IP Advisor - September 2009

A recent Federal Circuit decision, Epistar Corp. v. International Trade Commission, No. 2007-1457 (Fed. Cir. May 22, 2009), may have important implications for the scope of contractual covenants that restrict a patent licensee’s right to challenge the validity of a licensor’s patents (so-called “no-challenge provisions”) in the context of M&A transactions. Epistar may also influence how no-challenge provisions, and possibly other covenants, are interpreted by other courts in other circumstances. Regardless of its ultimate impact, the decision highlights the importance of carefully considering and addressing the potential M&A consequences of covenants in technology licenses and other contracts.

A Brief Introduction to No-Challenge Provisions

In its most prevalent form, a no-challenge provision is a covenant made by a patent licensee that it will not assert in court (or other government forum) that patents licensed to it are invalid. While a no-challenge provision can be an important tool in the patent licensor’s toolbox, it should be noted that the enforceability of no-challenge provisions has not been universally settled, other than in connection with patent licenses granted to settle litigation. If a no-challenge covenant is granted in the settlement of litigation, courts have generally held that it is enforceable (see Flexfoot, Inc. v. CRP, Inc., 238 F.3d.1362 (Fed. Cir. 2001)).

The Epistar Case

In Epistar, Philips Lumileds Lighting Company (“Lumileds”) owned a patent relating to a technology used to increase the brightness and efficiency of a light-emitting diode. Lumileds sued United Epitaxy Company (“UEC”) in 1999 for patent infringement and the parties settled the litigation in 2001, with Lumileds granting UEC a license to the patent at issue. Under that license, UEC agreed to a no-challenge provision protecting that patent. The no-challenge provision expressly applied to UEC’s successors and was not expressly limited to any particular set of products.

Two years later, Lumileds separately sued and settled with Epistar Corporation in connection with Epistar’s alleged infringement of the same patent. Lumileds granted Epistar a license to that patent in connection with a settlement and required Epistar to agree to a no-challenge provision that was limited to a particular set of products (i.e., the products licensed under the agreement). Moreover, for Epistar’s no-challenge provision, Epistar explicitly retained its right to challenge the validity of the patent if Lumileds sued Epistar in the future for infringement of any other patent with respect to any licensed products.

In 2005, UEC merged into Epistar, and Epistar, as the surviving entity, assumed all of the liabilities and contractual obligations of UEC, including UEC’s license agreement with Lumileds. Lumileds sued Epistar in the International Trade Commission, alleging that the importation by Epistar of certain products – products which were not at issue in either of the prior lawsuits – infringed the same patent that was the subject of the prior litigations. Epistar asserted that the patent was invalid. Lumileds argued in response that Epistar was prevented from asserting invalidity due to the no-challenge provision in the Lumileds-UEC license agreement that Epistar had assumed and that was not expressly limited to any particular set of products. The ITC agreed with Lumileds and found that Epistar was precluded from challenging the validity of the patent.

On appeal, the Federal Circuit reversed with respect to the applicability of the Lumileds-UEC no-challenge provision and held that “Epistar’s right to contest validity of the … patent with respect to its products is governed by its own separate agreement with [Lumileds].”  Thus, the no-challenge provision contained in UEC’s license agreement only applied with respect to UEC’s products that were in existence before the merger, and Epistar was free to challenge the validity of the patent with respect to its own (non-licensed) products. Again, the Federal Circuit arrived at this conclusion even though UEC’s license agreement expressly stated that it bound UEC’s successors and prohibited challenges against the patent with respect to any products.

Applicability in Other Contexts

The circumstances surrounding the relationship among Lumileds, Epistar and UEC are somewhat unusual, and it is not yet clear how the ruling in the Epistar case will be applied by other courts or in other contexts. Epistar could be interpreted narrowly, since the court placed significant weight on the fact that Epistar had negotiated its own, more limited, no-challenge provision with Lumileds prior to its merger with UEC, and that this no-challenge provision manifested a clear negotiated intent between Epistar and Lumileds sufficient to override UEC’s no-challenge provision that Epistar had assumed. In fact, the court in Epistar expressly stated that this result ensures that “Lumileds cannot fortuitously gain rights against Epistar that it could not secure pre-merger.”  Under this narrow interpretation, if Epistar had not already negotiated its own no-challenge provision, the court may have applied UEC’s no-challenge provision against Epistar as the successor entity.

Alternatively, other courts may take a broader view of Epistar and read into the decision that, whether or not the surviving entity had already negotiated its own no-challenge provision, no-challenge covenants made by non-surviving entities should not apply to products developed post-merger by the surviving entity. A court taking this broader view would not be surprising given the public policy goals enunciated by the Supreme Court in Lear, Inc. v. Atkins, 395 U.S. 653 (1969), which stated that “[i]t is as important to the public that competition should not be repressed by worthless patents as that the patentee of a really valuable invention should be protected in his monopoly” (see also MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007), which held that a licensee can challenge the validity of licensed patents while maintaining its license intact).

Moreover, other courts may also apply the reasoning in Epistar to licenses, covenants not to sue or other types of covenants since much of the same reasoning discussed in Epistar could arguably apply to these other license provisions. For example, the court in Epistar cited Medtronic AVE, Inc. v. Advanced Cardiovascular Systems, Inc., 247 F.3d 44 (3d Cir. 2001), in which the Third Circuit refused to extend an agreement to arbitrate entered into by the assignor to a dispute involving the assignee’s patents, since the assignor never owned those patents.

Finally, while the facts in Epistar involved a direct merger whereby one merger party, Epistar, survived, and the other merger party, UEC, did not, the reasoning in Epistar could apply in the context of an assignment of a license or other agreement in an asset purchase transaction. The court in Epistar cited the contract law treatise Corbin on Contracts for the principle that “the assignment of a contract to an assignee, such as from UEC to Epistar, only changes the obligated party, not the scope of the obligation.” 

Practical Implications in Light of Epistar

Regardless of how the Epistar case is interpreted by other courts going forward, it is important in the course of negotiating a no-challenge provision to be mindful of the possibility of a future M&A event, and to draft any no-challenge provision in line with one’s current and prospective business plans and goals. Similarly, when considering the potential acquisition of a target company that is a licensee under one or more license agreements, it is important to review the license agreement(s) carefully and examine the scope of any no-challenge provisions in the context of the proposed transaction with a goal of avoiding any unintended consequences in relation to the acquirer’s patent portfolio.

Patent law grants patent holders the right to exclude others from making, using or selling a patented invention. It also seeks to ensure that there is no unjustified extension of this protection. One manner in which the U.S. Patent and Trademark Office, the Board of Patent Appeals and Interferences (“BPAI”) and the Federal Circuit have enforced the latter goal is through the non-statutory rule against double patenting. This judicially created rule precludes the issuance of two commonly owned patents having claims that are not patentably distinct from one another. While this general rule for non-statutory double patenting is well settled, several recent decisions by the BPAI have received attention for their use of a unique and separate double patenting rule first applied in In re Schneller, 397 F.2d 350 (CCPA 1968), a 1968 Court of Customs and Patent Appeals (“CCPA”) decision that has been a source of conflict. Although Schneller has been cited to reject numerous patents on the basis of double patenting, an examination of the BPAI and Federal Circuit’s reading of Schneller reveals a double patenting test with no prevailing standard and a history of inconsistent interpretation.

In re Schneller

Schneller involved a continuation patent application (“child”) of a parent patent that claimed a clip system for securing a gypsum lath to support members in partition wall constructions. The parent patent claimed an invention comprised of elements A, B, C and X (“ABCX”). The parent patent also disclosed in its specification an embodiment involving elements ABCXY. The child claimed an invention comprised of elements ABCY. This embodiment was never claimed by the parent patent. In a non-majority opinion, the CCPA concluded that the subject matter of the child’s claims (ABCY) was “covered” by the subject matter of the parent patent because the child’s claims covered an embodiment comprised of elements ABCXY – an embodiment that was already disclosed by the parent patent.  Because there were also no mitigating circumstances that prevented the claim at issue from being part of the earlier patent, the CCPA rejected the child patent application claims on the basis of double patenting. However, in its decision the CCPA did not explicitly outline the necessary elements to reject a patent on the basis of double patenting. As a result, the BPAI has had to analyze Schneller in subsequent cases to determine its double patenting test.

The Inconsistent Schneller Tests

The BPAI has inconsistently interpreted Schneller in the years since the decision. Earlier cases generally relied on Schneller to support the proposition that the rule against double patenting is to prevent the unjustified extension of patent protection. Later cases, however, held Schneller to require a rejection of patents on the basis of double patenting where the particular set of facts set forth in Schneller are present. However, these later BPAI decisions are inconsistent with respect to the particular fact pattern that must be present. Several different lines of the Schneller test have developed over the years since the decision. However, there has yet to be a clear prevailing standard.

In one line of decisions, the BPAI held Schneller to require a rejection on the basis of double patenting where the claims at issue (i) read on the subject matter and do not improve or modify the prior patent, and (ii) were not prevented from being presented with the original patent.  See, e.g., Ex parte Nilssen, Appeal No. 96-3618 (Bd. Pat. App. & Inter. July 22, 1999).

In another line of decisions, the BPAI found Schneller to require a rejection on the basis of double patenting where the claims (i) are not “patentably distinct,” and (ii) were not prevented from being presented with the original patent. See, e.g., Ex parte Davis, 56 USPQ2d 1434 (Bd. Pat. App. & Inter. 2000).

In Ex parte Raterman, Appeal No. 1998-0941 (Bd. Pat. App. & Inter. July 31, 2000), the BPAI added an additional condition to the test set forth in Davis. It found Schneller to require a rejection on the basis of double patenting where (i) the claims are not “patentably distinct,” (ii) the claims were not prevented from being presented with the original patent, and (iii) no terminal disclaimer had been filed.

Scattered among these lines of cases are other unique interpretations of Schneller by the BPAI. In Ex parte Sommerfeld, Appeal No. 2008-0301 (Bd. Pat. App. & Inter. Mar. 31, 2008), the BPAI found Schneller to require rejection on the basis of double patenting where (i) everything disclosed in the application was disclosed in the patent and the patent disclosed additional matter and (ii) the application at issue was a continuation of an intermediate application. In Ex parte Walker, the BPAI rejected prior tests and instead found the correct test to be whether “the same invention [is] being claimed twice.”  Appeal No. 1999-1042, at *11 (Bd. Pat. App. & Inter. April 14, 2000).

Because CCPA decisions are binding on the Federal Circuit, South Corp. v. U.S., 690 F.2d 1368 (Fed. Cir. 1982), Schneller has been cited numerous times by that court. Unlike the BPAI decisions, the Federal Circuit has cited Schneller solely in applying the standard rule against double patenting. See e.g, Eli Lilly and Co. v. Barr Labs. Inc., 58 USPQ2d 1869 (Fed. Cir. 2001). Although the court in In re Metropolo Succinate Patent Lit., 494 F.3d 1011 (Fed. Cir. 2007), cited the case in finding obviousness-type double patenting, it never went so far as to find a separate rule under Schneller. Instead, the court used the case to limit several prior CCPA decisions in support of the proposition that a patentee may claim an element after claiming the combination without fear of a double patenting rejection.

The Latest Test  

The latest BPAI interpretation of Schneller was delivered on May 22, 2009, when the BPAI rejected the “Harvey 3” (“child”) patent on the basis of double patenting over the parent patent, “Harvey 2.”  Ex parte Reexamination Control, Appeal No. 2008-4228 (Bd. Pat. App. & Inter. May 22, 2009). The parent patent claimed a method of transmitting and detecting a signal that instructs a computer to generate a signal that would transmit the user information (“transmit signal”). The child patent claimed a method of transmitting and detecting a signal that instructs a computer to generate certain user information (“generate signal”). The parent never claimed this method but did disclose a method involving both the generate signal and the transmit signal. In the opinion, the BPAI enumerated a novel version of the Schneller test, concluding that it must reject child patent claims on the basis of double patenting where:

• The subject matter recited in a claim of the later application was fully disclosed and covered by a claim in the earlier patent;
• There was no reason why the applicant was prevented from presenting the same claims for examination in the issued patent; and
• It would be impossible to practice the preferred embodiment (best mode) of the patent covered by the parent claim without infringing the later claim.

In rejecting the child claims on the basis of double patenting, the BPAI concluded that the parent’s transmit signal claims covered the disclosed embodiment comprised of both the generate signal and the transmit signal. Because the child’s generate signal claims also covered this previously disclosed embodiment, the BPAI concluded that the child’s generate signal claims were covered by the parent’s transmit signal claims. In addition, the BPAI found that the child’s claims could have been included in the earlier patent. Finally, the BPAI held that it would have been impossible to practice the preferred embodiment without infringing the earlier patent.

Looking Ahead

Although Schneller has been cited to reject numerous patents on the basis of double patenting, an examination of BPAI decisions makes clear that there has yet to be a prevailing interpretation as to what particular fact pattern must be present in order to reject a patent under that decision. The BPAI, in its latest decision, adds to the confusion by adding a third element to the Schneller test, which appears to lack any foundation in the case’s 41-year history of interpretation. As a result, it may be prudent for inventors to be mindful of this decision when trying to claim an invention through one or more continuation patent applications so as to minimize the risk of inadvertently creating a situation for a double patenting rejection based on Schneller.

Publications

• Daniel Wilson published “The Risk and Reward of Provisional Patent Applications” in the August 21, 2009 issue of Mass High Tech.
• Mark Abate, Charles Sanders and Calvin Wingfield, Jr. published “Getting the Remedy You Want from the ITC” in the July 2009 issue of the ABA’s Intellectual Property Litigation.
• Richard Samuel, John Forcier and Nicholas Kim published “Tips for a Successful Re-Examination Request” in the June 3, 2009 issue of IP Law360.
• Mark Puzella published “Bing’s Video Preview Feature Stretches Fair Use – But Too Far?” in the June 2009 issue of the Media Law Resource Center Bulletin. 
• Daniel Wilson published “Building a Strong Patent Estate on a Limited Budget” in the May 9, 2009 issue of the Life Science Leader.

Upcoming Conferences

• 12th Annual International Generic Pharmaceutical Alliance Conference
  Date: September 30, 2009 – October 2, 2009
  Location: Montreal, CanadaThis annual conference brings together senior executives in the generic pharmaceutical industry. Top executives participate in panel discussions, answer questions from conference participants and share and debate current industry hot topics. Elaine Herrmann Blais will be on the “Key Developments in Intellectual Property Affecting Access to Generic Medicines” panel and will discuss the potential impact of U.S. patent reform legislation on access to affordable medicines. 
  
• The ABA National Institute on the Criminal Enforcement of Intellectual Property Rights
  Date: October 5, 2009
  Location: Washington, D.C.
  David Goldstone will speak on a panel examining recent significant cases and the developing trends in the trademark, copyright and trade secrets areas. 
  
• Fourth Annual BNA/ABA Section of Intellectual Property Law Patent Conference:  Controlling Discovery Costs in Patent Litigation
  Date: October 5, 2009
  Location: Washington, D.C.
  BNA and the ABA Section of Intellectual Property Law are presenting this conference to help law firms and corporate IP departments cope in the new economic environment and manage issues that arise regarding discovery in patent cases. Mark Abate is serving as a faculty member.
  
• BioPartnering Europe
  Date: October 11 – 13, 2009
  Location: London, England
  BioPartnering Europe offers an opportunity to meet with decision-makers from leading biotechnology, pharmaceutical and investment companies from around the world for one-to-one partnering meetings, presentations, expert panels and exhibitions. Kingsley Taft is a featured presenter.
  
• Merger & Acquisition Journal’s “Intellectual Property Roundtable”
  Date: November 1, 2009 (Publication Date)
  Location:  San Francisco
  Goodwin Procter is sponsoring this intellectual property roundtable discussion, featuring top IP professionals exploring how the economic downturn has affected the IP marketplace. A transcript of this roundtable will appear in the November 2009 issue of Mergers & Acquisitions Journal.

• Software Escrow Contracting Best Practices
  Date: November 18, 2009
  Location: Webinar
  Steve Charkoudian will speak as part of this Incisive Media webinar on software escrow contracting best practices. The webinar will be hosted by Iron Mountain in conjunction with the release of its new “Dummies” booklet on software escrow.