United States: Licensee May Challenge Patent Validity And Infringement In Royalty Dispute When Royalties Are Tied To The Practice Of The Licensed Patents

Abstract

A California court recently denied a licensor's motion to dismiss the licensee's counterclaims for patent invalidity and noninfringement. The parties disputed the amount of royalties owed by the licensee under a license agreement after the sole patent covered by the agreement expired. The licensor filed suit for breach of contract for failure to pay adequate royalties and the licensee filed patent-related counterclaims. The court found that it could hear the patent-related counterclaims because the payment of royalties under the agreement was tied to the practice of the licensed patents and thus resolving the contract dispute would require the court to determine the validity and scope of the patents.

When a party asserts noninfringement or invalidity counterclaims in response to a breach-of-contract claim, a court must determine whether there is a substantial controversy of sufficient immediacy and reality regarding the patent-related claims such that the court has subject-matter jurisdiction to hear such claims. In Miotox LLC v. Allergan, Inc.,1 the District Court for the Central District of California found it could hear patent-related counterclaims because the amount of royalties owed under the agreement was specifically tied to the practice of the licensed patents.

Background

In 1992, Dr. William Binder—the founder of Miotox's predecessor, Miotech—developed a therapy for treating migraine headaches using certain neurotoxins, such as Botox®. In 1998, U.S. Patent No. 5,714,468 ("the ʼ468 patent"), directed to such uses, issued to Dr. Binder.

In 1997, Allergan and Miotech entered into an option agreement, giving Allergan the option to acquire an exclusive license to Miotech's patents relating to the treatment of migraine headaches using variants of Botox® or other neurotoxins. After Miotech assigned its rights to Miotox, Allergan exercised its option in 1998 and entered into a license agreement covering only the ʼ468 patent. Under the agreement, Allergan agreed to pay royalties of net sales, defined under the agreement as "the actual selling price of Licensed Product sold by Licensee . . . to others in countries in which Licensed Patents have been granted for the Licensed Use." The agreement defined "Licensed Product" as "any medical product containing Botulinum Toxin or other toxin made, used, or sold by LICENSEE . . . whose use is covered by a Valid Patent Claim."

Several years later, in 2012, Dr. Binder filed additional patent applications and received several patents directed to the treatment of migraine headaches. In 2013, as the ʼ468 patent neared expiration, Miotox reached out to Allergan about amending the list of licensed patents, proposing to add several additional patents and pending applications ("the New Patents"). In response, Allergan sought to clarify the parties' understanding of the royalty provision, given the '468 patent's upcoming expiration. Allergan believed that it would only owe royalties on sales that resulted in Botox® being used for one of the methods covered by a valid claim of the New Patents. Miotox, on the other hand, believed that the agreement was broad, covering exclusive patent rights, know-how, clinical data, and improvements on the use of Botox® (or other toxins) for the treatment of migraine headaches and requiring Allergan to pay royalties on all sales of Botox® relating to the treatment of migraine headaches, not specifically tied to Allergan's practice of a licensed patent.

Miotox sued Allergan for breach of contract, as well as other state-law claims. Allergan filed counterclaims, including for declaratory judgment of noninfringement and invalidity of several of the New Patents. Miotox moved to dismiss Allergan's nonfringement and invalidity counterclaims, arguing they did not present an actual controversy because resolution of the counterclaims would not resolve the contract dispute.

The Decision

The court denied Miotox's motion to dismiss Allergan's noninfringement and invalidity counterclaims. The court explained that the crux of the dispute was which Botox® sales were royalty-bearing. Relying on the agreement's definition of "licensed product," which depended on the practice of licensed patents, the court rejected Miotox's argued that the agreement was not tied to Allergan's actual practice of the licensed patents. Rather, royalty payments under the agreement were tied to Allergan's sales of products covered by Miotox's patents. Thus, according to the court, the parties' dispute could not be resolved without deciding which of the unexpired patents were valid and covered the relevant use of Botox®.

The court also dismissed Miotox's reliance on court decisions dismissing invalidity and noninfringement counterclaims filed in response to breach-of-contract claims where the agreements required royalty payments with no reference to the licensors' patents. Unlike in those previous cases, the court explained, the agreement at issue explicitly defined the licensed products to be products whose "use is covered by a valid, unexpired claim."

Miotox's additional arguments fared no better with the court. Miotox argued that Allergan's failure to challenge the validity or infringement of all the New Patents rendered its declaratory-judgment counterclaims unripe for adjudication because resolution of the counterclaims would not resolve which sales were royalty-bearing. The court disagreed, noting that because Allergan did not challenge two of the New Patents, if Allergan prevailed on its counterclaims, its royalty obligations would be based on its sales covered by those two patents' claims.

Finally, the court rejected Miotox's argument that because neither party had triggered the termination clause, neither party could bring an infringement action. Although the court acknowledged that Miotox's filing of a complaint may or may not trigger the termination clause, it was clear from its breach-of-contract claim that Miotox believed Allergan to be in breach of the contract. The key fact, therefore, according to the court, was that Miotox could bring an infringement action, not whether it had.

Strategy and Conclusion

This case demonstrates that parties who bring only breach-of contract claims may nevertheless face noninfringement and invalidity counterclaims if the contract dispute depends on the defendant's practice or scope of the licensed patents.

Footnote

1. The Miotox opinion can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2015/Miotox_v_Allergan.pdf.

Previously published in LES Insights

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