Most favored licensee royalty refund

Patent license agreement

In a case of first impression, the Fifth Circuit addressed the retroactive application of a most favored licensee (MFL) clause under a fully-paid up lump sum royalty in a patent license agreement. In an underlying patent infringement case, DataTreasury Corp settled with JP Morgan Chase and negotiated a license in 2005. So too did Cathay Bank, but much later in 2012. JP Morgan paid $70M lump-sum, while Cathay paid only $250K. The patents were set to expire in 2016 and 2017. Each of the lump sums were calculated based on a per-transaction basis, but the MFL clause in JP Morgan’s agreement did not make that a material aspect of the enforceability of the right, or otherwise limit its scope or application. The court applied the MFL clause retroactively to the Cathay Bank license, and held JP Morgan entitled to a refund of $69M (98.6% of what it paid). Its reasoning rested on the distinction between a lump-sum versus a running royalty and, applying Texas law, used parol evidence rule to exclude extrinsic evidence of how the lump sums were determined. The dissent pointed out the obvious: a shorter, later in time license is necessarily less valuable than the longer, earlier in time license. He reasoned the MFL was ambiguous, and susceptible to the patentee’s construction.

The case is JP Morgan Chase Bank v. DataTreasury Corp., 823 F. 3d 1006 (5th Cir. 2016).

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