Federal Circuit Clarifies Need to Give Notice to Licensor under Lear Doctrine in Order to Recover License Payments

In Go Medical Industries Pty, Ltd., v. Inmed Corp., 80 USPQ2d 1629 (Fed. Cir. 2006), Go Medical sued MMG/Rusch (now Inmed) in U.S. District Court for the Northern District of Georgia, in February, 2001 alleging patent infringement, breach of contract, tortious interference with contract, conspiracy to breach fiduciary duty, trademark infringement and unfair competition. 

As background, Dr. O’Neil received U.S. Patent No. 4,652,259 (the ‘259 patent) for a catheter designed to reduce the occurrence of urinary infections.  The ‘259 patent was granted in 1987, and was a continuation in part based on a 1979 application.  The continuation in part was made to include his preferred embodiment (as evidenced by constructed examples and later, O’Neil’s own admission on deposition), where the distance from the stop member to the distal end of the catheter was specifically limited at 1.5 cm. 

However this distance preference was described in ‘259 patent as “crucial,” but, while known at the time of the 1979 application, was not included in the 1979 application and was not supported by the 1979 application’s drawings. 

Between the filing of the 1979 application and the filing of the continuation in part application, a 1982 publication issued which anticipated the claims.

Dr. O’Neil formed Go Medical in 1988 to contract with defendant MMG to distribute the catheters, sharing profits equally.  MMG sold “MMG/O’Neil” catheters and registered the “MMG/O’Neil” trademark.  The licensing agreement was silent on rights to use the name “O’Neil”. 

Independently in 1992, Go Medical sued competitor C.R. Bard for patent infringement.  In that suit, the district court granted summary judgment in March, 1999 for Bard, finding inter alia, the ‘259 patent invalid as anticipated.  The Federal Circuit court reversed and remanded in August, 2000 on the issue of invalidity, and the case later settled. 

Due to the litigation with Bard, MMG began in 1999 to place the licensing royalties in an escrow account.  Specifically, MMG sent a letter in June 1999 stating that the royalty payments were being placed in the escrow account pending an appeal of the invalidity finding, but did not state that MMG believed that the licensed patents were invalid.

Failure to Completely Cease Licensing Payments Makes Lear Inapplicable

The Lear doctrine was promulgated by the Supreme Court in Lear, Inc. v Adkins, 395 U.S. 653 (1969) and allows a licensee to challenge the validity of a licensed patent.  During the challenge, the licensee is permitted to cease license payments that would otherwise be contractually required up until there is a final holding of invalidity.  However, in order to take advantage of the Lear doctrine, the licensee must provide notice that the royalties are being ceased due to the licensed patent being invalid. 

The Federal Circuit held that the mere fact that MMG considered the agreement terminated upon the invalidity finding in the

 

Bard litigation was insufficient since MMG continued paying royalties into the escrow account.  Instead, the Federal Circuit held that the invalidity finding in the Bard litigation was independent of the contractual obligations set forth in the license.  Further, MMG’s continued payment into the escrow account was an implicit recognition that Go was still contractually entitled to payment pending appeal. 

Further, the Federal Circuit clarified that the June 1999 letter in which MMG gave notice that the royalties were being placed in escrow pending appeal did not give proper notice that royalties were being ceased due to a belief that the patent was invalid since the letter did not so state.  Thus, the June 1999 letter was insufficient notice for the purposes of Lear such that, contractually, MMG was obligated to continue the payments and the failure to remit these payments was a breach of the license.  The court vacated and remanded to the district court for recalculation of contract damages.

Best Mode Not Satisfied For 1979 Priority Application

Separately, the Federal circuit court affirmed the district court’s grant of summary judgment on patent invalidity due to anticipation.  Specifically, the Federal Circuit held that the 1979 application failed the best mode test and lacked adequate disclosure for the undisclosed 1.5 cm distance.  As such, the 1979 application was not compliant with 35 U.S.C. §112, and could not be a basis for a priority claim for the ‘259 patent.  Thus, the Federal Circuit affirmed the district court’s finding that the 1982 article on the subject matter anticipated the ‘259 patent.

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