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Badly drafted most-favored-licensee provision means patent owner must refund $69 million to Chase bank

Our old friend DataTreasury Corporation (“DTC”) had a bad day yesterday. See below for drafting tips that might have produced a different result.

Here’s a simplified summary of what ruined DTC’s day:

  • In 2005, DTC granted a fully-paid-up patent license to the giant bank JP Morgan Chase (“Chase”), in settlement of an infringement lawsuit that DTC had brought against Chase.
  • Under the license agreement, Chase agreed to pay (in install­ments) a flat fee of $70 million.
  • The license agreement included a most-favored-licensee provision that required DTC (i) to notify Chase of any other licenses granted, (ii) to provide Chase with a copy of the other license agreement(s), and (iii) to give Chase the benefit of any more-favorable license terms in those other licenses.
  • More than seven years later, in 2012, DTC granted the much-smaller Cathay General Bancorp a paid-up license in exchange for a much-lower flat license fee — and under those terms, Chase’s paid-up license fee would have been only $1 million. DTC failed to notify Chase or to provide it with a copy of the Cathay General license agreement until the litigation. This apparently was not the only time that DTC had granted more-favorable terms without complying with the Chase agreement’s notification requirement.
  • Shortly afterwards, Chase sued DTC for breach of contract.  The trial court held, and yesterday the Fifth Circuit agreed, that DTC owed Chase a refund of the $69 million difference between the license fee that Chase had paid and the license fee it would have paid under the terms granted to Cathay General.

See JP Morgan Chase Bank, N.A. v. DataTreasury Corp., No. 15-4095 (5th Cir. May 19, 2016), affirming  79 F. Supp. 3d 643 (E.D. Tex 2015) (granting Chase’s motion for summary judgment).

Here’s the text of the relevant part of the most-favored-licensee (“MFL”) provision, which is also known as a most-favored-nation (“MFN”) or most-favored-customer (“MFC”) provision:

9. Most Favored Licensee

If DTC grants to any other Person a license to any of the Licensed Patents,

  • it will so notify JPMC, and
  • JPMC will be entitled to the benefit of any and all more favorable terms with respect to such Licensed Patents. …

Id., slip op. at 4 (extra paragraphing and bullets added).

Drafting tips: What could DTC have done differently? The Fifth Circuit had some suggestions:

  1. set specific “apples to apples” requirements for the MFL provision to kick in — for example, the new licensee would have to be of at least a specified size, or a specified revenue level, or a specified volume of licensed products or services. DTC argued that such requirements should be implied in its Chase license, but the courts didn’t agree; and/or
  2. put a “sunset” on the MFL provision, so that after (let’s say) two years, or four years, or whatever, DTC would have been free to grant licenses on whatever terms it wanted without having to give the same terms to Chase; and/or
  3. tie the amount of the paid-up fee to the remaining life of the patent.

See id., slip op. at 21.

DTC could also have put in place an internal process to cross-check each proposed post-Chase license agreement against the Chase license agree­ment itself, and also against all other license agree­ments with MFL provisions, to verify that those MFL provisions weren’t about to be breached. That, of course, might have been an expensive operational burden.

I’m going to add this story to the Common Draft reading notes, to go along with the story about Oracle getting hit for nearly $200 million for violating the MFC clause in its contract with the U.S. Government. (The Common Draft reading notes include links to further reading about most-favored-X provisions.)

Comments on this entry are closed.

  • Nazar @ CMx - Contract Experience 2016-05-20, 4:51 pm

    It is obvious that poorly drafted of contracts may result in a negative financial impact sooner or later. Thanks for sharing.

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