What is a misrepresentation? How it present itself in apatent licensing scenario?
A person may make a statement of fact which is not couched simply asan expression of opinion but is made in such definite terms as reasonably tolead the person to whom the statement is made to believe it is true (however,it is not the case) and, in reliance on such statement, to enter into acontract with the maker of the statement. A statement of falsity as foresaid,shall be called a misrepresentation.
In the context of a patent licensing, a licensor may use a varietyof techniques to ensure monetization of its IP assets, which may include somemisrepresentations. A typical model therein is illustrated as follows.
We maysee licensor Q, licensor E and licensor N constitute roadblock in businessavenue of licensee Z in UK market. To pass through it, themost efficient way would be obtain a license from E under E’s patent (assumingthe shortest distance means least amount of royalties). To attract licensee Zto strike an agreement, E may make misrepresentation to assure licensee Z on bothpatentability and coverage. For patentability,it’s about there really exists a roadblock in effect (i.e., E’s patentportfolio). For coverage, E may make Z believe that the scope of license itwill pay for is consistent with the coverage Z has in mind necessary for thepurpose of access to market.
General remedies for Representation available to Licensee
When misrepresentation occurs the license agreement is voidable, sothe misrepresentee (in this case, i.e. licensee) has the option to void orcontinue. Equity gives the licensee aright to rescind the contract, whether the misrepresentation was fraudulent,negligent or wholly innocent, for his entry into this license agreement hasbeen brought on a false basis.
While a fraudulent misrepresentation is actionable because the lawof tort gives a general damage remedy in deceit for fraudulent statements, anegligent misrepresentation may only be actionable because it is made incircumstances where the licensor owed the licensee a duty of care. However, irregardless of the foresaid, the UKMisrepresentation Act 1967 gives the innocent party a right to damages unlessthe maker of a non-fraudulent misrepresentation can prove that he hadreasonable grounds to believe and did believe that the facts represented weretrue.
Mode and effect of rescission and damage
Rescission may be effected by notice to the licensor of the licensee’sintention to rescind, or by conduct equivalent to such notice where thelicensor has absconded and cannot be traced (which leads to the obligationsunder license agreement cannot be fulfilled), or by withholding royalty underthe contract. To safeguard himself incase of doubt, the licensee may ask for a declaration that the licenseagreement has been or ought to be rescinded. But even where a court order is sought, the rescission is the act of thelicensee, not of the court, and takes effect on giving notice of equivalentconduct, such as the commencement of proceedings. The order is declaratory only.
The effect of rescission is to cancel the license agreement from thebeginning, to avoid it retrospectively so that it is treated as never havingexisted. Hence a necessary concomitantof rescission is restitution in order to prevent the unjust enrichment of thelicensor. Royalty paid under the licenseagreement shall be refunded to the licensee. The rescission does not effect without limitations. The licensee may lose the right to rescind ifhe affirms the license agreement with knowledge of the falsity of therepresentation; and lapse of time also destroy a right to rescind. On top of those, court may decide to make licenseeaccept damages in lieu of rescission in the case of non-fraudulentmisrepresentation.
However, the function of damage is to compensate the licensee so asto put him as nearly as possible in the position in which he would have been ifthe license agreement had been performed. Damage is concerned not with restoration to pre-contractual position,but with compensation for normal loss andconsequential loss. Normal loss means loss of bargain, representedby the difference between the actual value of what he received and the value hewould have received had the license been in position as represented. If the licensee has suffered no loss, he isusually entitled to no more than nominal damages. Consequential loss means expenditure and lossof profit, which must be properly pleaded and proved. It is necessary for the licensee to adduceevidence as to the loss-producing event, and in this regard there is animportant distinction between past events and possible future events. That a past event occurred has to beestablished on a balance of probabilities, and if it is so established theevent is considered proved (from law’s perspective) and no discount is made forthe possibility that it might not have happened. The approach is all or nothing. But it cannot be proved that an uncertainfuture event will occur. So when alicensee claims damage for the loss of profits that might have been expected toflow from future events but for the misrepresentation, the claim is for loss ofchance that the future profits would have accrued. Normally the court will not embark on avaluation of chance if it merely speculative, but if it is significant, then anappropriate discount must be made for the possibility that the anticipatedprofits would not have accrued.
Election of licensee
Back to example above, if Company E makes misrepresentation which isintended to and does induce the Company Z to enter into the license agreement.The remedy arised thereupon is materially affected by the election of CompanyZ.
Suppose Company Z is asmartphone manufacturer, and Company Q, Company N and Company E are someserious standard essential patent holders in the field. Company Z intends toenter UK market with patent license of Company E, who makes falserepresentation on the patentability and coverage of its own patents, andpersuade Company Z that some lump sum payment paid to Company E would clear theroute for business operation in UK, once and for all. However, the truth is some payment to CompanyQ is what Company Z really need to payfor the purpose of entering into UKmarket.
Subject to the limitationsas foresaid, it is clear that if Company Z elects to rescind, upon notice to CompanyE, the license agreement is cancelled, and Company E shall refund royaltiespaid by Company Z as of the notice date.
If Company Z elects to treatthe license agreement repudiated and claim damage, there are several parts ofdamage. For the normal loss, Company Z isentitled to payment to Company Q from Company E. For the consequential loss, in respect ofpast events related loss, Company Z can recover expenditures it incurred, e.g.,marketing fee, material cost, insurance cost and freight; in respect ofpossible future events, Company might be entitled to the profit from sales ofsmartphones, and prospect of future contracts resulting from goodwill accruedfrom the first sales, so long as Company Z could properly plead, prove andconvince the court.
A way out for licensor
First and all, licensor shall not make any misrepresentation,whether in the form of fraudulent, negligent or innocent. That means licensor shall do some thoroughdue diligent work, and be cautious in making any representations.
Second, licensor shall clarify and carve out some representation itmade if he smells any risks in it (e.g., both of Q’s and E’s licenses arenecessary for access to the market). For example:
Company Z understands that thirdparty licenses shall be also obtained by Company Z. Company E and Company Z understands andacknowledges that Company E makes representations in this Agreement based onits reasonably prudent and diligent efforts to analyze and investigate, bothparties have reasonable grounds to believe the truth of the representation, andCompany Z is in no reliance on any misunderstanding thereof to enter into thislicense agreement.
3、Clarified route for access to market by Z
We may see by thisclause licensor has excluded fraudulent misrepresentation, negligentmisrepresentation, and part of innocent misrepresentation (which arises out oflicensee’s misunderstanding), and made a resort to damage remedy less likelypossible, though the theory therein is yet to be affirmed in court.
This article aims to make observations under common law practice, however, considering recent tendency of domination of statutory law and various development of case law in US law system, one may factor in such federal & state statutory law and precedents, when predicting effect of misrepresentations in US patent licensing.