We consider the role of “valid claim” wording in patent licensing arrangements.
Patents are risky assets
Patents play a crucial role in protecting innovation in the life sciences sector and are often essential to attracting investment and funding for new medicines and treatments. However, despite rigorous examination and opposition procedures at patent office level, a large number of invalid patents make it onto patent registers in Europe and worldwide. Estimates differ widely, but some suggest that up to 60% of granted patents are invalid. So the risk of invalidity cannot be disregarded by parties entering into patent licensing and other patent-heavy commercial arrangements.
How do commercial parties deal with the risk of invalidity?
Even where a patent is believed to be weak, in practice it may be better for third parties wishing to use the invention to take a licence rather than go the expensive route of challenging the patent. However, whether the patent is weak or strong, the licensee will wish to avoid a situation where it is paying royalties for technology that its competitors can use for free, as this will put it at a competitive disadvantage. A common solution is to provide that royalties under the licence are only payable on licensed products that would infringe a “valid” claim. “Valid claim” is then defined as one for which invalidity has not been formally and finally established. It should be noted that in an international licence the claim wording in equivalent patents may differ slightly between countries and the law on validity may also be different, for example the rules on equivalence differ between European countries even though the European Patent Convention applies throughout. In such licences, therefore, it is possible that the licensee will be paying royalties in some countries but not in others.
A mechanism to avoid dispute
This approach to “valid claims” promotes certainty between the parties and avoids the parties arguing about validity in a contractual dispute under the licensing agreement. If the licensee is confident that the patent is invalid but there has been no final invalidity decision, the solution is to institute revocation proceedings to invalidate the patent as a separate matter.
Can the licensor prevent the licensee challenging the patent?
Depending on the nature of the project the licensee may be in the best position to challenge the patent because it is working with the technology and knows it well. The licensor will wish to prevent the licensee from using the knowledge obtained under the licence in this way. From the point of view competition law, such “no-challenge” provisions are a controversial issue. The application of competition law will always depend on the circumstances, but under both UK and European competition law no-challenge clauses will generally be unenforceable in both non-exclusive and exclusive patent licences. In an exclusive licence it may, however, be acceptable to include a provision whereby the licensor is entitled to terminate the licence if the licensee challenges the patent. This puts the licensee under pressure as failure to invalidate the patent will result in infringement.
For more on patent licensing, please listen to our new patent licensing podcast series, "Meeting Room 7 – Patent licensing".