New Designs: Licenses May Be Evidence of
`the Nonobviousness of an Invention
`by john t. mcnelis
`
`TA license agreement frequently transfers some rights in an
`invention from a patent owner to a licensee. Such a license
`agreement can be used during litigation or during the patent
`application process as evidence of nonobviousness of the
`invention. That is, a license may help the patent owner prove
`that a patent is valid and may even help the licensor obtain a
`patent that is directed toward the licensed technology.
`
`Whether the claimed invention is obvious in view of the
`prior art is a difficult question relating to the patentability
`of an invention. This issue of obviousness frequently arises
`during patent prosecution, reexamination proceedings,
`and litigation. The Supreme Court set forth four factors
`that the courts must consider when determining whether a
`claimed invention is invalid because it is obvious. The court
`must identify: (1) the scope and content of the prior art, (2)
`differences between the prior art and the claims at issue,
`(3) the level of ordinary skill in the pertinent art, and (4)
`“objective” or “secondary” considerations, such as whether
`there was a long-felt need for the claimed invention, the
`failure of others, or whether the claimed invention has
`enjoyed commercial success. Graham v. John Deere Co., 383
`U.S. 1, 17-18 (1966).
`
`The courts use secondary considerations to, inter alia, focus
`attention on the economic and motivational issues rather
`than on technical issues. The economic and motivation issues
`are “more susceptible of judicial treatment than are highly
`technical facts often present in patent litigation.” Id. at 36.
`The Federal Circuit has found that “evidence of secondary
`considerations may often be the most probative and cogent
`evidence in the record.” Stratoflex Inc. v. Aeroquip Corp.,
`713 F.2d 1530, 38 (Fed. Cir. 1983), see also In re Mayne,
`104 F.3d 1339 (Fed. Cir. 1997). Two examples of secondary
`considerations are the commercial success of the claimed
`invention and the commercial acquiescence by market
`competitors. Licenses can be used as evidence of either of
`these secondary considerations.
`
`The commercial success of a product embodying a claimed
`invention is often used as evidence of nonobviousness.
`The courts suggest that evidence of commercial success is
`relevant to the question of obviousness because competitors
`
`would have been economically motivated to make the
`invention before the inventor if the invention had been
`obvious. Minnesota Mining & Manufacturing Co. v. Research
`Medical Inc., 679 F. Supp. 1037, 1054 (D. Utah 1988). The
`courts proffer that if the commercial success is based upon
`the capturing of a large market share or upon the licensing
`of the invention to many competitors, such actions tend to
`support the finding that the claimed invention is superior to
`existing products and is therefore a nonobvious advance over
`the prior art. Tennant Co. v. Hako Minuteman, Inc., 22 USPQ2d
`1161, 1177 (N.D. Ill. 1991). Evidence of commercial success
`includes a showing of growth in market share, a decrease
`in market share after other companies begin infringing, and
`licensing to other companies.
`
`The commercial acquiescence of a claimed invention is also
`used as evidence of nonobviousness under the theory that
`a license is generally a statement against the licensee’s
`interest. That is, a licensee does not generally act in a manner
`contrary to his economic self interest unless convinced of the
`validity of the patent or of the nonobviousness of the claimed
`invention in a pending patent application.
`
`Of course, commercial success or a successful licensing
`campaign can occur for a variety of reasons that are unrelated
`to the validity of a patent. Therefore, the courts have required
`not only evidence of commercial success or acquiescence
`but also a showing of a nexus between the evidence and the
`claimed invention. The term “nexus” refers to a legally and
`factually sufficient connection between the proven success
`and the claimed invention. In re Paulsen, 30 F.3d 1475, 1482
`(Fed. Cir. 1994). The stronger this connection, the stronger the
`evidentiary value of the commercial success. In re GPAC Inc.,
`57 F.3d 1573, 1580 (Fed. Cir. 1995). A nexus is proven when the
`commercial success or commercial acquiescence is shown
`to have been due to the nature of the claimed invention, as
`opposed to other economic and commercial factors unrelated
`to the technical quality of the claimed invention. Cable Electric
`Products, Inc. v. Genmark, Inc., 770 F.2d 1015, 1027 (Fed. Cir.
`1985). If a license covers many patents, only one of which
`is directed toward the claimed invention, the patent owner
`must show that the license arose out of a “recognition and
`acceptance” of the relevant patent. Stratoflex at 1539.
`
`www.fenwick.com
`
`Regeneron Exhibit 1174.001
`Regeneron v. Novartis
`IPR2021-00816
`
`

`

`When licenses are used as evidence of commercial success or
`commercial acquiescence, the evidentiary value given to the
`licenses depends upon the contents of the licenses and the
`nexus between the licenses and the claimed invention. The
`factors that are considered when determining the evidentiary
`value of the licenses include the royalty rate when compared
`to the cost of litigation, pre-license investigation by the
`licensees, the market position of the licensees, the market
`share of the licensees, and the nexus between the license and
`the claimed invention.
`
`When the royalty rate paid by a licensee is large when
`compared to the cost of litigation, the license will be
`persuasive evidence that the licensee believed the patent was
`valid. B&H Manufacturing Inc. v. Foster-Forbes Glass Co., 26
`USPQ2d 1066, 1070 (N.D. Ind. 1993). Licensees who perform a
`significant investigation into the validity and infringement of
`the patents covered by the license strengthen the evidentiary
`value of the license for the purpose of later proving
`nonobviousness. RCA Corp. v. Data General Corp., 701 F. Supp
`456, 471 (D.Del. 1988), aff’d, 887 F.2d 1056 (Fed. Cir. 1989).
`The market position of the licensees is a factor in determining
`the strength of the evidence under the theory that industry
`leaders are less likely to obtain a license unless they believe
`the patent is valid. In B&H Manufacturing, two of the licensees
`of the patent were “the most powerful bottling companies
`in the country” which led the court to believe that “they
`would not have bowed to pressure to take a license without
`first reaching the conclusion that ultimately litigation would
`prove futile.” B&H Manufacturing at 1070. A patent on a color
`television picture tube was similarly upheld based in part
`on the fact that “the leader in color television development”
`chose to license the patent. Columbia Broadcasting Sys. v.
`Sylvania Elec. Prods., Inc., 415 F.2d 719, 728 (1st Cir. 1969),
`cert denied, 396 U.S. 1061 (1970). The combined market share
`of the licensees is also relevant. The Supreme Court held
`that when the makers of two-thirds of the print paper of the
`country are licensees of the patent holder this constitutes
`“weighty evidence” of the validity of the patent. Eibel Process
`Co. v. Minnesota & Ontario Paper Co., 261 U.S. 45 (1923).
`
`Courts have found that licenses do not provide enough
`evidence of nonobviousness when the royalty rate is low
`when compared to the cost of litigation, the percentage of
`the relevant market controlled by the licensees is low, when
`the license represents a mutually beneficial arrangement,
`or when the nexus between the license and the claimed
`invention is not shown.
`
`
`The courts are in agreement that if the royalty rate of a license
`is low in comparison to the cost of a litigation defense, the
`licensee’s motivation for obtaining a license is more likely to
`avoid litigation rather than a belief that the patent was valid.
`This is a particularly strong motivation when the licensee is a
`small business having limited resources. The Supreme Court
`notes that when a license has a low royalty rate the “purchase
`of peace” may be the motivation for a small business and
`therefore the license is of limited value as evidence of patent
`validity. John E. Thropp’s Sons Co. v. Seiberling, 264 U.S. 320,
`329-30 (1924). Courts also look to the market share and size
`of the licensees. In Phillips Elec. & Pharmaceutical Indus.
`Corp. v. Thermal & Elec. Indus., Inc., 450 F.2d 1164 (3d Cir.
`1971), eleven manufactures of glass-to-metal seals obtained
`licenses under the patent. The court noted that the none of
`the major companies in the market obtained a license, the
`total market share of the eleven licensees was low and that
`it was possible that the licensees found acquiescence less
`burdensome and costly than the expense and problems of
`litigation. The courts indicate that another motivation for
`entering a license agreement is that a license may be mutually
`beneficial to both the licensee and the licensor. When a
`license is mutually beneficial the evidentiary value of the
`license as a secondary consideration is limited. EWP Corp.
`V. Reliance Universal Inc., 755 F.2d 898, 907-08, (Fed. Cir.),
`cert denied, 474 U.S. 843 (1985). For example, an exclusive
`license may be mutually beneficial since the licensee will
`have exclusive rights to make, use, offer to sell, and sell the
`invention.
`
`When attempting to overcome an obviousness argument
`the patent practitioner should identify licenses and other
`evidence that demonstrates the commercial success of a
`claimed invention and then clearly explain the nexus between
`the evidence and the claimed invention in order to maximize
`its evidentiary value.
`
`John T. McNelis (jmcnelis@fenwick.com) is a partner in the
`Mountain View office of Fenwick & West LLP, in the Patent
`Group.
`
`the views expressed in this publication are solely those
`of the author, and do not necessarily reflect the views
`of fenwick & west llp or its clients. the content of the
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`west llp. you should not act or refrain from acting on the
`basis of any content included in the publication without
`seeking the appropriate legal or professional advice on the
`particular facts and circumstances at issue.
`
`©1998 by Daily Journal, posted with permission.
`
`2 new designs: licenses may be evidence of the nonobviousness of an invention
`
`fenwick & west
`
`Regeneron Exhibit 1174.002
`Regeneron v. Novartis
`IPR2021-00816
`
`