Lear and its Progeny

1. Lear and its Progeny by D. Patrick O’Reilley Finnegan presented at Licensing & Management of IP AssetsAIPLA Annual MeetingOctober 26, 2012

2. Lear, Inc. v. Adkins395 U.S. 653 (1969) • Adkins licensed Lear under patent application • Lear to pay royalties • Lear could terminate if no patent issued or if patent was held invalid • Believing no patent would issue, Lear stopped paying royalties • Patent issued • Adkins sued under contract for royalties

3. California State Court Decisions • State courts refused to allow Lear to assert patent invalidity under licensee estoppel rule • “so long as a licensee is operating under a license agreement he is estopped to deny the validity of his licensor’s patent in a suit for royalties under the agreement.” • Supreme Court granted certiorari in view of • “recent decisions emphasizing the strong federal policy favoring free competition in ideas which do not merit patent protection” • Sears and Compco decisions

4. Supreme Court Decision • Supreme Court held public interest in free competition in use of ideas in public domain prevails over licensee estoppel • “Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification.”

5. Supreme Court Decision • Supreme Court also rejected arguments • That royalties were payable as consideration for disclosure and license of invention before patent issuance • But consider later decision in Aronson v. Quick Point • That royalties should be paid under contract until patent finally declared invalid • “enforcing this contractual provision would undermine the strong federal policy favoring the full and free use of ideas in the public domain”

6. Lear Principles Licensees may be only ones with incentive to challenge “patentability of an inventor’s discovery” Contract law principle – licensee estoppel – “must give way before the demands of the public interest” Contract provisions, such as royalty payments, that, if enforced, would frustrate overriding federal policy are unenforceable

7. Progeny of Lear v. Adkins • Effect of express no-challenge clause • Not enforceable • Massillon-Cleveland-Akron Sign v. Golden State Advertising, 444 F.2d 425 (9th Cir. 1971) • Not patent misuse • Panther Pumps & Equip. Co. v. Hydrocraft, Inc., 468 F.2d 225 (7th Cir. 1972)

8. Lear Does Not Apply • To Assignments • Possible exception based on post-assignment events • Shamrock Tech. v. Medical Sterilization, 903 F.2d 789 (Fed. Cir. 1990) (assignor estoppel); Earth Resources v. United States, 44 Fed. Cl. 274 (1999) (assignor-licensee is assignor for estoppel) • Roberts v. Sears & Roebuck Co., 573 F.2d 976 (7th Cir. 1978) (assignee estoppel) • To consent judgments disposing of litigation • Consent as to validity and infringement • Public interest in res judicata more compelling than free competition in public domain • Foster v. Hallco, 947 F.2d 469 (Fed. Cir. 1991)

9. Lear Does Not Apply • To agreements in settlement of litigation • Public interest in settlement of litigation and res judicata greater than public policy of Lear • “No challenge” provision enforceable • Flex-Foot Inc. v. CRP Inc., 238 F.3d 1362 (Fed. Cir. 2001); Interspiro USA Inc. v. Figgie Int'l, 18 F.3d 927 (Fed. Cir. 1994); Hemstreet v. Spiegal, 851 F.2d 348 (Fed. Cir. 1988)

10. Lear Applies • To exclusive and nonexclusive licenses • Beckman Instruments v. Technical Dev. Corp., 433 F.2d 55 (7th Cir. 1970) • To agreements in settlement of disputes in advance of litigation • Rates Tech., Inc. v. Speakeasy, Inc., 685 F.3d163 (2dCir. 2012); Massillon–Cleveland–Akron Sign Co. v. Golden State Adver. Co., 444 F.2d425 (9th Cir. 1971)