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Patent License Agreement in Korea – What Happens to Royalty Payment When the Patent Later Becomes Invalidated

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Korean Law OfficeThere is no doubt that intellectual property is a valuable asset and parties all around the world are dealing with an arrange of utilizing 3rd party’s intellectual properties.  Sometimes it could be a license 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 compared to other intellectual property such as a copyright to clear this issue because 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?  The Korean Patent Act provides that if a court’s decision invalidating a patent becomes final and conclusive, the patent shall be deemed never to have existed.  Then what happens to the royalty previously paid by the licensee?  Does the licensee can refuse to pay the royalty after the patent gets invalidated and even ask for the refund of the royalties previously paid pursuant to the patent license agreement?  The Supreme Court of Korea said No.

In the Supreme Court’s case, the plaintiff and the defendant made an agreement whereby the plaintiff grants non-exclusive license to the defendant, and the defendant pays 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 agreement, i.e. the patent, didn’t exist from the beginning.

The Supreme 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 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.

This ruling shows how Korean courts translate and applies the Patent Act to the matter of royalty payment obligation when the patent later becomes void unexpectedly.  In order to clear and minimize this kind of uncertainty, it is always a good practice to have a thorough due diligence to check any legal risk before entering into a patent and other intellectual property license agreements. 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.  Also, although you can resort to the Korean court’s review and ruling to settle a dispute with a Korean company, it is advisable to set a contractual safe harbor in place such as having a specific clause included in the license agreement which provides 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.

If you have any question 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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Author: Korean Qualified Lawyer

Korean Licensed Lawyer 韓国の弁護士

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