Case Summary: The Presumption Against Retroactive Licensing Absent Explicit Language to the Contrary Applies Equally to Sublicenses

1. Presumption Against Retroactivity: The court in Altria Client Services LLC v. R.J. Reynolds Vapor Company upheld that, due to Federal Circuit precedent, licenses are presumed not to have retroactive effect unless explicitly stated otherwise.
   
   
2. Lack of Authority for Retroactive Sublicense: The court concluded that JUUL did not have contractual authority to grant Reynolds a retroactive sublicense because the license agreement with Altria did not contain explicit language allowing such retroactive sublicensing.
   
   
3. Effect on Judgments and Royalties: The court determined that even if Reynolds had a valid retroactive sublicense from JUUL, it would not constitute an "extraordinary circumstance" sufficient to vacate the prior judgment or ongoing royalty order, though it mandated a further hearing on the ongoing royalty issue.

Abstract

In Altria Client Services LLC v. R.J. Reynolds Vapor Company, the Middle District of North Carolina found that the presumption against licenses with a retroactive effect, as per Federal Circuit precedent, also applies when interpreting whether a license permits a licensee to issue a retroactive sublicense. The court reasoned that without explicit language in a license agreement that would overcome the presumption against retroactivity, a licensee should not be permitted to unilaterally extinguish a licensor’s right to sue third party infringers for infringement.

Background

In May 2020, Altria Client Services LLC (“Altria”) sued R.J. Reynolds (“Reynolds”) for infringement of Altria’s patents claiming e-vapor technology and smokeless pouches, based on Reynolds’ use of Altria’s patents in Reynolds’ “VUSE Alto” e-vapor product.  In September 2022, a jury found that Reynolds infringed Altria’s patents and awarded Altria $95 million in damages for Reynolds’ past infringement through June 30, 2022, based on a 5.25% royalty rate. Following the jury trial,  Reynolds agreed to accrued royalties of 5.25% on net sales from July 1, 2022 through the date of judgment. The court also awarded Altria an ongoing royalty at a 5.25% rate for the life of the patents.

In 2018, prior to the dispute between Altria and Reynolds, Altria and JUUL Labs (“JUUL”) entered into a licensing agreement under which Altria granted JUUL a broad sublicensable license for its intellectual property, including the Altria asserted patents. Altria and JUUL’s business relationship later deteriorated, but the agreement remained in place.

In December 2023, after the 2022 judgment and award of ongoing royalties to Altria, JUUL and Reynolds entered into a license agreement, purporting to grant Reynolds a prospective and retroactive sublicense authorizing both future and prior use of Altria’s asserted patents. Accordingly, Reynolds moved for relief from (1) the judgment of infringement and payments already awarded under Federal Rule of Civil Procedure 60(b)(6), and (2) the ongoing royalty order under Rule 60(b)(5), contending that JUUL’s sublicense authorized Reynolds’ use of Altria’s patents.

The Court’s Decision

Contractual Authority to Issue Retroactive Sublicense

Under Rule 60(b)(6), Reynolds argued that its sublicense from JUUL was retroactive, negating any past alleged infringement of Altria’s patents, and asked the court to vacate the judgment of infringement and payments accrued prior to Reynolds’ acquisition of the sublicense. The court considered (1) whether JUUL was contractually authorized to issue retroactive sublicenses to third parties, and (2) whether that sublicense constituted an “extraordinary circumstance” that warranted vacating the judgment.

Altria argued that JUUL did not have the authority to grant retroactive sublicenses because the agreement did not explicitly authorize it to do so, while Reynolds argued that JUUL was authorized to do so because the agreement did not place any restrictions on JUUL’s right to sublicense. This disagreement stemmed from the parties’ differing opinions on the applicable governing law – Reynolds argued that Delaware contract law, which governs the agreement, supports enforcing contracts as written and thus does not prohibit retroactive sublicensing unless explicitly stated. On the other hand, Altria contended that under Federal Circuit precedent holding that “[p]atent licenses are prospective unless the parties make them retroactive with clear language,” because the agreement did not include clear language that JUUL was authorized to issue retroactive sublicenses, JUUL was not permitted to do so.

The question presented to the court was thus how it should interpret the scope of a sublicensing right. The court agreed with Altria, finding that the Federal Circuit’s presumption against retroactive licenses absent clear language to the contrary should “apply with the same force when determining the breadth of a sublicensing right.” The court concluded that because the Altria-JUUL license did not contain clear language that would overcome the presumption against retroactivity, JUUL did not have the authority to issue a retroactive sublicense to Reynolds for Altria’s asserted patents so as to extinguish Reynolds’ past infringement of Altria’s patents prior to its acquisition of the sublicense from JUUL. The court reasoned that concerns with retroactivity in the context of licenses applied equally in the context of sublicenses – that a licensor’s right to sue third party infringers for past infringement should not be unilaterally extinguished. As such, having found that the provision of JUUL’s sublicense to Reynolds purporting to apply retroactively was invalid, the court denied Reynolds’ request for relief from the judgment of infringement, damages, and accrued royalties.

Impact of a Retroactive Sublicense on a Prior Judgment of Infringement

Though the court concluded that the Altria-JUUL agreement did not permit JUUL to issue retroactive sublicenses in the present case, it nevertheless considered whether a valid retroactive sublicense could potentially undo a prior judgment of infringement under Rule 60(b)(6). On this question, the court found that even assuming Reynolds did indeed have a valid retroactive sublicense to the Altria asserted patents, it would only have an affirmative defense to infringement that would not rise to the level of an “extraordinary circumstance.” The court reasoned that Reynolds’ acquisition of a license after an adverse judgment against it, when it infringed Altria’s patents and had no license to assert as an affirmative defense prior to the judgement of infringement and damages, did not constitute an “extreme or unexpected hardship” to demonstrate an extraordinary circumstance.

Ongoing Royalties

Reynolds also argued that the ongoing royalty order should be vacated under Rule 60(b)(5) because the sublicense from JUUL authorized Reynolds’ use of Altria’s asserted patents going forward. The court ordered a further hearing to determine whether the sublicense warranted modification of the ongoing royalty award.

Strategy and Conclusion

When drafting and entering into licensing agreements, parties must ensure that they clearly and explicitly define the scope of any sublicensing rights in unambiguous terms. Specifically, if the parties intend that a licensee have the right to issue retroactive sublicenses to third parties, the license should explicitly grant that right.

Further Information

The Altria decision can be found here.