Implementing strategies to identify and protect intellectual property is a crucial but sometimes underemphasized part of the overall research, development and manufacturing process. Before introducing new products and processes to market, manufacturers should implement internal intellectual property protocols to ensure their development efforts benefit from the protections available under the U.S. patent system and to confirm their products and processes are insulated from legal attacks by competitors and other patent holders.
As intellectual property law evolves, so do the best practices for identifying and protecting intellectual property issues and assets. Accordingly, manufacturers should continually reevaluate and update their intellectual property strategies. Here we discuss two cases from the U.S. Supreme Court in the last term that should be considered when implementing or updating intellectual property strategies: Kimble v. Marvel Entertainment, LLC and Commil USA LLC v. Cisco Systems Inc. A deeper understanding of the practical implications of these decisions can enhance how businesses approach product development and manufacturing.
No Royalties for Use of Expired Patents
In Kimble v. Marvel Entertainment, LLC, the U.S. Supreme Court upheld a rule barring the collection of patent royalties beyond the expiration date of the underlying patent. In the case, Stephen Kimble obtained a patent covering a Spider-Man toy and sued Marvel for patent infringement for marketing a similar toy. During the litigation, the parties negotiated a settlement and license agreement, and Marvel agreed to purchase Kimble’s patent and know-how for an upfront payment plus an ongoing royalty.
The hybrid agreement was ambiguous as to the terms of the royalty obligation and contained no expiration date, no time limit on Marvel’s obligation to pay the royalty, and no reduction of royalty rate after the expiration of Kimble’s patent.
When the underlying patent expired, Marvel ceased paying royalties, and Kimble filed a lawsuit for breach of the settlement agreement. The court ruled in favor of Marvel and confirmed the bar on post-expiration patent royalties. Accordingly, license agreements that require royalty payments for use of patented technology are unenforceable beyond the expiration date of the underlying patent.
In light of this decision, manufacturers that have already entered into royalty-based patent license agreements should conduct an audit of the agreements to determine when the relevant patents expire. If any licensed patent expires before termination of a royalty obligation, the parties to the contract should consider amending or renegotiating the contract to avoid post-expiration royalties in contravention of the Kimble decision.
For new patent licensing agreements, contracting parties should endeavor to make clear that any post-expiration royalty payment is not tied to post-expiration use of the underlying patent. The U.S. Supreme Court identified several ways to structure patent license agreements to allow for payments following expiration of a patent. For example, businesses can defer payments for pre-expiration use of a patent into the post-expiration period. Alternatively, the parties can opt for a hybrid agreement granting patent and non-patent rights with a layered royalty plan that reduces the royalty rate upon patent expiration and explicitly ties the post-expiration royalty to the non-patent rights. In other words, if the parties to a patent license agreement want royalty payments to continue beyond patent expiration, they should carefully and creatively draft licensing agreements to make clear the post-expiration royalty is tied to something other than post-expiration use of the underlying patent.
Induced Patent Infringement More Difficult to Defend
Under U.S. patent law, any manufacturer who actively induces infringement of a patent is liable as an infringer. For example, a manufacturer who does not directly infringe a patent can still be found liable if the manufacturer induces another to directly infringe, or sells a product with instructions about an infringing use. A successful claim of induced infringement requires direct infringement and knowledge by the alleged inducer of both the patent and the direct infringement. The Commil decision addresses the knowledge requirement.
In Commil USA LLC v. Cisco Systems Inc., Commil sued Cisco alleging that Cisco’s manufacture and sale of networking equipment induced customers to infringe Commil’s patent covering a method of implementing short-range wireless networks.
Cisco argued that it lacked the required intent to induce infringement because Cisco believed in good faith that Commil’s patent was invalid. The jury returned a verdict for Commil on induced infringement and awarded $63.7 million in damages.
On appeal, the Supreme Court clarified two issues related to the knowledge requirement of induced infringement: (1) induced infringement requires not only knowledge of the asserted patent but also knowledge that the induced acts constitute infringement of the asserted patent; and (2) a good-faith belief that the asserted patent is invalid is not a defense to induced infringement.
The decision makes it more difficult to defend against induced infringement by eliminating a possible defense to the knowledge requirement. Accused infringers cannot rely on a sincere belief that a patent is invalid to insulate against a claim of inducing others to infringe a patent.
The Commil decision, however, does not alter the importance of obtaining advice of counsel regarding patent infringement and validity. A legal opinion letter concluding that a particular product does not infringe a patent remains a viable option to negate the knowledge requirement for induced patent infringement. Advice of counsel that a patent is invalid may not negate the knowledge requirement for induced patent infringement but provides useful ammunition to avoid the treble damages (directing a judge to triple the amount of monetary damages awarded by the jury) associated with a successful willful infringement claim. Consequently, obtaining legal advice on whether manufactured goods infringe valid and enforceable patents remains critically important to avoiding direct and secondary liability in patent infringement disputes and should be an integral part of the research, development, and manufacturing process for new products and processes.
Manufacturers that reevaluate their intellectual property strategies to account for these recent developments in intellectual property law will minimize exposure to patent infringement litigation and maximize the effectiveness of patent licensing agreements.
R. Gregory Parker and Alison K. Grippo are attorneys in the Nashville, Tenn. office of Bass, Berry & Sims PLC. Parker is a patent attorney who counsels global business innovators in the procurement and enforcement of intellectual property rights. He can be reached at [email protected] or (615) 742-7788. Grippo represents clients in intellectual property disputes related to patent, trademark, copyright, data security and other related issues. She can be reached at [email protected] or (615) 742-7836.