26 April 2021

Client Update: Term of Royalty Payments on Patent Licenses

26 April 2021

Client Update: Term of Royalty Payments on Patent Licenses

In a recent decision, the District Court of Tel Aviv confirmed that under Israeli law contracts for the payment of royalties subsequent to the term of the patent license may be voidable as against public policy. However, the District Court enforced the patent license in part, employing the flexibility that Israeli contract law grants courts to reform such voidable contracts. As such, the decision does not provide a clear rule as to how Israeli courts will approach such agreements. Clients should note that Israeli courts may apply these principles to contracts involving both Israeli and foreign patents. 

Background and Analysis

Cellopark Technologies Ltd. (“Cellopark”) and Pango Mobile Parking (“Pango”) are both Israeli companies that provide technology for the metering and payment of vehicle parking. In 2005, Pango sued Cellopark for the infringement of Pango’s Israeli “Patent Management System” patent. After extensive litigation, the parties reached a settlement in 2012. Though the patent was due to expire in 2016, the settlement agreement provided for the payment of royalties through 2024.

The District Court of Tel Aviv, citing to prior decisions of the Israeli Supreme Court as well as recent caselaw in the United States, held that contracts for the payment of patent royalties subsequent to the expiration of the patent term are voidable as against public policy under Israeli law. Such contracts, according to the court and prior Supreme Court precedent, effectively serve to extend the patent “monopoly” beyond the limited statutory patent term. However, since Israeli contract law provides courts will flexibility for the reformation of such contracts, in light of the circumstances the District Court decided to lower the royalties due under the license agreement rather than invalidate the contract altogether.

The District Court noted that United States courts had upheld agreements that provided for the payment of stepped-down royalties in cases where licenses included subject matter that was classified as know-how subsequent to the expiration of the patent term. In the present case, however, the District Court held that since the Cellopark license agreement did not expressly provide for such stepped-down royalties, it would not make any holding regarding the validity of contracts that provided for such stepped down royalties.   

The decision of the District Court relies to a large extent on Israeli contract law, rather than Israeli patent or competition law or similar doctrines such as patent misuse. As such, while the present court case involved only an Israeli patent, parties to patent license agreements should note that Israeli courts may in the future apply the same principles to license agreements that involve both Israeli and foreign patents

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