IP Law Daily Bank could invoke MFL clause to obtain better price for licensed check processing technology
Friday, May 20, 2016

Bank could invoke MFL clause to obtain better price for licensed check processing technology

By Linda O’Brien, J.D., LL.M.

In an issue of first impression, a bank that entered into an unlimited use license agreement with the patent holder of check processing technology could invoke the agreement’s most-favored licensee clause to obtain a refund of the difference between the amount the bank had paid for the license and a lower license fee given to a subsequent licensee, the U.S. Court of Appeals in New Orleans has ruled. Thus, the district court’s grant of summary judgment in favor of the bank was affirmed (JP Morgan Chase Bank, N.A. v. DataTreasury Corporation, May 19, 2016, Davis, W.).

DataTreasury Corporation (DTC) holds patents relating to electronic check processing systems. In 1990, DTC approached several banks over the use of DTC’s patented technology. The banks declined and instead created their own check processing systems. DTC sued JP Morgan Chase Bank (JPMC) and others, alleging patent infringement. In 2005, JPMC entered into a settlement agreement with DTC resolving the patent infringement claims. The parties also entered into a license agreement which included a most-favored licensee (MFL) clause. The license agreement permitted JPMC unlimited use of DTC’s patented technology in return for a lump sum payment of $70 million, to be made in seven installments.

In October 2012, DTC entered into a license agreement with Cathay General Bancorp and the lump sum price for Cathay’s sole use was $250,000. The subsequent license agreement also required Cathay to make additional payments for any additional entities that Cathay later acquired. In November 2012, JPMC filed suit against DTC for breach of contract, asserting that the subsequent licensee was granted a license on substantially more favorable terms that those afforded JPMC. The district court granted JMPC’s motion for summary judgment, finding that JPMC was entitled to a refund for the difference between that amount it paid for the license and the lesser amount paid for by Cathay, the subsequent licensee. DTC appealed.

MFL clause. The court found that the district court did not err in determining that the subsequent license given to Cathay was on more favorable terms and therefore JPMC was entitled to a refund under the MFL clause. DTC’s argument that that the MFL clause could not be applied retroactively to obtain a refund of amounts previously paid was rejected. According to the court, the licenses granted to JPMC and Cathay were identical in most respects—both were paid up lump sum licenses granting unlimited use of the patent and neither involved periodic royalty payments. The only material difference was the payment terms.

Since the MFL clause was silent on the issue of retroactivity, to accept DTC’s interpretation that JPMC could only escape future payments still owed under the license at the time the clause was invoked would render the MFL clause effectively meaningless. Once the first licensee fully paid the license fee, it could receive no practical benefit by invoking the clause under this interpretation, the court noted. In this case, JPMC made the final installment payment in 2012, prior to DTC granting Cathay an unlimited use for a lower price. When DTC, the patent holder, granted the subsequent licensee a lower lump sum, the most favorable rate became the lower lump sum amount.

Additionally, the district court did not err by not considering the different levels of usage by JPMC and Cathay based on check volume or the banks’ relative asset sizes. The MFL clause was clear and unambiguous and did not any language limiting the clause based on the number of check transactions or size of their assets, the court concluded.

Dissent. In his dissent, Judge Higginson interpreted the MFL clause to not allow JPMC to recoup sums paid before DTC granted the lower-priced subsequent license. In Higginson’s view, the MFL was ambiguous and a more reasonable interpretation of the clause was that JPMC was given the benefit of more favorable non-price terms for the duration of the license—such a excusing the bank from further payments in the event of a final judgment of patent invalidity—and protected JPMC with more favorable price terms during the seven years over which it made payments.

The case is No. 15-40905.

Attorneys: Noelle M. Reed (Skadden, Arps, Slate, Meagher & Flom LLP) for JP Morgan Chase Bank, N.A. Karl Anthony Rupp (Kendall Law Group, LLP) for DataTreasury Corporation.

Companies: JP Morgan Chase Bank, N.A; DataTreasury Corporation

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