This article is written by Poonam Gulati pursuing LLM in Corporate laws and Diploma in Intellectual Property, Media and Entertainment laws course at Lawsikho.
This article has been published by Sneha Mahawar.
Speculations regarding the enforceability of contractual limitations on challenging the validity of patents have been put to rest by the U.S. Court of Appeals for Federal Circuit in the case of, Nippon Shinyaku Co., Ltd. v. Sarepta Therapeutics, Inc., No. 2021-2369 (Fed. Cir. 2022), vide order dated February 8, 2022. This order declares that any restriction on the ability to challenge the validity of a patent shall be enforceable, thus making it clear that the parties may agree not to litigate and rightfully preclude from filing potential IPR patent challenges suits before the U.S. Patent and Trademark Office and add mutually acceptable covenants regarding contractual restrictions. Therefore, parties to the contract may sign specific covenants not to sue for and post the covenant period or to limit jurisdiction for future litigation to a particular forum by choice and expressly exclude other forums.
Inter Partes Review (IPR)
An IPR is a trial that determines the validity of a U.S. patent exclusively subject to the prior art of a patent or a publication. Any other consideration except the ‘prior act’ is not considered in an IPR petition and one must challenge that in a federal district court trial. An IPR may be challenged by any person or company and the patent owner has an opportunity to defend the patent rights and, with leave of the court, may choose to file a motion to amend claims without asserting prior art. The important takeaway here is that a competitor need not file a patent infringement lawsuit and may only challenge the validity of the patent or a publication via an IPR. IPR is an administrative trial process and usually concludes in a year and its filing does not pre-requisite the filing of a patent infringement lawsuit. IPRs are challenged before the U.S. Patent and Trademark Office (USPTO) and the administrative trail (IPR) is taken care of by the Patent Trial and Appeal Board (PTAB), a Section of the USPTO. The decision given by the PTAB may be appealed to the United States Court of Appeals for the Federal Circuit, and to the U.S. Supreme Court, thereafter.
IPR, PGR, and CBM are similar proceedings. A Post Grant Review (PGR) petition may be filed after 9 months of a U.S. patent being issued, challenging the validity of a patent only on any statutory grounds available for the same. A Covered Business Method (CBM) review may be filed in the case of patents involving financial transactions, this is a specialized proceeding for challenging the validity of U.S. patents.
Declaratory Judgment Action
“Neither party is seeking a judgment for money damages in a declaratory judgment action. Instead, the purpose of a declaratory judgment action is to determine the parties’ responsibilities in relation to a particular dispute.” Further, under Article III of the U.S. Constitution, “a federal court may only issue a declaratory judgment when there is an actual controversy.” Rule 57 of the Federal Rules of Civil Procedure and Title 28, Section 2201 of the U.S. Code govern declaratory judgments in federal court.
“A discretionary power that allows courts to dismiss a case where another court, or forum, is much better suited to hear the case. This dismissal does not prevent a plaintiff from re-filing his or her case in a more appropriate forum. See Res Judicata. This doctrine may be invoked by either the defendant or the court. See sua sponte.”
Discussion of facts, pleadings, and decisions
U.S. Court of Appeals for Federal Circuit in the case of, Nippon Shinyaku Co., Ltd. v. Sarepta Therapeutics, Inc., No. 2021-2369 (Fed. Cir. 2022), vide order dated February 8, 2022.
- Parties entered into contact and executed a mutual confidentiality agreement (MCA) for the purpose of a potential business relationship concerning Intellectual Property in the field of Duchenne Muscular Dystrophy.
The relevant sections of the MCA are summarized as follows-
- Section 6 of MCA establishes-
- The covenant term shall be commencing on the effective date and concluding 20 days post:
- either expiration of the term;
- or the effective date of termination
- The covenant not to sue in the U.S. Patent and Trademark Office (USPTO) or Japan Patent Office any of the following:
- Patent validity challenges
- Patent infringement litigation
- Declaratory judgment actions
- Or Re-examination proceedings before USPTO
- Section 10 of MCA included-
- Forum Selection Clause mentioned that any dispute arising regarding patents and other Intellectual Property disputes between the consenting parties post covenant term shall be filed within 2 years of the end of covenant term, only at the United States District Court for the District of Delaware
- Post any filing at Delaware none of the parties can either seek transfer on the ground of ‘forum non-conveniens’ or contest personal jurisdiction.
- The defendant filed 7 petitions for ‘inter partes review’ at the Patent Trial and Appeal Board (PTAB) in violation of the forum selection clause, on the day the covenant term clause ended and the forum selection clause took effect.
- Consequently, the plaintiff filed a complaint at the United States District Court for the District of Delaware asserting claims for breach of contract and seeking declaratory orders for non-infringement and invalidity of the defendant’s patents and infringement of patent holder rights. He further filed for a permanent injunction and issuance directions to withdraw all 7 IPR petitions filed at the PTAB.
The District Court denied a preliminary injunction and decided the matter against the plaintiff and an appeal of the same was preferred by the plaintiff before the U.S. Court of Appeals for the Federal Circuit against the impugned order. The U.S. Court of Appeals for the Federal Circuit reversed the decision of the district court and remanded for entry of a preliminary injunction.
Both the courts tested for the four well-established preliminary injunction factors mentioned herein-
- Likeliness to succeed on merits
- To suffer irreparable loss as a direct consequence of the absence of the extraordinary relief
- The tilt of balance of hardship in the favor of the plaintiff
- Relief must be warranted in the public interest.
The District Court, after analysing the above-mentioned factors concluded that the first factor was most important and was not met with as the probability of success on merit was found absent and the remaining three factors were also not logically fulfilled in their opinion. The court did not agree with the literal meaning and implication of the relevant sections and said that “Section 6 expressly deferred the filing of IPR petitions for one year and twenty days only for them to be impliedly delayed for two additional years, likely making them time-barred and never available.” The effect of this covenant was that the IPRs were allowed to proceed after the covenant term had expired, this was not appreciated by the district court as it would have the effect of waiving the rights to file IPR petitions under 35 U.S.C. § 315(b). Thus, no relief was granted to the complainant.
The Appellate Court in the instant appeal discussed that the denial of a preliminary injunction will be reviewed by the Federal Circuit and the Third Circuit for abuse of discretion [Adams v. Freedom Forge Corp., 204 F.3d 475, 484 (3d Cir. 2000)] The interpretation of private contracts is ordinarily a question of state law… ” [Howmedica Osteonics Corp. v. Wright Med. Tech., Inc., 540 F.3d 1337, 1347 (Fed. Cir. 2008) ] Following the said standard, the underlying questions of law shall be reviewed ‘De Novo’ [Antares Pharma, Inc. v. Medac Pharma Inc., 771 F.3d 1354, 1357 (Fed. Cir. 2014)]
The Appellate Court opinions that the parties are obliged to follow the laws of the State of Delaware as per their contractual obligation and the contract must be interpreted in consonance with the same. The precedents quoted that-
“Delaware adheres to the ‘objective’ theory of contracts, i.e. a contract’s construction should be that which would be understood by an objective, reasonable third party.” [ Estate of Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010)] Further, “Under Delaware law, we must “read a contract as a whole” and “give each provision and term effect, so as not to render any part of the contract mere surplusage.”[ Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396–97 (Del. 2010)]. Importantly, “when the contract is clear and unambiguous, we will give effect to the plain meaning of the contract’s terms and provisions.”[ Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992)]. “that “There is no public interest served by excusing a party’s violation of its previously negotiated contractual undertaking to litigate in a particular forum.” [Gen. Protect, 651 F.3d at 1366]
In simple words, observing the objective theory of the contract laws of Delaware and the intent of the contracting parties, the Appellant Court identified that:
- Both parties were committed to the forum selection clause, thus the defendant was in breach of contractual obligation, therefore all actions including IPR petitions should have been filed according to the forum Clause.
- They rejected the vaguely interpreted definition of ‘potential actions’ that made the reasonable reading of the contract nonsensical
- The court in Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396–97 (Del. 2010) referred as the Kannuu Case precedent observed that usually, the forum clause is not worded in a manner that it may extend to IPRs, however in the instant case the language of Section 10 as the district court acknowledged that the clause “literally encompasses IPRs.” [Decision, 2021 WL 4989489]
- The provisions of Section 6 and10 were found in harmony with each other because Section 6 simply prohibited the parties from litigating, directly or indirectly, during the covenant term and Section 10 indicated that once the covenant term as mentioned in Section 6 elapsed, the claims shall be raised only in United States District Court for the District of Delaware. This violation of the forum clause was made by the defendant and thus the plaintiff was likely to succeed on the merits of his claim for the breach of contract.
- Irreparable harm was caused by denial of a preliminary injunction as such denial would result in a multiplicity of litigation in several jurisdictions and the idea behind the bargain-for-choice of the forum would be lost, as compelled by binding precedent.
- Balance of hardship was found tilting towards the plaintiff as having contracted for freely for the selected forum should be adhered to, else would cause hardship [General Protecht 651 F.3d at 1365].
- The intent of the legislation regarding the IPR patent challenge procedure allows parties to resolve the matter with efficacy, public interest thus lies with speedy resolutions and such opportunity must be so availed. It is thus established that forum selection clauses “are prima facie valid and should be enforced” [ M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972)]
The decision of the court in the case discussed in this article concludes that the speculation regarding the enforceability of contractual restrictions wherein patent validity challenges may, by mutual consent, absolutely be barred from a challenge or be limited to challenge only in specified forums and expressly exclude other forums. They may even choose to apply the covenants of the agreement beyond its term to immunize post-term validity challenges with the USPTO. All such contractual restrictions regarding inter partes review (“IPR”) are enforceable in contractual relationships.
- Challenges to Patent Validity at the USPTO PTAB – Carstens and Cahoon (cclaw.com)
- https://www.jdsupra.com/legalnews/parties-to-exploratory-agreements-upon a covenant/
- 35 U.S. Code § 315 – Relation to other proceedings or actions | U.S. Code | US Law | LII / Legal Information Institute (cornell.edu)
- Exploration Agreements Definition | Law Insider
- Inter Partes Review – 35 U.S.C. § 315(b) One Year Bar and Exceptions | The National Law Review (natlawreview.com)
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