Patent License, Signed prior to Litigation, Cannot Prohibit Challenge of Patent Validity

The Second Circuit said, RATES TECHNOLOGY INC v. SPEAKEASY INC and others,  Tuesday that patent licensing agreements reached before litigation cannot be used to bar a licensee from later challenging the validity of a patent, even if the deal is called a legal settlement.  The court held that such an agreement, signed after accusations of infringement but before litigation, is void for public policy reasons under the Supreme Court’s decision in Lear, Inc. v. Adkins, 395 U.S. 653 (1969).

Rates Technology Inc. (RTI) notified Speakeasy that it believed Speakeasy was infringing its patents and offered to release Speakeasy from liability in exchange for a one-time payment.  It used a standard tiered pricing structure based on the size of the accused infringer measured by its annual sales.  RTI and Speakeasy entered into a Covenant Not to Sue, with a one-time payment of $475,000.  In addition to acknowledging the validity of the patents in question, and agreeing not to challenge their validity, the Convenant also included a liquidated damages clause, which said that Speakeasy would pay $12M if they assisted in any such challenge.

Subsequently, Speakeasy, then owned by Best Buy, was somehow affiliated with Covad.  When RTI asked Covad to license those same patents, Covad filed a Declaratory Judgment action.  RTI countersued, for violation of the Convenant not to Sue based on an allegation that Speakeasy and Best Buy assisted Covad in filing the DJ action.

The court noted that consent decrees, agreed to after the commencement of litigation, would estop future challenges to a patent’s validity.  Furthermore, they approvingly cite Flex–Foot, Inc. v. CRP in which the Federal Circuit held that a settlement, even without the entry of a consent decree, would likely not violate public policy.

Weighing for not holding the clause enforceable was that “neither side filed a lawsuit, and thus Speakeasy never had the opportunity to conduct discovery regarding the validity of RTI’s patent.”  The court noted that this meant that the defendant did not have a full opportunity to assess the validity of the patent, and there is no evidence that they had a genuine dispute.

As RTI argued, this may lead to more “sham litigation” in which a patent holding company files a lawsuit, prior to allowing a consent decree/settlement agreement, to ensure that its questionable patents’ validity not be challenged.  Given the enormous cost of patent litigation, defendants will have the incentive to settle, with a consent decree, to avoid the costs of litigation.  Whether or not a settlement filed prior to discovery will be sufficient to block later validity challenges remains an open question.





Customer Suggestions and the Law

Customers will often send kudos, complaints, reviews, as well as requests for features and suggestions for improvements to companies.  Many of these messages may simply be an expression of like or dislike, but sometimes customers will send suggestions on how to improve the product, or for future products.  Unfortunately, this can lead to problems if those ideas overlap with the company’s plans.

While ideas as such are not patentable, a creator has some rights to his or her ideas even if they are submitted freely as suggestions.  There is also the risk that the person contacting you has a patent or copyright.  There have been a number of cases where unsolicited manuscripts or emails were used as a basis for a claim of theft of ideas, or challenging ownership of a copyright in a game or movie.  In many of these cases, the companies won, having shown that they separately developed these ideas or that the ideas were quite distinct from the suggestion that was sent.  Unfortunately just having to respond to a complaint is expensive.

In order to protect yourself, and still let your customers feel like they can contact you, I recommend you set up automatic procedures that insulate customer suggestions from your design team.

  • Have a designated contact point, who receives and handles customer contacts, who is not involved in design, or creation.
  • Ask members of the creative teams to keep an inventor’s notebook or similar log of inventive activities, especially new ideas.
  • Keep a log of client contacts, and how they were processed.
  • Automatically respond to any contacts that include suggestions with a form response requesting that the customer return a signed assignment or disclaimer of rights.
  • Do not open attachments, or review suggestions until a signed assignment or disclaimer has been received.

This should make complaints more unlikely, and if any complaints are brought it will help you quickly prove that your processes make the suggested theft impossible.

Instant Messaging Considered Sufficient for Changing Contract Terms

A district court in Florida found in CX Digital v. Smoking Everywhere that a communication via instant messenger between company representatives was sufficient to modify the terms of the contract.

In this case, CX Digital was a referrer who had a contract with Smoking Everywhere to refer a maximum of 200 customers per day to their site, for an agreed-upon payment. In an Instant Messenger communication with the Vice President of Advertising, CX Digital asked about the removal of the limit. The VP agreed stating “No Limit.” This was held by the court to be sufficient to modify the contract terms, and bind Smoking Everywhere to the same per referred client payment for an unlimited number of referrals.

Lesson for in-house folks: Train your people that use IM, and realize that it’s not considered oral communication. And pro-actively, put in your contracts that instant messaging, voicemail, blog posting, or oral communications are insufficient to alter the contract.

h/t: Eric Goldman’s post