United States: Forum Selection Clause In Patent License Found To Preclude Challenging Patents At The Patent Trial And Appeal Board

On March 23, 2018, the U.S. District Court for the Northern District of California ordered a patent licensee to withdraw petitions to the Patent Trial and Appeal Board ("PTAB") seeking to invalidate a licensor's patents. The Court held that the forum selection clause of the patent license between the parties – which stipulated that "the parties agree...that disputes shall be litigated before the courts in San Francisco County or Orange County, California" – extinguished the patent licensee's right to bring challenges against the licensed patents in the PTAB located in Alexandria, Virginia.

In October 2016, Dodocase VR, Inc. entered into a master license agreement ("MLA") with MerchSource LLC regarding three patents owned by Dodocase (collectively referred to as "Dodocase patents"), related to mobile devices and virtual reality accessories. The MLA includes a forum selection clause that states:

THE PARTIES AGREE . . . THAT DISPUTES SHALL BE LITIGATED BEFORE THE COURTS IN SAN FRANCISCO COUNTY OR ORANGE COUNTY, CALIFORNIA.

In October 2017, MerchSource notified Dodocase that it had determined that the patents were invalid and would cease payment of royalties under the MLA. Dodocase responded by filing an action in the U.S. District Court for the Northern District of California seeking: (1) a declaration that certain Dodocase Patents are valid and enforceable; and (2) an injunction to prevent MerchSource from breaching the MLA. MerchSource then filed petitions with the PTAB seeking to have the licensed Dodocase patents declared invalid. 1

Responsive to Dodocase's motion for a preliminary injunction, the Court evaluated Dodocase's likelihood of success on the merits, whether Dodocase would be likely to suffer irreparable harm absent an injunction, the balance of equities between the parties, and public interest.

Plaintiff Dodocase argued that Defendant MerchSource's breach of the MLA's forum selection clause supports its motion for the injunctive relief. The Court first found the forum selection clause to include mandatory language ("disputes shall be litigated") akin to an express statement of exclusivity. With an exclusive forum selection clause, the scope of the forum selection clause becomes the central question in deciding whether Dodocase is likely to succeed on the merits. If the scope of the exclusive forum selection clause is broad enough to prohibit MerchSource from bringing an action at the PTAB, then Dodocase is likely to succeed on the merits.

While the forum selection clause provides that "the laws of the State of California shall govern any dispute arising out of or under this Agreement," the Court believed that a key question is whether a petition for inter partes review at the PTAB constitutes a dispute that arises out of or under the MLA. The Court answered this question in the affirmative for several reasons. First, MerchSource's justification for its refusal to make royalty payments (an alleged breach of the MLA) is that the Dodocase patents are invalid and unenforceable, which is the same issue MerchSource placed before the PTAB. Second, MerchSource, as part of its counterclaim against Dodocase, seeks a declaratory judgment that the patents are invalid on same grounds as those included in their PTAB Petitions, and asks for an award of all fees and expenses associated with the PTAB Petitions. Third, MerchSource only pursued the PTAB proceedings after the attempt to renegotiate the MLA based on alleged invalidity of the patents failed and after Dodocase filed the lawsuit alleging breach of the MLA. While the Court used the above reasons to show a close relationship between the PTAB proceedings and the MLA, the Court also believed that:

The loss of the ability to bring a case in a different forum where the party is advantaged by its procedural rules is not, on its own, a sufficiently compelling reason to disregard the parties' agreed-upon choice of forum. That is especially true where Defendant MerchSource was aware of the availability of PTAB proceedings when it entered into the MLA. (emphasis added.)

In addition, the Court held that the Dodocase is likely to suffer irreparable harm in absence of preliminary relief, because Dodocase would be put to the added time and expense of hiring specialized attorneys to respond to the PTAB Petitions. For the balance of hardships, the Court believed that it tips in favor of granting the injunction, because enforcement of the contract into which MerchSource freely entered should not cause hardship to MerchSource. Finally, the Court held that the public interest is not compromised by entering the preliminary injunction, because granting the injunction protects the right of parties to freely contract for a chosen forum and courts' ability to enforce such agreements, and an independent third party still has the opportunity to initiate separate PTAB proceedings.

As such, MerchSource's challenge to the validity of the Dodocase patents brought at the PTAB was precluded by the forum selection clause of the MLA. The Court ordered MerchSource to withdraw the validity challenges at the PTAB.

The preliminary injunction is currently stayed pending appeal to the U.S. Court of Appeals for the Federal Circuit. The PTAB recently issued an order to delay all relevant case deadlines until the Federal Circuit appeal is decided.

Nevertheless, as patent validity is not an issue exclusive to U.S. District Courts, practitioners involved in the drafting of any agreement that includes forum selection clause language that limits the ability to challenge a patent to a U.S. District Court need to fully consider the ramifications of eliminating the most favorable venue for patent invalidity challenges: the PTAB. Practitioners should consider consulting with an IP attorney to determine whether such restrictions in a forum selection clause are appropriate.

Footnotes

1 MerchSource filed two petitions for Post Grant Review and one petition for Inter Partes Review. See Case Nos. PGR2018-00019, PGR2018-00020, and IPR2018-00494.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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