The US Court of Appeals for the Fifth Circuit ruled that a most-favored licensee clause allowed a licensee that paid a lump sum of $70 million to be entitled to a refund when a subsequent licensee paid a lump sum of only $250,000. The refund applied to royalties paid both before and after the more favorable license. JP Morgan Chase Bank, N.A. v. DataTreasury Corp., Case No. 15-40905 (5th Cir., May 19, 2016) (Davis, J) (Higginson, J, dissenting in part).

In 2005, to resolve a patent infringement action filed by DataTreasury against JP Morgan, the parties entered into a license agreement under which JP Morgan would pay DataTreasury $70 million for use of one of DataTreasury’s check processing patents. The license agreement contained a “most-favored licensee” clause, which provided that if DataTreasury granted a similar license to anyone else, JP Morgan would “be entitled to the benefit of any and all more favorable terms.”

Seven years later, DataTreasury entered into a license agreement with Cathay General Bancorp that allowed Cathay to use the same DataTreasury patent for only $250,000. After it learned of Cathay’s cheaper license, JP Morgan began litigation to recover the difference between the $70 million it paid and the $250,000 paid by Cathay.

The dispute centered on whether the most-favored licensee clause applied retroactively—that is, to royalties JP Morgan paid during the entire term, including before Cathay’s license—or only prospectively, on royalties paid after Cathay’s more favorable license agreement. DataTreasury argued that JP Morgan was only entitled to a refund on royalties paid since 2012, the date of Cathay’s license.

The Fifth Circuit found that most-favored licensee clauses apply prospectively to running royalties but can also apply retroactively to lump sum royalties. A preliminary issue was whether JP Morgan’s royalties should be classified as lump sum royalties or running royalties. Under its license agreement, JP Morgan agreed to pay a total of $70 million but was allowed to pay in installments. The Court explained that this was a lump sum royalty because, according to the agreement, JP Morgan’s failure to pay any of the installments would terminate the entire license, in both the future and the past. In contrast, failure to make one payment of a running royalty would affect only the uses covered by that single payment, not previous uses.

JP Morgan was, therefore, entitled to a refund for all royalties paid since the parties first entered into their agreement in 2005, even before Cathay’s agreement. The Fifth Circuit distinguished case law that applied most-favored licensee clauses only to royalties paid after the more favorable license arose. Those cases all addressed licenses with running royalties. In contrast, JP Morgan’s most-favored licensee clause meant that all of its lump sum royalties should be reduced to the amount it would have paid under Cathay’s agreement.