Dodocase VR, Inc. v. Merchsource, LLC

Background

Dodocase manufactured mobile-device accessories, including virtual-reality accessories, and held three patents at issue in the case. MerchSource designs, sources, and distributes consumer goods and entered into a Master License Agreement with Dodocase concerning the patents. The agreement included a provision barring MerchSource from challenging the validity or enforceability of the licensed intellectual property.

MerchSource sent Dodocase a letter on October 5, 2017, stating that it had concluded the relevant patent claims were invalid under sections 102 and 103 of the Patent Act and would not pay royalties on products sold afterward. MerchSource later stopped paying royalties on products sold after that date. Dodocase terminated the agreement on February 14, 2018. The agreement included an 18-month sell-off period during which MerchSource could continue selling certain products, subject to the agreement’s provisions, including royalty payments.

The court had previously issued a preliminary injunction requiring the defendants to seek withdrawal of challenges filed with the Patent Trial and Appeal Board. After the appellate court affirmed that order and the proceedings ended, the court lifted the stay and allowed the parties to present motions addressing when MerchSource gave legally sufficient notice under the Lear doctrine and whether that doctrine applied during the sell-off period.

Legal standard

MerchSource’s motion was styled as a request for a declaration of rights but appeared to be a motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). The court stated that the Rule 12(c) standard is the same as the standard for a motion to dismiss for failure to state a claim under Rule 12(b)(6). Under that standard, the court considers the pleadings and accepts factual allegations as true, but need not accept conclusory allegations or unreasonable inferences.

Lear notice

The court explained that Lear, Inc. v. Adkins held that a patent licensee cannot be prevented from contesting the validity of a licensed patent when federal patent policy would be undermined by requiring continued royalty payments during the challenge. The Federal Circuit’s decision in Studiengesellschaft Kohle, M.B.H. v. Shell Oil Co. limited that protection by requiring the licensee to both stop paying royalties and notify the licensor that it stopped paying because it considered the relevant patent claims invalid. The Ninth Circuit has also stated that the licensee need not file a validity challenge immediately, but must clearly notify the licensor that it is challenging validity.

The court found that MerchSource satisfied those requirements. Its October 5, 2017 letter stated both that the relevant claims were invalid and that MerchSource would not pay royalties on products sold afterward. The court treated the later nonpayment as satisfying the requirement that MerchSource actually stop paying royalties. The court rejected Dodocase’s arguments that MerchSource’s negotiations, its later royalty check for an earlier period, the timing of its patent challenges, or its failure to disclose alleged prior art earlier prevented it from invoking Lear.

No-challenge provision

The court also concluded that the no-challenge provision in the Master License Agreement was unenforceable under Lear. It distinguished cases enforcing no-challenge provisions in settlement agreements, consent decrees, or dismissal orders because this provision was part of a pre-litigation agreement and was not the result of an earlier dispute or litigation between the parties. The court further distinguished authority involving a prior patent owner because MerchSource was a licensee, not the patent assignor.

Sell-off royalties

Dodocase argued that the sell-off provision separately required MerchSource to pay royalties for sales made during the 18-month period after termination. The court rejected that argument. It concluded that sell-off royalties were an extension of the royalties otherwise due under the agreement and that federal patent policy favoring early adjudication of patent validity overrides contrary contract provisions. Dodocase had not shown a basis for treating sell-off royalties differently from other royalties accruing after sufficient Lear notice.

Disposition

The court granted MerchSource’s motion for a declaration of rights and obligations under Lear. It found that MerchSource provided sufficient Lear notice on October 5, 2017, and that Lear applied to all claims for patent royalties accruing after that date, including royalty payments resulting from sales during the sell-off period under the agreement.