Legality of a Contractual Estoppel against Challenge to Patent Validity

Can a licensee who has reaped the benefits of a patented invention challenge the validity of the patent? Under the Patents Act, 1970, yes. Section 140(1)(d) provides that it shall not be lawful to insert in a patent-related contract or license a clause that prevents the licensee from challenging the validity of the licensed patent. It goes on to say that such a condition shall be void.

The said provision, which flows from Article 40 of the TRIPS, was introduced in the Act as part of the 2002 amendment. Interpreting the provision in Enercon (India) Limited v. Aloys Wobben in January 2013, the IPAB observed as follows:

“Licensee Estoppel

14.       The learned counsel for the respondent submitted that though S.140 of the Patents Act provides for avoidance of certain restrictive conditions, it is always subject to Ss. 115 and 117 of the Indian Evidence Act.  Having pleaded that the applicant is the transferee of the technology transferred, it cannot destroy the validity of the intellectual property that was transferred.  There is lack of good faith.  Learned counsel referred to paragraph-18 of the written statement filed by the applicant herein in the suit before the Delhi High Court. It was submitted that after revocation petition was filed, the applicant stopped paying the royalty.  Learned counsel referred to various paragraphs in the written statement. Learned counsel submitted that an order of revocation is a discretionary remedy and the discretion shall not be exercised in favour of the applicant. Learned counsel referred to the derivative action suit filed before the Bombay High Court.  Learned counsel submitted that the applicant must surrender the rights under the agreement (Intellectual Property Licence Agreement) before it attacks the patent. 

15.       In response, Mr. R. Parthasarathy, learned counsel for the applicant submitted that on 8.12.2008, the licence had been terminated and once it has been terminated, the subsequent  application for revocation  will not be barred by estoppel.  Learned counsel submitted that the respondent cannot plead in the same breath that the license has been terminated and that the applicant as the licensee is estopped from challenging it. According to him, the suit in the Bombay High Court was for a relief regarding the payment of royalty, etc. where the Court will decide the construction of documents and it is still pending before the Bombay High Court.  Learned counsel submitted that the answer to the question whether a licensee can file a revocation is ‘yes’ and referred to S. 140 of the Patents Act.  He submitted that the power under S. 64 is very wide.  He referred to the decision in Lear, Inc v. John S. Adkins [395 U.S.653, 89, S.Ct.1902].   

16.       So we will see whether even if the applicant is a person interested, he is estopped from suing for revocation being a licensee. S. 140 says that it is not lawful to insert in a licence to manufacture or use a patented article or to work any process protected by a patent, any condition of prevention to challenges to the validity of a patent.  This is the law.  This condition will govern all licences which relate to or are in relation to a patented article or a process protected by a patent.   Learned counsel for the applicant relied on AIR 2010 SC 259 in which it was held that there can be no estoppel against a statute. 

17.       In Lear Incorporated v. John S.Adkins [395 U.S.653, 89, S.Ct.1902], it has been held that the contractual rights give way to public interest in a challenge to a patent and therefore, even a licensee can attack an unworthy patent.  In Lear , the inventor was Adkins.  He was hired by Lear Incorporated to develop a gyroscope which was required in the aviation industry.  Adkins developed an invention which Lear incorporated in its production process.  In the litigation where Adkins claimed compensation for Lear’s use of the improvements which the inventor has patented, Lear sought to prove that Adkins inventions were not sufficiently novel.  The inventor argued that as a licensee, Lear must pay.  The California Supreme Court relied on the rule of estoppel to bar Lear from proving that Adkins’ invention was not patentable.  The U.S. Supreme Court granted Certiorari in this case to reconsider the Hazeltine rule which invoked estoppel to deny a licensee the right to prove that the licensor’s idea was really a part of the public domain.  The U.S. Supreme Court said that the present federal policy favoured free competition in ideas which do not merit patent protection, and  that the licensee estoppels had an uncertain status and it is a product of judicial efforts to accommodate the competing demands of the common law of contract in the federal law of patents.  It observed that instead of a creative compromise, there has been a chaos of conflicting case law. It also observed as under:

“Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain.  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.  We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued.”

The U.S. Supreme Court also held that the overriding federal policies would be significantly frustrated if licensees are required to continue to pay royalty during the time they are challenging the patent’s validity.  The Court observed that enforcing this contractual provision would undermine the strong federal policy favouring full and free use of ideas in the public domain.  So we have the Act which says that the conditions which restrict the right of a licensee from challenging the patent are illegal and we have the opinion of the U.S. Supreme Court explaining why a licensee is entitled to invalidate the patent. This restriction imposed by S.140, is another indicator of the public interest angle in patent law. While the law shall protect the rights of the property owner, it will not restrict the rights of the interested person to challenge the grant, so that unworthy patents are restored to the public domain.

Because of the costs of the litigation and the very special nuances of the technology, it may very well be that the licensee alone is capable of challenging the patent. He has the funds and the knowledge to launch the attack on the subject matter of the invention. This is why the U.S. Supreme Court held that it would be inequitable to restrict him from attacking the patent by any condition in the contract. The Parliament has specifically introduced this provision in our Patents Act which is a special enactment as far as patents are concerned and hence it will prevail over the general rules relating to contract. Therefore no licensee can be estopped from challenging the patent. This objection is rejected.”

I don’t think I could have captured the spirit and objective of Section 140 better. What needs to be understood is that the freedom to challenge the validity of a patent extends to a compulsory licensee and a prospective licensee as well. Considering additionally that a licensee or a prospective licensee is also a “person interested” within the meaning of Section 2(1)(t) of the Act who has the commercial incentive and the technical wherewithal to challenge the validity of the patent, I tend to agree with the policy intent underlying Section 140.