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New "Hair Trigger" Can Turn Licensing Negotiations into Litigation

May 2007

By: Brian T. Moriarty

Hamilton Brook Smith Reynolds Alert

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. This week, in Sandisk v. ST Microelectronics, 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 of this fundamental change, the tactics used to make or respond to unsolicited licensing offers will now change.

The New Rule

Under the new rule, a company that receives an unsolicited request to take a patent license can bring a lawsuit against the patentee where the company is left with option of either: 1) potentially infringing the patent, or 2) abandoning its business plan in fear of the patent. 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.

An Offer You Can Refuse

One of the key incentives a patent owner provides with its request for royalties is an implicit agreement that it will refrain from suing the target if the target engages in licensing negotiations. Under the old rule, the target did not have a coequal right. 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 bring 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. If the negotiations are successful, the lawsuit can be dismissed without incurring substantial litigation fees.

New Tactics for Patent Holders

Patent owners must be mindful that simply sending a licensing offer may result in the target company filing a lawsuit before there are any discussions. Patentees should consider the following options.

  • Assuming there is a proper basis, file a “plain vanilla” patent suit against thetarget 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.
  • Send the patent to the prospective licensee, but without any discussion of infringement or licensing and then offer to have continued discussions pursuant to a written contract that requires the parties to keep all communications confidential. Many negotiators believe they can talk candidly about patent issues and avoid the misuse of any admissions by agreeing that the discussions are “settlement discussions” protected by a provision of the Federal Rules of Evidence, Rule 408. While that rule does prohibit the use of statements made in licensing negotiations to show liability, that rule offers no protection against using statements as a basis for declaratory judgment jurisdiction. In other words, any threats or denials made in the heat of negotiations can be the basis for a lawsuit unless the parties specifically agree in advance that such statements cannot be used for that purpose.
  • Avoid making direct threats or direct denials regarding infringement or patent invalidity. Although candor has its place, a little caginess can go a long way.

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.

Hamilton Brook Smith Reynolds assists clients with licensing transaction strategy and negotiations. And, when disputes arise, our intellectual property litigation group offers solutions for protecting our clients’ valuable innovations.