United States: When a Patent License Fails: Looking At and Beyond the Patent Issues

US companies, government agencies, nonprofits, and universities are spending billions of dollars every year on research and development. Those efforts have fostered an enormous growth in intellectual property rights. Patent filings have increased, and the associated know-how for implementing new advances has leapt forward, but not every inventor has the wherewithal or interest to bring new technologies to market. Many universities, nonprofit organizations engaged in pure research, and companies that own rights to non-core technologies prefer to partner with other entities that will be responsible for developing and actually commercializing the technology.

The increase in research and corresponding patent activity means that there has been a similar increase in licensing arrangements. Passage of the Bayh-Dole Act by Congress in 1980 started research universities in the business of patenting and licensing their basic research.¹ The latest reports indicate that they are having incredible success in those endeavors.² Likewise, for many years, the intellectual property community has encouraged its business clients to commercialize and capitalize on technology assets, either by implementing the technology, licensing non-core developments, or pouring intellectual property assets into startup entities commissioned to develop the technology. These efforts have resulted in many agreements, ventures, collaborations, partnerships, and spin-offs. Not all of these ventures will succeed. Even optimists expect some to fail. Anyone familiar with the differing personalities and interests involved in researching versus commercializing will readily understand that failures may be the norm, not the exception. Under these circumstances, it is important to understand the ingredients of the failed technology collaboration and, more importantly, the possible consequences of a failed license arrangement.

The Federal Circuit recently addressed the fallout from a failed collaboration involving a series of patent licenses and technology transfer agreements. In Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corporation,³ the court considered claims by RhonePoulenc Agro (RPA) that DeKalb Genetics Corporation (DeKalb) (1) had fraudulently induced RPA to enter into a 1994 exclusive licensing agreement, (2) had misappropriated RPA’s trade secrets, and (3) had infringed on RPAs patents. The underlying transaction involved a lengthy collaboration between RPA and DeKalb, which focused on developing "Roundup Ready" corn that could survive doses of "Roundup" strong enough to kill surrounding weeds. The collaboration was key to bringing the ultimate product to market in 1998 because "[n]either company appeared to have the technical expertise to perform each other's work."⁴

The relationship started to go downhill in 1994 when DeKalb received the results of successful field experiments with the Roundup Ready corn but did not share those results with RPA. Meanwhile, following successful patent litigation against a third party, DeKalb and RPA renegotiated their licensing arrangement, and DeKalb ended up as the exclusive licensee. Soon after DeKalb introduced the corn to market in 1998, RPA realized that DeKalb must have known of the technology's imminent success. RPA sued, alleging fraud, trade secret misappropriation, and patent infringement, and it sought rescission of the license agreement. The Federal Circuit affirmed a jury verdict awarding RPA $15 million for DeKalb's unjust enrichment, $1 nominal damages, and $50 million in punitive damages, as well as findings of patent validity and infringement.

The key to the fraud claim and, in some respects, the entire case, was DeKalb's failure to share with RPA test results showing successful field trials of Roundup Ready corn. DeKalb had received those results just months before renegotiating the license to obtain exclusive rights. DeKalb's failure to disclose occurred despite many other contacts and collaborations between the parties' scientific personnel. For instance, right after DeKalb's researcher, Dr. Flick, received the test results, he wrote RPA a brief letter asking for permission to use the gene involved in soybeans. When queried as to why he did not tell anyone at RPA about the successful field tests, Flick "responded that it would have required him to write a longer letter."⁵ The Federal Circuit did not find this testimony impressive, wryly observing that "Dr. Flick was evidently not a compelling witness for DeKalb."⁶ In rather stark contrast, the jury heard testimony from RPA personnel that the success of the field trials was not only unknown but also unexpected, which explained why RPA was willing to grant DeKalb exclusive rights during a negotiation that occurred only months after the concealed field trials. Moreover, one of RPAs employees, Dr. DeRose, had a close and friendly relationship with the scientists at DeKalb, who had always previously forwarded relevant information to DeRose without RPAs having to ask.⁷ On the basis of these facts, the jury found fraud, breach of contract, and unjust enrichment and awarded $65 million on those claims.

RPA's case against DeKalb is not the only recent case in which the Federal Circuit has addressed failed relationships surrounding patented technology. Dr. Tronzo's suit against Biomet, Inc., for patent infringement, breach of confidential relationship, fraud, and unjust enrichment was heard on appeal a second time in 2001.⁸ Ultimately, Biomet's waiver of the right to appeal an earlier punitive damages award based on state law claims resulted in Tronzo's receiving a $20 million punitive damages award.

It is not surprising that cases involving failed collaborations are about more than just patent claims. Licensing and technology transactions frequently occur within a web of complex relationships between the parties. In the university context, the inventors' research may have been sponsored in whole or part by the licensee, which may have given grant money, equipment, or just technical support during the development of the technology. The inventor often has worked with the licensee before and after a patent is filed or know-how is developed and transferred. Many times, it is these relationships and the inventor's industry contacts that lead to a licensing deal.⁹ Even outside the university context, it is rare for a company to license the work of an individual inventor. More frequently, companies will license technology to or from a commercial partner, perhaps a supplier or customer. Several large companies have developed business units commissioned to out-license non-core technology. Experience teaches that those efforts are most fruitful when the licensor has some commercial relationship with the licensee.

Whatever the source of the collaboration, it takes hard work to make the arrangement successful for both sides. Pharmaceutical companies, among others that rely on collaborative arrangements to develop new technology, have developed highly sophisticated methods for managing the relationship.¹⁰ Nonetheless, the fact remains that some relationships necessarily will fail.

Indeed, the pressures on a licensing arrangement or broader collaboration are enormous. Universities or foundations that act as licensors are organized for other than purely commercial reasons; by contrast, the typical licensee is a company that is organized to exploit the licensed intellectual property and that is focused heavily on obtaining a substantial return on investment. Too often, however, a licensee may forget that the licensor, even if nominally an entity, really involves a few key persons, such as inventors. An inventor, "[o]ne who finds out or contrives some new thing,"¹¹ is not focused on the same objectives as the typical businessperson. Inventors frequently desire the prestige from being associated with a successful innovation that changes lives.¹² Anyone who works with inventors finds them almost invariably enthusiastic about their developments. Yet they may lack perspective and understanding of the difficulties of commercializing their developments. For instance, many universities encourage their inventors not to invent to reap royalty income, but rather to publish their findings to help achieve the reputation necessary for continued research funding and to attract prime researchers. Royalty income is "nice," but is not the coin of the realm to the researchers seeking prosperity under a publish-or-perish regime.

The business people on the other side of a collaboration and the counsel advising them often forget these truisms. Licensors tend to focus heavily on the economics of the deal; they desire information about the expected market, profitability, resources needed to commercialize, or competition. Rarely are the dealmakers concerned about the inventors' expectations. When the licensee finds that the development process requires more money and effort than contemplated, the licensee's primary focus on the economics and return on investment may result in termination of the license. Alternatively, the licensee may find priorities change as key personnel leave or as the result of a merger or acquisition that changes the company's development efforts. In short, on one side may be a party focused only on getting someone to commercialize the device, on the other may be a company that has found the technology to be unworkable, unprofitable, or inconsistent with new corporate objectives.

When the differing motivations and experiences of the parties result in termination of the agreement or disputes as to its proper scope, counsel must evaluate more than just the underlying patent issues. For instance, the obligations set forth in a license agreement may exceed the scope of the patent(s) at issue. Most licensing practitioners are familiar with the fact that a "product" clause within the agreement can be defined to be either exactly the same scope as the licensed patent rights or with respect to particular subject matter, essentially creating a different test for whether subject matter falls within the license agreement than a standard patent infringement analysis.¹³ In those instances, the licensor may have developed a product that does not fall within the patent but which falls within the license agreement and requires payment of royalties.¹⁴

Likewise, the course of dealing between the licensor and licensee may create a claim by the licensor that a licensee is estopped under general common law principles from denying that royalties are owed on a particular product. Federal courts have applied estoppel principles in connection with license agreements. In Crane Co. v. Aeroquip Corp.,¹⁵ the court was faced with consolidated breach of contract and patent infringement actions brought by the plaintiff patent owner, which had granted the defendant an exclusive license under the patent. After holding that certain products made by the licensee did not infringe the licensor's patent, the court nonetheless found the defendant liable for royalties to the patent owner on the ground of "marking estoppel."¹⁶ The basis for the estoppel was that the defendant licensee had marked the products in dispute with the number of the patent, thus representing the patent covered the products.¹⁷ Of course, a licensee may rely on similar equitable principles to estop a licensor's claim for royalties.

It may be even more important to analyze the obligations the licensor had to commercialize the technology. It is the rare licensee who does not at least seek to have the licensor accept a due diligence obligation.¹⁸ Further, many states imply an obligation to exploit the patent rights when the license is exclusive.¹⁹ Thus, licensors must be willing and ready to document reasonable efforts to comply with such explicit or implied obligations of due diligence. However, although best efforts clauses or implied obligations to exploit the licensed subject matter must be considered, those obligations are not always as broad as a licensor would desire. Courts will take a practical approach in assessing whether to imply best efforts and in construing the scope of such obligations. For instance, one court limited the breadth of a best efforts clause because to do otherwise would effectively have required the licensee to give up consideration of all competing technology.²⁰

Nevertheless, if you are the licensor and have heard and understood that all was well with the commercialization effort until, suddenly, the plug is pulled, you should request an explanation. Likewise, the prudent licensee should keep the licensor advised about the status of development efforts, consistent with the licensee's obligations of good faith and fair dealing, as well as to minimize a licensor's shock (and resulting desire to sue) upon termination of commercialization efforts. This means more than just telling the licensor the bare minimum; the licensee should try to give complete and accurate assessments on how the collaboration is coming. Clear communication about both progress and problems is unquestionably one of the best ways of preventing future disputes.

How was it that RPA, a sophisticated corporation, could reasonably have expected DeKalb to tell RPA of the favorable field tests of Roundup Ready corn? In that particular case, the testimony was that RPA and DeKalb held a 1992 meeting at which DeKalb agreed to share any such test results.²¹ North Carolina law allowed fraud to be established on proof that "a false representation or concealment of material fact was made."²² That standard, coupled with the parties' course of dealing and DeKalb's affirmative concealment, created a resounding victory for RPA, even though it was a sophisticated corporation well able to look after its own interests.

Such claims are not unique to North Carolina law. For instance, in Biosite, Inc. v. Xoma Ltd.,²³ a patent licensor counterclaimed with fraud allegations when the licensee sought a declaratory judgment of non-infringement. The gist of the fraud claim was that "Biosite told XOMA it wanted the licenses for one purpose, when in fact it wanted them for another purpose ... [and] that Biosite knew XOMA would not grant the licenses for the purpose that Biosite secretly intended.^"24

State law varies widely as to the elements of fraud. Naturally, in assessing the feasibility of these claims, the particular governing state law is crucial. Some states require proof of some special relationship for a disclosure obligation to arise;²⁵ others do not recognize a claim for failure to disclose. Likewise, some states consider fraud to be proved if it is shown that the licensor made a promise (e.g., "We will diligently seek to commercialize the technology") with no intent of performing, while other states do not consider such activity fraudulent.²⁶ In any event, regardless of the exact formulation of the fraud standard under the governing law, counsel advising parties to failed collaborations should necessarily assess fraud claims, especially when the licensing arrangement was exclusive or involved a broader collaborative effort.

It is critical to recognize that parties to the license often undertake additional obligations as a result of their interactions. Courts generally agree that the mere existence of an exclusive license agreement is not enough to imply fiduciary obligations.²⁷ This general rule helps protect licensees, which can also negotiate merger clauses in the agreement that aim to center the parties' relationship on just the contract. Nevertheless, the course of dealing between the parties can result in a finding of a fiduciary relationship, in which case one or both parties will have more strenuous disclosure obligations. As a practical matter, the larger the differences in the relative size and sophistication of the parties to the license agreement, the more likely it would seem that fraud claims may arise. In Rhone-Poulenc, RPA was able to assert successfully its non-disclosure claims against DeKalb, even though both parties arguably had the same level of sophistication and experience. The simple fact is that a larger licensee, sophisticated in bringing products to market, may end up owing fiduciary obligations to a less sophisticated licensor who assists in the effort beyond merely granting exclusive license rights. That same licensee likewise may be required to disclose more information to the licensor concerning the progress of the development efforts.

Generally, courts can find unjust enrichment when, "(1) at plaintiff's expense, (2) defendant received a benefit (3) under circumstances that would make it unjust for defendant to retain the benefit without paying."²⁸ To counsel more familiar with the extensive rules and tests underlying a patent infringement claim, this standard is, at best, murky. Generally, the unjust enrichment claim focuses on the parties' overall relationship. One must ask whether there was a true collaboration that went beyond a mere naked patent license. If so, and if a product was generated that can be traced to the collaboration, if not the patent claims, a claim may be lodged even when the patent is inapplicable.

The murkiness of unjust enrichment claims extends to valuing such claims, making it difficult to determine how much exposure one has under such claims. In University of Colorado Foundation, Inc. v. American Cyanamid Co.,²⁹ a district court found American Cyanmid's fraudulent conduct in secretly applying for patents invented by the university's researchers to support a finding of unjust enrichment and concomitant disgorgement of profits associated with sales of the patented product. Despite the difficulty of evaluating unjust enrichment claims, the serious consequences associated with proof of unjust enrichment require both parties to the failed collaboration to consider whether the facts support such a claim.

While the relationships created by a licensing agreement or collaboration may involve some state law issues, they will invariably implicate the patent(s) generated before or during the collaboration. The immediate and obvious issue is whether the licensee has, in fact, generated products that infringe the licensor's rights. A plethora of litigation in this area demonstrates that licensees often develop products they believe do not infringe, while the licensor is equally confident that the product does infringe. In that instance, if the licensee has chosen not to pay royalties on the product, it must necessarily expect to fight a separate patent infringement claim, and the licensor will not be limited merely to recovering breach of contract remedies .³⁰

Another key area for licensors is whether the licensee obtained patent rights itself that the licensor's personnel may have invented or co-invented. In University of Colorado Foundation, Inc. v American Cyanamid Co.,³¹ the Federal Circuit addressed an extreme example of this scenario. The University of Colorado alleged that its personnel had developed "Materna," a prenatal multivitamin/mineral supplement that American Cyanamid sold and on which it had secretly filed a patent application naming one of its employees as the sole inventor. The lower court originally held American Cyanamid liable for fraudulent nondisclosure and unjust enrichment after finding that American Cyanamid's intentional acts in omitting the university inventors precluded correction of the patent's inventorship. The Federal Circuit vacated the roughly $45 million judgment, instructed the lower court to apply federal standards for determining inventorship, reinstated the university's claim for correction of inventorship, and provided some instructions on assessing damages. On remand, the district court found that the university's researchers were, in fact, the true inventors under the applicable federal standards .³² In a subsequent opinion, the lower court ordered American Cyanamid to disgorge roughly $23 million in profits, pay an up-front royalty of $100,000, pay an additional 6 percent royalty on past sales, and pay $1 million in punitive damages.³³ The total award appears likely to equal or even exceed the amount originally awarded.

Although University of Colorado is an extreme example, the increasing importance and value of patent rights is causing many to reassess whether their contributions entitle them to be listed as an inventor. Licensing universities and their licensees have faced these claims, usually after a would-be-inventor has learned of some commercialization of the patent(s) that would provide a stream of licensing revenue.³⁴ Likewise, companies have found that failed commercial ventures often result in later claims that one party's employee was a sole or co-inventor on patents resulting from the venture.³⁵ Diligence is required in asserting these claims, as the Federal Circuit seems quick to approve equitably estopping those who are aware of their claims but who do not press these claims during the collaboration effort to maintain good business relations.³⁶

Collaborations and licensing arrangements are a necessity to most companies and institutions. Increasingly, these deals drive critical components of our economy by fostering innovation and development. As with any business ventures, they will result in many failures that provide fertile ground for disputes. In assessing those, counsel cannot focus only on the patent issues, especially when the parties were involved in a broader relationship than that embodied in issued patents or even license agreements. In counseling clients, remember to find out as much as possible about the nature of the parties' relationship so as to assess the potential claims arising from the failure of the collaboration. In doing so, counsel should not forget his or her role as counselor, a role perhaps best fulfilled by helping the client understand the other party's expectations and motivations.