Practical Considerations for Licensors

When drafting a settlement agreement for a pending lawsuit, a licensor can attempt to prevent future validity challenges before the USPTO by including a no challenge clause in the settlement agreement along with consequences that a licensee will face in the event of an unsuccessful validity challenge. For example, a licensor can include a provision in which, should a licensee unsuccessfully challenge the validity of a patent before the USPTO, the licensee’s license could, for example, convert from exclusive to non-exclusive; result in increased royalty rates, result acceleration of milestone payments; and/or payment of attorney fees.

1 Dot Hill Systems Corp. v. Crossroads Systems, Inc., Case IPR2015-00822, slip op. (PTAB Sept 17, 2015) (Paper 18).
2 Lear, Inc. v. Adkins, 395 U.S. 653, 656 (1969) (citations omitted).
3 Automatic Radio Manufacturing Co. v. Hazeltine Research, Inc., 339 U.S. 827, 836 (1950).
4 Lear, at 673-76./span>
5 Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004).
6 Medimmune Inc. v. Genentech, Inc., 549 U.S. 118 (2007).
7 Ex. 2207 AMENDED SETTLEMENT AND LICENSE AGREEMENT, IPR2015-00822 (Paper 72) (“For as long as the License remains in effect, Dot Hill agrees that it will not challenge, participate in any challenge to, or aid any Third Party in challenging the validity or enforceability of any patent in the ‘972 Patent Family, except as required by subpoena, by law, or by any governmental or regulatory authority”).
8 See IPR2015-00822 at 6-7 (citing Redline Detection, LLC v. Star Environtech, Inc., Case IPR2013-00106, slip op. at 4 (PTAB Oct. 1, 2013) (Paper 40); Athena Automation Ltd. v. Husky Injection Molding Sys. Ltd., Case IPR2013-00290, slip op. at 13 (PTAB Oct. 25, 2013) (Paper 18); Palo Alto Networks, Inc. v. Juniper Networks, Inc., Case IPR2013-00369, slip op. at 11-12 (PTAB Dec. 19, 2013) (Paper 16)).
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