Intellectual Property Licensing in Korea – What Happens to Royalty Payment When the Patent Becomes Invalidated

Korean Law OfficeThere is no doubt that intellectual property is a valuable asset.  Parties all around the world are taking an arrangement to utilize 3rd party’s intellectual properties.  Sometimes it could be a license agreement or sometimes a transfer.

In any case, it is very important to verify the validity of the underlying intellectual property before entering into a contract.  As for a patent, first, it looks relatively simple to clear the validity, compared to other intellectual property such as a copyright.  A patent is being registered with the Korean Intellectual Property Office.  The registration, however, does not guaranty the validity of the patent at issue.  It can be challenged later by 3rd party and could be nullified by the court’s decision.

Then what happens if the patent becomes void after the license agreement is entered into?

Korean Court’s Opinion

Patent Act of Korea

The Korean Patent Act provides that if a court renders a decision to invalidate a patent and it becomes final and conclusive, the patent shall be deemed never to have existed.  The real issue we are to discuss is what happens to the royalty previously paid by the licensee?  Can the licensee refuse to pay the royalty after the patent gets invalidated?  And even Can ask for the refund of the royalties previously paid?  The Supreme Court of Korea said No.

Recent Supreme Court’s Ruling

In the recent Supreme Court’s case, the plaintiff and the defendant made an agreement whereby the plaintiff grants a non-exclusive license to the defendant and the defendant pays a royalty to the plaintiff.  As the defendant failed to pay the royalty from around the middle of the term, the plaintiff terminated the agreement and filed a lawsuit to receive the unpaid royalties.  But soon after the filing, the plaintiff’s patent became invalidated by another court’s decision filed by the 3rd party.  Then the defendant argued that the plaintiff’s claim should be dismissed on the ground that the patent license agreement should become void as its purpose of the agreement, i.e. the patent didn’t exist from the beginning.

The Supreme Court dismissed the defendant’s argument.  The highest court held that the validity of the patent and the validity of the patent license agreement are separate legal matters.  The court further explained that, by entering into a patent license agreement, at least until the invalidity of a patent becomes final, a patent holder is barred from seeking for damages arising from, or injunction against, the licensee’s use of the patent, and any 3rd party is barred from practicing the patent against the patent’s exclusivity.  

In light of the foregoing, the court held that even though the patent later became invalidated, its license agreement shall not be treated as primitively void and unenforceable.  The patent license agreement becomes void only after the invalidation becomes final.  

Based on this reasoning, the court ruled that the defendant shall pay the royalties until the time when the patent became finally invalidated.

How to Protect Yourself in Intellectual Property Licensing in Korea

Due Diligence

In order to clear and minimize this kind of uncertainty, it is always a good practice to have thorough due diligence to check any legal risk before entering into a patent and other intellectual property licensing in Korea. The validity of the intellectual property and its chain of title would be one of the main points which should be taken care of by the Korean lawyer.

Safe Harbor Clause

Also, although you can resort to the court’s review and ruling to settle a dispute with a Korean company, it is advisable to set a contractual safe harbor in place.  One idea would be inserting a clause that regulates how to deal with the license payment obligation including the matters of any ongoing payment and a refund of the previously paid royalties in the event that the intellectual property gets invalidated.

Hiring a Korean Intellectual Property Attorney

Lastly, it is very important for any entrepreneur to bear in mind each country has its own legal standard.  That being said, when you intend to do an intellectual property licensing in Korea, hiring a competent Korean intellectual property attorney to review the contract thoroughly.

If you have any questions regarding this article or you are in a similar case/situation, please visit our Legal Consultation center or send your inquiry email by clicking here.  Our Korean qualified lawyer will answer your inquiry.

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