December 2023
Yanting Pei and Teresa Huang
In the previous article, we mainly analyzed the legal problems often encountered in the process of obtaining patent rights, and in this article, we will analyze the legal problems that may be encountered in the process of licensing the patent rights to others. From the published effective judgment, most disputes in the patent license contract mainly occurred in the validity of contract, the determination of breach, the assumption of breach liability, and the termination of contract. In this article, we will select some typical cases to share with readers, and put forward some practical suggestions to address these issues.
I. Issues of contract validity
As per Article 502 of the Civil Code, a legally established contract takes effect from the time of its formation, unless otherwise provided by law or agreed upon by the parties. The so-called legally established contract, according to relevant provisions of the Civil Code, generally refers to the one in which the actor has the appropriate civil capacity, the expression of intent is true without violating any mandatory provision of laws or administrative regulations, or violating any public order or moral, and both parties have reached a consensus. In order to claim that a contract is invalid, it is necessary to prove, in accordance with above provisions, that the subject does not have the appropriate civil capacity, or that the expression of intent is false and untrue, or that the contract is contrary to any mandatory provision or public order or moral, or that the contract is requested to be rescinded on the basis of fraud, duress or material misinterpretation in accordance with Articles 147 to 151 of the Civil Code. In addition, according to Article 502 of the Civil Code, contracts for which administrative authorization should be obtained become effective upon obtaining such authorization, otherwise such contracts may be deemed invalid if certain conditions are met.
As for disputes in the patent license contract, in addition to situations mentioned above, the question often encountered is “If the patent right is declared invalid by the patent office, is the contract signed previously still valid?”
This question is answered in Article 47 of the Patent Law, that is, the invalidated patent right is regarded as not existing from the beginning, but such invalidation may not be traced back to any judgment or mediation of patent infringement already made and enforced, any decision of patent infringement dispute already performed or compulsorily enforced, as well as any patent license contract and patent right transfer contract already performed by the People’s Court before such invalidation. In other words, a patent that has been declared invalid has no effect on the part that has already been performed, and royalties, as well as other fees that have been paid do not need to be returned. But for the fairness, the article also provides that compensation should still be paid for damages caused to others by the patentee’s bad faith. At the same time, if it obviously violates the principle of fairness by retaining the patent infringement damages, patent royalties and patent right transfer fees, these fees shall be returned in whole or in part.
What is “the patentee’s bad faith” and “the principle of fairness”? According to the published judgments, the court mainly considers following factors when determining the “patentee’s bad faith”:
Whether the patentee has obtained the patent right knowing that the patented technology is not patentable or knowing that the patent right has been declared invalid
In the Civil Judgment of the second instance of the dispute in returning the original thing between Shang Hengzhong and Haoqian Plastic Products Factory in Liunan District of Liuzhou ((2021) ZGFZMZ1986), the court holds that the patentee obtains the patent right knowing that its patented technology is not patentable or claims the right to other people knowing that its patent right has been declared invalid, belonging to the “patentee’s bad faith” specified in this article. Specifically to the case, first of all, the patent concerned is a patent for invention after substantive examination, and there is no obvious unpatentable situation or any evidence to prove that Shang Hengzhong has intentionally circumvented the law or obtained the patent right by improper means. Secondly, although the outsiders in the case request for invalidation of the patent concerned before the effective date of the mediation, when both parties reach a settlement agreement, the invalidation proceedings has not yet organized the substantive hearing. Therefore, as Haoqian Factory does not challenge or inquiry, Shang Hengzhong does not take the initiative to explain circumstances of the invalidation request, it is difficult to conclude the constitution of a bad faith. As result, it cannot be found that Shang Hengzhong has a bad faith based on the available evidence.
In addition, in the Civil Judgment of the first instance of the dispute in the technology transfer contract among Karamay Wuwu Machinery Manufacturing Co., Ltd., Wang Xujian and Shihezi Guangda Agricultural Machinery Co., Ltd. ((2023)B08ZMC1), although the court does not explicitly discuss whether the patentee had a bad faith, as for the effectiveness of the contract after the patent was invalidated, the judge believes that the patentee has no intent to defraud in concluding the contract, and states that “Because the technology transfer contract concerned was signed at the stage of invention patent application, Guangda Company (i.e. the licensee) had the public access to whether the invention patent could be granted and the content of the evaluation report from the Intellectual Property Office, and it should bear the result of not taking the initiative to understand the evaluation report and the grant of the invention patent when signing the contract. And the fact that after more than 1 year of sales since the release of the evaluation report, the licensee signed a (patent) technology transfer contract with the patentee again and paid RMB300,000 Yuan of late transfer fee is enough to show that the licensee signed the contract after measuring the value of the patent technology concerned, therefore, the licensee’s claim that the (patent) technology transfer contract should be revoked due to fraud lacks factual and legal basis, and the court will not support it”.
It can be seen that, on the one hand, whether the patentee is aware of the status of its rights at the time of signing the contract is a factor to be taken into account by the court, while on the other hand, whether the licensee has actively tried to check the validity status of the rights will also be a factor to be taken into account by the court.
In determining whether the “principle of fairness” is met, the court will consider following factors:
1. Whether the ratio of the total amount of patent infringement damages, patent royalties, patent transfer fees and license royalties paid prior to the date of invalidation is significantly higher than that of the period of actual use of the patented technology prior to the date of invalidation to the entire licensing period
Similarly, in the Civil Judgment of the second instance of the dispute in returning the original thing between Shang Hengzhong and Haoqian Plastic Products Factory in Liunan District of Liuzhou ((2021) ZGFZMZ1986), the court holds that, whether the compensation, royalties or transfer fees have been returned should be proved by the person licensed to implementation the patent or the respondent infringer, and specific to the case, the mediation is the confirmation of the settlement agreement reached voluntarily by both parties in the patent infringement dispute, the amount of licensing fees is slightly lower than the amount of other infringement disputes, and Haoqian Factory fails to prove that the amount is clearly beyond the normal range. Secondly, the mediation is a settlement agreement in the form of patent license in the patent infringement dispute. The ratio of RMB120,000 Yuan paid by Haoqian Factory before the patent is declared invalid to the total amount of RMB220,000 Yuan of license fee is still reasonable in comparison with the ratio of the period that Haoqian Factory has actually used the patented technology before the patent was declared invalid to the license period agreed in the mediation without any obvious unfairness.
2. Whether the patentee has provided appropriate technical services
On the issue of the refund of fees, in the Civil Judgment of the first instance of the dispute in the technology transfer contract among Karamay Wuwu Machinery Manufacturing Co., Ltd., Wang Xujian and Shihezi Guangda Agricultural Machinery Co., Ltd. ((2023)B08ZMC1), the court holds that the patentee has delivered the drawings and provided the technical guidance, and the licensee has produced and sold the corresponding products based on such drawings and guidance provided by the patentee, and then signed the (patent) technology transfer contract again and paid RMB300,000 Yuan as the transfer fee. Therefore, even though the licensed utility model patented technology concerned has been revoked, the licensee has subsequently made new creations on the basis of the licensed utility model patented technology and obtained a new utility model patent. However, the patentee asserts that the transfer fee paid by the licensee can be regarded as remuneration and expenses for providing technical services and the licensee’s claim for the return of the transfer fee cannot be supported.
It can be seen that, on the one hand, the ratio of the amount paid to the total license fee is a comparatively important reference factor, and on the other hand, the technology and services substantially provided by the patentee may also be a factor to be taken into account by the court.
II. Determination of breach and assumption of breach liabilities
1. Determination of breach
As far as the determination of breach is concerned, as per Article 577 of the Civil Code, if either party fails to perform a contractual obligation or performs it in a way that is not in accordance with the agreement, such party shall be liable for the breach. However, the determination of whether it constitutes a breach generally needs to be combined with the specific terms of the contract signed by both parties.
i. Failure to pay price, remuneration, rent, interest, or to fulfill other pecuniary obligations may be determined as a breach
For example, in the Civil Judgment of the second instance of the invention patent licensing contract dispute and utility model patent licensing contract dispute between Anhui Changgu New Building Technology Co., Ltd. and Zhejiang Green Building Integration Technology Co., Ltd. ((2022)HMZ1034), although the plaintiff claims that the defendant does not provide it with the technical information according to the agreement, constituting the breach, the court holds that the defendant does not provide the technical information because the plaintiff does not make contractual payments as agreed, so the defendant does not constitute a breach. Another example is in the Civil Judgment of the second instance of the utility model patent licensing contract dispute between Hu Shunyong and Opple Lighting Co., Ltd. ((2022)ZGFZMZ233), in which the court holds that the contract concerned stipulates that, if Hu Shunyong refused to pay the royalties, Opple had the right to require Hu Shunyong to compensate for the loss and pay liquidated damages of RMB300,000 Yuan. Since Hu Shunyong does not pay the royalties as agreed, Hu Shunyong should pay liquidated damages to Opple.
Therefore, if both parties have agreed in the contract on the default liability for non-payment of the price, and the party concerned has no reasonable grounds for refusing to pay the price, such party will generally be determined as in breach of contract, and will be liable for the corresponding breach.
ii. Explicitly indicating or demonstrating by one’s own conduct that one is not performing a contractual obligation may constitute a breach
In the abovementioned invention patent licensing contract dispute between Anhui Changgu and Zhejiang Green Building ((2022)HMZ1034), the plaintiff indicates at the same time that the defendant refuses to perform the contract any more, and the court thus holds that the act of the party concerned to explicitly refuse to continue to perform the contract without the right of termination constitutes a fundamental breach. Besides, in the Civil Judgment of the second instance of the invention patent licensing contract dispute between Beijing Donghe Limu Technology Co., Ltd. and Peking University School of Stomatology ((2021)ZGFZMZ2420), the court holds that, after repeated reminders from the Stomatological Hospital, Donghe Company still refuses to accept the patented products and pay the patent license royalty that the act of Donghe to unilaterally refuse to fulfill its contractual obligations breaches the main obligations of the agreement concerned and prevents the realization of the purpose of the contract. The trial court, based on the provisions of the Contract Law, affirms that it is not improper for the agreement concerned to be terminated when the Notice on Termination of Patent License Agreement issued by the Stomatological Hospital is delivered to Donghe Company.
2. Liability for breach
As far as the assumption of breach liability is concerned, as per Article 577 of the Civil Code, if either party fails to perform a contractual obligation or performs it in a way that is not in accordance with the agreement, the other party may demand, inter alia, continued performance, remedial measures, or compensation for damages. If both parties have agreed on the breach liability, they can request the assumption of breach liability according to such agreement. If the contract is unclear as to the breach liability, then as per Article 582 of the Civil Code, if it cannot be determined through supplementary agreements, contract terms or trading practices, the injured party may reasonably choose to request the other party to assume the breach liability, such as repairing, remaking, replacing, returning goods, reducing the price or remuneration depending on the nature of subject matter and the significance of damages. And a question often encountered in practice may be whether liquidated damages can be claimed at the same time as loss damages? Can liquidated damages exceed actual loss damages? And whether the liquidated damages which are too high or too low can be adjusted? On these questions, the Supreme People’s Court makes explicit descriptions in the Civil Judgment of the second instance of the invention patent licensing contract dispute between Henan Dingyi Electrical Appliance Technology Development Co., Ltd. and Shanghai Duohuan Oil Smoke Purification Equipment Co., Ltd. ((2022)ZGFZMZ93). The court holds that:
“Loss damages for breach refer to the liability for damages that the breaching party shall bear according to the law or contractual agreement for the losses caused to the other party due to the non-performance or incomplete performance of its contractual obligations. Liquidated damages are a certain amount of money payable to the other party when either party breaches the contract, as agreed upon in advance by both parties at the time of conclusion of the contract. Liquidated damages are both compensatory and punitive, focusing on the former and supplemented by the latter, possessing dual natures. In terms of the compensatory nature of liquidated damages, liquidated damages are essentially a kind of predetermined amount of damages whose main function is to fill the loss of the observant party, acting as the substitution of performance. In the case of contractual termination, a claim for loss damages and a claim for liquidated damages may coexist. If they are directed to different interests, the observant party may claim them together; if they are directed to the same interest, they may not be claimed together in order to avoid a situation of double enrichment.”
“Article 29(1) of the Interpretation to Certain Issues by the Supreme People’s Court on the Application of the Contract Law of the People’s Republic of China (II) (hereinafter referred to as the Interpretation to Contract Law) stipulates that if the party concerned claims that the agreed liquidated damages are too high and requests it to be appropriately reduced, the People’s Court shall be based on the actual loss, taking into account comprehensive factors such as the performance of the contract, the degree of fault of the party concerned, and the expected benefits, weigh them in accordance with the principle of fairness and honesty to make a decision. As per Article 29(2), if the liquidated damages agreed upon by the parties concerned exceeds thirty percent of the loss caused, it can generally be recognized as “excessively higher than the losses caused” as stipulated in Article 114(2) of the Contract Law. As mentioned above, in addition to its compensatory nature, liquidated damages also carry a certain punitive function, and according to the above Interpretation to Contract Law, liquidated damages may appropriately exceed the actual losses on the premise of being able to ascertain the actual losses, but not more than thirty percent of the losses.”
It can be seen that generally either liquidated damages or loss damages may be claimed, but if the interests against which the two claims are made are not the same, they can be claimed at the same time. And as far as the amount is concerned, a request for adjustment can be made, and the liquidated damages can appropriately exceed the actual losses, but not more than thirty per cent of such losses. In addition, according to the Civil Judgment of the second instance of the utility model patent licensing contract dispute between Hu Shunyong and Opple Lighting Co., Ltd. ((2022)ZGFZMZ233), if either party believes that the liquidated damages are too high or too low, such party should submit evidences, otherwise it may not be supported by the court.
III. Contract termination
As per Article 562 and Article 563 of the Civil Code, the termination of a contract is generally divided into agreed termination and statutory termination, whereby agreed termination requires consensus of the parties or the fulfillment of conditions of agreed termination, while statutory termination requires the fulfillment of conditions of statutory termination, i.e., the fulfillment of one of the following circumstances:
1) It is unable to achieve the purpose of the contract as a result of force majeure;
2) Before the expiration of the period for performance, either party expressly or by his or her own conduct indicates non-performance of the principal obligation;
3) Either party is late in the performance of a principal obligation and fails to perform it within a reasonable period after being called upon;
4) Either party has delayed the performance of a debt or has committed other breaches that prevent the realization of the purpose of the contract;
5) Other circumstances provided for by law;
6) In the case of an indeterminate contract consisting of an obligation to be performed continuously, the parties concerned may terminate the contract at any time, provided that it shall give notice to the other party before a reasonable period of time.
In practice, in the absence of agreement on the right of termination, there may be disputes between both parties as for whether the purpose of the contract can be achieved. However, specifically speaking, it shall be judged in combination with the specific circumstances of each case. This paper hereby briefly introduces some special circumstances:
1. Availability of appropriate qualifications does not necessarily constitute failure to realize the purpose of the contract
In the abovementioned invention patent licensing contract dispute between Anhui Changgu and Zhejiang Green Building ((2022)HMZ1034), the plaintiff also claims that the defendant does not possess the corresponding qualification, thus constituting a breach, but the court finally holds that, although the defendant’s publicity is inconsistent with the facts, the publicity of corresponding performance is not the description of the contract concerned or promise, not affecting whether the plaintiff signs the contract and how to price the subject matter, and the evidence in the case is not enough to prove that the defendant is unable to perform the contract. Therefore, it does not constitute fraud in the sense of contract law, and there is no fundamental breach that prevents the realization of the purpose of the contract.
2. Defective patent rights do not necessarily constitute failure to realize the purpose of the contract
Similarly, in the abovementioned judgment ((2022)HMZ1034), Changgu Company claimes that the technology authorized by Green Building has serious defects, failing to conform to the requirements and needs of standards like Regulations for Implementation of Standardization Law and Measures for Administration of Patents Involved in Engineering and Construction Standards that the patent concerned has not entered standardization nor passed the expert argumentation, obviously lacking the necessity, advancement and feasibility, and could not be used for market promotion and engineering design application in construction engineering projects, constituting a fundamental breach and preventing the realization of the purpose of Changgu Company in the contract. However, the court holds that inventions and utility models granted with patent rights should be novel, inventive and practical, and the technology licensed under the contract concerned has already been granted with patent license, thus proving prima facie that it contains certain utility and could be put into manufacture or use. At the same time, the contract concerned does not explicitly agree on whether the licensed technology need to enter the standard, and Changgu Company has not proved that the licensed technology in the contract concerned has serious defects and is not feasible. Therefore, Changgu Company’s relevant grounds of appeal are not valid and cannot be supported by the court.
3. Invalidity of a contract may not be claimed on the sole ground that the patented technology has not yet been licensed
In addition, it should be noted that for the technology that has been applied for but not yet licensed, according to the Interpretation to Certain Issues by the Supreme People’s Court on the Application of Laws to the Trial of Cases over Technology Contract Disputes (Revised in 2020), the People’s Court shall not invalidate the contract on the basis that the parties entered into a contract on patent implementation licensing for the technology that has been applied for a patent but has not yet been licensed. Therefore, a claim for invalidity of a contract on the sole ground that the patented technology has not yet been licensed may not necessarily be supported by the court.
4. Patent invalidation does not ipso facto entitle either party to a right of rescission
As mentioned above, the invalidation of a patent right does not have retroactive effect on previous licensing contracts, but it does have an effect on the validity status of the contract after the invalidation. But does this mean that as long as the patent is invalidated, the implementation contract is automatically invalidated? In the Civil Judgment of the second instance of the dispute in patent ownership and invention licensing contract dispute between Qinghai Minhe Chaoming Printing Co., Ltd. and Qinghai Yuheng Educational Supplies Co., Ltd., the court holds that Article 344 of the Contract Law, “the patent license contract is valid only during the period of survival of the patent right”, could not be used as a negative inference to determine that a patent license contract is automatically invalid if the patent right is invalidated. Therefore, in the case where the patent right is declared invalid, the party concerned may invoke Article 94(5) of the Contract Law (Author’s Note: Now it may rely on Article 563(5) of the Civil Code), and based on Article 344 of the Contract Law and Article 47(1) of the Patent Law, claim that the declaration of invalidity of the patent right constitutes “other circumstances stipulated by the law” and request the exercise of the right of statutory rescission. Therefore, if both sides have not agreed on the right of rescission in the contract for the patent invalidation, and can not negotiate with the other party with respect to the rescission, it may need to exercise the right of rescission through the court.
In addition, the common situation is that either party refuses to pay the patent implementation costs and the other party proposes the rescission. In such cases, it is easier to be considered that the purpose of the contract cannot be realized, so as to obtain the court’s support for the rescission of the contract. For example, in the Civil Judgment of the first instance of the invention patent licensing contract dispute between Shenzhen Zhaobo Organic Biological Iodized Salt Technology Development Center and Quanye Industry Co., Ltd. ((2021)Y03MC6736), the court holds that, as of the plaintiff files this lawsuit until the trial, the defendant has not yet paid any licensing fees or carried out any production inputs, nor realized the inputs and production of organic iodized salt up to more than 20,000 tons. As the patent license contract signed by both sides is actually in the state to be effective, the defendant, with its inaction, blocks the effective conditions of the contract and preventing the realization of both sides’ purpose. As a result, the plaintiff’s claim of rescinding the contract in accordance with the law is supported by the court. And in the Civil Judgment of the second instance of the invention patent licensing contract dispute between Beijing Donghe Limu Technology Co., Ltd. and Peking University School of Stomatology ((2021)ZGFZMZ2420), the court holds that Donghe Company refuses to receive the patented product after repeated notifications from the Stomatological Hospital and fails to pay the patent license royalty to the Stomatological Hospital in accordance with the agreement, and the contractual purpose of the agreement could not be realized. The Stomatological Hospital issued the Notice of Rescission of Patent License Agreement to Donghe Company, claiming that the rescission of the contract is justified under the law and that the rescission of the contract will become effective when the notice is delivered to Donghe Company.
IV. Key Points for Reviewing Patent License Contracts
Generally speaking, when it comes to patent license contracts, there are a number of elements that need to be examined:
1. The state of validity of the licensed right;
2. Scope and manner of licensing
3. Terms of payment of license fees
4. Delivery of technical information
5. Attribution of results for technological improvements
6. Confidentiality
7. Joint defend of rights
8. Export control
In addition, it can be seen from the characteristics of abovementioned disputes that the stability of the patent for the effectiveness of the patent license contract is also very important. While practicing their own internal strength to improve the quality of the patent, when signing relevant contracts, enterprises can also pay attention to the arrangement of corresponding provisions, such as the refund of fees paid and the rescission of contract under the circumstance that the patent is declared invalid, thus making relevant agreements in advance. In terms of breach liabilities, enterprises must pay attention to the conditions for assuming breach liabilities and the determination of specific liabilities. In terms of the rescission, enterprises need to pay attention to clarify the circumstances under which the contract can be rescinded, otherwise, dispute is easy to arise.
In general, the resolution of contractual disputes in most cases requires a case-by-case analysis, and this article will hopefully enlighten the reader, although it will be difficult to describe all the topics in a comprehensive manner.
Related Articles
- Series Articles of Patent Protection Practice (1) ─ Introduction to the Scope of Protection of Patent Rights and Patent Layout (Mainland China)
- Series Articles of Patent Protection Practice (2) ─ Brief Analysis of the Attribution of Patent Rights in Service Invention and Cooperative Development (Mainland China)
- Series Articles of Patent Protection Practice (4) ─ Determination of Patent Infringement (Mainland China)
- Series Articles of Patent Protection Practice (5) ─ Defense of Patent Infringement (Mainland China)
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