IP Transactions: A Litigator’s Perspective

Abstract

Intellectual Property (IP) litigation can be complex, resource-intensive, and dependent on nuances like patent claim scope or trade secret definitions. But issues from underlying IP transactions or license agreements can exacerbate these complexities, and create unintended consequences in downstream litigation. It is critical for transactional lawyers to be aware of such potential litigation pitfalls when drafting IP licensing agreements and other IP-heavy transactions, including the impact on litigation standing, infringement defenses, and damages. Several recent cases highlight these considerations, and their lessons can help avoid unintentional impact on future litigation. On the whole, keeping abreast of these litigation issues can lead to agreements that potentially strengthen—rather than distract from—future IP litigation.

I. Introduction

Future possible litigation over intellectual property (IP) infringement is not always top of mind when lawyers draft and negotiate IP-related transactions, but it should be. If IP agreements are not structured properly, lawsuits later brought against IP infringers can become mired in arguments over the precise nature of the agreement that, if resolved unfavorably, could distract from—or even undermine—the merits of the IP litigation. This includes issues that can potentially compromise ownership and standing to sue, covenants not to sue and the ability to bring a substantive litigation claim, or unexpected damages calculations. Fortunately, recent cases from the Federal Circuit and district courts shed light on key transactional issues, and can help IP license drafters negotiate strong agreements that can potentially strengthen—rather than undermine—downstream IP litigation.

II. Litigation Issues Arising From IP Agreements

Inattentive draftsmanship in any component of an IP licensing agreement can cause problems in later litigation, but certain provisions pose greater risks than others for the merits of an IP claim. In particular, recent cases highlight the following litigation issues created by language in prior IP agreements:

• Standing to sue: In order to have the right to bring lawsuits against parties that infringe upon a licensed patent, the licensee must own “all substantial rights” in the patent, such that the license is tantamount to ownership.¹ If the license is held by a set of joint owners, then each owner has the right to exploit the patent, but such lawsuit can only be brought when all of the joint owners voluntarily join as plaintiffs. Likewise, ownership of IP—and consequently, standing to sue—can be impacted when invention ownership agreements contain carve-outs. For example, many employment agreements that implicate IP rights include a provision generally stripping employees of the rights to all inventions “conceived, developed, or reduced to practice” that “relate to the business or activities of” the company.² Carve-outs, like a provision permitting employees to retain the rights to inventions devised “entirely on [the employee’s] own time,” can impact ownership and standing, and consequently inject ambiguity into a downstream infringement litigation if there is a dispute over whether the carve-out applies.³

• Infringing vs. Licensed Activity: If a party to an IP licensing agreement that has a right of action promises not to assert that right in litigation, then that party may lack legal recourse in the event that the other party breaches the agreement, such that monetary damages and other typically available legal remedies may not be accessible.⁴ On the flip side, a license may not prevent an infringement suit if the technological scope of the license is narrower than the licensee’s product offerings. In patent cases, this issue can be exacerbated if the rights granted under the license could be insufficient depending on the ultimate scope of the patent claims.⁵

• Inability to Collect Royalties: It is unlawful to charge royalties on a patent after its expiration. As the Supreme Court put it: “A court need only ask whether a licensing agreement provides royalties for postexpiration use of a patent. If not, no problem; if so, no dice.”⁶ However, this prohibition extends only to royalty agreements that actively require the use of a patented invention after that patent’s expiration. Royalty agreements that relate to an expired patent—but that do not require the practice of that patent—are generally enforceable.⁷

• Alteration of Potential Damages: Damages in patent cases typically involve either lost profits or a reasonable royalty. Reasonable royalty damages are often calculated using the Georgia-Pacific factors, which includes consideration of royalty rates paid in comparable licenses.⁸ Thus, the structure and amount of royalties paid in IP licenses can have consequences for applicable litigation damages. This can also be true for lump-sum payments and settlements. For example, a patentee’s history of entering into lump-sum settlement agreements for a particular patent might influence the amount of damages awarded in an infringement action brought in connection with that patent. However, in that instance, it is important that the agreement provide sufficient evidence tying the lump-sum payment to a per-unit royalty for estimated past and future sales.⁹

III. IP Agreement Tips and Tactics for Future Litigation

Based on above considerations, lawyers drafting and negotiating IP agreements should consider the following:

First, if the licensee desires the ability to sue infringers, then the agreement should provide a full-scope, exclusive license giving all substantial rights in the underlying IP to the licensee, such that the license is effectively tantamount to an assignment. In addition, the license should state the intent to vest enforcement rights in the licensee.

Second, to ensure that the chain of title in the relevant IP rights is complete—thus preserving litigation standing—drafters should be especially careful when crafting assignment rights carve-outs that include potentially ambiguous phrases like “on one’s own time,” and instead opt for maximum specificity.

Third, to avoid downstream litigation purportedly covered by a license or settlement agreement, covenants not to sue should be crafted with extreme care. If the intention is full coverage for a licensees’ business, covenants to not sue covering any acts that would infringe the relevant patent are likely broader than those directed to a particular product field or claim scope. If field-specific limitations are necessary, carefully consider whether the licensee’s insulation from infringement litigation could vary depending upon the scope of a patent claim as interpreted by a court (which could involve review of the relevant patents themselves). Such an inquiry can be fact-intensive and can necessitate detailed knowledge of the patent claims at issue, so subject-matter experts should be consulted liberally.

Fourth, keen attention must be paid to how royalties and payments could be used in downstream litigation. If an agreement seeks royalties after expiration of a relevant patent, the agreement must be clear that the payments are not tethered to practicing the patent. While there exists a bright-line rule against extending the length of a patent monopoly by charging royalties for what would otherwise constitute infringement post-expiration, courts have upheld and enforced agreements charging royalties on non-infringing activities or amortizing in-term royalties over a period of time extending past a patent’s expiration date. In crafting such an arrangement, ensure that no attempts are made to restrain commerce beyond the exclusive rights attendant to the underlying patent, as that may constitute patent misuse, which could make the relevant patent unenforceable in its entirety.

Fifth, be mindful of unintentionally (or intentionally) creating a royalty structure used in downstream litigation via lump-sum settlement agreements. The en banc judgment in favor of the infringer-defendant in EcoFactor, Inc. v. Google, LLC at the Federal Circuit provides guidance on the support needed in an agreement to tie a lump-sum payment to a unit-based royalty. Likewise, IP owners should nonetheless be wary of declaring how settlement amounts were calculated as an estimate of royalties unless setting such a precedent would be helpful in recovering reasonable royalties from other infringers who refuse to settle out of court.

These considerations are by no means exhaustive or foolproof, but keeping them top of mind can help lower the risk of inadvertently undermining the substance of downstream IP litigation.

¹ See Univ. of S. Fla. Rsch. Found., Inc. v. Fujifim Med. Sys. U.S.A., Inc., 19 F.4th 1315, 1322 (Fed. Cir. 2021) (“While we acknowledge that the license agreement transfers significant rights to USFRF and that the … duration of the license agreement is substantial, we agree with the district court that USF retained enough important rights to conclude that USF did not transfer all substantial rights in the patent.”).

² Core Optical Techs., LLC v. Nokia Corp., 102 F.4th 1267, 1270 (Fed. Cir. 2024).

³ See id. at 1275 (“But Dr. Core was not free to use the entirety of his off-the-clock hours any way he wished without accountability to TRW. His participation in the fellowship program … was dependent on his actual pursuit of his PhD research, so he had to spend a large chunk of his off-the-clock time in ways for which he was accountable, financially, to TRW. The contract language, “entirely on [his] own time,” allows either perspective, though the first would support Core Optical and the second would support Nokia.”).

⁴ See John D. Calamari & Joseph M. Perillo, The Law of Contracts § 21-11 (3d ed. 1987) (“The theory is that should the creditor sue despite his promise not to, the debtor has a counterclaim for damages for breach of the creditor’s covenant not to sue which is equal to and cancels the original claim.”).

⁵ See AlexSam, Inc. v. Aetna, Inc., 119 F.4th 27, 37 (Fed. Cir. 2024) (“The patent claims asserted by AlexSam … are not limited to transactions involving activation or adding value. Thus, the scope of the asserted claims is broader than the scope of the license granted to Mastercard in the License Agreement. Consequently, not every act that infringes these claims will necessarily be licensed.”).

⁶ Kimble v. Marvel Ent., LLC, 576 U.S. 446, 459 (2015).

⁷See Ares Trading S.A. v. Dyax Corp., 114 F.4th 123, 128 (3d Cir. 2024) (“[A] patent licensee’s royalty obligation is unenforceable only if it is calculated based on activity requiring use of inventions after their patents expire. Ares’ obligation is not calculated based on activity requiring use of inventions covered by the CAT Patents after their expiration, so it does not improperly prolong the CAT Patents’ duration….”).

⁸ Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).

⁹ See EcoFactor, Inc. v. Google, LLC, 137 F.4th 1333, 1341 (Fed. Cir. 2025) (en banc) (“As part of his analysis, Mr. Kennedy considered lump-sum settlement licenses between EcoFactor and three licensees … [and] testified that the Daikin, Schneider, and Johnson lump-sum amounts reflected an $X per unit rate applied to their sales…. We hold the existing licenses upon which Mr. Kennedy relied were insufficient, individually or in combination, to support his conclusion that prior licensees agreed to the $X royalty rate and therefore the district court abused its discretion in failing to exclude this testimony.” (internal citations omitted)).