Another Thing That Can Go Wrong With HR 3309

Are you tracking the anti-troll legislation making its way through Congress? Chris Gallagher has been doing that, and some of you are no doubt on his mailing list with updates. If you are an administrator at a university, and you are responsible for patent licensing, and you are not following this legislation, then here is a wake-up call.

Under the proposed bills, such as HR 3309 and S. 1013, the prevailing party in a patent infringement case brought by a non-operating entity or patent “troll” can recover its costs from the “non-prevailing” party. It gets more interesting if the non-prevailing party, like a semi-failed university startup, doesn’t have the money to pay. Then the court can look to “interested parties”–basically anyone with an ownership interest in the patent or a financial interest in the outcome–for payment. What does that mean for universities? Well, for one, if you go out a-litigating, it could come back to bite if you lose, since universities will likely end up as “non-operating entities” when they choose to “enforce” their patents on industry.

But that’s really not the big problem, because a university can choose not to litigate, and deal with the successful use of inventions and discoveries made by faculty in some other way, like celebrating or something, or offering to help the happy companies that have adopted university research.

No, the big problem is in the deals already done. Universities often license exclusively, and these days universities like to license to startup companies, and since private investment is difficult for such startups to obtain, universities like to license to shell companies that barely have operations, let alone product. These licenses typically have provisions that allow the licensee to enforce licensed patent rights. These provisions often require the licensor–the university–to join the litigation. Often when the press reports a university has sued a company for infringement, it’s actually the university’s licensee that has taken the action, and pulled the university in via the exclusive license agreement.

If the new anti-troll legislation passes in anything like its present form, all those past exclusive licenses will suddenly have new meaning for universities. Even if the university does not have to participate in the litigation, the university may be an “interested party” if it is the patent owner, or expects royalties, or expects a share of any settlement. The problem runs deep: because the provisions are embedded in licensing agreements–in binding contracts–a university cannot just rewrite the license to account for the change in law. Some licensees might agree–but others might find the change advantageous, shifting financial burden onto university licensors.

University administrators should check their exclusive licenses for the following:

  1. Does the licensee have product on the market?
  2. Does your license allow the licensee to sue for patent infringement?
  3. Do you agree to defend the patent?
  4. Do you agree to be joined if the licensee sues for patent infringement?
  5. Does the license have a clause sharing income from patent litigation or settlements?
  6. Does the license treat litigation proceeds as royalties?

If your answer to 1. is “No” and your answer to 2. or 3. is “Yes” and you answer “Yes” to any of 4. through 6., then your university may be exposed to new financial liability under the law (if it passes).

But wait, it gets worse. A university may be found to be an interested party if it has assigned a patent to an affiliated research foundation and has a contract with that foundation under which the foundation is obligated to share licensing income–royalties or judgments or settlements. If the foundation has a lot of cash or has an insurance policy that covers these new situations, then you may be fine. But if it’s a cash-poor, self-insured research foundation, then the costs of patent infringement litigation by a licensee of the foundation could find its way all the back to the university, which remains an “interested party.”

If the legislation passes in its present form, then many university exclusive licenses will go radioactive for years to come. It’s not just new deals that will be in play, but a whole lot of existing deals that were drafted without anticipating that federal law could change and expose university licensors to litigation expenses of prevailing parties. Nearly every university that has granted exclusive licenses to startups will be affected by the new law, should it pass. This would be a good time to wake up and take an interest in the situation, while there is time to shape the final form of the legislation.

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