Doubling Down on Double Adjudication – the MerchSource post-issuance review model

Doubling Down on Double Adjudication – the MerchSource post-issuance review modelImagine this: you become aware of a patent that might cover your products, so you reach out to the patentee to secure a license agreement. After negotiating and entering the agreement, you later decide you’d like to pay less or no royalties. So you threaten to file some IPR and PGR petitions, and when that fails to secure more favorable terms, you breach the contract. If you find yourself sued for patent infringement you protest to the court that as the agent of public interest, you must be allowed to simultaneously challenge the validity of the patents not only before that court, but also before the PTAB. On the same grounds. At the same time. This is what at least one licensee is trying, and the Federal Circuit may soon provide guidance on the viability of this double-adjudication-for-the-public-good-tactic.

In mid-2016, MerchSource contacted Dodocase about licensing Dodocase’s US 9,420,075. The parties entered into a license agreement (“MLA”) in October 2016, agreeing amongst other things that (1) MerchSource would license the ’075 patent and any continuation or divisional patents thereof, (2) MerchSource would pay specified royalties, and (3) disputes arising out of the MLA will be governed by the California law and litigated before the courts in San Francisco County or Orange County, CA. Fast-forward to June 2017, MerchSource informs Dodocase that it is unhappy with the MLA because Dodocase was not sufficiently enforcing its patent rights against third parties. A quick review of the now-public MLA shows that Dodocase had no affirmative duty to enforce its patent rights against MerchSource’s competitors. Nonetheless, through various threats including assertions of patent invalidity, MerchSource breached the MLA. Dodocase then filed suit in the Northern District of California.

While perhaps not up to Eagle Scout standards, the facts up to this point are not too surprising, especially post-MedImmune. But then things get more interesting. On December 22, 2017, MerchSource moved for an extension of time to answer the complaint, citing the holidays and counsels’ need to further investigate the claims. The Court granted an extension to February 2. But it appears that the time what not spent sipping eggnog. Instead, MerchSource used the most wonderful time of the year to threaten Dodocase with the filing of three IPR and PGR petitions. When these stocking stuffers failed to corner Dodocase into settlement, MerchSource filed its petitions with the PTO on January 15. And when MerchSource finally filed its answer in February, it asserted counterclaims of invalidity, incorporating by reference the arguments set forth in its IPR and PGR petitions and nothing more. Dodocase moved for injunctive relief, asking the court to enforce the MLA forum selection clause – after all, MerchSource had agreed to litigate disputes in California – and to order MerchSource to withdraw its petitions at the PTAB.

Surely there is no need to have two different adjudicators in two different forums addressing the very same invalidity arguments. That the AIA included a time bar as well as estoppel provisions strongly suggests that such dual adjudication would be undesirable and probably an absurd waste of resources. The drain on resources only increases when one considers that the Federal Circuit could ultimately hear the appeals from both forums, also an undesirable outcome for our system.

For its part, MerchSource disagrees, arguing in large part that it is acting in the public interest and is shocked, shocked that it should be limited to just one forum.

It appears MerchSource informed the court that it would be “denied its day in court” if MerchSource had to withdraw its PTAB petitions. As you might imagine, the district court, i.e., the only one of the two forums that is an actual court, was perplexed by this argument, patiently having to break the news that a district court is an adequate forum to adjudicate claims of patent validity. But that did not stop MerchSource from arguing to yet another court – the Federal Circuit – that one cannot possibly accept the notion that a district court is a proper place to address a validity challenge.

We are left to wonder what policy could possibly support MerchSource’s position, particularly given its voluntary acceptance of a forum selection clause that, not for nothing, it entered well after AIA post-issuance proceedings came into effect. All that policy should demand is that a party wanting to challenge the validity of patents allegedly covering its products has an adequate and just forum to do so. A ruling disregarding the forum selection clause on public policy grounds in this case could only mean that we have reached a point where we are comfortable saying that double adjudication is good, and that no patent is really valid until it has been blessed in a PTO post-issuance proceeding, regardless of what our district courts have to say. Perhaps that is what MerchSource was alluding to when it argued that the PTO has a strong policy interest in deciding the validity of these patents – apparently a strong interest in second guessing or correcting the decisions of our district courts.

And it seems we must also be willing to believe that private agreements between entities ordering their business must inevitably surrender to allegations of the public interest in rooting out “weak” patents, but only if invalidity is decided at the PTAB. As MerchSource put it: “Private contractual provisions must yield to the significant public interest in the patent system and ensuring valid patents.” Just not in our Article III courts, apparently.

It also is notable that MerchSource is arguing that public policy would be undermined if patent owners “could so easily circumvent PTO review of patents through a forum selection clause.” Let’s remember, MerchSource sought this license, not Dodocase. Other unrelated entities are still free to challenge Dodocase’s patents at the PTAB if they see fit. The only party who shouldn’t be allowed to do so is MerchSource, who in seeking a business arrangement with Dodocase negotiated for certain benefits while surrendering certain rights.

While the district court sided with Dodocase, the Federal Circuit has stayed the district court’s injunction, ordering expedited briefing. Presumably the stay was granted out of an abundance of caution given the tight timelines of the district court’s order. But soon enough we will hear what the appeals court thinks. Let us remember that it was not too long ago that defendants were shouting from the rooftops about the harms of forum shopping. This case squarely presents not only the opportunity to decide whether we countenance infringer forum shopping, but whether we endorse the PTAB as the superior forum.

To read the documents see:

Dodocase VR, Inc. v. MerchSource, LLC et al., No. 17cv7088 (N.D. Cal.)

MerchSource, LLC v. Dodocase VR, Inc., No. 2018-1724 (Fed. Cir.)





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Join the Discussion

6 comments so far.

  • [Avatar for Joachim Martillo]
    Joachim Martillo
    April 4, 2018 01:13 am

    Reexamination is as questionable constitutionally as post-grant review proceedings.

    SAWS and other secret unlawful “quality assurance” programs as well as all the post-grant proceedings (except of course reissue application) provide much too much scope for agency corruption.

    Forum selection clauses are presumptively enforceable.

    Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas (__ S.Ct. __, 2013 WL 6231157 (Dec. 3, 2013))

    It seems just a wee bit inconsistent for SCOTUS to work so hard to hammer out Erie Doctrine in the case of federal vs. state jurisdiction

    (1) to discourage forum shopping among litigants, and

    (2) to avoid inequitable administration of the laws and then

    to permit an obviously inconsistent more chaotic and potentially corrupt situation to arise in the situation of article III court vs. administrative tribunal jurisdiction.

  • [Avatar for Paul Morgan]
    Paul Morgan
    April 3, 2018 06:58 pm

    First, what reportedly happened here has happened for many years – since reexaminations became available. Which is why most licensors these days are smart enough to get most license royalty payments up front, not as “running royalties.”
    But if there is such a license, and the licensee stops paying [or even escrows] overdue running royalties, that is a material breach of the license that allows the patent owner to sue for infringement.
    As for the author apparently being shocked by being able to “simultaneously challenge the validity of the patents not only before that court, but also before the PTAB. ” Good grief, that is what the reexamination and AIA statutes clearly intended, and it has been occurring thousands times already over those years.
    Of course in most courts the litigation is stayed until the IPR petition is denied or is granted and decided against all the claims in suit within its short statutory time period.

  • [Avatar for Joachim Martillo]
    Joachim Martillo
    April 3, 2018 12:16 pm

    I meant:

    “As I understand tax law, tax FRAUD — a crime that my uncle routinely committed (among others) while he worked for the IRS — includes the attempt to evade or to defeat paying taxes.”

  • [Avatar for Joachim Martillo]
    Joachim Martillo
    April 3, 2018 12:14 pm

    Preventing the US from receiving tax revenue it would be owed when USPTO employees do their jobs according to the law (and are not corruptly serving the interests of large slothful incumbent corporations) seems to be a clear violation of US Code.

    As I understand tax law, tax evasion — a crime that my uncle routinely committed (among others) while he worked for the IRS — tax fraud includes the attempt to evade or to defeat paying taxes. As I understand SAWS and and other unlawful USPTO quality assurance programs, they enable large slothful incumbent corporations to use IP belonging to other entities, which consequently pay no taxes on income that such entities should have received from selling licenses or patents.

    Thus crooked USPTO employees do harm to original IP holders and in effect defeat the payment of taxes — which is among the definitions used by the IRS of tax fraud, which I believe to be defrauding the US government.

  • [Avatar for Anon]
    April 3, 2018 08:32 am

    … are defrauding the US government of tax revenue.

    That’s not how the concept of fraud works, Joachim.

  • [Avatar for Joachim Martillo]
    Joachim Martillo
    April 3, 2018 08:03 am

    From the standpoint of accounting, this case raise an interesting question, would the cancellation of monetary liability associated with the patent invalidation represent taxable income to MerchSource? I suspect without sureness that it might. It might make a difference whether MerchSource does its accounts on a cash or accrual basis and exactly how the expense of acquiring the license is accounted in the MerchSource ledger.

    Thinking about taxes and USPTO misbehavior or criminality brings us to the question of SAWS and other unlawful USPTO secret “quality assurance” procedures that prevent issuance of patents (for the sake of slothful incumbent corporations) to those that are entitled to them or that might decrease term of issued patents.

    Licensing of issued patents or sales of issued patents represent taxable income. The crooks and clowns that prevent patents from issuing to those that are entitled to them or that are via IPR or PGR corruptly canceling patents that are completely valid are defrauding the US government of tax revenue.

    Are these crooked senior USPTO officials not in violation of 18 U.S. Code § 371 – Conspiracy to commit offense or to defraud United States, and should not the FBI and the SEC be crawling all over USPTO records to understand the conspiracy that seems to go back to 1994. IP adjudication at the USPTO is at least as susceptible to corruption as trading and investing on Wall Street. Only complete transparency can keep USPTO officials honest.

    [Perhaps some of the USPTO crooks commit their crimes for noble reasons because of Olof Söderblom and Gilbert Hyatt debacles. I consulted briefly for Proteon in its dispute with Söderblom. I find the names of people, who were junior USPTO personnel back in the early 90s and are now senior USPTO personnel, involved in unlawful secret “quality assurance” programs that defraud the US government of tax revenue.]

    Here is that statute that the conspiracy of crooked USPTO personnel is violating.

    If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.

    If, however, the offense, the commission of which is the object of the conspiracy, is a misdemeanor only, the punishment for such conspiracy shall not exceed the maximum punishment provided for such misdemeanor.

    (June 25, 1948, ch. 645, 62 Stat. 701; Pub. L. 103–322, title XXXIII, §?330016(1)(L), Sept. 13, 1994, 108 Stat. 2147.)