New tactic for licensing negotiations: Sue first, talk later

The U.S. Supreme Court’s January 2007 decision in Medimmune clarifying the power of federal courts to hear patent licensing disputes has already had an immediate and dramatic impact.
In two decisions issued at the end of March, Sandisk v. ST Microelectronics and Teva v. Novartis, the Federal Circuit reversed decades of precedent and has now made it substantially easier for a prospective licensee to gain a tactical advantage by filing a lawsuit rather than negotiating a license.
Because both the patent holder and the prospective licensee now have equal rights to file a patent infringement litigation as part of a licensing negotiation, it is likely that one or the other parties will file a “protective” lawsuit as a negotiation tactic.
In other words, almost all “unsolicited” licensing negotiations will take place in the context of settling an already-filed lawsuit.

The new rule
Under the new rule, a company that receives from a patentee an unsolicited request to take a patent license and pay a royalty can file a lawsuit where the patentee’s assertions give the target the option of either (1) infringing the patent if the patent holder is correct, or (2) abandoning its business plan in fear of the patent.
To be clear, there must be some action or assertion by the patent holder directed to the target and its product to create a basis for court jurisdiction.
For example, if the patent holder merely provides a company with a copy of the patent, and nothing more, that conduct would most likely not be a sufficient basis for a declaratory judgment lawsuit. How much more than the mere act of sending a patent is required to create jurisdiction is not clear.
This change in the law, described by the concurring judge as a “sweeping change,” can turn any run-of-the-mill licensing negotiation into a patent litigation.

Boston, not Marshall, Texas
Under the old law, one of the key incentives a patent owner provided with its request for royalties was an implicit agreement that it would refrain from suing the target if the target engaged in licensing negotiations.
The target did not have a co-equal right to sue the patent holder if it disagreed with the patent holder’s assertions about the applicability of the patent to the target’s product. That imbalance has now been eliminated, giving prospective licensees an important weapon to use in patent licensing negotiations.
Thus, if the patentee makes a charge of infringement, however veiled, the prospective licensee can simply deny the charge and file a lawsuit in a favorable forum. By “suing first, talking second,” the prospective licensee has taken away the patentee’s biggest threat, and can now negotiate with greater confidence.
For companies based in New England, this may mean the difference between having a patent infringement action heard in Boston rather than in Marshall, Texas, the current hotbed for plaintiffs to file patent infringement actions and the second busiest patent court in the U.S., ahead of such well-known patent forums as New York City, Boston, Chicago, San Francisco and Delaware. If the negotiations are successful, the lawsuit can be dismissed without incurring substantial litigation fees.

Patent holders: Sue first, talk later
Patent holders must be mindful that simply sending a licensing offer may result in the target company filing a lawsuit before there are any discussions. Even sending just a copy of the patent might result in a lawsuit.
Although a patent holder may be able to get such a suit dismissed because there is no “current” controversy, it may find itself in an untenable position if it later sues the target in a different district and alleges that there is “now” a controversy.
Patentees should consider the following two options.
First, assuming there is a proper basis, file a plain vanilla patent suit against the target before sending a license offer. If you refrain from serving the lawsuit, you can allow licensing negotiations to bear fruit or fail, while controlling against the prospect of defending a lawsuit on someone else’s terms in an unwelcome forum.
Given the recent (and growing surge) of patent litigation in Marshall, Texas, it appears that many patent holders are already following this tactic in order to preserve the perceived advantage patent holders have in that part of Texas.
Second, you can send the patent to the prospective licensee without any discussion of infringement or licensing, then offer to have continued discussions pursuant to a written contract that requires the parties to keep all communications confidential. The proposal itself to have further discussion must be carefully presented such that it does not give the target grounds to bring a declaratory judgment action.
In addition, the terms of the contract must make clear the “off limits” nature of the expected licensing discussions. Many negotiators believe they can talk candidly about patent issues and avoid the misuse of these admissions by agreeing the discussions are covered by a provision in Rule 408 of the Federal Rules of Evidence.
While that rule does prohibit the use of statements made in licensing negotiations to show liability, it offers no protection against using statements as a basis for declaratory judgment jurisdiction. In other words, any threats, denials or communications made in the heat of negotiations can be the basis for a lawsuit, unless you specifically agree in advance that such statements can not be used for that purpose.

Strategy first, negotiate second
The new, looser standard for filing declaratory judgment actions makes it imperative that companies offering or receiving an unsolicited licensing proposal clearly think out their strategy and statements before any communications are made. Failure to do so can place your company in an unfavorable, or even unwanted, litigation position.
Brian T. Moriarty is a principal with Hamilton, Brook, Smith & Reynolds, P.C. in Concord, Mass. (www.hbsr.com). Brian is an intellectual property litigator with expertise in the areas of biotechnology and pharmaceuticals. He is one of a few registered patent attorneys in the U.S. who also has served as an assistant U.S. Attorney. Brian can be reached at [email protected] or 978.341.0036.