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Forum Selection Clause Precludes IPR—Non Conveniens Becomes Impossibilis

April 22, 2022

Forum selection provisions appear (or are at least proposed) in all types of agreements and often provoke disagreement in negotiations because of the potential for a real or perceived strategic advantage of a particular court or geography. A recent federal circuit decision (Nippon Shinyaku v. Sarepta Therapeutics, 25 F.4th 998 (Fed. Cir. 2022)), however, undid what one party originally likely expected was a big accomplishment at the time of the agreement, finding the language in one such clause also limited that party’s ability to later challenge the other’s patents at the U.S. Patent Office.

The case arises out of a confidentiality agreement, an agreement familiar to all areas of the law and not always even evoking a need to have IP counsel involved. Nippon Shinyaku provides a cautionary tale demonstrating the importance of language that might in some cases be considered boilerplate (even if the terms themselves are negotiated) when patent issues underlie the business deal.

Nippon Shinyaku and Sarepta entered into a mutual confidentiality agreement in June 2020 for the purpose of enabling the parties to more freely discuss a potential business relationship for therapies used in treating muscular dystrophy. A bit more complex than most standard nondisclosure agreements, one section provided that during the term of the agreement (and a short time thereafter) each party granted the other a covenant not to sue regarding any intellectual property claims in the field of muscular dystrophy therapies. The covenant not to sue explicitly referred to validity challenges at the U.S. Patent and Trademark Office (USPTO).

The parties’ confidentiality agreement also separately included a forum selection clause setting forth that all “potential actions” relating to infringement or validity filed within two years after the covenant not to sue expired could be filed only in the U.S. District Court in Delaware. Unlike the covenant not to sue, no explicit reference was made to the USPTO, although the definition of “potential actions” referenced disputes filed with a court or administrative agency. With both parties agreeing to personal jurisdiction in Delaware and waiving any defense for improper venue based on forum non conveniens, Sarepta probably considered this provision a significant achievement at the time: forcing a foreign corporation to travel halfway around the world to Delaware might be expected to discourage any adverse filing.

The day after the covenant not to sue ended, Sarepta filed seven petitions for inter partes review (IPR) with the Patent Trial and Appeals Board of the U.S. Patent & Trademark Office (PTAB) seeking to invalidate Nippon Shinyaku’s patents. IPRs are administrative proceedings that are initiated with a petition requesting the PTAB review the validity of a granted patent. If the PTAB grants the petition, a trial is instituted on the single issue of patent validity. IPR proceedings are often considered desirable by patent challengers because of their pace and because of a lower threshold in the burden of proof for invalidity.

Three weeks after Sarepta’s petitions, Nippon Shinyaku filed a complaint against Sarepta in Delaware alleging patent infringement as well as breach of contract because of Sarepta’s IPR filings. Nippon Shinyaku also filed a motion for preliminary injunction asking the Court to enjoin the IPRs.

Before Judge Leonard Stark, an experienced patent judge and now recently confirmed to the federal circuit, the district court denied the preliminary injunction. The court found the forum selection clause, read in context, applied only to other federal court proceedings and that the parties would not likely have expressly prevented the filing of an IPR during the term of the agreement if they expected the forum selection clause would thereafter impliedly delay such filings for an additional two years. Further, because the Patent Act prevents filing an IPR more than one year after a defendant has been served with an infringement action, the court rationalized the parties did not intend to completely bar an IPR if an infringement action had been filed during the first year of the forum selection clause window.

On appeal, however, the federal circuit reversed. The federal circuit reasoned the plain language of the forum selection clause did, in fact, explicitly contemplate PTAB proceedings because a filing with an “administrative agency” was included within the definition of potential action. It further dismissed the idea of any tension between the covenant not to sue and the forum selection clause because the restrictions applied at different points in time. Finally, it determined the impact of a potential time bar was not enough to suggest the parties did not intend to bargain away the ability to file an IPR—the parties were not agreeing that a patent’s validity could not be challenged, only how that challenge could materialize under certain circumstances. Validity remains a defense in district court even in the absence of an IPR, albeit with a different standard of proof.

Finding a likelihood of success on the merits, the federal circuit determined the remaining preliminary injunction factors also favored Nippon Shinyaku. In reversing the denial of a preliminary injunction, the federal circuit went a step further and directed the district court enter the preliminary injunction.

In the meantime, the PTAB had already granted all of Sarepta’s petitions, agreeing there was a reasonable likelihood the patents at issue were invalid and instituting a formal administrative trial to resolve the question in response to each of the seven petitions.  hose proceedings were all stayed pending the appeal and remain so through late April. An en banc petition remains pending as of this writing.

On its face, the impact may seem insignificant—the two hour drive between Wilmington, Delaware where the district court sits and Alexandria, Virginia where the PTAB sits is hardly an inconvenience worth fighting over. But IPRs are often viewed as a preferred mechanism to challenge patent validity. Importantly, patents are presumed valid in federal court proceedings and must be shown to be invalid by clear and convincing evidence. Conversely, patents are not presumed valid within the Patent Office, and the challenger need show only a preponderance of the evidence to demonstrate invalidity. Moreover, the timeline from institution of a trial to a final decision is one year by statute, typically moving faster than litigation. Thus, enjoining Sarepta’s IPRs and its loss of that avenue for challenge could have a significant impact on the ultimate outcome of whether Nippon Shinyaku’s patents survive, as well as the length of time to know the result.

Regardless of the ultimate outcome of Sarepta following any action on the request for en banc rehearing, the case provides an important cautionary tale. Confidentiality agreements are often prepared and negotiated in many circumstances in which intellectual property assets are not specifically contemplated as part of the agreement, but might still underlie the reason for the business relationship. The concern is not limited just to patents; trademarks and other forms of registered intellectual property also have analogues in which validity can be challenged before other administrative bodies, such oppositions and cancellation proceedings at the Trademark Trial and Appeal Board. As this case demonstrates, even when the patents were contemplated, the impact of express versus implied limits on activity can lead to a negative outcome.

Particularly when it may not be known at the time of drafting whether patents, trademarks or other specific intellectual property will ultimately be relevant, attorneys should consider forum selection clauses that foreclose alternative courts but not other forms of administrative proceedings. Of course, that consideration comes with its own risks: as with all terms of a mutual agreement—like most confidentiality agreements are—the advantage of preserving a right for an alternative administrative path of review won’t necessarily be known in advance and will likely depend on whether it ends up being your patents or other party’s in dispute.

Shawn Leppoa member at McNees Wallace & Nurick, is a patent attorney and co-chair of the firm’s intellectual property group. Leppo’s practice includes advice and counseling on all aspects of intellectual property law, with a focus on patent matters, including patent prosecution, enforcement, licensing, and risk avoidance strategies.