Patent Invalidity Holding In Different Lawsuit Did Not Terminate Royalty Obligation

In Go Medical Indus. v. Inmed Corp. (October 27, 2006), the Federal Circuit concluded that a holding of patent invalidty won by a third party in a different lawsuit did not relieve the defendent from its royalty obligations in this case:

The district court erred in applying the Lear doctrine to relieve MMG of the obligation to pay any royalties after the finding of patent invalidity during Go's litigation against C.R. Bard in March 1999. That ruling had no effect on the contractual relationship between Go and MMG. Although the 1997 amendment tied the term of the contract to the life of the '259 patent, the license did not automatically terminate with the district court's ruling, as MMG believed, because the invalidity finding was still pending appeal. In fact, MMG's June 21, 1999 letter to Go stated that it was placing its royalty payments "in an escrow account until such time as the appeal is decided" (emphasis added). This was an implicit acknowledgment that Go was entitled to the royalty payments, meaning the funds would be transferred out of escrow, in the event that the district court's invalidity finding was reversed.

Moreover, MMG's June 21, 1999 letter did not state that its reason for ceasing payment of royalties was that it deemed the '259 patent to be invalid. Instead, it merely indicated that MMG was placing its royalty payments in escrow until the validity of the patent was resolved on appeal. (Even if it had been sufficient to constitute the requisite notice, the district court still erred in finding that Lear relieved MMG from all royalty payments after March 1999 instead of the date of this notice—i.e., June 1999.)

MMG is trying to have it both ways. As the exclusive U.S. distributor of the urinary catheter described in the '259 patent, MMG not only urged Go to sue C.R. Bard, but was the primary beneficiary when we later reversed the invalidity finding from that litigation. Significantly, it did not file its own declaratory judgment suit to challenge the patent's validity after it learned about the district court's March 1999 ruling. Indeed, until the agreement was terminated by Go in August 1999, MMG was contractually obligated to share the costs of enforcing the '259 patent, including the costs of pursuing the appeal.

Because the district court misapplied the Lear doctrine, we vacate and remand for a recalculation of the contract damages.

In Lear, the Supreme Court held that a licensee was not estopped from challenging the validity of the licensor's patent. 395 U.S. at 671. A licensee may cease payments due under a license—i.e., contractual royalty provisions will not be enforced—during the time it is challenging patent validity in the courts. However, the Lear doctrine does not prevent a patentee from recovering royalties until the date the licensee first challenges the validity of the patent. Studiengesellschaft Kohle, M.B.H. v. Shell Oil Co., 112 F.3d 1561, 1568 (Fed. Cir. 1997). In other words, a licensee "cannot invoke the protection of the Lear doctrine until it (i) actually ceases payment of royalties, and (ii) provides notice to the licensor that the reason for ceasing payment of royalties is because it has deemed the relevant claims to be invalid."