Licensors Should Be Wary Of Validity Challenges
In Medimmune v. Genentech, the U.S. Supreme Court held that licensees may seek declaratory judgment challenging the licensor’s patent rights. In order to avoid the expense and inconvenience of licensee-based declaratory judgment actions, licensors should take care when drafting license agreements. Under Medimmune, a licensee may claim the benefit of the license while at the same time challenge the validity of the underlying patent.
By including terms in a license addressing a patent challenges, licensors can lessen the effects of the new rule. Among the provisions Licensors should have in place include a clause reserving the right to terminate the license in the event of a patent challenge, a requirement for advance notification of any intended invalidity claim, a forum selection clause, and termination clause preventing the licensee from challenging the patent after termination of the license.
Auditing of Royalty Payments Becoming More Common
Nearly all license agreements include the ability to send in accountants to check the licensees’ books and records once per year, and if a significant enough discrepancy is found the licensee must pay for the audit. With the overall economy struggling, many accounting firms are recommending such audits and report they nearly always show unreported royalties sufficient to justify the effort. Some clients are reluctant to audit fearing souring relationships with the licensee, although doing such a check every few years would not seem unreasonable.