Patentee Ordered to Refund
License Royalty When Patent Invalidated¹

        The IP Court in the second instance affirmed a case of patent licensing on June 6, 2019. In the case the court ruled that the former patentee should refund the royalty received plus interests to the former licensee once the patent in dispute had been invalidated by the licensee.

        PackProper is an institute engaged in the design and manufacture of packing materials, which was approached by JollyCup, a paper-cup maker that owns patented technology in the production of thermal-insulating paper cups. JollyCup’s patent, TWI271364 (‘364 patent), is of an improved method that manufactures paper container with thermal insulation layer, and is featured to customize the exterior heat-insulating layers of cups. The ‘364 patent enables the production of disposable cup with various visual and tangible three-dimensional design. JollyCup was convinced that its ‘364 patent and associate patent family granted in other countries should provide disposable cup makers an enhanced competitive advantage in the marketplace.

        PackProper and JollyCup entered into a deal that consists of three contracts as a whole, which are the Agreement for Equipment Procurement, the Agreement for Licensed Manufacture and Regional Head Agency, and the Agreement for Licensed Manufacture and Exclusive Agency. According to the deal, PackProper was entitled to practice the ‘364 patent and receive affiliated machines dedicated to make paper cups. For the consideration, PackProper as the licensee was obliged to pay a sum of NTD 75 million in return.

        But 16 months later, the machines for manufacturing were found with irregularities such as part breaking, oil leakage, and operation discontinuation. Nonetheless, JollyCup was not able to send staffs for maintenance and inspection. Furthermore, PackProper also found the ‘364 patent as being defected in novelty or inventiveness. In subsequence, PackProper initiated an invalidation action towards the patent before the TIPO and succeeded. The ‘364 patent was, therefore, invalidated. Afterwards, PackProper filed a civil case to a district court as an effort to terminate the three contracts and reclaim the licensing fee of NTD 63 million paid. The district court ruled in favor of PackProper. Though JollyCup made its appeal, the IP Court affirmed the judgment delivered by the district court.

        Both the IP Court and district court found the efforts by the licensee to revoke the contracts and to request for a refund of royalty payment justifiable upon following reasons. First, the three contracts were associated contracts; as viewed, if one of which is revoked, the rest of them will be certainly be rendered null and void. Second, the patent was eventually invalidated for lack of novelty and inventiveness, not to mention the lack of support in the disclosure for the patent amendment. The fact that the patent has been finally and bindingly invalidated should take effect retroactively from its issue date under Article 82.3 of the Patent Act. As such, JollyCup should enjoy no such right to license its patent to the licensee. Even more, JollyCup was incapable to remedy the defects of the manufacturing machines in spite of numerous reminders made by PackProper. Since the onus of incapability to perform the contract was attributable to JollyCup, so that the contract has become vulnerable to revocation, rendering the licensee PackProper rightful to terminate the deal of three agreements. Both parties should, henceforth, resort to restitution and resume the status as if there were no contracts ever formed, meaning that JollyCup was obligated to return the sum of payment, NTD 63 million, previously received from PackProper.

 Jesse K.Y. Peng, partner of Tsai, Lee & Chen, has dedicated some period of time into the research and published a paper reasoning if the licensee has any legitimate claim for refund from the licensor for the paid royalty in subsequence from the patent invalidation. As pointed out in his paper, Article 35 of the Community Patent Convention restricts the impact of invalidating a community patent, and “any contract concluded prior to the revocation decision” shall not, therefore, be retroactively affected by the revocation.² Also, the German Federal Court of Justice had made several judgements holding that the licensee’s obligation to pay royalty extinguishes only for the future (ex nunc), but not from the beginning (ab initio). One of the reasons is that the licensee has been shielded and enjoyed market advantage as a result of patent protection.

The US federal courts likewise indicated that, for the interim royalties paid before the patent being held invalid, the licensee is not entitled to claim for a refund unless the license agreement or the payment of royalty is a fraud. One of the inferences roots in the policy perspective. If royalty paid can be requested for return, it opens up a loophole for the licensee to first enjoy the patent’s fiscal rewards but later seek for its invalidation in order to re-claim the royalties already paid to the licensor. That would be unfair to the patentee and licensor. Besides, royalty refund after invalidity, if established, would blatantly discourage the patent system which protects innovation by granting a patent protection in exchange of public disclosure. As a result, innovators would gradually opt for trade secrets rather than patents in the long run.

Mr. Peng advises that the above-mentioned issue may be resolved based on the legal theory of unjust enrichment.

In 2012, the Judicial Yuan held a panel discussion on Intellectual Property Law, in which the legal issue of royalties return after the patent right is invalidated was debated. The majority of Justices were convinced that, for the stability of law, the royalties paid before the patent right being invalidated should NOT be constituted as unjust enrichment of the patentee. The licensing agreement of patent should be in effect before the patent at issue is confirmed invalid. As such, the patentee is rightful to receive royalties paid by the licensee during the term of valid patent. However, law practitioners disagree the effect of patent right “shall be deemed to have not existed when it is confirmed revoked” under the current Patent Act. If the patent right is deemed to have not existed upon revocation, the patentee and licensee will owe to each other a duty to return any gains and interests they respectively have benefited from the null and void licensing agreement, meaning that each party may have been unjustly enriched without legal cause. In fact, the Supreme Court in the judgment of (104)TaiShangZu No. 2016 for a similar case on October 22, 2015 seems to concur that the licensee might have to return possible interest if it is gained from the exploitation of the patent at issue before the patent is revoked.

Mr. Peng further advises that a licensing agreement may include both technology licensing and patent licensing. If the patent is rendered null and void due to later invalidation action, the technology license can remain in effect. As the legal theory of unjust enrichment applies, while the patentee owes the duty to return monetary interests received before the patent at issue is revoked, the licensee also owes the duty to return monetary interests gained owing to the exclusive exploitation of the patent right for not being sued. As such, the mutual liabilities between the patentee and licensee can be offset. In other words, the patentee’s fiscal revenue from licensee’s royalty payment has legitimately cancelled out the licensee’s fiscal interest gained from not being sued by the patentee and from being safeguarded from third parties’ competition. As a result, the patentee would only be required to refund the difference to the licensee.

for any questions relating to this topic, please contact us at cjchen@tsailee.com.tw