12th Annual Rocky Mountain Intellectual Property & Technology Institute
2014 LICENSING LAW UPDATE By
Jeff C. Dodd [email protected]
May 2014
Copyright © 2014 by Jeff C. Dodd. All rights reserved.
2014 Licensing Law Update
Jeff Dodd*
1. Overview
As in years past, I will canvass cases, (primarily Federal appellate cases) decided over the past year or so, that I believe may be relevant to a practitioner who defends, enforces, drafts, or challenges a license. Again, I remind my readers that I view licensing law as an admixture of contract, intellectual property and public policy doctrines.1 We will see this principle in the cases described below. Let us get started. 2. Choice of Forum and Jurisdiction
(a) Contractual choice of forum
(i) Selection of judicial forum
Against a background of uncertainty and the risk of exposure to lawsuits throughout the country and the world, it is not surprising that many contracts designate the locations in which lawsuits can be brought. With few exceptions grounded largely in consumer cases in a minority of states where a particular choice of forum is seen as effectively denying any access to court,2 the vast majority of courts give effect to judicial forum selection clauses. As the Supreme Court in Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas3 stated, the ‘“enforcement of valid forum-selection clauses, bargained for by the parties, protects their legitimate expectations and furthers vital interests of the justice system.’ …For that reason, and
* Copyright © 2014 by Jeff C. Dodd. All rights reserved. Jeff Dodd is a partner in the Austin and Houston, Texas offices of Andrews Kurth LLP and he is chair of AK’s IP and Technology Practice Group. This paper builds upon prior papers by the author and the treatise, “Modern Licensing Law,” of which Raymond Nimmer and Jeff Dodd are co-authors. Indeed, the author has used and will use this paper in other publications and for other presentations. For example, this update undoubtedly will be the grist for an update to the Modern Licensing Law treatise. I also have lifted portions of that treatise and deposited them in this paper when necessary to provide background or elaboration. Finally, no one should attribute what I write or say to the unsuspecting and innocent clients and lawyers of my firm, much less my long suffering family, or to anyone else, living or dead, or even to my avatars or the avatars of others, any or all of whom may well ferociously disagree and disavow what I have to say in this paper, or for that matter, anything I have to say anywhere. 1 This thesis is elaborated and defended in Chapter 1 of Modern Licensing Law. 2 See, e.g. Dix v. ICT Group, Inc., 160 Wash. 2d 826, 161 P.3d 1016 (2007) (Although in general choice of forum clauses are enforced even in consumer cases, the forum selection clause in this case was unenforceable where lack of class action procedure would leave the plaintiff with no avenue for relief.). 3 Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas, --U.S.--, 134 S.Ct. 568 (2013).
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because the overarching consideration under Section 1404(a) is whether a transfer would promote ‘the interest of justice,’ ‘a valid forum-selection clause [should be] given controlling weight in all but the most exceptional cases.”’4 Indeed, many reported cases describe a forum selection clause as presumptively or prima facie valid.5 This presumption, of course, assumes that the clause is properly included within a contract between the parties.6 In Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas7 the Supreme Court addressed the proper procedure for enforcing an forum-selection clause. In the case, Atlantic Marine entered into a subcontract with J-Crew that contained a clause specifying that all disputes would be litigated in specified state and federal courts in a designated jurisdiction. Nonetheless, J-Crew ignored the clause and filed suit in another jurisdiction. Rejecting the idea that a forum selection clause could be enforced by a motion to dismiss under 28 U.S.C. § 1406(a) or Rule 12(b)(3) of the Federal Rules of Civil Procedure,8 the Supreme Court held that “a forum-selection clause may be enforced by a motion to transfer under” 28 USC § 1404(a), which provides that ‘“[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.’ When a defendant files such a motion, we conclude, a district court should transfer the case unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer.”9 Unlike other forum non conveniens motions under Section 1404(a), the
4 Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas, --U.S.--, 134 S.Ct. 568, 581 (2013). 5 See, e.g., Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 589-95, 111 S. Ct. 1522, 113 L. Ed. 2d 622, 1991 A.M.C. 1697 (1991); Monsanto Co. v. McFarling, 302 F.3d 1291, 64 U.S.P.Q.2d 1161 (Fed. Cir. 2002). See also M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10, 92 S. Ct. 1907, 32 L. Ed. 2d 513, 1972 A.M.C. 1407 (1972). 6 See Fteja v. Facebook, Inc., 841 F. Supp. 2d 829 (S.D. N.Y. 2012) (forum selection in terms of use enforceable even though web site's terms of use required user to click on “sign up” button to assent, and did not contain any mechanism that forced user to actually examine the terms appearing on hyperlink before assenting; user was prompted to examine terms and informed of the consequences of his assenting click). Compare Jerez v. JD Closeouts, LLC, 36 Misc. 3d 161, 943 N.Y.S.2d 392 (Dist. Ct. 2012) (Even though a forum selection clause was presumptively enforceable, the court concluded it did not become part of the contract because the buyer was not made aware of it. The contract was started by an email offer with terms that did not mention that more terms were at the website: the only way to have found the forum selection clause was by “clicking on an inconspicuous link on the company's “About Us” page,” i.e., the court viewed them as too “buried” and “submerged” to become part of the contract.). 7 Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas, --U.S.--, 134 S.Ct. 568 (2013). 8 Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas, --U.S.--, 134 S.Ct. 568, 577 (2013)(28 USC Section 1406(a) and Rule 12(b)(3) relate to dismissals where venue was improper: “Section 1406(a) provides that ‘[t]he district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought.’ Rule 12(b)(3) states that a party may move to dismiss a case for ‘improper venue.’ These provisions therefore authorize dismissal only when venue is ‘wrong’ or ‘improper’ in the forum in which it was brought”; enforcement of a forum selection clause does not turn on whether venue is or would be wrong or improper). 9 Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas, --U.S.--, 134 S.Ct. 568, 575 (2013). As the Supreme Court elaborated, “the appropriate way to enforce a forum-selection clause pointing to a state or foreign forum is through the doctrine of forum non conveniens. Section 1404(a) is merely a codification of the
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convenience of the parties and witnesses is not of any moment. Indeed, the Supreme Court instructed that, when faced with a forum selection clause in an otherwise enforceable contract, the federal courts needed to alter their typical Section 1404(a) analysis: First, the plaintiff's choice of forum merits no weight. Rather, as the party defying the forum-selection clause, the plaintiff bears the burden of establishing that transfer to the forum for which the parties bargained is unwarranted. … Second, a court evaluating a defendant's § 1404(a) motion to transfer based on a forum- selection clause should not consider arguments about the parties' private interests. When parties agree to a forum-selection clause, they waive the right to challenge the preselected forum as inconvenient or less convenient for themselves or their witnesses, or for their pursuit of the litigation. A court accordingly must deem the private-interest factors to weigh entirely in favor of the preselected forum. … Third, when a party bound by a forum-selection clause flouts its contractual obligation and files suit in a different forum, a § 1404(a) transfer of venue will not carry with it the original venue's choice-of-law rules—a factor that in some circumstances may affect public-interest considerations…. The court in the contractually selected venue should not apply the law of the transferor venue to which the parties waived their right.10 The only matter left for the courts in considering a Section 1404(a) motion to force a transfer to a selected forum is whether the transfer would promote “the interest of justice”-- which the Supreme Court unmistakably stated that it would: “As a consequence, a district court may consider arguments about public-interest factors only. … Because those factors will rarely defeat a transfer motion, the practical result is that forum-selection clauses should control except in unusual cases. Although it is ‘conceivable in a particular case’ that the district court ‘would refuse to transfer a case notwithstanding the counterweight of a forum-selection clause,’… such cases will not be common. … When parties have contracted in advance to litigate disputes in a particular forum, courts should not unnecessarily disrupt the parties' settled expectations. A forum-selection clause, after all, may have figured centrally in the parties' negotiations and may have affected how they set monetary and other contractual terms; it may, in fact, have been a critical factor in their agreement to do business together in the first place. In all but the most unusual cases, therefore, ‘the interest of justice’ is served by holding parties to their bargain.”11
(ii) Arbitration Clauses
doctrine of forum non conveniens for the subset of cases in which the transferee forum is within the federal court system; in such cases, Congress has replaced the traditional remedy of outright dismissal with transfer.” Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas, --U.S.--, 134 S.Ct. 568, 580 (2013). 10 Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas, --U.S.--, 134 S.Ct. 568, 581-82 (2013). 11 Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas, --U.S.--, 134 S.Ct. 568, 582, 583 (2013).
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(A) Who--judge or arbitrator--decides whether the dispute is subject to arbitration? While arbitration clauses are generally enforceable and routinely enforced, the scope and coverage of the arbitration will be governed by the terms of the contract.12 In essence, arbitration is a contractual remedy. Within the contractual scope, courts generally give the arbitrators fairly wide berth in reaching a decision. For that reason, the question of who--court or arbitrator-- decides whether the matter is subject to arbitration or whether the arbitration clause is valid is an important question. As the Federal Circuit noted in MicroChip Technology Incorporated v. U.S. Philips Corporation,13 the Supreme Court in John Wiley & Sons, Inc. v. Livingston14 “held that the question of whether a party is bound by an agreement containing an arbitration provision is a ‘threshold question’ for the court to decide…. Because a party ‘cannot be compelled to arbitrate if an arbitration clause does not bind it,’ the Court held that there was 'no doubt' that 'a compulsory submission to arbitration cannot precede judicial determination that the ... agreement does in fact create such a duty.”’15 However, this rule is a presumption: the parties can, if they so choose, have the arbitrators decide whether the dispute is covered by the arbitration clause,16 as long as they do so clearly and unmistakably.17
12 See Promega Corp. v. Life Technologies Corp., 674 F.3d 1352, 102 U.S.P.Q.2d 1207 (Fed. Cir. 2012) (Provision for mandatory arbitration in patent license agreement bound assignee of license and covered dispute about royalties and infringement; arbitration provision clearly and unambiguously applied to all disputes arising out of or relating to agreement, limitations on discovery did not warrant departure from mandate of Federal Arbitration Act (FAA) to enforce arbitration provisions.); 1mage Software, Inc. v. Reynolds and Reynolds Co., 459 F.3d 1044, 79 U.S.P.Q.2d 1942 (10th Cir. 2006) (citing cases). 13 Microchip Technology Inc. v. U.S. Philips Corp., 367 F.3d 1350, 70 U.S.P.Q.2d 1847 (Fed. Cir. 2004). 14 John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 84 S. Ct. 909, 11 L. Ed. 2d 898, 55 L.R.R.M. (BNA) 2769, 49 Lab. Cas. (CCH) P 18846 (1964). 15 Microchip Technology Inc. v. U.S. Philips Corp., 367 F.3d 1350, 1357, 70 U.S.P.Q.2d 1847 (Fed. Cir. 2004). 16 Thus if parties narrowly draw the ambit of dispute subject to arbitration or even the scope of the arbitrator’s power to determine arbitrability their intentions should be given effect. See, e.g. Kramer v. Toyota Motor Corporation, 2013 WL 357792 *4-5 (9th Cir. 2013)(“Here, the arbitration agreements do not contain clear and unmistakable evidence that Plaintiffs and Toyota agreed to arbitrate arbitrability. While Plaintiffs may have agreed to arbitrate arbitrability in a dispute with the Dealerships, the terms of the arbitration clauses are expressly limited to Plaintiffs and the Dealerships….The language of the contracts thus evidences Plaintiffs' intent to arbitrate arbitrability with the Dealerships and no one else…”). 17 See, e.g. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943-45, 115 S.Ct. 1920, 1923-24 (1995) (“Just as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, … so the question “who has the primary power to decide arbitrability” turns upon what the parties agreed about that matter. Did the parties agree to submit the arbitrability question itself to arbitration? If so, then the court's standard for reviewing the arbitrator's decision about that matter should not differ from the standard courts apply when they review any other matter that parties have agreed to arbitrate. … That is to say, the court should give considerable leeway to the arbitrator, setting aside his or her decision only in certain narrow circumstances. …If, on the other hand, the parties did not agree to submit the arbitrability question itself to arbitration, then the court should decide that question just as it would decide any other question that the parties did not submit to arbitration, namely, independently. These two answers flow inexorably from the fact that arbitration is simply a matter of contract between the parties; it is a way to resolve those disputes-but only those disputes-that the parties have agreed to
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Clear and unmistakable does not mean, however, that the arbitration clause itself must explicitly state that arbitrators will determine arbitrability, though perhaps it is good practice to do so. Many courts have found that if the rules (such as the American Arbitration Rules) selected by the arbitration clause refer questions of arbitrability to the arbitrators, then the clear and unmistakable test has been met.18 Consider here Oracle America, Inc. v. Myriad Group A.G.19 In this case, the Ninth Circuit considered a license providing that disputes “arising out of or relating to” the license, which would be subject to arbitration administered by the AAA in accordance with the United Nations Commission on International Trade Law (UNCITRAL)… in effect at the time of arbitration as modified herein,” but with an important exception: “except that either party may bring any action, in a court of competent jurisdiction (which jurisdiction shall be exclusive), with respect to any dispute relating to such party's Intellectual Property Rights or with respect to Your compliance with the TCK license.”20 When Oracle sued Myriad for infringing its copyrights, breaching the license, violating the Lanham Act, among other things,
submit to arbitration…. When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally (though with a qualification we discuss below) should apply ordinary state-law principles that govern the formation of contracts. … This Court, however, has (as we just said) added an important qualification, applicable when courts decide whether a party has agreed that arbitrators should decide arbitrability: Courts should not assume that the parties agreed to arbitrate arbitrability unless there is “clea[r] and unmistakabl[e]” evidence that they did so. … In this manner the law treats silence or ambiguity about the question “ who (primarily) should decide arbitrability” differently from the way it treats silence or ambiguity about the question “ whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement”-for in respect to this latter question the law reverses the presumption.” ); Oracle America, Inc. v. Myriad Group A.G., --- F.3d ----, 2013 WL 3839668 *2 (9th Cir. 2013)(“ “Just as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, so the question ‘who has the primary power to decide arbitrability’ turns upon what the parties agreed about that matter.” … But, unlike the arbitrability of claims in general, whether the court or the arbitrator decides arbitrability is ‘an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.’ … In other words, there is a presumption that courts will decide which issues are arbitrable; the federal policy in favor of arbitration does not extend to deciding questions of arbitrability); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1371, 1373, 80 U.S.P.Q.2d 1669 (Fed. Cir. 2006)(“"the 'question of arbitrability ... is undeniably an issue for judicial determination' ... but the parties could agree to submit arbitrability to the arbitrator to determine as long as the court was satisfied that there was ‘clear and unmistakable’ evidence that they did so. “; if the court concludes that the parties did not clearly and unmistakably intend to delegate arbitrability decisions to an arbitrator, the general rule that the 'question of arbitrability ... is ... for judicial determination' applies and the court should undertake a full arbitrability inquiry in order to be 'satisfied' that the issue involved is referable to arbitration."). See also Agere Systems, Inc. v. Samsung Electronics Co. Ltd., 560 F.3d 337, 340, 89 U.S.P.Q.2d 1955 (5th Cir. 2009) (Fifth Circuit considered a tangle of license agreements that the parties and their predecessors had entered into over a several year period. It found that the terms of the agreements clearly vested determination of arbitrability in the arbitrator, thus overcoming the rule that the courts generally determined that question.). 18 See, e.g. Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1373, 80 U.S.P.Q.2d 1669 (Fed. Cir. 2006) (“the 2001 Agreement, which incorporates the AAA Rules clearly and unmistakably shows the parties' intent to delegate the issue of determining arbitrability to an arbitrator”). See also, Oracle America, Inc. v. Myriad Group A.G., --- F.3d --- -, 2013 WL 3839668 *4 (9th Cir. 2013)(collecting cases supporting the interpretation that invoking AAA Rules in an arbitration clause allowed arbitrators determine arbitrability). 19 Oracle America, Inc. v. Myriad Group A.G., --- F.3d ----, 2013 WL 3839668 (9th Cir. 2013). 20 Oracle America, Inc. v. Myriad Group A.G., --- F.3d ----, 2013 WL 3839668 *1 (9th Cir. 2013).
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Myriad invoked the arbitration clause in the license, arguing that the UNICTRAL Rules in effect when it demanded arbitration referred arbitrability to the arbitrators. The Ninth Circuit held that “incorporation of the UNCITRAL arbitration rules is clear and unmistakable evidence that the parties agreed the arbitrator would decide arbitrability. We hold that as long as an arbitration agreement is between sophisticated parties to commercial contracts, those parties shall be expected to understand that incorporation of the UNCITRAL rules delegates questions of arbitrability to the arbitrator.”21 But what of the exception providing that infringement claims or issues of whether the licensee acted with the scope of the license would be determined exclusively by the courts? The Ninth Circuit noted that Oracle’s ability to enforce its intellectual property claims would be limited if the license Myraid claimed in defense applied. “Thus, by definition, the claims excepted from arbitration by the carve-out clause are claims ‘arising out of or relating to’ the Source License. Oracle's argument conflates the scope of the arbitration clause, i.e., which claims fall within the carve-out provision, with the question of who decides arbitrability. The decision that a claim relates to intellectual property rights or compliance with the TCK License constitutes an arbitrability determination, which the parties have clearly and unmistakably delegated to the arbitrator by incorporating the UNCITRAL rules.”22 While the cases uniformly follow the principle that arbitrators can decide arbitrability when the arbitration clause clearly and unmistakably says they can, in Qualcomm Inc. v. Nokia Corp.23 the Federal Circuit added a very peculiar qualification to that well-nigh universal clear and unmistakable rule. The case related to a patent license agreement containing an arbitration clause requiring any dispute relating to the license to be resolved in arbitration conducted under American Arbitration Rules. When Qualcomm sued Nokia for patent infringement, Nokia invoked the license and argued that the matter had to be arbitrated, Qualcomm, with whom the district court agreed, argued that the infringement issues did not implicate the license at all, so the matter was not subject to arbitration at all. The Federal Circuit reversed. It found that the license did, in fact, clearly and unmistakably confer the power of determining arbitrability on the arbitration panel. This is all the Supreme Court precedent required. However, the Federal Circuit engrafted another qualification onto the clear and unmistakable test: If … the court concludes that the parties to the agreement did clearly and unmistakably intend to delegate the power to decide arbitrability to an arbitrator, then the court should perform a second, more limited inquiry to determine whether the assertion of arbitrability is “wholly groundless.” … If the court finds that the assertion of arbitrability is not “wholly groundless,” then it should stay the trial of the action pending a ruling on arbitrability by an arbitrator. If the district court finds that the assertion of arbitrability is “wholly groundless,” then it
21 Oracle America, Inc. v. Myriad Group A.G., --- F.3d ----, 2013 WL 3839668 *5 (9th Cir. 2013). 22 Oracle America, Inc. v. Myriad Group A.G., --- F.3d ----, 2013 WL 3839668 *6 (9th Cir. 2013). 23 Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 80 U.S.P.Q.2d 1669 (Fed. Cir. 2006).
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may conclude that it is not “satisfied” …, and deny the moving party's request for a stay.24 InterDigital Communications, LLC v. International Trade Com'n25 gave us an inkling how the Federal Circuit might use its “wholly groundless” exception to the Supreme Court’s clear and unmistakable principle--although, fortunately, the case was, on appeal, vacated by the Supreme Court as moot. The case involved a patent license containing an arbitration clause incorporating the AAA Rules, which, as we discussed above, routinely has been found to be clear and unmistakable expression of the intention of having arbitrators decide whether a dispute was susceptible to arbitration. The Federal Circuit, however, found that a court could decide a dispute over license interpretation on the merits--in essence removing the case from the arbitrators’ hands wholly, not just as to the question of who decides arbitrability--if the court found the construction of the license advanced by the party invoking arbitration not to be plausible. The Federal Circuit argued that Qualcomm’s ‘“wholly groundless’ inquiry allows a court to stay an action based on an agreement among the parties to submit their disputes to arbitration, ‘while also preventing a party from asserting any claim at all, no matter how divorced from the parties' agreement, to force an arbitration.”’26 But note Qualcomm’s instruction was limited: the district court should perform its second inquiry to determine whether the assertion of arbitrability was wholly groundless. One could reasonably view this as limiting the district court’s scrutiny to a determination of whether, on the face of the agreement, the assertion that the dispute must be arbitrated was wholly groundless, not whether, the claims or defenses or interpretations were meritless or not.27 Yet, the Federal
24 Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1371, 80 U.S.P.Q.2d 1669 (Fed. Cir. 2006). 25 InterDigital Communications, LLC v. International Trade Com'n, 718 F.3d 1336 (Fed. Cir. 2013), cert. granted, judg’t vacated and remanded to dismiss as moot, sub. nom. LG Electronics, Inc. v. InterDigital Communications, LLC. --U.S.--, -- S.Ct. ----, 2014 WL 1515685 (2014). 26 InterDigital Communications, LLC v. International Trade Com'n, 718 F.3d 1336, 1346 (Fed. Cir. 2013) cert. granted, judg’t vacated and remanded to dismiss as moot, sub. nom. LG Electronics, Inc. v. InterDigital Communications, LLC. --U.S.--, -- S.Ct. ----, 2014 WL 1515685 (2014). 27 Thus Qualcomm’s test spoke solely to the question of arbitrability: the court should perform a second, more limited inquiry to determine whether the assertion of arbitrability is “wholly groundless.” … If the court finds that the assertion of arbitrability is not “wholly groundless,” then it should stay the trial of the action pending a ruling on arbitrability by an arbitrator. If the district court finds that the assertion of arbitrability is “wholly groundless,” then it may conclude that it is not “satisfied” under section 3, and deny the moving party's request for a stay.” Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1371, 80 U.S.P.Q.2d 1669 (Fed. Cir. 2006)(emphasis added). The court in Agere Systems, Inc. v. Samsung Electronics Co. Ltd., 560 F.3d 337, 89 U.S.P.Q.2d 1955 (5th Cir. 2009) certainly read Qualcomm’s test as relating only to the question of whether a claim could be arbitrated, not to whether the underlying contentions were meritless: “Given the parties' differing positions, Samsung suggests that, if we have any doubt regarding whether the arbitration provision is applicable to the current dispute, we should resolve that doubt in favor of arbitration because of the “strong federal policy favoring arbitration” announced by Congress in the Federal Arbitration Act. …The doubt here, of course, is whether the arbitration clause is still in effect. … We …conclude that there is a legitimate argument that this arbitration clause covers the present dispute, and, on the other hand, that it does not. The resolution of these plausible arguments is left for the arbitrator.” Agere Systems, Inc. v. Samsung Electronics Co. Ltd., 560 F.3d 337, 340, 89 U.S.P.Q.2d 1955 (5th Cir. 2009).
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Circuit’s decision in InterDigital Communications would move the test well beyond scrutiny of the scope of the arbitration clause to scrutiny of the claims and defenses of the parties: If the ALJ had performed the proper analysis, he would have found that LG's license defense is not plausible. Rather, a cursory review of the relevant provisions in the Agreement confirms that LG no longer holds a license to InterDigital's patents for 3G products. Section 2.1, the grant clause, provided LG with a license to InterDigital's patents for both 2G and 3G products during the term of the Agreement. However, the Agreement terminated on December 31, 2010. … After that date, only the provisions specified in the survival clause survived. Relevant to the present dispute, the survival clause provides for the survival of “Section 2.1 (the last sentence as to GSM paid-up license grant only).” … The “last sentence” of Section 2.1 provides the following: …[‘]In addition, provided Licensee is not in default under this Agreement at the end of the Term, Licensee shall be fully paid-up under and for the life of the Licensed Patents as to GSM Licensed Terminal Units only at the end of the Term.[’]… “GSM Licensed Terminal Units” refers to licensed 2G products. …Reading these provisions together, the result is unambiguous: the only surviving portion of the grant clause is that portion providing LG with a “fully paid-up” license for the life of InterDigital's patents for 2G products. There simply is no plausible argument that LG's license for 3G products survived the termination of the Agreement. Accordingly, LG's assertion of arbitrability was ‘wholly groundless.”’28 After a petition for a writ of certiorari was filed, InterDigital filed a motion to withdraw its complaint at the ITC as to petitioners and, in February 2014, the ITC granted the motion, ending the investigation. Both the Solicitor General (on behalf of the ITC) and LG argued that this rendered the case moot at InterDigital’s request. The issue was whether the Supreme Court should merely deny the petition or vacate the judgment below. LG vociferously argued that the “difference between denial and vacatur matters in this case. Petitioner LG and respondent InterDigital are engaged in litigation in numerous forums over the same licensing agreement that the majority of a divided Federal Circuit panel--despite lacking even a colorable basis for asserting jurisdiction--construed against LG. We can be confident that InterDigital will assert, if this Court denies certiorari, that LG is collaterally estopped from arguing its construction of the agreement in the copending arbitration regarding the same agreement. Although such an argument would be wrong, arbitrators that actually have jurisdiction should not be forced to grapple with the complex law of issue preclusion before reaching the merits.”29 The petitioners
28 InterDigital Communications, LLC v. International Trade Com'n, 718 F.3d 1336, 1347 (Fed. Cir. 2013) cert. granted, judg’t vacated and remanded to dismiss as moot, sub. nom. LG Electronics, Inc. v. InterDigital Communications, LLC. --U.S.--, -- S.Ct. ----, 2014 WL 1515685 (2014). 29 Reply Brief for Petitioners on Petition for Writ of Certiorari, pp 1-2 (Filed April 2, 2014) in InterDigital Communications, LLC v. International Trade Com'n, 718 F.3d 1336, 1347 (Fed. Cir. 2013) cert. granted, judg’t vacated and remanded to dismiss as moot, sub. nom. LG Electronics, Inc. v. InterDigital Communications, LLC. -- U.S.--, -- S.Ct. ----, 2014 WL 1515685 (2014).
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were granted their plea for vacatur, leaving the issues to be re-litigated another day.30 Fortunately for all, this allows the Federal Circuit to reconsider its improvident interpretation. (B) On what grounds can an arbitral award be vacated or appealed? The Federal Arbitration Act31 sets out grounds for judicial review of an arbitration award: Section 9: If the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration, and shall specify the court, then at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award, and thereupon the court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title. If no court is specified in the agreement of the parties, then such application may be made to the United States court in and for the district within which such award was made. Section 10(a): In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration--(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. Section 11: In either of the following cases the United States court in and for the district wherein the award was made may make an order modifying or correcting the award upon the application of any party to the arbitration--(a) Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award. (b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted. (c) Where the award is imperfect in matter of form not affecting the merits of the
30 LG Electronics, Inc. v. InterDigital Communications, LLC. --U.S.--, -- S.Ct. ----, 2014 WL 1515685 (2014). The Supreme Court cited United States v. Munsingwear, Inc., 340 U. S. 36 (1950), which held that the “established practice of the Court in dealing with a civil case from a court in the federal system which has become moot while on its way here or pending our decision on the merits is to reverse or vacate the judgment below and remand with a direction to dismiss. … That procedure clears the path for future relitigation of the issues between the parties and eliminates a judgment, review of which was prevented through happenstance. When that procedure is followed, the rights of all parties are preserved; none is prejudiced by a decision which in the statutory scheme was only preliminary.” United States v. Munsingwear, Inc., 340 U. S. 36, 40 (1950). 31 9 U.S.C.A. §§1 et seq.
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controversy. The order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties. But can the parties, by contract, agree on additional grounds for appeal? Since arbitration is the creature of consent and contract, one might think that the parties would be free to structure the procedure relating to the arbitration in any manner they choose, including the grounds for appeal from arbitration. Indeed, in the past parties have crafted various limitations on arbitratorial discretion and protections against error. However, in Hall Street Associates, L.L.C. v. Mattel, Inc.,32 the Supreme Court held that, as to arbitration subject to the Federal Arbitration Act, even though parties may "tailor some, even many features of arbitration by contract, including the way arbitrators are chosen, what their qualifications should be, which issues are arbitrable, along with procedure and choice of substantive law" the parties cannot expand the grounds for vacating or modifying the award beyond those fixed by sections 10 and 11 of the FAA.33 Based on this holding, the Fifth Circuit found that even a manifest disregard of the law would not serve as grounds for vacatur, since such a standard was not one of the specifically enumerated grounds in section 10 of the FAA.34 The Second, Sixth and Ninth Circuits all have found that manifest disregard in some form survives after Hall Street either because they read that standard into the statute--most particularly Section10(4)(a)35--or read Hall Street narrowly.36 Yet, the prospect of risking a final decision to one or a few arbitrators, with such a limited ability to appeal, has proved troublesome to many licensors and licensees when they negotiate commercial licenses. Little wonder, then, that the Hall Street case proved disappointing to many, giving pause to some about adopting arbitration with no limited recourse to appeal putative error, especially when the license is complex or convers especially challenging or crucial technology or where the dollars at stake are quite large. In 2013 the American Arbitration Association responded to such concerns by adopting Optional Appellate Rules,
32 Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S. Ct. 1396, 170 L. Ed. 2d 254, 2008 A.M.C. 1058 (2008). 33 Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S. Ct. 1396, 1404-1405, 170 L. Ed. 2d 254, 2008 A.M.C. 1058 (2008) ("expanding the detailed categories would rub too much against the grain of the §9 language, where provision for judicial confirmation carries no hint of flexibility. On application for an order confirming the arbitration award, the court "must grant" the order "unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title." There is nothing malleable about "must grant," which unequivocally tells courts to grant confirmation in all cases, except when one of the "prescribed" exceptions applies. This does not sound remotely like a provision meant to tell a court what to do just in case the parties say nothing else"). 34 Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009). See also, Ramos-Santiago v. United Parcel Service, 524 F.3d 120, n.3 (1st Cir. 2008). 35 See, e.g. In re Wal-Mart Wage and Hour Employment Practices Litigation, 737 F.3d 1262, note 7 (9th Cir. 2013) (courts “may also vacate arbitration awards on the basis of an arbitrator's manifest disregard for law. …Although the words ‘manifest disregard for law’ do not appear in the FAA, they have come to serve as a judicial gloss on the standard for vacatur set forth in FAA § 10(a)(4)”). 36 Stolt-Nielsen SA v. AnimalFeeds Intern. Corp., 548 F.3d 85 (2d Cir. 2008), rev'd and remanded on other grounds, 559 U.S. 662, 130 S. Ct. 1758 (2010); Coffee Beanery, Ltd. v. WW, L.L.C., 300 Fed. Appx. 415, 419 (6th Cir. 2008); Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277, 1290 (9th Cir. 2009).
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which the parties may contract to apply.37 The question remains whether such rules would survive scrutiny under Hall Street, given its holding that the parties cannot expand the grounds for vacating or modifying the award beyond those fixed by sections 10 and 11 of the FAA. We think that they should, for Hall Street only considered contractual provisions that created additional grounds for appealing to a federal court for vacating an award. Nothing precludes the parties from contractually adopting methods for reviewing and appealing arbitral decisions within the arbitration process itself. The Ninth Circuit considered the obverse case of expanding the grounds for vacatur or appeal in the case of In re Wal-Mart Wage and Hour Employment Practices Litigation.38 The Ninth Circuit decided that an agreement forbidding appeals from an arbitration award did not preclude vacatur of awards based on grounds set forth in Section 10 of the Federal Arbitration Act. The clause in question provided that disputes would be submitted “to binding, non- appealable arbitration…”39 The Ninth Circuit observed that the such a non-appealability clause could be read two different ways: the phrase “binding, non-appealable arbitration” could be read as precluding only “federal court review of the merits of the Arbitrator's decision, and not to eliminate the parties' right to appeal from the Arbitrator's decision under § 10 of the FAA,”40 or it could be read as divesting “both the district court and our court of jurisdiction to review the Arbitrator's fee allocation on any ground, including those enumerated in § 10 of the FAA.”41 While other, more craftily written clauses preserving appeal from an arbitrator’s decision to a district court on Section 10 grounds but forbidding appeals thereafter might, perhaps, avoid
37The rules may be found at https://www.adr.org/aaa/ShowProperty?nodeId=/UCM/ADRSTAGE2016218&revision=latestreleased
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being rendered unenforceable,42 the Ninth Circuit held that a clause purporting wholly to divest any judicial review whatsoever under Section 10 of the FAA was unenforceable. Though the Supreme Court had embraced the private ordering allowed freedom of contract in crafting arbitration clauses, it also “articulated limits on parties' freedom to modify judicial review of arbitration awards,” most particularly in Hall Street: Just as the text of the FAA compels the conclusion that the grounds for vacatur of an arbitration award may not be supplemented, it also compels the conclusion that these grounds are not waivable, or subject to elimination by contract. A federal court ‘must’ confirm an arbitration award unless, among other things, it is vacated under § 10. …This language ‘carries no hint of flexibility’ and “does not sound remotely like a provision meant to tell a court what to do just in case the parties say nothing else.’…. If the text of the statute trumps a contractual arrangement to expand review beyond the statute, then it follows that the statute forecloses a contractual arrangement to eliminate review under its terms… .Permitting parties to contractually eliminate all judicial review of arbitration awards would not only run counter to the text of the FAA, but would also frustrate Congress's attempt to ensure a minimum level of due process for parties to an arbitration.43 (C) What is the effect of termination of the license on the arbitration clause? Sanofi-Aventis Deutschland GmbH v. Genentech, Inc.44 dealt with the issue of whether, after a final judgment in “the United States that a patent is not infringed, a party is entitled to an injunction preventing the patent owner from proceeding in a previously-filed foreign arbitration of a license to that patent.”45 The origins of the suit arose out of a series of arrangements between predecessor to Sanofi, Behringwerke, which had filed patent applications relating to the use of certain DNA enhancers. Behringwerke licensed its intellectual property related to enhancers, including the applications, to Genentech in 1992. Eventually the patents-in-suit issued upon the
42 In re Wal-Mart Wage and Hour Employment Practices Litigation, 737 F.3d 1262, note 3 (9th Cir. 2013).The Ninth Circuit noted that the arbitration clause in question in its case was “different from the clause at issue in MACTEC, Inc. v. Gorelick, which stated in relevant part that ‘[j]udgment upon the award rendered by the arbitrator shall be final and nonappealable....’ The Tenth Circuit held that the non-appealability clause in that case foreclosed only appellate review, and was enforceable because it preserved federal court review by the district court. … The clause at issue here, in contrast, arguably forecloses all federal court review. We express no opinion concerning whether a non-appealability clause that precludes only appellate review is enforceable.”). 43 In re Wal-Mart Wage and Hour Employment Practices Litigation, 737 F.3d 1262, 1267-68 (9th Cir. 2013). The Ninth Circuit also noted that it and other Circuits had held that courts “may also vacate arbitration awards on the basis of an arbitrator's manifest disregard for law. …Although the words ‘manifest disregard for law’ do not appear in the FAA, they have come to serve as a judicial gloss on the standard for vacatur set forth in FAA § 10(a)(4).” It went on to say that to the extent that this doctrine “informs § 10(a)(4), parties may not contract to preclude judicial review of manifest disregard for law.” In re Wal-Mart Wage and Hour Employment Practices Litigation, 737 F.3d 1262, note 7 (9th Cir. 2013). 44 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835 (Fed. Cir. 2013). 45 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1836 (Fed. Cir. 2013).
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applications. The license called for fixed payments (which allowed Genentech could practice licensed intellectual property for research purposes) and running royalties “0.5% on the sale of commercially marketable goods incorporating a ‘Licensed Product.’ The Agreement defined licensed products as ‘materials (including organisms), the manufacture, use or sale of which would, in the absence of this Agreement, infringe one or more unexpired issued claims of the Licensed Patent Rights.”’46 The license specified that German law would govern and that disputes would be resolved in International Chamber of Commerce arbitration. Sanofi sent letters in June and July of 2008 alleging that Biogen and Genentech infringed its patents in manufacturing and selling Rituxan and Avastin, neither of which were identified by Genentech as licensed products and neither of which were the subject of any royalty payments. In August Genentech notified Sanofi of its intent to terminate the license; in October Sanfoi (via its parent Hoechst) demanded arbitration before a European arbitrator of the ICC. Three days later, Genentech terminated the license and filed a declaratory judgment of invalidity and non- infringement and Sanofi filed an infringement complaint in different district courts. The cases were consolidated and ultimately led to a judgment of noninfringement, which was upheld on appeal. But what of the arbitration clause? Why was the US litigation not enjoined, since, after all, the parties had adopted a forum selection clause (ICC arbitration)? The Federal Circuit found that if Genentech not terminated the Agreement, …[w]hether Genentech had infringed, and therefore owed royalties under the Agreement, would be a claim arising out of the Agreement and subject to the Agreement's forum selection clause….By electing to terminate the license, however, Genentech created a situation where, at least for the period after it had terminated the license, neither the Agreement nor the forum selection clause applied, and Genentech was free to litigate infringement in the United States. …To the extent that that judgment concerns Genentech's actions after the Agreement was terminated, it does not arise out of the Agreement.47 Note here that the Federal Circuit effectively made two implicit holdings: termination of the license extinguished the arbitration clause as to future activities and the termination provisions would be deemed to have a prospective effect. Thus, ICC arbitration would be required with respect to pre-termination disputes (or disputes relating to activities pre-termination, even if arbitration occurred later).48 Perhaps including a clause specifying what the effect of termination would be on the arbitration clause would have led to a different result, but no such clause was
46 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1836 (Fed. Cir. 2013). 47 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1839 (Fed. Cir. 2013)(emphasis added). 48 See, Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1839 (Fed. Cir. 2013) (“Of course, the license would also be a defense to infringement. But this simply reinforces the point that when the license was in effect, the proper forum was the ICC.”).
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included. In essence, the default rule of interpretation is that termination eliminates all provisions with respect to events after termination, absent a survival clause to the contrary. So, even as the litigation proceeded in the US as to infringement with respect to post- termination events, the ICC arbitration could continue abroad as to pre-termination events. But Sanfoi argued that the US judgment was wrong as to infringement, a position with which the arbitrator was inclined to agree. This led Genentech to seek an injunction against Sanofi from continuing with the foreign arbitration. The district court demurred. In September, the arbitrator issued a Third Partial Award, which held that German substantive law, not United States patent law, would determine whether Rituxan was a licensed product and under that law, a drug would be a licensed product even if it did incorporate the patented enhancers as long as the enhancers were used in its manufacture, which the arbitrator found to be the case as to making Rituxan. Genentech appealed the denial of its request for an anti-suit injunction.49 Applying Ninth Circuit law in evaluating the denial of the injunction,50 the Federal Circuit noted that “U.S. courts have the power to enjoin parties from pursuing litigation before foreign tribunals. … ‘[I]n evaluating a request for an anti-suit injunction, [the district court] must determine (1) ‘whether or not the parties and the issues are the same, and whether or not the first action is dispositive of the action to be enjoined’; (2) whether the foreign litigation would ‘frustrate a policy of the forum issuing the injunction’; and (3) ‘whether the impact on comity would be tolerable.”’51 As to the first element, the issues need not be identical, but at least must be “functionally the same such that the result in one action is dispositive of the other. …If they are not identical or functionally the same, no injunction will lie.”52 In this case, the Federal Circuit decided that the issues in question were not the same: In this case, the judgment of non-infringement did not apply to the period during which the license was in effect. For the issue in the foreign arbitration is breach of the Agreement, not patent infringement. Applying German law, the arbitrator has already deviated from U.S. patent law by concluding that infringement is possible even if the patents are invalid. In addition, the arbitrator has adopted a definition of infringement that includes using the enhancer to produce Rituxan, even if the enhancer is not in the ultimate product. The arbitrator thus appears to
49 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1837 (Fed. Cir. 2013). Query: Should the choice of law clause been written to make the law applying to the royalty clause depend on whether infringement claims under the law of the jurisdiction of sale would lie? 50 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1838 (Fed. Cir. 2013)(‘“For issues not unique to patent law, we apply the law of the regional circuit in which this appeal would otherwise lie.’... The issue before us is whether an anti-suit injunction should issue, which is not unique to patent law….The Ninth Circuit reviews the grant or denial of an anti-suit injunction for abuse of discretion. … Under Ninth Circuit law, the denial of an anti-suit injunction will be reversed “where the district court abused its discretion or based its decision on an erroneous legal standard or on clearly erroneous findings of fact.”’). 51 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1838 (Fed. Cir. 2013). 52 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1838 (Fed. Cir. 2013).
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have adopted a definition of infringement that is both over- and under-inclusive compared to U.S. law. The district court came to the same conclusion, stating that ‘[t]o the extent that the arbitration involves the same infringement questions, under U.S. law, Genentech can present its arguments to the arbitrator regarding why the judgment of this court should be respected.’ In our view, this statement correctly recognizes that the meaning of infringement under the Agreement and the meaning of infringement under U.S. law are not functionally the same.53 Noting that res judicata as to the infringement litigation did not apply to the determinations to be made by the arbitrator in this case,54 the Federal Circuit found that if an injunction issued to prevent ICC arbitration the policies of the forum would be frustrated. As the Federal Circuit noted, the United States has a strong policy in favor of forum selection clauses. “To the extent that the parties sought relief for the period after the license was terminated, there was no frustration of the policy in favor of enforcing forum selection clauses. By seeking to impose the U.S. judgment of non-infringement on the foreign arbitration, however, Genentech effectively asked this court to relieve it of its obligation to settle such disputes at the ICC.”55
53 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1839 (Fed. Cir. 2013)(emphasis added). 54 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1840 (Fed. Cir. 2013) (“Gentech suggests that the judgment of non-infringement has res judicata effects on the foreign arbitration. But Genentech is not arguing that the district court in this case is bound by res judicata-it is in essence asking us to find that res judicata should apply in another case, the foreign arbitration. First, Genentech cites no authority to suggest that res judicata can be applied in this manner. Second, Genentech asks us to apply res judicata in a manner that essentially replaces the Ninth Circuit's three-factor test in Gallo…, effectively nullifying it. Third, we are persuaded by Collins v. D.R. Horton, Inc. , 505 F.3d 874, 880 (9th Cir. 2007), which Genentech itself has cited to us, that although arbitrators may not ignore res judicata, they “generally are entitled to determine in the first instance whether to give the prior judicial determination preclusive effect.” This is especially appropriate here, where there is no reason to believe that res judicata operates identically under German law. Furthermore, given that we have acknowledged that the issues are not the same, and the named parties in the foreign arbitration are different from those in the U.S. litigation, the res judicata argument is not persuasive.”). 55 Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1840 (Fed. Cir. 2013). The Federal Circuit also discussed the third factor: “The third and final factor when reviewing an anti-suit injunction is ‘“whether the impact on comity would be tolerable.’ …. Here, because forum selection is involved, this factor overlaps with the second factor. … As we have explained more fully above, the parties in this case agreed to the ICC as a forum for disputes over the license. ‘In a situation like this one, where private parties have previously agreed to litigate their disputes in a certain forum, one party's filing first in a different forum would not implicate comity at all.”’ Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1840-41 (Fed. Cir. 2013). Judge Dyk concurred that that the district court did not abuse its discretion in denying the anti-suit injunction sought by Genentech. The majority correctly concludes that the issues litigated in the foreign International Chamber of Commerce arbitration and the United States patent infringement proceeding were not identical. Specifically, it concludes that ‘the U.S. judgment of non-infringement is not dispositive as to breach of the agreement,’ …and that ‘the meaning of infringement under the Agreement [arising from German contract law] and the meaning of infringement under U.S. law are not functionally the same.’ …. Because identity of issues is a “threshold consideration” that must necessarily be met before an anti-suit injunction may issue, see Microsoft Corp. v. Motorola, Inc. ,
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Thus, the forum selection clause with respect to disputes under the license would be subject to arbitration as specified by the license and no injunction would issue to prevent arbitration as to pre-termination disputes as to the meaning of the license terms, even if those terms required a determination of whether, for the purposes of the license, a product was infringing. (b) Subject Matter Jurisdiction (i) Background Federal judicial power extends only to cases as to which the federal court has subject matter jurisdiction.56 Article III, Section 2 of the U.S. Constitution fixes the subject matter jurisdiction in broad terms. In relevant part, it provides that the “judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority; ... to Controversies ... between Citizens of different States….” Thus, in order to exercise federal judicial power a "case" or "controversy" must be in play. Moreover, only certain types of cases or controversies can be adjudicated in federal courts. Two types are particularly relevant here: diversity cases and cases arising under the laws of the United States. In addition, various state laws set the terms for the exercise of jurisdiction by the state courts. In licensing cases, contract issues figure prominently and contracts are creatures of state law and generally subject to the exercise of state court jurisdiction. To the extent that the case arises under federal statutes relating to patents or copyrights, the federal courts will have exclusive jurisdiction. Title 28, Section 1338 of the United States Code reads:
696 F.3d 872, 882 (9th Cir. 2012), the lack of identical issues in the two proceedings is alone sufficient to demonstrate that the district court did not abuse its discretion…The majority opinion, however, goes on to address the two remaining factors that are sometimes given some weight in determining whether an anti-suit injunction should issue. …However, despite this language, I do not read the majority as holding that comity and public policies favoring forum selection clauses necessarily foreclose anti-suit injunctions where the issues are the same. …Specifically, there may be instances where, in contrast to this case, the issues raised and resolved in the U.S. patent infringement action were identical to those raised in the international forum. In such instances, the patent holder should not be allowed to make an end run around the U.S. determination by later invoking an international proceeding, and an anti-suit injunction against the foreign proceeding may be appropriate. Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, 1841 (Fed. Cir. 2013). The majority acknowledged Judge Dyk’s point: “The fact that we discuss the second and third Gallo factors should not be read to imply that an anti-suit injunction would necessarily be precluded based on those factors alone in a case where the issues are the same. As the concurrence correctly observes, this is not such a case. We express no opinion as to the correct result under Ninth Circuit law should those circumstances arise in some future case.” Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835, note 6 (Fed. Cir. 2013). 56 Federal courts have "an independent obligation" to mind their subject-matter jurisdiction and this issue can be brought up at any point in the litigation. See 1mage Software, Inc. v. Reynolds and Reynolds Co., 459 F.3d 1044, 79 U.S.P.Q.2d 1942 (10th Cir. 2006).
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(a) The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks. No State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents, plant variety protection, or copyrights. For purposes of this subsection, the term “State” includes any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the United States Virgin Islands, American Samoa, Guam, and the Northern Mariana Islands. (b) The district courts shall have original jurisdiction of any civil action asserting a claim of unfair competition when joined with a substantial and related claim under the copyright, patent, plant variety protection or trademark laws. (c) Subsections (a) and (b) apply to exclusive rights in mask works under chapter 9 of title 17, and to exclusive rights in designs under chapter 13 of title 17, to the same extent as such subsections apply to copyrights.57 Clearly, federal courts can thus lay claim to jurisdiction over patent, plant variety protection, copyright, and trademark (including, by judicial interpretation, Lanham Act unfair competition58) claims, and do so exclusively as to patent, plant variety protection, and copyright cases. They also have pendent jurisdiction over state law claims of unfair competition. Also, again, the federal courts still would be able to exercise diversity jurisdiction. State courts can try trademark and unfair competition claims. Nor does anything in section 1338 forbid state courts from exercising jurisdiction over traditional state law claims, such as contract disputes. That is about as clear as matters get, however. For the courts have struggled over the exact confines of state and federal power in reference to licensing claims that often implicate both federal and state law. In any given license dispute, a plaintiff may be claiming breach of contract--e.g., the failure to pay royalties--or a violation of underlying property rights (i.e., as when the licensee exceeds the scope of the license) or both types of claims. Is the civil action in any such situation "arising under any Act of Congress relating to patents, plant variety protection, copyrights and trade-marks"? In patent cases, this issue has even greater importance, since the Federal Circuit has exclusive appellate jurisdiction over a patent (and plant variety protection) cases. Specifically, after the amendments made by the America Invents Act, Title 28, section 1292 of the United States Code provides: (a) The United States Court of Appeals for the Federal Circuit shall have exclusive jurisdiction-- (1) of an appeal from a final decision of a district court of the United States, the District Court of Guam, the District Court of the Virgin Islands, or the District Court of the Northern Mariana Islands, in any civil action arising
57 28 U.S.C.A. §1338. 58 See MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §27:45 (4th ed.).
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under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents or plant variety protection…59 Thus, if federal question jurisdiction under section 1338 (applicable to intellectual property disputes) applies to a case involving patents, the Federal Circuit has exclusive appellate jurisdiction. The common shorthand rendition of this power is that the Federal Circuit has exclusive appellate jurisdiction over cases arising under federal patent (and plant variety protection) laws. However, even though the compass of Federal Circuit court jurisdiction may seem to be tied narrowly to the federal question jurisdiction of the federal district courts, the Federal Circuit has shown a healthy appetite for jurisdiction. For now, however, just take note that the normally vexing issues of federal question jurisdiction over disputes implicating intellectual property licenses are especially trying when they relate to patents. (ii) Case or Controversy: Declaratory judgments and Licensee challenges to intellectual property validity In many cases, the difficult questions are not whether independent subject matter jurisdiction exists or whether the district court should exercise its discretionary authority, but whether an "actual controversy" exists.60 This is especially true where the licensee is in good standing under a license or a covenant not to sue and thus does not face the prospect of an infringement action as long as it performs pursuant to the agreement. In fact, for years the Federal Circuit rejected declaratory judgment suits by such licensees on the grounds that there was no "reasonable apprehension of (imminent) suit."61
59 28 U.S.C.A. §1295(a). Prior to the America Invents Act, the reference to compulsory counterclaims arising under the patent laws was absent. This led the Supreme Court in Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826, 122 S. Ct. 1889, 153 L. Ed. 2d 13, 62 U.S.P.Q.2d 1801 (2002) to hold that unless the plaintiff’s complaint asserted patent claims the case did not arise under the patent laws and that a compulsory counterclaim raising a patent claim did not trigger "arising under" jurisdiction. Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826, 833-34, 122 S. Ct. 1889, 153 L. Ed. 2d 13, 62 U.S.P.Q.2d 1801 (2002). The America Invents Act obviously overturns Holmes Group on that point. However, as the Federal Circuit in Wawrzynski v. H.J. Heinz Co., 728 F.3d 1374, 108 U.S.P.Q.2d 1127 (Fed. Cir. 2013) noted, the appellate jurisdiction “over appeals based on a civil action ‘in which a party has asserted a compulsory counterclaim arising under any Act of Congress relating to patents’…[only]…applies to “any civil action commenced on or after the date of the enactment of this Act,” which is September 16, 2011. Pub.L. 112–29, § 19(e), 125 Stat. 284, 333. Mr. Wawrzynski's complaint was filed and the “action commenced” prior to this date.” Wawrzynski v. H.J. Heinz Co., 728 F.3d 1374, 1378, 108 U.S.P.Q.2d 1127 (Fed. Cir. 2013). 60 The Supreme Court treats the requirement of an "actual controversy" under the Declaratory Judgment Act as the equivalent to the case-or-controversy requirement for justiciability under Article III, Section 2 of the Constitution. See, e.g., Aetna Life Ins. Co. of Hartford, Conn. v. Haworth, 300 U.S. 227, 57 S. Ct. 461 (1937). 61 See, e.g., Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376, 1378, 70 U.S.P.Q.2d 1087 (Fed. Cir. 2004) (abrogated by, MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764 (2007)). Other Federal Circuit cases followed the "reasonable apprehension of suit" test (later modified to be "reasonable apprehension of imminent suit"). See Pactiv Corp. v. Dow Chemical Co., 449 F.3d 1227, 1229-30, 78 U.S.P.Q.2d 1939 (Fed. Cir. 2006); Plumtree Software, Inc. v. Datamize, LLC, 473 F.3d 1152, 1158-60, 81 U.S.P.Q.2d 1251 (Fed. Cir. 2006).
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In MedImmune, Inc. v. Genentech, Inc.,62 the Supreme Court rejected the Federal Circuit's "reasonable apprehension" test and held that a licensee "was not required, insofar as Article III is concerned, to break or terminate its … license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed."63 In rejecting the Federal Circuit's "reasonable apprehension" test, the Supreme Court instructed the lower courts to look to the totality of the circumstances: "Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment."64 This decision worked a change in the dynamics of patent license negotiations and in the administration of patent licensing programs where the underlying patents have not yet been subject to judicial challenge. Note also that the license in question granted MedImmune a license covering an existing patent and a patent application and required MedImmune to pay royalties on “Licensed Products,” which were defined as “a specified antibody, ‘the manufacture, use or sale of which ... would, if not licensed under th[e] Agreement, infringe one or more claims of either or both of [the covered patents,] which have neither expired nor been held invalid by a court or other body of competent jurisdiction from which no appeal has been or may be taken.’”65 Genentech claimed that MedImmune's Synagis product came within the scope of the patent that issued upon the application covered by the license. MedImmune disagreed but paid the demanded royalties "under protest and with reservation of all of [its] rights." MedImmune then sought a declaratory judgment that the patent was invalid and not infringed and that as a result it did not owe royalties. Finding that an "actual controversy" existed, the Supreme Court noted that the dispute involved not merely "a freestanding claim of patent invalidity" but "rather a claim that, both because of patent invalidity and because of noninfringement, no royalties are owing under the license agreement."66 The terms of the license only required payment of royalties on "Licensed Products," a term that, as we quoted above, hinged on whether the licensee's conduct would (absent the license) infringe covered patents that had not expired or been held invalid. The majority emphasized that this was no mere case of patent invalidity but rather a contractual case: the petitioner argued that it did not owe any royalties because the patents were invalid.
62 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764 (2007). 63 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 777 (2007). 64 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 771 (2007). (quoting Maryland Cas. Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273, 61 S. Ct. 510, 85 L. Ed. 826 (1941). The Supreme Court indicated that to meet the case-or-controversy requirement, "the dispute be definite and concrete, touching the legal relations having adverse legal interests and that it be real and substantial and admit of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts." MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 770-71 (2007). 65 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 768 (2007). 66 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 768-69 (2007).
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Interestingly, however, the Supreme Court also opined that the issue "probably makes no difference to the ultimate issue of subject-matter jurisdiction."67 Yet, perhaps the issue was of greater moment than the majority and some of the commentators suggested. For the license obligated the petitioner "to pay royalties until a patent claim has been held invalid by a competent body."68 The Supreme Court interpreted its decision in Lear, Inc. v. Adkins69 as rejecting "the argument that a repudiating licensee must comply with its contract and pay royalties until its claim is vindicated in court."70 The Supreme Court expressed "no opinion on whether a nonrepudiating licensee is similarly relieved of its contract obligation during a successful challenge to a patent's validity-that is, on the applicability of licensee estoppel under these circumstances."71 Thus, MedImmune had to be repudiating the license: that, along with the potential threat, made the case-or-controversy concrete and allowed the Supreme Court to determine "that the petitioner has alleged a contractual dispute."72 If it had not alleged a contractual coverage claim (i.e., it did not owe royalties), there may not have been a dispute. The Supreme Court acknowledged that its cases "do not draw the brightest of lines between those declaratory-judgment actions that satisfy the case-or-controversy requirement and those that do not."73 Unfortunately, the Supreme Court did not make matters any clearer. While the Federal Circuit indicated that the existence of a valid license was why there was no controversy, the Supreme Court majority inverted that, suggesting that the continued royalty payment was a ground for finding a case or controversy: The factual and legal dimensions of the dispute are well defined and, but for petitioner's continuing to make royalty payments, nothing about the dispute would render it unfit for judicial resolution. [The] continuation of royalty payments makes what would otherwise be an imminent threat at least remote, if not nonexistent…. Petitioner's own acts, in other words, eliminate the imminent threat of harm.74 In essence, performance of a contractual obligation is nothing but a dispute in waiting. Evidently, by the Supreme Court's reasoning, any contract counterparty arguably has a justiciable case or
67 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 768 (2007). 68 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 769 (2007). The court rightly noted that the license in Lear also provided that "royalties are to be paid until such time as the patent ... is held invalid." Lear, Inc. v. Adkins, 395 U.S. 653, 673, 89 S. Ct. 1902 (1969). 69 Lear, Inc. v. Adkins, 395 U.S. 653, 673, 89 S. Ct. 1902 (1969). 70 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 769-70 (2007)(emphasis in original). 71 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 769-70 (2007). 72 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 770 (2007). 73 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 770 (2007). 74 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 771-72 (2007).
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controversy, even with continuing performance on both sides, on the theory that if it did not perform, its other counterparty would sue or cancel.75 While the language of the opinion seems to permit any suit by a contractual counterparty without breach or overt threat of cancellation, throughout the case the Supreme Court pointed to the potential consequences of breaching a license, which it viewed as infringement remedies (e.g., treble damages),76 and the particular potential consequences of MedImmune's failure to comply with Genentech’s demand--80% of MedImmune's business came from the product in issue.77 Now, of course, contrary to the Supreme Court's suggestion, breach of a royalty obligation does not lead automatically to claim for infringement;78 infringement might arise as a result of continued use after the licensor's rightful cancellation of the license based on the breach of contract (if, in fact, the breach were material); but on the facts of the case, the prospect of such a cancellation could wreak havoc on MedImmune's business. Perhaps that potentially devastating prospect may provide a point of distinction in future cases. Medtronic, Inc. v. Mirowski Family Ventures, LLC79 dealt with another important issue relating to declaratory judgment actions by a licensee claiming non-infringement: who bears the burden of proving infringement? In the case, Medtronic, as licensee, entered into a license with Mirowski with respect to certain of Mirowski’s patents relating to implantable heart stimulators, pursuant to which Medtronic could practice the patents in exchange for royalty payments. The original 1991 agreement also provided that, if Mirowski notified Medtronic that a new “Medtronic product ‘infringe[d]’ a Mirowski patent, Medtronic had a choice. …. Medtronic could simply ‘cure the nonpayment of royalties.’… Or it could pay royalties and, at the same time, ‘challenge’ the ‘assertion of infringement of any of the Mirowski patents through a Declaratory Judgment action.’”80 Or it could ignore the license wholly and not pay any royalties, which would allow Mirowski to terminate the license and sue for infringement. A later amendment in 2006 modified the dispute resolution procedure, so that if Medtronic received a notice of infringement, it could seek a declaratory judgment to challenge infringement and deposit disputed royalties in escrow. One year later the procedure was put to the test, for Mirowski gave Medtronic notice that “it believed seven new Medtronic products violated various claims contained in two of its patents …. Medtronic thought that its products did not infringe Mirowski's patents, either because the products fell outside the scope of the patent claims or because the patents were invalid. … Medtronic brought …[a] declaratory judgment action …that its products did not infringe Mirowski's patents and that the patents were invalid. But, as its
75 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 772, n. 8 (2007). 76 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 774 n.11 (2007). 77 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 775 (2007). 78 See Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 51 U.S.P.Q.2d 1825 (9th Cir. 1999). 79 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 109 U.S.P.Q.2d 1341 (2014). 80 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 847, 109 U.S.P.Q.2d 1341 (2014).
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agreement with Mirowski provided, Medtronic paid all the relevant royalties into an escrow account.”81 As Justice Breyer framed the issue in the case and its core holding, “A patentee ordinarily bears the burden of proving infringement. … This case asks us to decide whether the burden of proof shifts when the patentee is a defendant in a declaratory judgment action, and the plaintiff (the potential infringer) seeks a judgment that he does not infringe the patent. We hold that, when a licensee seeks a declaratory judgment against a patentee to establish that there is no infringement, the burden of proving infringement remains with the patentee.” 82 Since the “the burden of proving infringement generally rests upon the patentee,” and ‘“the operation of the Declaratory Judgment Act’ to be only ‘procedural,’…leaving ‘substantive rights unchanged,’” and since the ‘“the burden of proof’ is a ‘substantive’ aspect of a claim,” it followed that “in a licensee's declaratory judgment action, the burden of proving infringement should remain with the patentee.”83 The Supreme Court also thought the prudence dictated as much: To shift the burden depending upon the form of the action could create postlitigation uncertainty about the scope of the patent. Suppose the evidence is inconclusive, and an alleged infringer loses his declaratory judgment action because he failed to prove noninfringement. The alleged infringer, or others, might continue to engage in the same allegedly infringing behavior, leaving it to the patentee to bring an infringement action. If the burden shifts, the patentee might lose that action because, the evidence being inconclusive, he failed to prove infringement. So, both sides might lose as to infringement, leaving the infringement question undecided, creating uncertainty among the parties and others who seek to know just what products and processes they are free to use…..Moreover, to shift the burden can, at least on occasion, create unnecessary complexity by making it difficult for the licensee to understand upon just what theory the patentee's infringement claim rests. … A patent holder is in a better position than an alleged infringer to know, and to be able to point out, just where, how, and why a product (or process) infringes a claim of that patent. … Finally burden shifting here is difficult to reconcile with a basic purpose of the Declaratory Judgment Act. In MedImmune, Inc. v. Genentech, Inc., …we wrote that the “ ‘very purpose’ ” of that Act is to “ ‘ameliorate’ ” the “dilemma” posed by “putting” one who challenges a patent's scope “to the choice between abandoning his rights or risking” suit. …. In the absence of the declaratory judgment procedure, Medtronic would face the precise dilemma that MedImmune describes. Either Medtronic would have to abandon its right to challenge the scope of Mirowski's patents, or it would have to stop paying royalties, risk losing
81 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 847, 109 U.S.P.Q.2d 1341 (2014). 82 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 846, 109 U.S.P.Q.2d 1341 (2014). 83 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 849, 109 U.S.P.Q.2d 1341 (2014).
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an ordinary patent infringement lawsuit, and thereby risk liability for treble damages and attorney's fees as well as injunctive relief.”84 (iii) Case or Controversy: Unilateral grants of covenant not to sue to prevent validity challenges One circumstance where “case” or “controversy” principles come into play arises when an intellectual property owner unilaterally grants a covenant not to sue, usually in the context of litigation. Does this unilateral grant eliminate “case” or “controversy” and thus defeat justiciability? The answer is a lawyer's answer: “Yes, perhaps, but not always.” We start with Super Sack Mfg Corp. v. Chase Packaging Corp.85 After Super Sack sued Chase for patent infringement, Chase counterclaimed for declaratory judgment of infringement and invalidity as to the patents. During the litigation, Super Sack “withdrew” its infringement claim and “unconditionally” agreed “not to sue Chase for infringement as to any claim of the patents-in-suit based upon the products currently manufactured and sold by Chase.”86 While the covenant not to sue only covered past and current products, not future products, the Federal Circuit held that the covenant destroyed justiciability because it eliminated the threat of the infringement suits as to Chase's present activity.87 We note, however, that the case relied upon the Federal Circuit's “reasonable apprehension” test for justiciability, which, as we discussed above, has now been discredited by the Supreme Court's opinion in MedImmune. In Revolution Eyewear, Inc. v. Aspex Eyewear, Inc.88 the Federal Circuit reformulated the Super Sack doctrine to apply in the post-MedImmune world. Revolution sued Aspex for patent infringement and Aspex responded by discontinuing sales of the accused products--just as Revolution would have hoped--and counterclaimed for non-infringement, invalidity, and unenforceability of the asserted patent. After summary judgments, appeals, reversals, more appeals, dismissals and the like, on the eve of a trial, Revolution e-mailed to Aspex a covenant not to sue, stating that it would be filed with a motion to dismiss. The covenant read as follows: “Revolution and counter-defendant Gary Zelman hereby unconditionally covenant not to sue Aspex for patent infringement under the '913 patent based upon any activities and/or products made, used, or sold on or before the dismissal of this action (03-5965 case).”89
84 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 849-50, 109 U.S.P.Q.2d 1341 (2014). 85 Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054, 1056, 35 U.S.P.Q.2d 1139 (Fed. Cir. 1995). See also Nike, Inc. v. Already, LLC, 663 F.3d 89, 96, 100 U.S.P.Q.2d 1621 (2d Cir. 2011), cert. granted, 2012 WL 425184 (U.S. 2012) (Same result in a trademark case.). 86 Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054, 1056, 35 U.S.P.Q.2d 1139 (Fed. Cir. 1995). 87 Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054, 1059, 35 U.S.P.Q.2d 1139 (Fed. Cir. 1995). See also Amana Refrigeration, Inc. v. Quadlux, Inc., 172 F.3d 852, 855-56, 50 U.S.P.Q.2d 1304 (Fed. Cir. 1999) (“However, an actual controversy cannot be based on a fear of litigation over future products…. The Quadlux covenant ensures that Quadlux is forever estopped from asserting liability against Amana in connection with any products that Amana advertised, manufactured, marketed, or sold before July 31, 1997, and that resolves the controversy.”). 88 Revolution Eyewear, Inc. v. Aspex Eyeware, Inc., 556 F.3d 1294, 89 U.S.P.2d 1885 (Fed. Cir. 2009). 89 Revolution Eyewear, Inc. v. Aspex Eyeware, Inc., 556 F.3d 1294, 89 U.S.P.2d 1885 (Fed. Cir. 2009).
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The Federal Circuit noted that Aspex had been selling products prior to the litigation that were of a design that it did not intend to change. This distinguished Super Sack: In Super Sack this court deemed it 'speculative' as to whether any unknown future products of potentially changed structure would be sufficiently at risk of infringement, to warrant present prosecution of declaratory charges of invalidity. In contrast, Aspex states that it does not intend to change its design, and that the Revolution covenant does not extend to future sales of products of the same structure. We agree that this is a critical distinction from Super Sack...90 The Federal Circuit also clearly acknowledged that the reasonable apprehension test that served as justification for Super Sack had, of course, been eliminated by MedImmune and replaced by “a totality-of-the-circumstances test for deciding whether there is indeed an actual controversy, on the particular facts and relationships involved.”91 But that did not mean that post-MedImmune covenants not to sue would be ineffective in eliminating cases or controversies. Rather, the question of whether “a covenant not to sue will divest the trial court of jurisdiction depends on what is covered by the covenant.”92 It contrasted two cases post-MedImmune to illustrate the point. In SanDisk, the patentee's statement that it would not sue for infringement as to particular products, after it had threatened to sue, did not prevent the exercise of declaratory judgment jurisdiction because it patentee had sufficiently demonstrated that it was willing to enforce its rights despite the statement--a “scare-the-customer-and run” tactic. However, another post- MedImmune case, Benitec Australia, Ltd. v. Nucleonics, Inc.,93 found that a covenant not to sue based on a product the alleged infringer was developing but for which it had yet to obtain required FDA approval ousted the court of jurisdiction because “the Hatch-Waxman Act exempted it from infringement liability arising out of its testing and research and the it did not expect to file the FDA applications “before 'at least 2010-2012, if ever,' thus removing “immediacy and reality” from the declaratory action” since, '[t]he residual possibility of a future infringement suit based on [ ] future acts is simply too speculative.”94 The Federal Circuit then applied its covenant not to sue decisions in light of MedImmune: [in] Benitec, as in Super Sack, the continuing activities were not subject to an infringement suit, either because of a covenant that extended to future production and sale of the same products that were the subject of the infringement suit... or ... because of a statutory exemption…. In contrast, Revolution's covenant did not extend to future sales of the same product as was previously sold…. Aspex maintains that it has the right to make and sell the disputed eyewear products because the '913 patent is invalid or unenforceable. The planned activity is not
90 Revolution Eyewear, Inc. v. Aspex Eyeware, Inc., 556 F.3d 1294, 89 U.S.P.2d 1885 (Fed. Cir. 2009). 91 Revolution Eyewear, Inc. v. Aspex Eyeware, Inc., 556 F.3d 1294, 89 U.S.P.2d 1885 (Fed. Cir. 2009). 92 Revolution Eyewear, Inc. v. Aspex Eyeware, Inc., 556 F.3d 1294, 89 U.S.P.2d 1885 (Fed. Cir. 2009). 93 Benitec Australia, Ltd. v. Nucleonics, Inc., 495 F.3d 1340, 83 U.S.P.Q.2d 1449 (Fed. Cir. 2007). 94 Revolution Eyewear, Inc. v. Aspex Eyeware, Inc., 556 F.3d 1294, 1298, 89 U.S.P.2d 1885 (Fed. Cir. 2009).
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speculative. Indeed, it appears that Aspex already has in storage a quantity of the product that it sold before and wishes to sell again. In turn, Revolution states that it will return to court if Aspex reenters this market with these products…. The dispute is “definite and concrete,” for it pertains to the '913 patent as applied to the specific merchandise that was previously produced and sold by Aspex and that Aspex wishes to reintroduce to the market. The dispute is “real and substantial,” as evidenced by the lengthy litigation and the limited covenant. The issue “touch[es] the legal relations of parties having adverse legal interests,” for it affects whether Aspex can return to this market without risking treble damages should the challenge eventually fail, and the dispute is amenable to “specific relief through a decree of a conclusive character” because the resolution of the counterclaims for validity and enforceability of the '913 patent will conclusively determine the issue. The case thus satisfies the requirements stated in MedImmune….95 Already, LLC v. Nike, Inc.96 illustrates a particularly effective offensive use of a covenant not to sue outside of the declaratory judgment context--and indeed in a trademark, not a patent case. In this case, Nike sued Already for trademark infringement, claiming that Already’s “Soulja Boys” infringed and diluted Nike’s Air Force 1 trademark. Already claimed otherwise and, for good measure, filed a counterclaim contending that the Air Force 1 trademark was invalid. After commencing enforcement and forcing Already to the expense of responding, Nike beat a hasty strategic retreat with an unilaterally granted covenant not to sue, in which it coyly suggested infringement: “Already's actions ... no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of continued litigation.’” The covenant stated: ‘[Nike] unconditionally and irrevocably covenants to refrain from making any claim(s) or demand(s) ... against Already or any of its ... related business entities ... [including] distributors ... and employees of such entities and all customers ... on account of any possible cause of action based on or involving trademark infringement, unfair competition, or dilution, under state or federal law ... relating to the NIKE Mark based on the appearance of any of Already's current and/or previous footwear product designs, and any colorable imitations thereof, regardless of whether that footwear is produced ... or otherwise used in commerce before or after the Effective Date of this Covenant.’ So, Nike brought the fight to a smaller competitor, but wanted to retreat in the face of a challenge, all the while suggesting that there still could be infringement but not enough so as to justify the cost of continuing the fight that it started. Yet one may wonder what had changed:
95 Revolution Eyewear, Inc. v. Aspex Eyewear, Inc., 556 F.3d 1294, 1298-99, 89 U.S.P.Q.2d 1885 (Fed. Cir. 2009). Unfortunately, the Federal Circuit slipped and used language from its discredited doctrine: “Thus, in each case, there was not a reasonable apprehension of suit.” Revolution Eyewear, Inc. v. Aspex Eyewear, Inc., 556 F.3d 1294, 1298, 89 U.S.P.Q.2d 1885 (Fed. Cir. 2009). 96 Already LLC v. Nike, Inc., --U.S.--, 133 S.Ct. 721 (2013).
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Already was selling the same shoe, so the level of infringement that had prompted the suit had not changed at all. The only explanation was not an economic one or changed circumstances: it picked a fight with a competitor that was willing to take on Nike’s mark. Already had suffered from Nike’s suit: Nike’s suit had the intended effect of hobbling Already as a competitor by frightening prospective investors from investing, a concern not lessened by the covenant since, according to one investor, that the covenant “provided inadequate assurance that Nike could not “assert its trademarks against” Yums in the future over the sales of shoes similar to Air Force 1.” If Nike’s strategic and clever grant of this unrequested covenant not to sue worked, all it had to do was to suffer a smaller competitor’s distribution of competing shoes, such as they were—if, that is, the smaller company could maintain its markets and financing under the pallor cast by Nike’s continued suggestion of infringement and survive the marketing that Nike could afford, even if it could not afford the costs of the litigation that it initiated. Indeed, Already alleged that Nike suggested to retailers that they refrain from selling Already’s shoes. And, of course, the smaller competitor and its investors would know that they were on Nike’s radar screen as to future shoes that were not the same or colorable imitations of what had been sold. Nike’s move worked. The Supreme Court held that the covenant extinguished the case or controversy, noting that a case becomes moot—and therefore no longer a ‘Case’ or ‘Controversy’ for purposes of Article III—‘when the issues presented are no longer ‘live’ or the parties lack a legally cognizable interest in the outcome.’ That said, the Supreme Court acknowledged “that a defendant cannot automatically moot a case simply by ending its unlawful conduct once sued…Otherwise, a defendant could engage in unlawful conduct, stop when sued to have the case declared moot, then pick up where he left off, repeating this cycle until he achieves all his unlawful ends. Given this concern, our cases have explained that ‘a defendant claiming that its voluntary compliance moots a case bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.’97 Though it is far from clear to me that the filing of the suit was wrongful – the wrongful act arguably was using an invalid mark and that arguably, was continuing – the Supreme Court used its voluntary cessation jurisprudence to find that no case or controversy existed after the covenant not to sue had been granted. The Supreme Court found that the breadth of this covenant suffices to meet the burden imposed by the voluntary cessation test. The covenant is unconditional and irrevocable. Beyond simply prohibiting Nike from filing suit, it prohibits Nike from making any claim or any demand. It reaches beyond Already to protect Already's distributors and customers. And it covers not just current or previous designs, but any colorable imitations…In addition, Nike originally argued that the Sugars and Soulja Boys
97 Already LLC v. Nike Inc., --U.S.--, 133 S.Ct. 721, 726-727 (2013) (quoting Friends of the Earth Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167 (2000)).
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infringed its trademark; in other words, Nike believed those shoes were “colorable imitations” of the Air Force 1s.…Nike's covenant now allows Already to produce all of its existing footwear designs—including the Sugar and Soulja Boy—and any “colorable imitation” of those designs.98 The only way that Already could continue the fight would be to show that it had “sufficiently concrete plans to engage in activities not covered by the covenant…Given the covenant's broad language, and given that Already has asserted no concrete plans to engage in conduct not covered by the covenant, we can conclude the case is moot because the challenged conduct cannot reasonably be expected to recur.”99 The troubles caused with investors and retailers were of no weight in the Article III calculus, for once it is ‘“absolutely clear’ that challenged conduct cannot ‘reasonably be expected to recur,’ …the fact that some individuals may base decisions on ‘conjectural or hypothetical’ speculation does not give rise to the sort of ‘concrete’ and ‘actual’ injury necessary to establish Article III standing… Even if a plaintiff may bring an invalidity claim based on a reasonable expectation that a trademark holder will take action against the plaintiff's retailers, the covenant here extends protection to Already's distributors and customers. And even if Nike were engaging in harassment or unfair trade practices, Already has not explained how invalidating Nike's trademark would do anything to stop it.”100
98 Already LLC v. Nike, Inc., --U.S.--, 133 S.Ct. 721, 728 (2013). 99 Already, LLC v. Nike, Inc.,--U.S.--, 133 S.Ct. 721, 727-29 (2013). This, the Supreme Court believed made the current case, “unlike Altvater v. Freeman, 319 U.S. 359, 63 S.Ct. 1115, 87 L.Ed. 1450 (1943). There, patent holders brought suit against licensees for specific performance of a license. The licensees counterclaimed, seeking a declaratory judgment that the patents were invalid. The Court of Appeals, after finding that the license was no longer in force and the devices at issue did not infringe, dismissed the licensees' counterclaim as moot. We reversed, finding the controversy still live because the licensees continued to “manufactur[e] and sell[ ] additional articles claimed to fall under the patents,” and the patent holders continued to “demand[ ] ... royalties” for those products. … Here of course the whole point is that Already is free to sell its shoes without any fear of a trademark claim.” Id. at 729. 100 Already, LLC v. Nike, Inc.,--U.S.--, 133 S.Ct. 721, 730 (2013). Justice Kennedy joined by three others, concurred, though they were a little more concerned about the perils faced by a small company when a larger competitor brought infringement litigation based on allegedly invalid intellectual property right. “This brief, separate concurrence is written to underscore that covenants like the one Nike filed here ought not to be taken as an automatic means for the party who first charged a competitor with trademark infringement suddenly to abandon the suit without incurring the risk of an ensuing adverse adjudication…. Any demonstrated reluctance by investors, distributors, and retailers to maintain good relations with the alleged infringer might, in an appropriate case, be an indication that the market itself anticipates that a new line of products could be outside the covenant not to sue yet still within a zone of alleged infringement. And, as noted at the outset, it is the trademark holder who has the burden to show that this is not the case…In later cases careful consideration must be given to the consequences of using a covenant not to sue as the basis for a motion to dismiss as moot. If the holder of an alleged trademark can commence suit against a competitor; in midcourse file a covenant not to sue; and then require the competitor and its business network to engage in costly, satellite proceedings to demonstrate that future production or sales might still be compromised, it would seem that the trademark holder's burden to show the case is moot may fall well short of being formidable.” Id. at 733. The concurrence went on to say, “There are relatively few cases that have discussed the meaning and effect of covenants not to sue in the context of ongoing litigation. See, e.g., Revolution Eyewear, Inc. v. Aspex Eyewear, Inc., 556 F.3d 1294 (C.A.Fed.2009); Caraco Pharmaceutical Labs., Ltd. v. Forest Labs., Inc., 527 F.3d 1278 (C.A.Fed.2008). Courts should proceed with caution before ruling that they can be used to
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Organic Seed Growers and Trade Ass'n v. Monsanto Co.,101 went even further in finding case or controversy to be extinguished by a mere statement by a patent owner that no suit would be brought. In the case, a coalition of farmers, seed sellers, and agricultural organizations, filed a declaratory judgment action, seeking a declaration of non-infringement and invalidity as to patents owned by Monsanto. The Federal Circuit held that there was no justiciable case or controversy, since “Monsanto has made binding assurances that it will not “take legal action against growers whose crops might inadvertently contain traces of Monsanto biotech genes (because, for example, some transgenic seed or pollen blew onto the grower's land)”” and the coalition failed to adduce “any circumstances placing them beyond the scope of those assurances.”102 The patents in question related to “Roundup Ready” glyphosate-resistant seeds. Farmers planting such seeds could spray glyphosate on their crops grown from the seeds, which would eliminate weeds but spare the crops.103 “Monsanto sells seed and licenses others to grow and sell seed, pursuant to a limited-use license (the “Technology Agreement”) permitting growers to plant, harvest, and sell a single generation of genetically modified seeds. It is undisputed that Monsanto has enforced its patent rights against farmers who planted Monsanto's genetically modified seeds without authorization, …, or who replanted saved seeds in violation of the Technology Agreement.”104 While members of the coalition had not been threatened with suit, the coalition argued that given how aggressive Monsanto had been in suing farmers and seed suppliers (144 suits and 700 settlements), if their fields ‘“do indeed become contaminated by transgenic seed, which may very well be inevitable given the proliferation of transgenic seed today, they could quite perversely also be accused of patent infringement by the company responsible for the transgenic seed that contaminates them.”’105 This was not a fanciful fear. Both the district court and the
terminate litigation. An insistence on the proper allocation of the formidable burden on the party asserting mootness is one way to ensure that covenants are not automatic mechanisms for trademark holders to use courts to intimidate competitors without, at the same time, assuming the risk that their trademark will be found invalid and unenforceable.” Id. at 733. 101 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067 (Fed. Cir. 2013). 102 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1069 (Fed. Cir. 2013). 103 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1070 (Fed. Cir. 2013). 104 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1070 (Fed. Cir. 2013). 105 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1070, 1073 (Fed. Cir. 2013) (citing “Micron Tech, Inc. v. MOSAID Techs., Inc. , 518 F.3d 897, 901 [ 86 USPQ2d 1038] (Fed. Cir. 2008) (patentee's suits against other manufacturers supported declaratory judgment jurisdiction); Prasco, LLC v. Medicis Pharm. Corp. , 537 F.3d 1329, 1341 [ 87 USPQ2d 1675] (Fed. Cir. 2008) (“Prior litigious conduct is one circumstance to be considered in assessing whether the totality of circumstances creates an actual controversy.”); see also Holder v. Humanitarian Law Project , 561 U.S. ___, 130 S.Ct. 2705, 2717 (2010) (holding that plaintiffs had standing where similarly situated parties had been prosecuted under the same statute). “). Also, while “Appellants … contend on the merits that they cannot be liable for infringement because they do not
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Federal Circuit found that “it is likely inevitable that conventional crops will be contaminated by trace amounts of windblown pollen or seeds from genetically modified crops or other sources. ….. Monsanto acknowledges that conventional crops could be exposed to “cross-pollination from nearby fields where biotech crops are grown,” …and that they “might inadvertently contain traces of Monsanto biotech genes (because, for example, some transgenic seed or pollen blew onto the grower's land).”106 Nonetheless, Monsanto claimed that it had not sued “inadvertent infringers,” thought its view of inadvertent infringer was quite narrow, only excluding those growers whose crops become accidentally contaminated, and who do not treat their fields with Roundup, but who, knowing of the contamination, harvest and replant or sell the seeds….[There was] a substantial risk that at least some of the appellants could be liable for infringement if they harvested and replanted or sold contaminated seed. …[O]ur cases suggest that one who, within the meaning of the Patent Act, uses (replants) or sells even very small quantities of patented transgenic seeds without authorization may infringe any patents covering those seeds.”107 Indeed, Monsanto consistently refused to “‘waive any claim for patent infringement [Monsanto] may ever have against [appellants] and memorialize that waiver by providing a written covenant not to sue.’… Monsanto refused their request and referred the appellants to a statement posted on its website, which reads in relevant part: ‘It has never been, nor will it be Monsanto policy to exercise its patent rights where trace amounts of our patented seeds or traits are present in farmer's fields as a result of inadvertent means.”’108 It also assured them that “Monsanto is unaware of any circumstances that would give rise to any claim for patent infringement or any lawsuit against your clients. Monsanto therefore does not assert and has no intention of asserting patent-infringement claims against your clients.”109 Interestingly, Monsanto would not provide the coalition or its members a contractual covenant not to sue, arguing not that it was unable to
purposefully use or sell Monsanto's transgenic seed and would do so only inadvertently, …. [d]eclaratory judgment plaintiffs' refusal to concede infringement does not, of course, defeat jurisdiction.” Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, note 5 (Fed. Cir. 2013) (citing Arrowhead Indus. Water, Inc. v. Echolochem, Inc., 846 F.2d 731 , 738 (Fed. Cir. 1988)). 106 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1073 (Fed. Cir. 2013). 107 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1072-73 (Fed. Cir. 2013)(“In SmithKline Beecham Corp. v. Apotex Corp. …, we rejected the proposition that patent claims should be construed to avoid reading on “trace amounts” of a patented compound, even though that compound's self-replicating properties might “place potential infringers in the untenable position of never knowing whether their product infringes because even a single undetectable [molecule] would infringe.” 403 F.3d 1331, 1336, 1339-40 (Fed. Cir. 2005); see also Abbott Labs. v. Sandoz, Inc. , 566 F.3d 1282, 1299 (Fed. Cir. 2009) (noting that de minimis infringement can still be infringement); Embrex, Inc. v. Serv. Eng'g Corp. , 216 F.3d 1343, 1352-53 (Fed. Cir. 2000) (Rader, J., concurring) (“[T]his court has not tolerated the notion that a little infringement-de minimis infringement-is acceptable infringement or not infringement at all.”)”). 108 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1070 (Fed. Cir. 2013). 109 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1071 (Fed. Cir. 2013).
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or could be prevented from suing, but just that it would be inconvenient for it to do so in light of the expected recovery.110 How was that sufficient assurance that no suit could be forthcoming? The Federal Circuit duly noted that in Already the Supreme Court had equipped licensors with the power to moot a plaintiff’s action with a broad covenant not to sue, the very arrangement that Monsanto refused to accord. Monsanto published an assurance that it had not been its policy and will not be its policy to ‘“exercise its patent rights where trace amounts of our patented seeds or traits are present in farmer's fields as a result of inadvertent means,”’ though it beguilingly left open the most important elements of “trace” and “inadvertence.”111 Was the cloud of infringement really dissipated? The Federal Circuit came to Monsanto’s aid to negotiate an faux covenant not to sue to moot the suit. First, it defined “trace” though Monsanto had sedulously not done so: “taken together, Monsanto's representations unequivocally disclaim any intent to sue appellant growers, seed sellers, or organizations for inadvertently using or selling “trace amounts” of genetically modified seeds. Monsanto makes clear that this covers “USDA [United States Department of Agriculture]-certified organic farm or handling operation[s],” … which are prohibited from using genetically modified seed…. While the USDA has not established an upper limit on the amount of trace contamination that is permissible, the appellants argue, and Monsanto does not contest, that “trace amounts” must mean approximately one percent (the level permitted under various seed and product certification standards). We conclude that Monsanto has disclaimed any intent to sue inadvertent users or sellers of seeds that are inadvertently contaminated with up to one percent of seeds carrying Monsanto's patented traits.”112 Second, the Federal Circuit decided that Monsanto, who so intransigently refused to grant a covenant not to sue, had effectively given the equivalent (at least as engineered by the Federal Circuit) by judicial estoppel: “If we rely on Monsanto's representations to defeat the appellants' declaratory judgment claims (as we do), those representations are binding as a matter of judicial estoppel.”113 That was enough. Though the Federal Circuit conspicuously avoided defining the term “inadvertently” with as much care as Monsanto had, the representation was sufficient to destroy jurisdiction even if the growers had to wonder whether, even if the amount of contamination by seed were trace, they would be able to prove that trace contamination came by
110 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1071 (Fed. Cir. 2013). 111 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1074 (Fed. Cir. 2013). 112 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1074 (Fed. Cir. 2013). Thus, while the disclaimer would not cover “a conventional grower who never buys modified seed, but accumulates greater than trace amounts of modified seed by using or selling contaminated seed from his field,” the growers here did not allege “that they will necessarily harvest and use or sell trace amounts of modified seeds, no appellants have alleged that they are engaging in activities that place them outside the scope of Monsanto's disclaimer.” Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1074 (Fed. Cir. 2013). 113 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1074 (Fed. Cir. 2013).
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inadvertence. For while it is ‘uncertain when, if ever, the declaratory plaintiff would engage in potentially infringing activity, the dispute [does] not present a case or controversy of sufficient immediacy to support a declaratory judgment.’ …. As the Supreme Court explained in Already, it is ‘incumbent on [the declaratory judgment plaintiff] to indicate that it engages in or has sufficiently concrete plans to engage in activities not covered” by a defendant's covenant not to sue….[And] ‘[a]llegations of a subjective “chill” are not an adequate substitute for a claim of specific present objective harm or a threat of specific future harm.’ … Declaratory judgment plaintiffs need not be ‘literally certain that the harm they identify will come about,’ but they must show that they are at ‘substantial risk’ of that harm, and that costly precautions are a reasonable response.’114 Note that even at oral argument, Monsanto's counsel was quite careful never to represent that Monsanto would forgo suit against a grower who harvested and replanted windblown seeds-even if that grower gained no advantage by doing so.”115 Just how effective was the judicially created covenant not to sue? (iv) Arising Under: Patent cases Section 1338 confers jurisdiction on the federal district courts over suits "arising under" Acts of Congress relating to "patents." As with copyright cases, that jurisdiction is exclusive. Here we confront the relation between federal and state power: the more expansive the reading of "arising under" section 1338, the smaller the warrant the state courts have to hear cases that may have a patent in play. Moreover, as discussed in “Background” above, only the Federal Circuit has appellate jurisdiction over patent cases as to which the federal district courts have exclusive jurisdiction.116 Thus, if the lower courts decide a case "arising under" the patent laws, the Federal Circuit can hear the appeal--indeed it is the only circuit court that can.117 So, in
114 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, 1075-76 (Fed. Cir. 2013). 115 Organic Seed Growers and Trade Ass'n v. Monsanto Co., --- F.3d ----, 2013 WL 2460949, 107 U.S.P.Q.2d 1067, note 6 (Fed. Cir. 2013). 116 In CytoLogix Corp. v. Ventana Medical Systems, Inc., 513 F.3d 271, 85 U.S.P.Q.2d 1638 (1st Cir. 2008), CytoLogix sued Ventana brought a patent infringement action and a separate antitrust/misappropriation action. The district court did not consolidate the cases before trial, but then after trial after entry of judgment on all claims it ordered that the cases were consolidated nunc pro tunc. CytoLogix filed an appeal in the Federal Circuit and also in the First Circuit. Noting that under 28 U.S.C.A. §1295(a) the Federal Circuit had exclusive jurisdiction if the jurisdiction of the district court was based, in whole or in part under Section 1338--which gave the district courts original jurisdiction of actions arising under patent law, the First Circuit found that since one of the complaints was based on patent claims, when the cases were consolidated, then “jurisdiction of the entire case was necessarily based 'in part' on section 1338." CytoLogix Corp. v. Ventana Medical Systems, Inc., 513 F.3d 271, 272, 85 U.S.P.Q.2d 1638 (1st Cir. 2008) (quoting Xeta, Inc. v. Atex, Inc., 825 F.2d 604, 607-08, 3 U.S.P.Q.2d 1590 (1st Cir. 1987)). 117 28 U.S.C.A. §1295(a). Prior to the America Invents Act, the reference to compulsory counterclaims arising under the patent laws was absent. This led the Supreme Court in The Supreme Court in Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826, 122 S. Ct. 1889, 153 L. Ed. 2d 13, 62 U.S.P.Q.2d 1801 (2002) to hold that unless the plaintiff’s complaint asserted patent claims the case did not arise under the patent laws and that a
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patent cases, the courts confront not only questions of federalism but also the relations between the various federal courts. As Professor Chisum observed: the courts distinguish between patent cases and patent questions. Not all suits that raise patent questions arise under the patent laws. An example is a suit for breach of a patent license, in which the invalidity of the underlying patent is raised as a defense. Such suits may be filed in state court of general jurisdiction. They may be filed in federal court, only if some other statutory basis for jurisdiction can be found (such as diversity of citizenship).118 How then, should courts mark the line between the case "arise under" an “Act” relating to patents and cases involving only patent questions? Justice Holmes approached this question by looking at two elements. In The Fair v. Kholer Die & Specialty Company,119 Justice Holmes made clear that jurisdiction would be determined by what the plaintiff pleaded: Of course, the party who brings the suit is master to decide what law he will rely upon, and therefore does determine whether he will bring a suit arising; the patent or other law of the United States by his declaration or bill. That question cannot depend upon the answer, and accordingly, jurisdiction cannot be conferred by the defense, even when anticipated and replied to in a bill…. Conversely, when the plaintiff bases his cause of action upon an act of Congress, jurisdiction cannot be defeated by a plea denying the merits of the claim.120 Clearly by this decision, Justice Holmes applied what is now termed the "well-pleaded complaint rule": the plaintiff sets the course of the jurisdiction decision by its complaint, regardless of whether the defenses to the plaintiff's claim would have obviated the necessity of federal court intervention. The second element was more subtle and important. In American Well Works Company v. Layne & Bowler Company,121 Justice Holmes stated matter-of-factly:
compulsory counterclaim raising a patent claim did not trigger "arising under" jurisdiction. Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826, 833-34, 122 S. Ct. 1889, 153 L. Ed. 2d 13, 62 U.S.P.Q.2d 1801 (2002). The America Invents Act obviously overturns Holmes Group on that point. However, as the Federal Circuit in Wawrzynski v. H.J. Heinz Co., 728 F.3d 1374, 108 U.S.P.Q.2d 1127 (Fed. Cir. 2013) noted, the appellate jurisdiction “over appeals based on a civil action ‘in which a party has asserted a compulsory counterclaim arising under any Act of Congress relating to patents’…[only]…applies to “any civil action commenced on or after the date of the enactment of this Act,” which is September 16, 2011. Pub.L. 112–29, § 19(e), 125 Stat. 284, 333. Mr. Wawrzynski's complaint was filed and the “action commenced” prior to this date.” Wawrzynski v. H.J. Heinz Co., 728 F.3d 1374, 1378, 108 U.S.P.Q.2d 1127 (Fed. Cir. 2013). 118 8 Chisum, Chisum on Patents §21.02[1] (emphasis added). 119 The Fair v. Kohler Die & Specialty Co., 228 U.S. 22, 33 S. Ct. 410, 57 L. Ed. 716 (1913). 120 The Fair v. Kohler Die & Specialty Co., 228 U.S. 22, 33 S. Ct. 410, 57 L. Ed. 716 (1913). 121 American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 36 S. Ct. 585, 60 L. Ed. 987 (1916).
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A suit for damages to business caused by a threat to sue under the patent law is not itself a suit under the patent law. What makes the defendants' act a wrong is its manifest tendency to injure the plaintiff's business; and a wrong is the same whatever the means by which it is accomplished. But whether it is a wrong or not depends upon the law of the state where the act is done, not upon the patent law, and therefore the suit arises under law of the state…. The fact that the justification may involve the validity and infringement of a patent is no more material to the question under what law the suit is brought then it would be in an action of contract…. The state is master of the whole matter, and if it saw fit to do away with actions of this type altogether no one, we imagine, would suppose that they still could be maintained under the patent laws of the United States.122 Thus, as Justice Holmes left matters, one looked to the complaint to see whether it alleged a cause of action that state law created. Indeed, if the state law could abolish the cause of action--if the claim would not gain legal recognition other than by the force of state law--then the cause of action did not arise under the patent laws. Now we jump forward to Christianson v. Colt Industries Operating Corp.123 In this case, slightly altered the second element in Justice Holmes’ formulation. In that case, the Supreme Court held that in determining whether a case or arose under the Patent Act the courts were to apply the following test: a district court's federal question jurisdiction "extends over 'only those cases in which a well-pleaded complaint establishes either that federal law creates the cause of action or that the plaintiff's right to relief necessarily depends on a resolution of a substantial question of federal law,' in that 'federal law is a necessary element of one of the well-pleaded ... claims.’”124 No longer, therefore, was did the second part of the test turn upon whether state law created the cause of action. Rather if the well-pleaded claim made federal law a necessary element, jurisdiction would lie. In this formulation would lie great mischief. In U.S. Valves, Inc. v. Dray,125 the Seventh Circuit and Federal Circuit both oddly concluded that issues of federal patent law were so pressing in a simple breach of a license case seeking contract damages--not infringement damages, mind you--that the Federal Circuit was compelled to exercise its plenary jurisdiction over the case. The license’s scope was anchored to a specified patent: the license granted U.S. Valves "an exclusive right to manufacture, use, sell, advertise and distribute the Licensed Product into practice and commercialize invention [sic] into any patent thereon and to use the Know-How developed by the Licensor," with the license defining the "Licensed Product" by reference to the claims residing in the patent application that ultimately matured into the '282 patent.126 Where the second prong of the Christianson test
122 American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 36 S. Ct. 585, 60 L. Ed. 987 (1916). 123 Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 108 S. Ct. 2166 (1988). 124 Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 808, 108 S. Ct. 2166 (1988) (citing Franchise Tax Bd. of State of Cal. v. Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 103 S. Ct. 2841 (1983)). 125 U.S. Valves, Inc. v. Dray, 212 F.3d 1368, 54 U.S.P.Q.2d 1834 (Fed. Cir. 2000). 126 U.S. Valves, Inc. v. Dray, 212 F.3d 1368, 1370, 54 U.S.P.Q.2d 1834 (Fed. Cir. 2000).
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asked whether the "plaintiff's right to relief necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of the well- pleaded claims,"127 the this element was now recast: second prong of Christianson's test--whether relief depends on resolution of a patent law question--... [was met because if] the only way for U.S. Valves to establish this claim is for it to show that Dray sold valves covered by the patents licensed to U.S. Valves ... , then the court must first examine the patent and determine which valves are covered and whether the patent was infringed…. Whether Dray breached the exclusivity provision of the license agreement depends on whether he sold valves which infringed on the licensed patents. The only way to tell whether a valve is covered by the licensed patents is to apply substantive patent law. Moreover, the only means by which to fix damages is to evaluate each valve sold, and determine whether that valve is an infringing valve.128 But was this not, in Professor Chisum's words, simply patent question as opposed to a patent case? Effectively, as the Supreme Court’s tests were recast by Dray, state courts could not hear breach of contract claims involving the construction of the scope of a patent license where scope was co-extensive with the claims of the licensed patents.129 As we discuss below, we question whether this case and those of similar ilk and reasoning remain vital after the Supreme Court’s
127 U.S. Valves, Inc. v. Dray, 190 F.3d 811, 813, 52 U.S.P.Q.2d 1055 (7th Cir. 1999). 128 U.S. Valves, Inc. v. Dray, 190 F.3d 811, 813-814, 52 U.S.P.Q.2d 1055 (7th Cir. 1999). 129 In Scherbatskoy v. Halliburton Co. 125 F.3d 288, 291, 44 U.S.P.Q.2d 1466 (5th Cir. 1997) Halliburton received a license to use the Scherbatskoy's "measuring while drilling" (MWD) patents in exchange for royalties that would increase if Halliburton acquired a "New Company" offering MWD services if prior to the date of acquisition that new company did not have immunity from suit or a license under Scherbatskoy's or the trusts' patent rights. Shortly thereafter, Halliburton announced that it intended to buy certain assets from Smith International, including Smith's MWD technology, but Halliburton argued that the Smith International transaction was not an acquisition of a New Company. "The plaintiff's original petition alleges Halliburton breached the contract when it failed to pay additional royalties under the Patent License Agreement after acquiring a new company, Smith International, which, it is alleged, infringed the Scherbatskoy's patents. Clearly, determining whether Smith International infringed the Scherbatskoy's patents is a necessary element to recovery of additional royalties and a finding that Halliburton breached the patent license agreement. Both issues require the application of the federal patent laws.". We question whether this breach of contract case really required resolution of "substantial" issues of patent law. The enhanced royalty provision only required the court to determine the answers to three questions: (1) did the Smith International transaction constitute the acquisition of a new company and (2) did that new company offer "MWD services prior to the date of its acquisition" and (3) did that company have "immunity from suit or a royalty-free license" under the Scherbatskoy patents? We defer our critique of this case’s and Dray’s reasoning to our discussion of Gunn v. Minton below, but we note that even under the Christianson test, for a necessary element in the claim was not whether Smith International infringed the patents. We think the Seventh Circuit got it right in Dawn Equipment Co. v. Micro-Trak Systems, Inc., 186 F.3d 981, 51 U.S.P.Q.2d 1666, 1669 (7th Cir. 1999) (a breach of case involving an agreement relating to a sale of a patent; the Seventh Circuit decided that the case did not fall into the Federal Circuit Court's jurisdiction because the only issue was what the defined term "Suitable Patent" meant; yet the Seventh Circuit had to analyze whether the patent in issue made the assignee the "exclusive producer of a device utilizing the means described in the patent application").
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decision in Gunn v. Minton.130 Before we do so, however, we wish to stress that much of the confusion as to jurisdiction arises from in the Federal Circuit’s reformulation of the second prong of the Christianson test. ClearPlay Inc. v. Abecassis131 provides an example. Let us start with Christianson’s language again: under the Christianson test, patent jurisdiction extends: only to those cases in which a well-pleaded complaint establishes either that federal patent law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of the well-pleaded claims.132 Now let us see how the Federal Circuit reformulated the second prong: at least one of the plaintiff's claims must necessarily turn on an issue of Federal Patent Law. That is if there is a theory of liability for each of the asserted claims for which it is not necessary to resolve an issue of federal patent law, the district court lacked jurisdiction under Section 1338, and we correspondingly lack jurisdiction under Section 1295.133 Note how the Federal Circuit subtly changed the Christianson test. Where Christianson focused on the relief--did the plaintiff's right to relief necessarily depend on the resolution of substantial question of federal patent law because patent law was a necessary element of the claim--the Federal Circuit asked only whether an issue of patent law was to be resolved, not whether that the right to relief necessarily depended on that resolution. Also note how the Christianson imposed the constraint of necessity in its second prong. Neither the Christianson court nor the Supreme Court before in the cases decided by Justice Holmes denied the ability of any court to interpret and analyze what federal patent law may be--that is, patent questions were fair game for state and federal courts. The focus was on whether the relief to be granted for the claims established in the complaint necessarily depended on resolution of a substantial question of federal patent law. This is clear from the Christianson opinion itself. The Supreme Court observed the following about its second prong: Nor is it necessarily sufficient that a well-pleaded claim alleges a single theory under which resolution of a patent-law question is essential. If "on the face of a well-pleaded complaint there are ... reasons completely unrelated to the provisions and purposes of [the patent laws] why the [plaintiff] may or may not be entitled to the relief it seeks," ... , then the claim does not "arise under" those laws…. Thus, a claim supported by alternative theories in the complaint may not form the basis for §1338(a) jurisdiction unless patent law is essential to each of those theories.134
130 Gunn v. Minton, --U.S.--133 S.Ct. 1059 (2013). 131 ClearPlay, Inc. v. Abecassis, 602 F.3d 1364, 94 U.S.P.Q.2d 1763 (Fed. Cir. 2010). 132 Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 809, 108 S. Ct. 2166 (1988) (emphasis added). 133 ClearPlay, Inc. v. Abecassis, 602 F.3d 1364, 94 U.S.P.Q.2d 1763, 1776 (Fed. Cir. 2010). 134 Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 810, 108 S. Ct. 2166 (1988).
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In our reading of this passage, the Supreme Court did not state this was the sole litmus test for the second "necessary element" prong. Rather, one way, perhaps the most simple way, to determine whether a claim had patent law as a necessary element would be to ask whether the plaintiff's relief could be granted on grounds unrelated to the patent laws. The Federal Circuit interpreted this passage, however, as providing the test: only if in "the case of each asserted claim there is at least one theory of relief that would not require the resolution of a patent law issue would the State Court be able to return jurisdiction over State law claims."135 This analysis led the Federal Circuit to focus on whether the case would involve any analysis of a patent law issue, such as infringement or invalidity.136 In short, the Christianson case’s reference to “resolution of a patent-law question” had led the Federal Circuit cast the net of exclusive federal question jurisdiction to catch a vast quantity of cases where resolution of a state law claim by one party required the interpretation of patent validity or infringement.137 Enter Gunn v. Minton.138 The case itself related to a state law malpractice claim against lawyers who handled patent litigation for Minton. In a series of cases, the Federal Circuit decided that state law malpractice claims relating to patent matters arose under the patent laws
135 ClearPlay, Inc. v. Abecassis, 602 F.3d 1364, 94 U.S.P.Q.2d 1763, 1766-1767 (Fed. Cir. 2010). 136 See, e.g. Laboratory Corp. of America Holdings v. Metabolite Laboratories, Inc., 599 F.3d 1277, 94 U.S.P.Q.2d 1224, 1229 (Fed. Cir. 2010) (acknowledging that its prior decisions had established "that issues of inventorship, infringement, validity and enforceability present sufficiently substantial questions of federal patent law to support jurisdiction under section 1338(a)."). 137 In Forrester Environmental Services, Inc. v. Wheelabrator Technologies, Inc.,715 F.3d 1329, 106 U.S.P.Q.2d 1842 (Fed. Cir. 2013) the Federal Circuit summarized its cases finding that state law disparagement, injurious falsehood claims or similar claims premised on allegedly false statements about patents raised a substantial question of federal patent law. For example, in Additive Controls & Measurement Systems, Inc. v. Flowdata, Inc., we concluded that the plaintiff's state law business disparagement claims arose under patent law for the purposes of 28 U.S.C. § 1338. 986 F.2d 476, 478 (Fed.Cir.1993). We noted that under state law, “a business disparagement claim requires [the] plaintiff to prove ... the falsity of [the] defendant's allegedly disparaging statements.” Id. There, the allegedly disparaging statement was an accusation of patent infringement; thus, we concluded that in order to prove the falsity of that statement, the plaintiff would have to “show that its product does not infringe the ... patent.” Id. Reasoning that the infringement issue presented a substantial question of patent law, we concluded that the claims arose under federal patent law for the purposes of § 1338. Id. at 478–79. Similarly in Hunter Douglas, Inc. v. Harmonic Design, Inc., the plaintiff asserted a claim for “injurious falsehood” on the theory that the defendant falsely claimed to “hold exclusive rights to make or sell window shades covered by one or more” patents. 153 F.3d 1318, 1329 (Fed.Cir.1998) (quotation marks omitted), overruled on other grounds by Midwest Indus., Inc. v. Karavan Trailers, Inc., 175 F.3d 1356 (Fed.Cir.1999) (en banc). We concluded that the plaintiff's claim arose under federal patent law because the question of falsity turned on issues of validity and enforceability, which presented “a substantial question of federal patent law.” Hunter Douglas, 153 F.3d at 1329–31. Forrester Environmental Services, Inc. v. Wheelabrator Technologies, Inc.,715 F.3d 1329, 1334, 106 U.S.P.Q.2d 1842 (Fed. Cir. 2013). 138 Gunn v. Minton, --U.S.--133 S.Ct. 1059 (2013).
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and hence had to be brought only in the federal courts and, of course, were within its exclusive appellate jurisdiction. Thus, Federal Circuit found that exclusive federal jurisdiction was not confined to whether the claim to relief had patent law as an element, but rather extended to "jurisdiction over state-law legal malpractice actions when the adjudication of the malpractice claims requires the court to address the merits of the plaintiff's underlying patent infringement lawsuit."139 Gunn presented just such a case. Minton sued the litigators who handled his patent infringement case for committing malpractice, arguing that their failure to raise an experimental use exception to the on-sale bar defense against patent infringement “cost him the lawsuit and led to invalidation of his patent.” 140 His new lawyers filed the malpractice suit in a Texas state court, which poured his case out on the grounds that his experimental use argument was bogus and thus would have not prevented a finding of an on sale bar even if it had been timely raised. Though his new lawyers had brought the suit in Texas state courts, they now argued that the since the “legal malpractice claim was based on an alleged error in a patent case, it “aris[es] under” federal patent. The Texas Supreme Court agreed with Minton, relying on Federal Circuit precedent. The Supreme Court reversed. It began by noting that since the phrase “arising under” appeared in the general statute dealing with original jurisdiction as well as the specific jurisdictional provisions relating to patent cases, it applied the same tests for determining “arising under.”141 A case arose under federal law in two ways: when “federal law creates the
139 Warrior Sports, Inc. v. Dickinson Wright, P.L.L.C., 631 F.3d 1367, 97 U.S.P.Q.2d 1657, 1659 (Fed. Cir. 2011). In Warrior Sports, the Federal Circuit observed that the plaintiff alleged that if the law firm's malpractice had not allowed the 216 Patent in question to be impaired then the plaintiff would have been successful in an infringement lawsuit. The Federal Circuit stated that under Michigan law malpractice claims had four elements: an existence of an attorney/client relationship, negligence by the attorney, negligence causing proximate cause of the injury, and the fact and extent of the injury alleged. Where was patent law a necessary element in this list? The Federal Circuit found that to prove proximate cause the plaintiff had to show that but for the alleged malpractice the plaintiff would have been successful in the underlying suit. Therefore, the Federal Circuit held: Warrior's theory under its first malpractice claim is that but for the availability of the inequitable conduct defense that was attributable to its attorneys' conduct, it would not have settled its meritorious infringement action against STX, and that the availability of the inequitable conduct defense forced Warrior to settle for much less than the true value of the claim. As part of its prima facie case, Warrior must prove that it suffered a compensable loss that was proximately caused by appellant's negligence. If the accused products do not infringe the '216 patent, then the availability of the inequitable conduct defense did not proximately cause any harm to Warrior…. Warrior Sports, Inc. v. Dickinson Wright, P.L.L.C., 631 F.3d 1367, 97 U.S.P.Q.2d 1657, 1660 (Fed. Cir. 2011). See also, Air Measurement Technologies, Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 504 F.3d 1262, 84 U.S.P.Q.2d 2002 (Fed. Cir. 2007). 140 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1063 (2013). 141 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1064 (2013) (“Adhering to the demands of “[l]inguistic consistency,” we have interpreted the phrase “arising under” in both sections [1331 and 1338(a)] identically, applying our § 1331 and § 1338(a) precedents interchangeably. See Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 808– 809, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988).”).
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cause of action asserted”142 and a “special and small category” of cases where the “claim finds its origins in state rather than federal law.” Here the Supreme Court turned to its decision in Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg.,143 as opposed to the Christianson case that had caused so much confusion. In order for a state law claim to be treated as creating “arising under” federal jurisdiction it would have to satisfy the following test from Grable: “Does the ‘state-law claim necessarily raise a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities’?.... That is, federal jurisdiction over a state law claim will lie if a federal issue is: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress. Where all four of these requirements are met, we held, jurisdiction is proper because there is a ‘serious federal interest in claiming the advantages thought to be inherent in a federal forum,’ which can be vindicated without disrupting Congress's intended division of labor between state and federal courts.”144 Applying this test, the Supreme Court found that state law malpractice claims would be unlikely to “arise under” the patent laws. To be sure, they often would--as in this case-- “necessarily raise disputed questions of patent law.”145 To be sure, they often would feature an actual dispute over an interpretation of federal patent law.146 But would they really call into question a substantial federal issue? Here the Supreme Court faulted the Federal Circuit analysis that would render all cases where the parties would necessarily dispute a matter of federal patent law into a patent case arising under Section 1331. “As our past cases show, however, it is not enough that the federal issue be significant to the particular parties in the immediate suit; that will always be true when the state claim “necessarily raise[s]” a disputed federal issue…. The substantiality inquiry under Grable looks instead to the importance of the issue to the federal system as a whole.”147 Rather, because “of the backward-looking nature of a legal malpractice claim, the question is posed in a merely hypothetical sense: If Minton's lawyers had raised a timely experimental-use argument, would the result in the patent infringement proceeding have been different? No matter how the state courts resolve that hypothetical “case within a case,” it
142 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1064 (2013) (citing among other cases American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 260, 36 S.Ct. 585, 60 L.Ed. 987 (1916)). 143 Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308, 125 S.Ct. 2363 (2005). 144 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1065 (2013)(citing Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308, 125 S.Ct. 2363 (2005)). 145 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1065 (2013)(“ To prevail on his legal malpractice claim, therefore, Minton must show that he would have prevailed in his federal patent infringement case if only petitioners had timely made an experimental-use argument on his behalf. …That will necessarily require application of patent law to the facts of Minton's case.”) 146 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1065 (2013)(“The federal issue is also “actually disputed” here—indeed, on the merits, it is the central point of dispute. Minton argues that the experimental-use exception properly applied to his lease to Stark, saving his patent from the on-sale bar; petitioners argue that it did not.”). 147 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1066 (2013)(citing Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308, 125 S.Ct. 2363 (2005)).
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will not change the real-world result of the prior federal patent litigation. Minton's patent will remain invalid.”148 Indeed, a state court resolution of a malpractice claim would not undermine ‘“the development of a uniform body of [patent] law,”’ for the federal courts would not be “bound by state court case-within-a-case patent rulings....As for more novel questions of patent law that may arise for the first time in a state court “case within a case,” they will at some point be decided by a federal court in the context of an actual patent case, with review in the Federal Circuit. If the question arises frequently, it will soon be resolved within the federal system, laying to rest any contrary state court precedent; if it does not arise frequently, it is unlikely to implicate substantial federal interests. The present case is ‘poles apart from Grable,’ in which a state court's resolution of the federal question ‘would be controlling in numerous other cases.”’149 Even “the possibility that a state court will incorrectly resolve a state claim is not, by itself, enough to trigger the federal courts' exclusive patent jurisdiction, even if the potential error finds its root in a misunderstanding of patent law. … There is no doubt that resolution of a patent issue in the context of a state legal malpractice action can be vitally important to the particular parties in that case. But something more, demonstrating that the question is significant to the federal system as a whole, is needed.”150 After Gunn, one may well question the vitality of the line of Federal Circuit cases requiring exclusive federal jurisdiction to be asserted over license disputes when the outcome of the dispute only turns on interpretation of patent law. Consider, for example, a dispute involving the interpretation of the scope of a license or a royalty provision that is framed by reference to whether a patent would be infringed. While the resolution of the patent issue would have significance to the parties in the license case rare, perhaps non-existent, would be the case where a license dispute would pose a significant question to the federal system itself--even, as Gunn noted, the state court botches the patent law interpretative cases. A license dispute of the type described above is a perfect example of a case within a case151 where the resolution of the
148 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1066-67 (2013). 149 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1067 (2013). 150 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1068(2013). For similar reasons, the fourth part of Grable’s test was not met: “That requirement is concerned with the appropriate “balance of federal and state judicial responsibilities.” … . We have already explained the absence of a substantial federal issue within the meaning of Grable. The States, on the other hand, have “a special responsibility for maintaining standards among members of the licensed professions.’ …We have no reason to suppose that Congress—in establishing exclusive federal jurisdiction over patent cases—meant to bar from state courts state legal malpractice claims simply because they require resolution of a hypothetical patent issue.” Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1068(2013). 151 Laboratory Corp. of America Holdings v. Metabolite Laboratories, Inc., 599 F.3d 1277, 94 U.S.P.Q.2d 1224 (Fed. Cir. 2010) acknowledged as much in distinguishing the malpractice and license cases: “This is not a case in which the contract claim requires resolution of a related question of patent law. Cf. Air Measurement Tech., Inc. v. Akin Gump Strauss Hauer & Feld, LLP, 504 F.3d 1262, 1272(Fed.Cir.2007) (finding a disputed, substantial issue of patent law exists when a party is required to prove its patent infringement suit to satisfy the “but for” causation requirement of a state legal malpractice claim); Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F.3d 1281, 1285 (Fed.Cir.2007) (same); U.S. Valves, Inc. v. Dray, 212 F.3d 1368, 1372 (Fed.Cir.2000) (holding that the exercise of § 1338 jurisdiction by a district court is proper when a plaintiff, in order to succeed on a breach of contract action, is required to prove that certain of defendant's products infringe). Such cases are distinguishable
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contractual issue would not create patent precedent binding on the federal courts even though patent law would necessarily be interpreted. Yet, the Federal Circuit may have decided to interpret Gunn narrowly. Pointing to Gunn’s reference to the “backward-looking nature of a legal malpractice” the Federal Circuit in Forrester Environmental Services, Inc. v. Wheelabrator Technologies, Inc.152 found that the line of cases holding that state law disparagement, injurious falsehood or similar claims asserting or based on alleged false statements about patents or infringement gave rise to exclusive patent subject matter jurisdiction153 might have survived Gunn. It wrote: Those cases may well have survived the Supreme Court's decision in Gunn. Unlike the purely “backward-looking” legal malpractice claim in Gunn,… permitting state courts to adjudicate disparagement cases (involving alleged false statements about U.S. patent rights) could result in inconsistent judgments between state and federal courts. For example, a federal court could conclude that certain conduct constituted infringement of a patent while a state court addressing the same infringement question could conclude that the accusation of infringement was false and the patentee could be enjoined from making future public claims about the full scope of its patent as construed in federal court.154 Even though the Forrester Environmental Services case ultimately determined that, on the facts, the tortious interference and consumer protection violations would not pose such dangers and so did not give rise to exclusive federal jurisdiction,155 the dicta quoted above raises
because the instant matter does not present a “case within a case.” Here, it is undisputed that the post-trial conduct falls within the scope of the ′658 patent. While the finding of breach is based on a finding of infringement, the district court would not have to conduct an infringement analysis because Metabolite I established infringement and neither party contests that decision. Moreover, in Board of Regents, we clarified the scope of Valves and made clear that not “all breach of contract actions involving patents require” a determination of patent infringement.” Id. at 1229. 152 Forrester Environmental Services, Inc. v. Wheelabrator Technologies, Inc.,715 F.3d 1329, 106 U.S.P.Q.2d 1842 (Fed. Cir. 2013). 153 The Federal Circuit was referring to its decisions in Additive Controls & Measurement Systems, Inc. v. Flowdata, Inc., 986 F.2d 476, 478 (Fed.Cir.1993) and Hunter Douglas, Inc. v. Harmonic Design, Inc., 153 F.3d 1318, 1329 (Fed.Cir.1998), overruled on other grounds by Midwest Indus., Inc. v. Karavan Trailers, Inc., 175 F.3d 1356 (Fed.Cir.1999) (en banc). 154 Forrester Environmental Services, Inc. v. Wheelabrator Technologies, Inc.,715 F.3d 1329, 1334, 106 U.S.P.Q.2d 1842 (Fed. Cir. 2013). 155 Forrester Environmental Services, Inc. v. Wheelabrator Technologies, Inc.,715 F.3d 1329, 1334-35, 106 U.S.P.Q.2d 1842 (Fed. Cir. 2013) (“Wheelabrator's allegedly inaccurate statements regarding its patent rights concerned conduct taking place entirely in Taiwan. Those statements did not concern activities that could infringe U.S. patent rights, and it is not entirely clear why the Taiwanese entities in this case cared about the extent of Wheelabrator's U.S. patent rights. The use of a patented process outside the United States is not an act of patent infringement. While the importation into the United States of a product produced by a U.S. patented process can constitute infringement, …there is no suggestion here that any product was being imported into the United States. Therefore there is no prospect of a future U.S. infringement suit arising out of Kobin's use of WES–PHix or FESI– BOND in Taiwan, and accordingly no prospect of inconsistent judgments between state and federal courts.
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the possibility that the Federal Circuit will improperly confine Gunn. Certainly, the Supreme Court did refer to the malpractice claims as being backward-looking, but that was not the test for determining whether a the federal issue was substantial under the Grable test--which was the element that the Supreme Court referred to the backward-looking nature of malpractice claims. As it stated, under Grable, the substantiality element did not turn on whether “the federal issue be significant to the particular parties in the immediate suit…The substantiality inquiry under Grable looks instead to the importance of the issue to the federal system as a whole.”156 Even where state law disparagement claims involving claims about patents or infringement are brought, we would venture to say that the outcome would not usually be so important to the federal system as whole, though it might be to the litigants. But we leave Forrester Environmental Services for now. We believe that where a license’s scope or royalties is framed by reference to the scope or validity of a patent, the correct application of Gunn should require an inquiry as to whether the resolution of the issue would be significant to the parties only or to the federal system as a whole. We believe that virtually all such cases would be “‘poles apart from Grable,’ in which a state court's resolution of the federal question ‘would be controlling in numerous other cases.”’157 MDS (Canada) Inc. v. Rad Source Technologies, Inc.158 supports this line of reasoning. In that case, the Eleventh Circuit decided that the Federal Circuit’s exclusive jurisdiction did not extend to an appeal of a breach of contract claim, even though a patent infringement claim would need to resolved for the complainant to succeed. Rad Source argued that the Federal Circuit had exclusive appellate jurisdiction “because at least one of the claims requires the district court to answer a question of patent infringement.”159 Rad Source had granted a license to Nordion with respect to specified patents, which contained a term prohibiting Rad Source “from developing and promoting technology that “embodies, in whole or in part, the Patents.”’160 As the court noted, to succeed on its claim of breach, Nordion would have to prove that the accused product in question, the RS 3400, embodied the licensed patents. “Although state law creates the cause of action for breach of contract, the related question of patent infringement is federal in nature and the parties dispute whether the RS 3400 infringes the licensed patents. But the question of patent infringement here is not substantial.”161 And that meant that the license dispute did not arise under the patent laws.
Moreover, the '356, ' 233, and '114 patents have all now expired, so there is also no prospect that future conduct in the U.S. could lead to an infringement suit regarding those patents.”). 156 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1066 (2013)(citing Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308, 125 S.Ct. 2363 (2005)). 157 Gunn v. Minton, --U.S.--133 S.Ct. 1059, 1067 (2013). 158 MDS (Canada) Inc. v. Rad Source Technologies, Inc., 720 F.3d 833, 107 U.S.P.Q.2d 1323 (11th. Cir. 2013). 159 MDS (Canada) Inc. v. Rad Source Technologies, Inc., 720 F.3d 833, 841, 107 U.S.P.Q.2d 1323 (11th. Cir. 2013). 160 MDS (Canada) Inc. v. Rad Source Technologies, Inc., 720 F.3d 833, 841-42, 107 U.S.P.Q.2d 1323 (11th. Cir. 2013). 161 MDS (Canada) Inc. v. Rad Source Technologies, Inc., 720 F.3d 833, 842, 107 U.S.P.Q.2d 1323 (11th. Cir. 2013).
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Quoting Gunn the Eleventh Circuit stated that ‘“substantiality inquiry under Grable looks [ ] to the importance of the issue to the federal system as a whole’ …[T]he Supreme Court has identified three factors to assist in this inquiry. First, a pure question of law is more likely to be a substantial federal question. …Second, a question that will control many other cases is more likely to be a substantial federal question. …Third, a question that the government has a strong interest in litigating in a federal forum is more likely to be a substantial federal question…. All of these factors establish that the issue of patent infringement here is not a substantial federal question for the purpose of section 1338.”162 As the Eleventh Circuit noted, while patent infringement is a mixed question of fact and law, the question as whether the item in question embodied the licensed patents within the meaning of the license was “fact-bound and situation- specific,” involving not only construing the claims in the patents, but also determining whether the patent claims read on the particular device,: “We have a fact-specific application of rules that come from both federal and state law rather than a context-free inquiry into the meaning of a federal law.”’163 Moreover, since the question of infringement--or more precisely determining whether the specific item in question embodied the patents--was so “heavily fact-bound” the resolution of that issue would be “unlikely to control any future cases. All of the relevant parties are joined in this lawsuit and will be bound by the decision regarding the RS 3400. Both the highly specialized nature of patent claims and the niche market for blood irradiator devices suggest that the resolution of this issue is unlikely to impact any future constructions of claims. “The present case is ‘poles apart from Grable,’ in which a state court's resolution of the federal question ‘would be controlling in numerous other cases.’”164 Nor was the governmental interest in having this particular case heard in a federal forum strong, since it did not affect the government directly or affect its ability to act.165 As the Eleventh Circuit noted holding “that all questions of patent infringement are substantial questions of federal law for the purposes of federal patent jurisdiction would sweep a number of state-law claims into federal” and, importantly, quoting Gunn “state law claims ‘based on underlying patent matters will rarely, if ever, arise under federal patent law for purposes of § 1338(a).”’166 So since the case was not based in whole or in part on Section 1338, the Federal Circuit did not have exclusive appellate jurisdiction. Let us now consider a different approach to finding exclusive subject matter jurisdiction even if the only issue in question is a contractual one. In Medtronic, Inc. v. Mirowski Family
162 MDS (Canada) Inc. v. Rad Source Technologies, Inc., 720 F.3d 833, 842, 107 U.S.P.Q.2d 1323 (11th. Cir. 2013) (citing Gunn v. Minton, –––U.S. ––––, 133 S.Ct. 1059, 1066 (2013), Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308, 314, 125 S.Ct. 2363 (2005), Empire Healthchoice Assur., Inc. v. McVeigh, 547 U.S. 677, 700–01, 126 S.Ct. 2121 (2006))). 163 MDS (Canada) Inc. v. Rad Source Technologies, Inc., 720 F.3d 833, 842, 107 U.S.P.Q.2d 1323 (11th. Cir. 2013). 164 MDS (Canada) Inc. v. Rad Source Technologies, Inc., 720 F.3d 833, 842, 107 U.S.P.Q.2d 1323 (11th. Cir. 2013). 165 MDS (Canada) Inc. v. Rad Source Technologies, Inc., 720 F.3d 833, 842-43, 107 U.S.P.Q.2d 1323 (11th. Cir. 2013). 166 MDS (Canada) Inc. v. Rad Source Technologies, Inc., 720 F.3d 833, 843, 107 U.S.P.Q.2d 1323 (11th. Cir. 2013).
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Ventures, LLC, 167 Medtronic, as licensee, entered into a license with Mirowski with respect to certain of Mirowski’s patents relating to implantable heart stimulators, pursuant to which Medtronic could practice the patents in exchange for royalty payments. The original 1991 agreement also provided that, if Mirowski notified Medtronic that a new “Medtronic product ‘infringe[d]’ a Mirowski patent, Medtronic had a choice. …. Medtronic could simply ‘cure the nonpayment of royalties.’… Or it could pay royalties and, at the same time, ‘challenge’ the ‘assertion of infringement of any of the Mirowski patents through a Declaratory Judgment action.’”168 Or it could ignore the license wholly and not pay any royalties, which would allow Mirowski to terminate the license and sue for infringement. A later amendment in 2006 modified the dispute resolution procedure, so that if Medtronic received a notice of infringement, it could seek a declaratory judgment to challenge infringement and deposit disputed royalties in escrow. One year later the procedure was put to the test, for Mirowski gave Medtronic notice that “it believed seven new Medtronic products violated various claims contained in two of its patents …. Medtronic thought that its products did not infringe Mirowski's patents, either because the products fell outside the scope of the patent claims or because the patents were invalid. … Medtronic brought …[a] declaratory judgment action …that its products did not infringe Mirowski's patents and that the patents were invalid. But, as its agreement with Mirowski provided, Medtronic paid all the relevant royalties into an escrow account.”169 The Supreme Court addressed whether the Federal Circuit had subject matter jurisdiction over the case, noting that 28 U.S.C. § 1338(a) and § 1295(a)(1) vested district courts exclusive jurisdiction over civil actions arising under Congressional laws “relating to patents” and the Federal Circuit exclusive appellate jurisdiction cases where district court jurisdiction “was based, in whole or in part, on section 1338.”170 The Supreme Court also noted that, in determining declaratory judgment jurisdiction, courts ‘“often look to the “character of the threatened action.’…That is to say, they ask whether “a coercive action” brought by “the declaratory judgment defendant” (here Mirowski) ‘would necessarily present a federal question.”’171 The amicus curiae argued that the coercive action would not have been patent infringement, but rather a suit for contractual breach of the Mirowski–Medtronic licensing contract, “in which patent infringement is the central issue”172--that is, the contract based the scope of products bearing royalties coterminous with the scope of infringing products. But, as the Supreme Court pointed out, the contract could have been terminated and infringement suit brought if the royalties had not been paid, in which case the “action would arise under federal patent law because ‘federal patent law creates the cause of action.”’173 Though an infringement suit might
167 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 109 U.S.P.Q.2d 1341 (2014). 168 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 847, 109 U.S.P.Q.2d 1341 (2014). 169 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 847, 109 U.S.P.Q.2d 1341 (2014). 170 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 848, 109 U.S.P.Q.2d 1341 (2014). 171 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 848, 109 U.S.P.Q.2d 1341 (2014). 172 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 848, 109 U.S.P.Q.2d 1341 (2014). 173 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 848, 109 U.S.P.Q.2d 1341 (2014) (quoting Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 809 (1988)).
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have been unlikely, the “relevant question concerns the nature of the threatened action in the absence of the declaratory judgment suit. Medtronic believes—and seeks to establish in this declaratory judgment suit—that it does not owe royalties because its products are noninfringing. If Medtronic were to act on that belief (by not paying royalties and not bringing a declaratory judgment action), Mirowski could terminate the license and bring an ordinary federal patent law action for infringement. …. Consequently this declaratory judgment action, which avoids that threatened action, also “arises under” federal patent law.”174 Note the mere possibility that Mirowski could have taken that action created arising under subject matter jurisdiction; but also note that the parties had, in fact, created an alternative pay-into-escrow-and-declaratory- judgment mechanism that they, in fact, used and--more importantly--that Mirowski could not circumvent with termination and infringement action because the mechanism required the payment of royalties so that no power to terminate would arise.175 The fact that Medtroinic
174 Medtronic, Inc. v. Mirowski Family Ventures, LLC, --US--, 134 S.Ct. 843, 848-49, 109 U.S.P.Q.2d 1341 (2014) (citing MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 128 (2007) with the parenthetical summary following: “(concluding that Article III's case-or-controversy requirement was satisfied where a patent licensee faced the threat of suit if it ceased making payments under a license agreement, notwithstanding that the licensee's continued royalty payments rendered the prospect of such a suit ‘remote, if not nonexistent’)”). 175 As I read the original license agreement, if Medtronic believed that its challenged products were not infringing, it had one of two courses of action: if Mirowski notified Medtronic of the allegation of infringement, “Medtronic shall have ninety days to cure the nonpayment of royalties. If Medtronic fails to pay such royalties within the cure period and continue payment thereunder Lilly shall have the right to terminate the sublicense as to that Mirowski Patent(s). If Medtronic pays the royalty, Medtronic shall, while maintaining its sublicense under the License Agreement, have the right to challenge the validity and enforceability of any patent under the Mirowski license… [other than specified patents] and shall have the right to challenge Lilly’s assertion of infringement of any of the Mirowski patents through a Declaratory Judgment action. In such action, Lilly and the Mirowski family shall not make claims for wilful infringement or punitive damages and neither Lilly nor the Mirowski family shall seek injunctive relief.” Interestingly, this does not explicitly say that any claims for infringement would be stayed and tolled, but only that Mirwoski could not “make claims for wilful infringement or punitive damages” or “seek injunctive relief.” License Agreement, May 13, 1991 (excerpted at page 13 of Joint Appendix to Writ of Certiorari in Medtronic Inc. v. Boston Scientific Corp, 2013 WL 3935055). However, under the original license, the royalties were being paid, so there would have been no power to terminate (at least for breach). The later amendment allowed Medtronic to put the royalties in escrow, as opposed to being required to pay and then seek recoupment: “10. Medtronic agrees to pay disputed royalties under [the license]…as follows: (a) Medtronic will accumulate disputed royalties and future disputed royalties in the amounts and at the times required by the [license agreement]…, together with interest at two (2) points above the prime rate ….” Litigation Tolling Agreement, July 2006 (excerpted at page 27 of Joint Appendix to Writ of Certiorari in Medtronic Inc. v. Boston Scientific Corp, 2013 WL 3935055). In essence the obligation to pay royalties in order to avoid termination and infringement action was changed to an obligation to deposit into escrow. Amicus Curaie Tessera Technologies argued that the provisions, “taken together, make clear that the parties have established a comprehensive and contractual royalty dispute resolution procedure that permits nested determination of all relevant patent issues under the aegis of their agreements while affording Medtronic privileges that it would not, or at least may not, possess in conventional patent litigation…. As a result, Medtronic did not, as of the initial filing date, face the patent licensee’s usual choice between, on the one hand, continuing to pay royalties while litigating its declaratory judgment action and risking inability to recoup those payments, and, on the other, ceasing to pay royalties and risking termination of the license and subsequent freestanding patent litigation entailing potentially far greater damages and injunctive relief. Medtronic could have its cake and eat it too. There therefore was simply no chance that Medtronic suddenly would abandon the contractual dispute resolution procedure after nearly twenty years by ceasing to pay royalties when it
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could possibly fail to escrow royalties and that could lead to termination and infringement litigation was enough, even though payment was, in fact, made. Was the hypothetical case even ripe for resolution? Does this effectively mean that all royalty disputes under a patent license--or for that matter any dispute relating to a license provision that could, if breached, give rise to power to terminate--are in effect arising under the patent laws? Note particularly, subject matter jurisdiction did not arise because the royalty provisions were tied to patent coverage (which would require some interpretation of patent scope), but rather because the mere possibility, no matter how ludicrously improbable, that a party could breach and that breach could give rise to a power to terminate and that termination could unleash an infringement action (at least as to future periods). What Gunn gave to the state courts, Medtronic may well have taken away. But one might argue that Medtronic might be wrong on this point. Arguably if the license were in effect and was breached by virtue of a failure to pay royalties, the only relief, at least as to the period prior to actual termination of the license, would be contractual damages. As to future activities after termination and after the defense of license would be extinguished, infringement might lie, but not as to activities prior to termination.176 Under this view, a dispute over royalties with respect pre-termination events would not give rise to “arising under” jurisdiction and would be nothing more than an ordinary contract case.
3. Scope
(a) Interaction between breach and scope. Alexsam, Inc. v. IDT Corp.177 dealt with not only a pure interpretation of the scope of a license (actually a sublicense), but also the interaction between scope and breach. In the case, Alexsam asserted its 608 patent relating to activating multi-function cards (including prepaid phone and gift cards) using a point of sale system. IDT sold phone cards and gift cards activated by point of sale systems, including the “SafeNet System,” which sent activation data from the point of sale system “first to a bank computer “first to a bank computer, and then to IDT by way
could resolve the very same patent issues within the contractual framework, and when it knew that both of the licensed patents would, in any event, expire within a year. …Indeed, Medtronic’s own brief confirms that "Medtronic did not wish to repudiate" the license at the time it initially filed suit. … That is why, of course, its initial complaint was addressed entirely to the contractual dispute resolution mechanism, was phrased in the past and present continuous tense, and made no mention of any fear of future termination of the agreements if Medtronic were to cease payment of royalties, or any anticipation of freestanding patent litigation with exposure to damages, treble damages, or injunctive relief upon any such termination.” Brief of Tessera Technologies, Inc. as Amicus Curiae in Support of Neither Party Suggesting Vacatur and Remand on Subject-Matter Jurisdictional Grounds pp. 9, 19-20 (Aug. 2, 2013) 2013 WL 4022086. 176 Cf. Sanofi-Aventis Deutschland GmbH v. Genentech, Inc., --- F.3d ----, 2013 WL 1921073, 106 U.S.P.Q.2d 1835 (Fed. Cir. 2013) (forum selection clause applied with respect to disputes under a license with respect to pre- termination events; infringement would be determined by the courts as to post termination events). 177 Alexsam, Inc. v. IDT Corp., 715 F.3d 1336 (Fed. Cir. 2013).
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of a network maintained by MasterCard for use in credit card transactions.”178 IDT argued that the SafeNet System was covered by a sublicensing agreement between MasterCard and Alexsam. The Federal Circuit held: We agree with the district court that the activations taking place over the SafeNet system were sublicensed under the plain language of the agreement, and therefore affirm the grant of JMOL. …The Alexsam–MasterCard agreement defined a “Licensed Transaction” as “each process of activating ... an account or subaccount which is associated with a transaction that utilizes MasterCard's network ... wherein data is transmitted between a [POS] Device and MasterCard's financial network ..., provided that such process is covered by one of the Licensed Patents.” … The agreement further stipulated that “Licensed Transactions” include “the entire value chain and all parts of the transaction and may involve other parties including ... processors [and] card vendors.” … The contract provided that “[t]o the extent that these other parties participate in a Licensed Transaction, they will also be licensed under this Agreement,” and specified that “[u]nless otherwise sublicensed as permitted hereunder, all Licensed Transactions shall be deemed sublicensed under an implied sublicense granted hereunder to all participating parties.” … MasterCard was obligated to report the total number of licensed transactions to Alexsam at the end of each month, and to pay a fee for each transaction. …The district court correctly found that under the plain terms of this agreement, any activation transaction covered by the patents in suit and taking place over the MasterCard network was automatically “deemed sublicensed,” without regard to the intent of either Alexsam or MasterCard regarding that particular transaction.179 Moreover, the failure to pay royalties by the licensee did not eviscerate the sublicensee’s rights: “Because the license was not conditioned on the royalty payments, the fact that MasterCard refused to pay Alexsam royalties for IDT's SafeNet activations did not retroactively revoke the sublicense under which those transactions took place. This case is governed by Tessera, Inc. v. International Trade Commission…and there were no disputed issues of material fact to be submitted for determination by the jury.”180 (b) References to specified patents and doctrine of Legal Estoppel.
178 Alexsam, Inc. v. IDT Corp., 715 F.3d 1336, 1340 (Fed. Cir. 2013). 179 Alexsam, Inc. v. IDT Corp., 715 F.3d 1336, 1345-46 (Fed. Cir. 2013). 180 Alexsam, Inc. v. IDT Corp., 715 F.3d 1336 (Fed. Cir. 2013) quoted Tessera, Inc. v. International Trade Commission, 646 F.3d 1357 (Fed.Cir.2011) as follows: “[T]here is nothing in any of the license agreements to even remotely suggest that the existence of a condition subsequent, namely, the payment of royalties, operates to convert ... authorized sales into unauthorized sales.... That some licensees subsequently renege or fall behind on their royalty payments does not convert a once authorized sale into a non-authorized sale. Any subsequent non-payment of royalty obligations arising under the ... Licenses would give rise to a dispute with [the patent owner's] licensees, not with its licensees' customers.” Alexsam, Inc. v. IDT Corp., 715 F.3d 1336, note 8 (Fed. Cir. 2013) (quoting Tessera, Inc. v. International Trade Commission, 646 F.3d 1357, 1370 (Fed.Cir.2011)).
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One recurring problems with patent licenses referring to specifically enumerated patents or to classes of patents is illustrated by the trio of decisions in Intel Corporation v. Negotiated Data Solutions, Inc.,181 TransCore v. Electronic Transaction Consultants Corp.,182 and General Protecht Group, Inc. v. Leviton Manufacturing Co.183 In essence, if the granting clause refers to specified patents does that reference only mean the claims in the extant patents or does it implicitly include reissued and continuation patents? Let us consider Intel first. In that case, Intel and National entered into a patent cross- licensing agreement granting Intel: non-exclusive, non-transferrable, royalty-free, world-wide licenses under NATIONAL PATENTS and NATIONAL PATENT APPLICATIONS to make, to have made, to use, to sell (either directly or indirectly), to lease and to otherwise dispose of LICENSED PRODUCTS,” …, for the life or lives of the patents, … The Agreement defined “NATIONAL PATENTS” (“National Patents”) as: …all classes or types of patents and utility models of all countries of the world, applications for which have a first effective filing date in any country prior to the date of expiration or termination of this Agreement, in respect of which, as of the EFFECTIVE DATE, or thereafter during the term of this Agreement, NATIONAL owns or controls ... [or has] the right to grant licenses of the scope granted herein.... 184 The five year agreement was extended three times, finally expiring on December 31, 2003. While the agreement was in force, National assigned certain patents--each of which was a “NATIONAL PATENT” as defined in the agreement--to Vertical, which set about the business of filing broadening reissue applications as to some of the patents, increasing their claim count from 77 to 378. Later, Vertical assigned to N-Data the patents and the reissue applications. The reissue patents issued after the date the Intel-National agreement expired. When N–Data sued Dell, one of Intel's customers, alleging infringement of several patents, including the reissue patents in question, Intel intervened, seeking a declaratory judgment that under the original cross-license with National, Intel and its customers were licensed to the National Patents and all reissue patents owned by N–Data derived from any of the National Patents. The issue was whether the grant as to “NATIONAL PATENTS” as defined in the original cross license agreement automatically extended to any reissue patents derived from those patents. N–Data predictably argued that because the reissue patents were issued directly to N–Data after the agreement had expired, they could not fall within the defined term. e National Patents and were not licensed to Intel.
181 Intel Corp. v. Negotiated Data Solutions, Inc., 703 F.3d 1360 (Fed. Cir. 2012). 182 TransCore v. Electronic Transaction Consultants Corp., 563 F.3d 1271 (Fed.Cir.2009). 183 General Protecht Group, Inc. v. Leviton Manufacturing Co., 651 F.3d 1355 (Fed.Cir.2011), 184 Intel Corporation v. Negotiated Data Solutions, Inc., 703 F.3d 1360, 1361-1362 (Fed. Cir. 2012).
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As the Federal Circuit panel correctly noted, this issue was a matter of contractual interpretation.185 According to the Federal Circuit panel, “the key question in this case is not whether the Reissue Patents are National Patents under the definition set forth in the Agreement, but whether the Agreement evinces an intent on the part of the parties that Reissue Patents should be treated as National Patents under the Agreement. “186This distinguished the case from Intergraph Corp v. Intel Corp.,187 which, according to the Federal Circuit panel, held “that patent applications momentarily possessed by National as a part of an acquisition and subsequent sale of a subsidiary company did not become National Patents subject to license simply by virtue of that transaction.”188 Using Section 251 of the Patent Act at the time the agreement was signed as to interpret the scope of the agreement,189 the Federal Circuit noted that Section 251 did not refer to “issuance of ‘a’ reissue patent for ‘an’ invention, but referred to ‘“reissue of ‘the’ inoperative or invalid patent for ‘the’ invention disclosed in the original patent. …The statute prohibits addition of new matter via reissue and indicates that ‘the’ reissued patent will be effective for the remainder of the unexpired term of the original patent. … Thus, the text of § 251 suggests to a potential licensee that—in the absence of contrary language in the licensing agreement—a license under the patent that is not directed to any specific claims, field of use, or other limited right will extend to the full extent of protection provided by law to the invention
185 Intel Corporation v. Negotiated Data Solutions, Inc., 703 F.3d 1360, 1364-65 (Fed. Cir. 2012) (“N–Data contends that 35 U.S.C. § 252 as a whole defines a nuanced arrangement where only substantially identical claims reach back to the date of the original patent and argues that the Agreement expressly covers only patents owned or controlled by National during the term of the license…. Intel, however, focuses on § 252's language that “every reissued patent shall have the same effect and operation in law, on the trial of actions for causes thereafter arising, as if the same had been originally granted in such amended form.”…At bottom, the scheme set forth in § 252 does not support Intel's simplistic proposition that a reissue patent replaces the original patent nunc pro tunc. The question remains, however, whether the National Agreement itself is properly interpreted, under California law, to extend the license granted thereunder to the Reissue Patents.”). Query: if the issue on appeal solely related to this contract interpretation issue, would the Federal Circuit have jurisdiction over the case? 186 Intel Corporation v. Negotiated Data Solutions, Inc., 703 F.3d 1360, 1365 (Fed. Cir. 2012).. 187 Intergraph Corp v. Intel Corp., 241 F.3d 1353 (Fed. Cir. 2001). 188 Intel Corporation v. Negotiated Data Solutions, Inc., 703 F.3d 1360, 1363 (Fed. Cir. 2012). The Federal Circuit also distinguished Altvater v. Freeman, 319 U.S. 359 (1943) as being applicable, noting that the “issue that the Supreme Court considered in Altvater was whether there was a controversy between the parties when the district court found that there was not a valid license between the parties…The Court in Altvater was not deciding whether the license agreement between the parties terminated because of surrender and reissue…. Altvater has no bearing on whether the National Agreement grants to Intel rights to reissue patents derived from National Patents and it does not compel adoption of the sweeping rule N–Data derives from it.” Intel Corporation v. Negotiated Data Solutions, Inc., 703 F.3d 1360, 1365-1366 (Fed. Cir. 2012). 189 Intel Corporation v. Negotiated Data Solutions, Inc., 703 F.3d 1360, 1364-65 (Fed. Cir. 2012) (quoting 35 U.S.C. § 251 (1976) as follows: “[w]henever any patent is, through error without any deceptive intention, deemed wholly or partly inoperative or invalid, by reason of a defective specification or drawing, or by reason of the patentee claiming more or less than he had a right to claim in the patent, the Commissioner shall, on the surrender of such patent ... reissue the patent for the invention disclosed in the original patent, and in accordance with a new and amended application, for the unexpired part of the term of the original patent. No new matter shall be introduced into the application for reissue.”).
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which is the subject of that patent. Because the patent laws provide for the grant of reissue patents under specified circumstances, it is reasonable to conclude that the parties' mutual intent at the time of contracting was that the broad and unrestricted grant of license under National Patents extended to any reissues thereof.”190 The Federal Circuit panel also pointed to its decisions in TransCore v. Electronic Transaction Consultants Corp.191 and General Protecht Group, Inc. v. Leviton Manufacturing Co.192 The panel found that those cases dealt with a licensee's rights when the patent holder received a continuation patent that, if asserted against the licensee, would derogate from the licensee's right to practice the previously licensed patents.…Specifically, in General Protecht [the]… ‘same inventive subject matter was disclosed’ in the continuation patents as in the licensed patents, and ‘[i]f Leviton did not intend its license of these products to extend to claims presented in continuation patents, it had an obligation to make that clear.’ …TransCore and General Protecht recognized that allowing the patent holder to sue on subsequent patents, when those later patents contain the same inventive subject matter that was licensed, risks derogating rights for which the licensee had paid consideration. In situations where the full extent of an invention disclosed in a patent is licensed, the concerns raised in General Protecht and TransCore are equally relevant, regardless of whether the case involves reissue patents or continuation patents.193 The majority of the panel deciding Endo Pharmaceuticals Inc. v. Actavis, Inc.194 would narrowly confine TransCore, General Protecht and Intel. Endo considered two licenses as to patents related to Opana® ER, branded extended release tablets with a painkiller called oxymorphone. Endo owned the asserted patents--the 122 and 216 patents--which were continuations of the same parent application, the '357 application, and were directed to extended release oxymorphone compositions and methods of treating pain. After an earlier lawsuit, Endo settled with Roxane by entering into an agreement, pursuant to which Endo provided a covenant that it would not assert that Roxane's generic versions of Opana® ER ‘“infringe[ ] the Licensed Patents’ and a license ‘under the Licensed Patents ... to make, use, have made, sell, offer to sell, import and use”’ such generic versions.195 Section 1.16(b) of the Roxane Agreement defined “Licensed Patents” as follows: (a) any [U.S.] patents that are both (i) now owned by Endo ... and (ii) issued as of
190 Intel Corporation v. Negotiated Data Solutions, Inc., 703 F.3d 1360, 1366 (Fed. Cir. 2012). 191 TransCore v. Electronic Transaction Consultants Corp., 563 F.3d 1271 (Fed.Cir.2009). 192 General Protecht Group, Inc. v. Leviton Manufacturing Co., 651 F.3d 1355 (Fed.Cir.2011). 193 Intel Corporation v. Negotiated Data Solutions, Inc., 703 F.3d 1360, 1366-67 (Fed. Cir. 2012). 194 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 (Fed. Cir. 2014). 195 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *1 (Fed. Cir. 2014)(emphases added by court).
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the Effective Date of this Agreement, including the Opana® ER Patents, (b) any [U.S.] patent applications that claim priority to the Opana® ER Patents, including any continuation, continuation-in-part and divisional patent applications that claim priority to Opana® ER Patents, and (c) any patents resulting from the reissue or reexamination of patents or patent application of patents or patent applications comprised within clauses (a) and (b) … (emphases added).196 The Roxane Agreement defined “Opana® ER Patents” as the ‘456 and ‘250.197 The ‘250 patent claimed priority to the ‘357 provisional application; the '122 and '216 patents--which were the patents in suit--also claimed priority to the ‘357 provisional application.198 This agreement also included the customary “no implied rights” clause (i.e. no license or right was conferred “whether by implication, estoppel or otherwise, other than as expressly granted herein”). According to the majority of the panel the agreement with the other appellee, Actavis, was much the same, though it covered an additional patent not included in the Roxane Agreement.199
196 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *1 (Fed. Cir. 2014)(emphases added by court). 197 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *1 (Fed. Cir. 2014). 198 The unrelated 482 patent related to purified oxymorphone compositions and methods of their making. 199 In dissent, Judge Dyk pointed out that the Actavis agreement in fact differed quite significantly from the Roxane agreement: While the majority states that the language of the Actavis and Roxane agreements is “similar,” … there are, in fact, important differences. …. While both agreements provide an explicit license to produce generic versions of Opana® ER covered by Actavis's and Roxane's ANDAs under the '250, '456, and '933 patents, clause (c) of the agreements is different. Clause (c) of the Actavis agreement reads: (c) For avoidance of doubt, and notwithstanding anything to the contrary in this Agreement, the License and Covenant Not to Sue do not grant to Actavis any rights or immunities with respect to any products other than the Opana® ER Generic Products, including any combination products. …. (emphasis added). Critically, the agreement defines “Opana® ER Generic Products” as “any product that is marketed and/or sold under the Actavis ANDA.” …(emphases added). Actavis sells the allegedly infringing product under the Actavis ANDA. … In contrast, clause (c) of the Roxane license agreement reads: (c) ... the License and Covenant Not to Sue does not grant to Roxane any rights or immunities with respect to any products other than the Roxane Products or with respect to any patents other than the Licensed Patents.
…. (emphasis added). The agreement defines “Licensed Patents” as
(a) any United States patents that are both (i) now owned by Endo ... and (ii) issued as of the Effective Date of this Agreement, including the Opana® ER Patents, (b) any United States patent applications that claim priority to the Opana® ER Patents, including any continuation, continuation in-part and divisional patent applications that claim priority
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The Federal Circuit held that Roxane did not have an express license with respect to the ‘122 and ‘216 patents, though they claimed priority to the same ‘357 provisional application as to which the enumerated ‘250 patent in the definition of “Licensed Patents”--even despite the word “including” in the granting clause. Certainly the ‘122 and ‘216 patents were not within the specifically enumerated “Licensed Patents,” but Roxane argued that the word “including” demonstrated that the agreement covered “more than just continuation, continuation-in-part, and divisional applications that claim priority to the Opana® ER Patents,” maintaining that the granting clause in Section 1.16 ‘“necessarily embraces any patent applications that claim priority to any applications and provisional applications’ to which the licensed patents likewise claim priority” and that “the common provisional application teaches subject matter that ‘binds’ the '250 patent to the asserted '122 and '216 patents.”200 The Federal Circuit, however, rejected such an interpretation, technically and narrowly construing the granting clause. To be sure, Section 1.16(b) did cover U.S. patent applications claiming ‘“priority to the Opana® ER Patents [e.g., any of the licensed patents], including any continuation, continuation-in-part and divisional patent applications that claim priority to Opana® ER Patents.”’201 But the '122 and '216 patents were not technically continuations of or did not claim priority to any licensed patent. As the Federal Circuit explained, the Patent and Trademark office regulations required that an “application that claims priority to another patent must contain an express cross-reference to ‘a prior-filed nonprovisional application from which the patent issued.”’202 This the '216 and '122 patents did not do, so they could not “claim priority to” the licensed patents as a technical matter. Those drafting with technical language derived from the patent law or related regulations in effect at the time of the drafting must expect a
to the Opana® ER Patents, and (c) any patents resulting from the reissue or reexamination of patents or parent applications comprised within clauses (a) and (b) above, in each case that Endo ... could assert would be infringing by the making, using, selling, offering to sell or importing of the Roxane Product. …. (emphases added). Thus, while the Actavis license is only limited to “any product that is marketed and/or sold under the Actavis ANDA,” … (emphasis added), the Roxane license specifies that it neither extends to any other “products” nor “to any patents other than the Licensed Patents,” … (emphasis added), i.e., the 250, '456, and '933 patents. Thus, in subsection (c), the Actavis agreement does not limit the license to specific patents as the Roxane agreement does. A comparison of the two license agreements and the different negotiation histories suggests that Actavis could reasonably conclude it had negotiated a right to sell all Opana® ER generic products despite the interim issuance of the '122 and '216 patents, not merely practice the patents expressly licensed. Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *10-11 (Fed. Cir. 2014)(dissent by Judge Dyk). 200 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *3 (Fed. Cir. 2014). 201 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *3 (Fed. Cir. 2014). 202 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *3 (Fed. Cir. 2014)(citing 37 CFR Section 1.78(b)).
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technical interpretation.203 But why did not the word “including” soften that technical interpretation? Two reasons: First, as the Federal Circuit pointed out the word “including” followed the operative grant that also set claiming priority as the key element of the grant: “any [U.S.] patent applications that claim priority to the Opana® ER Patents[here the 250 patent], including ….” Thus, claiming priority to a licensed patent was the touchstone for the grant. As the Federal Circuit pointed out the “'122 and '216 patents claim priority to the '357 provisional application, and the '250 patent claims priority to the '357 application as well. The '122 and '216 patents do not claim priority to the '250 patent.”204 Second, the Federal Circuit interestingly relied on extrinsic evidence--here drafting history--to interpret an agreement that it found clear on its face. It pointed out Although the language is clear on its face, the fact that Endo and Roxane considered including in their agreement a grant of a license to “any application claiming a common priority date as the licensed patents” reinforces this conclusion. …. (emphasis added). Because the '122 and ' 216 patents have a provisional application in common with the '250 patent, the “common priority date” language would have expressly covered the ' 122 and '216 patents. See 35 U.S.C. § 119(e)(1) (2012). But that language does not appear in the final version of the Roxane Agreement.205 Roxane argued that even if the Roxane Agreement did not expressly grant a license as to the ‘126 and ‘216 patents, the principles of legal estoppel developed in TransCore, General Protecht and Intel required that an implied license be found. The majority of the Federal Circuit panel hearing the appeal disagreed, clipping the wings of legal estoppel in the process. It found that the …doctrine of legal estoppel does not nullify these general principles. Instead, it “refers to a narrow category of conduct encompassing scenarios where a patentee has licensed or assigned a right, received consideration, and then sought to derogate from the right granted.” … (emphasis added). In TransCore, the patentee asserted a continuation patent that “was broader than, and necessary to practice” one of the patents included in a prior settlement agreement. … We observed that the fact that the patentee “adopted its [licensed] patent infringement contentions as its contentions related to the [asserted] patent,” … provided
203 But should the Actavis agreement have been so treated? The language of the two granting clauses was quite different. See note 199. 204 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *3 (Fed. Cir. 2014). For similar reasons, the “Actavis Agreement likewise does not cover the '122, '216, and ' 482 patents at issue in the Actavis appeal. It contains the same “continuations, continuations-in-part or divisionals” language as the Roxane Agreement. … For the reasons discussed above, the asserted patents are not continuations, continuations-in-part, or divisionals of the licensed patents. … Finally, the '482 patent is completely unrelated to any of the previously licensed patents, and is likewise not covered by the agreement.” Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *4 (Fed. Cir. 2014). 205 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *3 (Fed. Cir. 2014).
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undisputed evidence that the patentee “sought to enforce the [asserted] patent in derogation of the rights it granted” under the prior agreement…. Even though the agreement stated that it “shall not apply to other patents ... to be issued in the future,” we concluded that the patentee was legally estopped from asserting a patent whose claim scope fully encompassed that of the claims of one of the licensed patents. …Our subsequent cases confirm the limited scope of TransCore. In General Protecht Group, Inc. v. Leviton Manufacturing Co., Inc ., we found an implied license where the asserted patents had “[t]he same inventive subject matter [as that] disclosed in the licensed patents” and “[t]he same products were accused.” ….As in TransCore, the patents at issue in General Protecht were continuations of the licensed patents. … We observed that “the newly asserted continuations are based on the same disclosure as the previously licensed patents and that, by definition, the continuations can claim no new inventions not already supported in the earlier issued patents.” …. [W]e held that “where ... continuations issue from parent patents that previously have been licensed as to certain products, it may be presumed that, absent a clear indication of mutual intent to the contrary, those products are impliedly licensed under the continuations as well.” …. (emphasis added). In Intel Corp. v. Negotiated Data Solutions, Inc., we explained that TransCore and General Protecht “analyzed a licensee's rights when the patent holder received a continuation patent ” and “recognized that allowing the patent holder to sue on subsequent patents, when those later patents contain the same inventive subject matter that was licensed, risks derogating rights for which the licensee paid consideration.” ….(emphases added). Taken together, these cases stand for the rule that a license or a covenant not to sue enumerating specific patents may legally estop the patentee from asserting continuations of the licensed patents in the absence of mutual intent to the contrary.206 Here the asserted patents--the ‘122 and ‘216 patents--were not continuations of the specifically enumerated licensed patents--the ‘250 and the ‘482. The Federal Circuit employed the same reasoning it used to find no express license to confine the scope of implied license by legal estoppel: “The only familial relationship between the asserted and licensed patents is that the '122 and '216 patents claim priority to the same provisional application as the '250 patent. That, however, does not make these patents continuations of the '250 patent…. The '482 patent is not related to any of the licensed patents.”207 The combination of the lack of “continuation relationship between any of the asserted and licensed patents” and the stock “explicit disclaimer of any other licenses not within the literal terms of the contract”208 were dispositive for the majority of the panel: “We reject Appellees' invitation to expand the implied license doctrine.
206 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *5 (Fed. Cir. 2014). 207 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *6 (Fed. Cir. 2014) (citing to MPEP § 201.07)). 208 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *6 (Fed. Cir. 2014).
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You get what you bargain for. And we will not use the implied license doctrine to insert ourselves into that bargain and rewrite the contract.”209 So this case would confine TransCore, General Protecht and Intel to situations where there was a continuation relationship between the asserted and specifically listed patents, as opposed to building upon the general doctrine underlying those decisions--to wit: a “grantor is estopped from taking back in any extent that for which he has already received consideration.”210 This
209 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *5 (Fed. Cir. 2014). 210 Judge Dyk in dissent would not have confined the prior decisions so tightly and narrowly. Pointing to the differences in language between the Roxane and Actavis licenses, see 199, Judge Dyk would have ruled differently as to whether Actavis had an implied license to the '122 and '216 patents. “In my view, the majority's holding that Actavis has no right to an implied license is inconsistent with our prior decisions in Transcore… and General Protecht… . The majority reads [TransCore and General Protecht] …as standing for the proposition ‘that a license or a covenant not to sue enumerating specific patents may legally estop the patentee from asserting continuations of the licensed patents in the absence of mutual intent to the contrary.’ … I think there is no meaningful distinction between the provisional patent relationship at issue in this appeal and the continuation patent relationships at issue in our earlier decisions.…. TransCore clarified that an explicit disclaimer of any other license not within the literal terms of the contract does not protect the patentee from an implied license when such a license is necessary to ensure the licensee obtains “the benefit of its bargain.” …. Similarly, in General Protecht, …. this court reasoned that …[in] ‘this case, [the patentee's] actions have unquestionably derogated from [General Protecht]'s rights under the Settlement Agreement. The same products were accused. The same inventive subject matter was disclosed in the licensed patents. If [the patentee] did not intend its license of these products to extend to claims presented in continuation patents, it had an obligation to make that clear.’… (emphasis added) …..Here too, if Endo succeeds on its infringement allegations, Actavis will not be able to sell the very product for which it secured licenses in its settlement agreement. Although the '122 and '216 patents are not continuations of the licensed patents, as was the case in TransCore and General Protecht, the logic of those cases applies equally here. …Thus, as we have explained in the past, “ ‘[w]hat is claimed by the patent application [claiming priority to a provisional application] must be the same as what is disclosed in the [provisional] specification.’ “ ….That is to say, a patent claiming priority to a provisional application must cover the same inventive subject matter as the provisional application. …Since the '250 patent (covered by the license agreements) and the ' 122 and '216 patent applications (subsequently issued) claim priority to the same provisional application and, thus, must cover the same inventive subject matter, the agreements confer an implied license to the two new patents absent contrary evidence. In other words, under our decisions in TransCore and General Protecht, the settlement agreements here created a presumption that the '122 and '216 patents were impliedly licensed to Actavis and Roxane, even though the only licenses explicitly mentioned in the settlement agreements were to the '250, '456, and '933 patents.” Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *8-10 (Fed. Cir. 2014)(dissent by Judge Dyk). What distinguished the Roxane Agreement and the Actavis Agreement was the significant difference in language, see note 199, and the circumstances of negotiation: “…I also think that the parties can agree to eliminate the presumption of implied licenses. Under our prior decisions, this cannot be accomplished simply by stating that the agreement does not extend to any patents beyond those listed in the agreement. … Here, as to Roxane there is more. In the course of its negotiations with Endo, Roxane became aware of the '122 and ' 216 patent applications, sought to have these pending patents included in the agreement, and ultimately failed to secure a license to them. That history, it seems to me, is sufficient to negate an implied license. …The record contains no indication that the '122 and '216 patent applications were discussed during Actavis–Endo negotiations or that Actavis was even aware of Endo's applications for the '122 and '216 patents. …….That the '122 and '216 patent applications were published at the time of the settlement negotiations should not affect this conclusion: in both General Protecht and TransCore, at least one of the new patents at issue was published as a pending application at the time of the settlement and licensing negotiations. .... Although Actavis could have researched pending patent applications at the time of the settlement, placing the burden of disclosure on the party with greater access to information (here, Endo) increases the efficiency of the bargaining
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narrow reading of the scope of the license and of TransCore, General Protecht and Intel allowed the majority of the panel to characterize the appellees’ argument as a pure grab, a seeking “to capture via implied license subject matter in addition to that for which they bargained.”211 The key was the defined scope: “Endo has granted to Appellees a license and covenant not to sue limited to specific patents and patent applications. If Appellees wanted to market and sell their accused generic products free from any threat of being sued by Endo for patent infringement, they could have negotiated for the appropriate language in the settlement and license agreements. …. Having agreed to licenses that do not cover the patents at issue in these appeals, Appellees will not now be heard to complain.”212 (c) Interpreting Scope and Exclusivity: Extrinsic Evidence/Implied Duty of Good Faith Let us consider now Mylan Inc. v. SmithKline Beecham Corp.213 In the case, GSK held a patent (the 640 patent) and FDA marketing rights as to paroxetine (brand name Paxil CR) for treatment of depression. As part of a settlement, GSK granted Mylan a license to market, sell and produce generic paroxetine; later, as a result of another settlement, GSK began supplying Apotex with GSK-produced generic paroxetine for sale. Mylan sued, claiming that GSK violated the license agreement with Mylan by making such sales. The license agreement granted “ Mylan exclusive rights to market and sell generic paroxetine for the remaining life of GSK's patent (i.e., nearly nine years of complete generic exclusivity). This included manufacturing, marketing, and selling Mylan's own generic paroxetine drug products, as well as sales rights for AG paroxetine manufactured by GSK. Mylan's generic rights were exclusive ‘even [as] to GSK.”’214 However, federal law required the parties to submit the license agreement to the FTC for review under 25 USC Section 355, the result of which required the parties to amend their license to provide for two exceptions to the generic exclusivity clause:
process. …Assigning this burden to the party with inferior access to information creates an incentive for the more knowledgeable party to hide information: the more informed party will not face repercussions for failing to disclose information, and, indeed, will benefit from such information asymmetries. … By creating incentives to hide and obscure important information in settlement negotiations, we undermine the purpose of the settlement process: the avoidance of further litigation.” Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *10-11 (Fed. Cir. 2014)(dissent by Judge Dyk). 211 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *6 (Fed. Cir. 2014). 212 Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *6 (Fed. Cir. 2014). This distinguished the venerable AMP case: “the agreement at issue in that case gave the Government the license ‘to practice, and cause to be practiced ... throughout the world, each Subject Invention’—rather than any specific patents…. (emphasis added). AMP made clear that “[t]he facet of this licensing agreement which is of crucial importance ... is that it licenses the Government to use an idea and not just the Byrem Patent itself.” … (emphasis in original). By asserting a newly acquired patent covering the licensed invention, AMP derogated from its grant, and the Court of Claims concluded that AMP's patent infringement suit was barred by legal estoppel ‘in order to protect the specific rights granted to the Government by contract.”’ Endo Pharmaceuticals Inc. v. Actavis, Inc., --- F.3d ----, 2014 WL 1272846 *6 (Fed. Cir. 2014). However, as Judge Dyk observed in dissent, the majority neglected very material differences between the Roxane and Actavis licenses. See note 199 above. 213 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413 (3rd Cir. 2013). 214 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413, 416 (3rd Cir. 2013).
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First, in the settlement of subsequent patent litigation with other third-party companies that had filed ANDAs for generic paroxetine, GSK was permitted to grant nonexclusive licenses as part of a settlement agreement with those third parties: If GSK receives a Third Party Notification and GSK initiates an action for patent infringement, GSK can enter into a settlement agreement with respect to such action at any time and Mylan agrees to waive its exclusivity under Section II(c) in order to permit GSK under such settlement agreement to grant such Third Party a non-exclusive license under the GSK Patents to sell Generic Paroxetine Product(s) in the dosage form(s) specified in the Third Party's ANDA....… (the so-called “ANDA Clause”). Second, and more relevant here, GSK (or a GSK affiliate) was entitled to market and sell AG paroxetine beginning two years after Mylan launched its generic products: Also, GSK or its Affiliate may commence marketing and selling generic paroxetine hydrochloride controlled or modified release products pursuant to its Paxil® CR NDA (“Authorized Generic Products”) at the end of the second year after Mylan launches its Generic Paroxetine Products. ……. (the “Authorized Generic Clause”).215 After this license was granted in 2007, Mylan launched its generic paroxetine product in May 2008. Two years later--May 2010--GSK settled an antitrust lawsuit brought by Apotex: The terms of the settlement agreement provided for a $300 million cash payment to Apotex; in addition, Apotex was entitled to a guaranteed minimum of $180 million to be earned through the sale of GSK products (i.e., “in-kind transfers”). During negotiations regarding the potential products GSK would provide for the in-kind transfers, Apotex became aware that Mylan (i) had certain licensing rights with respect to paroxetine, for which Mylan paid GSK royalties, and (ii) was the only generic paroxetine market participant. While it refused Apotex's request for a copy of the License Agreement due to confidentiality concerns, GSK did advise Apotex that its supply obligation to Mylan ended by June 2010. …The parties agreed that one of the GSK-supplied products from which Apotex would produce sales revenues would
215 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413, 416-17 (3rd Cir. 2013). As the court explained, “Once a new pharmaceutical has been approved for sale, there are two means by which a generic form of the drug may be introduced into the market. First, a generic company can file an Abbreviated New Drug Application (“ANDA”), which seeks FDA authorization to produce and sell a generic version of an already approved drug product. See 21 U.S.C. § 355(j); 21 C.F.R. § 314.92–99. Second, the brand company may produce an “authorized generic” (“AG”) under its approved NDA, which is labeled as generic and sold at a lower price than its branded equivalent, to compete with other generic products on the market. See 21 U.S.C. § 355(t)(3). ..An ANDA filer must certify that the generic drug will not infringe on any patent covering the pioneer drug. One way it may do this—as was done by Mylan here—is by challenging the validity of the relevant patent via a “Paragraph IV” certification. See id. § 355(j)(2)(A)(vii)(IV). For a more thorough discussion of the patent obligations with respect to generic applicants, see Abbreviated New Drug Application Regulations; Patent Exclusivity Provisions, 59 Fed.Reg. 50,338 (Oct. 3, 1994) (codified at 21 C.F.R. pt. 314). .. Id. at note 4.
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be AG paroxetine. Thus, to implement the in-kind transfer arrangement, GSK and Apotex subsequently entered into an Exclusive Supply & Distribution Agreement for AG paroxetine (“S & D Agreement”). … Apotex subsequently began sales activities for AG paroxetine, which led to the filing by Mylan of this lawsuit in September 2010.216 Apotex did not qualify as a “Third Party” under the ANDA clause because it had not filed an ANDA. So the question was whether GSK could supply Apotex with generic paroxetine for resale to “downstream” customers (eg. Wholesalers, hospitals, retailers, etc.) under the Authorized Generic Clause. Mylan argued that the clause only authorized GSK or its Affiliates to market or sell generic paroxetine two years after the Mylan launch. Since Apoxtex is not an affiliate, the argument went, GSK could not sell to Apotex--a competitor of Mylan’s--for resale. The district court found that since there was no such limitation on the face of the license, so it granted a summary judgment against Mylan, refusing to consider extrinsic evidence. The Third Circuit reversed, holding that under the law governing the license (New Jersey) extrinsic evidence should have been admitted, making summary judgment inappropriate.217 In order to secure the admission of the extrinsic evidence, Mylan not only invoked canons of construction in interpreting different clauses in the same agreement in light of one another, but also “extrinsic evidence of the License Agreement's negotiations, including the parties' respective objectives and their actions taken to mollify the FTC's concerns about Mylan's nine-year exclusivity pre-Second Amendment. Mylan also offered custom and usage evidence, including expert testimony regarding industry understanding of the phrase ‘marketing and selling.”’218 Of particular note was the custom and usage evidence: “In a specialized and highly technical field, such as the pharmaceutical industry, trade usage evidence is particularly instructive when interpreting the meaning of disputed contractual language.”219 This extrinsic evidence to aid interpretation revealed a latent ambiguity not evidence from the face of the license--i.e. as to whether marketing and selling would refer to sale to a third party for resale. However the Third Circuit did uphold the summary judgment against Mylan on its breach of the implied covenant of good faith and fair dealing imposed by New Jersey law. Mylan simply had not proffered sufficient evidence “that GSK acted with the requisite bad motive or intent when entering into the S & D Agreement with Apotex...While the S & D Agreement
216 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413, 417 (3rd Cir. 2013). 217 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413, 419 (3rd Cir. 2013) (“Under New Jersey law (which the parties do not dispute governs here), courts must always “consider all of the relevant evidence that will assist in determining the intent and meaning of the contract” when making ambiguity determinations. …“Evidence of the circumstances is always admissible in aid of the interpretation of an integrated agreement. This is so even when the contract on its face is free from ambiguity.” … In aid of interpretation, courts should consider, for example, “the particular contractual provision, an overview of all the terms, the circumstances leading up to the formation of the contract, custom, usage, and the interpretation placed on the disputed provision by the parties' conduct.” … Thus, courts must consider all relevant evidence to determine if any ambiguity exists and, if the contested provisions fall in that gray area, summary judgment is improper.” ). 218 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413, 419-20 (3rd Cir. 2013). 219 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413, note 10 (3rd Cir. 2013).
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arguably frustrated expected profits of Mylan from sales of its generic products by introducing a direct third-party competitor, it has not produced any evidence that GSK entered into that subsequent agreement with bad faith or improper motive.”220 The Third Circuit also found that Mylan had not shown sufficient evidence to overcome a summary judgment motion as to its interference with contract claim: Under New Jersey law, a plaintiff must demonstrate interference with a contractual relationship that is knowing, intentional, and wrongful. …. Mylan falls short of establishing that interference here. …As an initial matter, the record does not suggest that Apotex had knowledge of Mylan's asserted contractual right to preclude other generic pharmaceutical companies from marketing and selling AG paroxetine. Actual knowledge of the contract with which a defendant supposedly interfered is a prerequisite to making out a claim for tortious interference. … It is undisputed that Apotex never saw the License Agreement, and there is no evidence in the record that it knew any specifics with regard to the Agreement's terms during the S & D negotiations with GSK. And without knowledge of the specific contractual right, Apotex cannot be deemed to have intentionally interfered with that right. … Assuming, for the sake of argument, that showing a deliberate indifference to the terms of a contract would be sufficient to satisfy the first tortious interference element, the record merely demonstrates that Apotex understood Mylan had licensing rights to sell a generic form of paroxetine. Mylan has not pointed to any evidence indicating Apotex believed that Mylan's licensing rights were exclusive as to other third-party sellers or that Apotex's resale of AG paroxetine would otherwise infringe the Licensing Agreement. … And even if we were to impute knowledge to Apotex, Mylan has failed to establish the requisite “malice” to sustain this cause of action. Where the parties to a tortious interference claim are business competitors—such as Mylan and Apotex—establishing intentional and malicious interference requires evidence that “one competitor interfere[d] with another's economic advantage through conduct which [wa]s fraudulent, dishonest, or illegal.” …. There is no record indication that Apotex secured its S & D Agreement with GSK through fraud, dishonesty, or illegal conduct of any kind.221 As the Third Circuit noted, a “breach alone is insufficient to establish that a third party is liable for tortious interference.”222 4. Royalties Jang v. Boston Scientific Scimed, Inc.,223 related to the interpretation of a royalty clause. Jang obtained a ‘021 patent directed to coronary stent technology. He assigned the patent to
220 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413, 421 (3rd Cir. 2013). 221 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413, 422-23 (3rd Cir. 2013). 222 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413, note 14 (3rd Cir. 2013). 223 Jang v. Boston Scientific Scimed, Inc., 729 F.3d 357 (3rd. Cir. 2013).
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Boston Scientific Corporation (with its subsidiary Scimed, (“BSC”) pursuant to an agreement requiring an upfront payment and a payment based on “Net Sales,” which was defined to include damages BSC obtained from third party infringers. Specifically the provision in question stated Any recovery of damages by [BSC] in a suit brought pursuant to the provisions of this Section 7.3 shall be applied first in satisfaction of any unreimbursed expenses and legal fees of [BSC] relating to the suit or settlement thereof. The balance, if any, remaining after [BSC] has been compensated for expenses shall be retained by [BSC]; provided, that any recovery of ordinary damages based upon such infringement shall be deemed to be “Net Sales” and upon receipt of such recovery amount, [BSC] shall pay Jang as additional Earn Out from such recovery amount an amount calculated in accordance with Section 3.1(c) to reimburse Jang for payments due in respect of lost sales of Contingent Payment Products. Any such recovery shall be count[ed] toward Net Sales as of the date of the infringement for purposes of Section 3.1(d). The allocation described in this Section 7.3(c) shall not apply as to special or punitive damages.224 The agreement prohibited assignments225 and provided that it would be governed by Massachusetts law. One year after the agreement was signed, Cordis sued BSC for infringement, alleging that BSC stents infringed Cordis patents. BSC responded with an infringement claim based on Jang’s '021 patent. Both Cordis and BSC were found to be infringers of each other’s patents. Before a trial as to damages commenced, Cordis and BSC settled: The settlement … entailed an exchange of licenses. BSC granted Cordis non- exclusive, perpetual, irrevocable, fully paid-up and retroactive licenses on eleven Jang patents, including the '021 patent. Cordis granted BSC non-exclusive, perpetual, irrevocable, fully paid-up and retroactive licenses on ten Cordis patents. Each company released its infringement claims against the other. …The settlement agreement provided for only one cash payment: approximately $1.725 billion from BSC to Cordis. Jang alleges, and BSC appears to admit, that this represented the net difference between the companies' claims: Cordis' damages minus BSC's damages. As BSC wrote in its brief, the damages to which it was entitled for the Jang-patent infringement translated into a “settlement offset” against the damages it owed Cordis. … Jang alleges that BSC's payment to Cordis was offset by several billion dollars.226
224 Jang v. Boston Scientific Scimed, Inc., 729 F.3d 357, note 2 (3rd. Cir. 2013). 225 Jang v. Boston Scientific Scimed, Inc., 729 F.3d 357, note 3 (3rd. Cir. 2013)(“neither party may assign its rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld in the case of any assignment; provided that the proposed assignee under this Section 9.4 agrees in writing to assume all of the obligations of the assignor party under this Agreement”). 226 Jang v. Boston Scientific Scimed, Inc., 729 F.3d 357, 359, 360-61 (3rd. Cir. 2013).
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The issue was whether the requirement to share “any recovery of damages” from third-party infringers covered all of the benefits that BSC received, including the amount offset against a damages payment to Cordis and the value of the cross licenses. The Third Circuit agreed with the district court that Section 7.3(c)’s reference to “damages” referred to “cash received or monetary profits,” pointing to “the provision's terms— ‘damages,’ ‘the balance,’ ‘upon receipt,’ and ‘from such recovery amount’—“ as plainly alluding to “monetary gain.”227 However, BSC did receive monetary gain from the offset, and therefore the full amount--the amount offset and the net payment made--would be treated as “damages.” The Third Circuit found that A cash offset is the functional equivalent of a cash payment. Instead of receiving a direct transfer from Cordis, BSC deducted the amount it would have received from the amount it owed Cordis for separate acts of infringement. …An illustration may be useful: Had BSC received a $2 billion check for the Jang- patent infringement, and then paid Cordis $3.725 billion out of its general funds for Cordis' separate claim, there would be no dispute that the Jang claim had produced $2 billion in “damages.” BSC simply combined the transactions. Using the numbers from our illustration, BSC deducted $2 billion from its debt to Cordis, thereby receiving the $2 billion in the form of an “offset.” It is still better off, by $2 billion, than it would have been without the Jang infringement claim. This is clearly a monetary gain. …In this case, BSC made money on the Jang patent. It lost money on Cordis' separate claim. That its gain and loss were consolidated to produce one net payment does not change the fact that the Jang patent produced a monetary gain for BSC….The real question is whether that gain qualifies as a “recovery.” We see no reason why it should not; it makes no difference to BSC's bottom line whether it receives a check for the Jang infringement claim or reduces its debt by the same amount. The fact that BSC obtained a right to damages, and then regained the value of its lost profits through settlement, should be sufficient to demonstrate a ‘recovery.”’ 228 However, while the cash offset would be damages, what was “arguably” ambiguous would be whether § 7.3(c) applied “only when there is a net ‘recovery’ in the ‘suit or settlement’ as a whole, or whether it applies to any recovery on the particular claims involving Jang patents, even if the suit as a whole produces a loss. .. [Also it was] arguably ambiguous whether [the cash offset]… qualifies as a “recovery” pursuant to § 7.3(c). Because “any recovery of damages” in § 7.3(c) could reasonably be read to include the cash offset, the District Court erred in dismissing Jang's breach-of-contract claim as a matter of law.”229 The Third Circuit also considered whether Jang was entitled to share in the value of the licenses that BSC recovered:
227 Jang v. Boston Scientific Scimed, Inc., 729 F.3d 357, 359, 362 (3rd. Cir. 2013). 228 Jang v. Boston Scientific Scimed, Inc., 729 F.3d 357, 359, 363 (3rd. Cir. 2013). 229 Jang v. Boston Scientific Scimed, Inc., 729 F.3d 357, 359, 363-64 (3rd. Cir. 2013).
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Construing the facts in the light most favorable to Jang, it is possible that the parties did not consider it. Jang contends that the contract is thus ambiguous, and that we cannot infer that § 7.3(c) was intended to exclude non-monetary recoveries, because that would allow BSC to evade its obligation at any time simply by arranging to receive its recovery in non-monetary form…. Jang's argument is compelling—but not, in the end, persuasive. …Section 7.3(c) plainly applies to monetary recoveries only. Even if this is because the parties considered no other kind, that omission does not render the scope of § 7.3(c)—which imposes an affirmative obligation on BSC—ambiguous. The contract simply does not require BSC to share the proceeds of a settlement-in-kind, and we cannot supplement the contract terms. …It is true that this reading allows BSC to circumvent § 7.3(c) by electing to receive any recovery in non-monetary form. If BSC takes this course of action to intentionally thwart the purpose of the provision, however, the appropriate charge against it is violation of the implied covenant of good faith and fair dealing, not breach of the express contract terms. We agree with the District Court that BSC did not breach the Agreement's express terms in refusing to share the value of the Cordis licenses.230 The Third Circuit found that Jang’s claim that “BSC violated the implied covenant of good faith and fair dealing by structuring a settlement deal to thwart that purpose” raised a material fact that precluded dismissal.231 It noted that, Under Massachusetts law, every contract includes an implied covenant of good faith and fair dealing (“implied covenant” or “covenant”)…. The covenant provides “ ‘that neither party shall do anything that will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.’ ” … Good faith requires “faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.” … Conduct that does not breach the express terms of the contract may still violate the covenant if it constitutes an “evasion of the spirit of the bargain,” … or if it violates “community standards of decency, fairness or reasonableness,” …. “The covenant may not, however, be invoked to create rights and duties not otherwise provided for in the existing contractual relationship....” …‘A party may breach the covenant of good faith and fair dealing implicit in every contract without breaching any express term of that contract.’…The appropriate question is whether Jang's allegations state a plausible claim that BSC intentionally subverted the purpose of the Agreement and Jang's justified expectations. The complaint alleged that Jang ‘reasonably expected’ to share in ‘the value of the consideration received’ by BSC in any suit or settlement against infringers, and further that BSC structured the settlement to ‘depriv[e]’ him of that benefit, ‘while enriching themselves at Dr. Jang's expense.’ … The complaint described the settlement and
230 Jang v. Boston Scientific Scimed, Inc., 729 F.3d 357, 359, 364-65 (3rd. Cir. 2013). 231 Jang v. Boston Scientific Scimed, Inc., 729 F.3d 357, 365 (3rd. Cir. 2013).
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asserted that BSC received a value of several billion dollars for the Jang patent infringement, while paying Jang nothing. These allegations are minimally sufficient to state a claim for violation of the implied covenant, and to survive dismissal on the pleadings…. We do not, as the dissent alleges, hold that Jang could have ‘understood or expected[ ] that BSC was obligated to structure all settlements to provide for a monetary recovery.’ … His allegation is that BSC intentionally arranged a non-monetary recovery in order to exploit the terminology of § 7.3(c) and deny any obligation to share the value with him. …Viewed in the light most favorable to him, Jang's allegations describe a situation similar to cases in which the Massachusetts Supreme Judicial Court has found that a party violated the covenant by circumventing—rather than breaching—a contractual obligation. …If BSC intentionally circumvented its obligation to share infringement profits with Jang by arranging to receive those profits in a form that does not qualify as a “recovery,” it may have violated the covenant….Because there are disputed material facts as to the purpose of § 7.3(c) and the reasonableness of Jang's expectations, his implied-covenant claim is not barred as a matter of law, and the District Court erred by dismissing it on the pleadings.232 In Eastman Kodak Co. v. Ricoh Co., Ltd.,233 Kodak sued Ricoh for breaching a license agreement by failing to pay royalties on “Digital Cameras” sold by Pentax, a company acquired by Ricoh. As the court explained, Pentax sold two types of digital cameras relevant to this action: point-and shoot cameras, and Digital Single–Lens Reflex (“DSLR”) cameras. Furthermore, Pentax sold DSLR cameras in at least two ways: the DSLR camera body was sometimes sold on its own; sometimes it was sold in a “kit” with one or more DSLR lenses. Kodak contended that Ricoh was liable under the PLA to pay royalties on Pentax’s sales of point-and-shoot cameras and DSLR camera bodies sold in a kit with a DSLR lens.234 The issue at hand was whether the kit containing DSLR camera bodies and DSLR lens was a “Digital Camera,” subjecting the sales of kit to a royalty.235 The license agreement defined “Digital Camera” as follows: [a] portable, self-contained device utilizing an Area Image Sensor having at least
232 Jang v. Boston Scientific Scimed, Inc., 729 F.3d 357, 365-66 (3rd. Cir. 2013). 233 Eastman Kodak Co. v. Ricoh Co., Ltd., --- F.Supp.2d ----, 2014 WL 888219 (S.D.N.Y. 2014). 234 Eastman Kodak Co. v. Ricoh Co., Ltd., --- F.Supp.2d ----, 2014 WL 888219 *1 (S.D.N.Y. 2014). 235 Eastman Kodak Co. v. Ricoh Co., Ltd., --- F.Supp.2d ----, 2014 WL 888219 *1 (S.D.N.Y. 2014). The court had previously determined that the sales of the point and shoot cameras were subject to the royalty provision. Also, on the “eve of trial, the parties stipulated to the amount of damages on Pentax’s point-and-shoot cameras and, if Ricoh were liable for royalties on DSLR cameras, the amount of damages on Pentax’s DSLR camera bodies sold in a kit.” Eastman Kodak Co. v. Ricoh Co., Ltd., --- F.Supp.2d ----, 2014 WL 888219 *1 (S.D.N.Y. 2014).
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300,000 pixels, as well as electronics and optical elements that captures still or motion images of visible radiation and (a) records a digital signal representing such images on a Removable Digital Storage Media or (b) stores at least two such images in internal memory.236 The critical question was whether a body sold in a kit with a DSLR lens was a “self-contained device,” a term that had been determined at summary judgment to mean ‘“complete in itself’ or ‘complete, or having all that is needed, in itself.”’237 The jury found that the kits fell within the definition of Digital Camera as so construed, even though the two components--camera body and lens--were not attached and could not be used separately as a camera. In rejecting a motion for judgment as a matter of law, the district court stated: The jury’s finding that a DSLR camera body sold in a kit with an unattached DSLR lens is “complete” was adequately supported by the evidence. The jury was presented with examples of the actual “kits” at issue in this case. These kits consisted of a single rectangular box containing both a DSLR camera body and a DSLR camera lens. In some instances, the body and lens were themselves contained within smaller rectangular boxes housed within the larger rectangular box that constituted the kit. In all instances, the DSLR camera body and the DSLR camera lens were in close physical proximity and part of the same overall box that constituted the “kit.” Additionally, the jury was presented with the live testimony of Kodak’s expert witness, Dr. Ramchandran, and the deposition of testimony of Pentax employee Mr. Kawano. Both pieces of testimony established that when the DSLR camera body is “attached” to the DSLR lens, it is capable of taking a photograph and is therefore “complete.” Having seen the kits containing both a DSLR camera body and DSLR lens in close proximity, and having heard testimony establishing that a DSLR camera body is “complete” when it is “attached” to a DSLR lens, a reasonable and fair minded jury could reach the conclusion that the DSLR camera body, even when detached from the DSLR lens when sold in such a kit, is a “complete” device, and thus a “self-contained device” under the PLA. …. Here, the jury deliberated and chose-in the language of this Court’s ruling on the initial motion for judgment as a matter of law—“substance over form,” a determination that was entirely appropriate given its function and one that was also entirely consistent with the evidentiary record.238 5. First Sale, Implied License and Patent Exhaustion (a) Background Principles. License agreements focus on information and informational rights. Many licenses do not involve transfer of any tangible property. In other transactions, however, the licensed
236 Eastman Kodak Co. v. Ricoh Co., Ltd., --- F.Supp.2d ----, 2014 WL 888219 *1 (S.D.N.Y. 2014) (emphasis added by court). 237 Eastman Kodak Co. v. Ricoh Co., Ltd., --- F.Supp.2d ----, 2014 WL 888219 *1 (S.D.N.Y. 2014). 238 Eastman Kodak Co. v. Ricoh Co., Ltd., --- F.Supp.2d ----, 2014 WL 888219 *4-5 (S.D.N.Y. 2014).
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information is delivered on tangible media (goods) or the intellectual property rights cover the tangible property (e.g., patented machine). In these cases, issues can arise about whether delivery of the goods pursuant to a license constitutes a first sale of the copy under copyright law, is a first sale of genuine trademarked goods under trademark law or creates a case of patent exhaustion under patent law.239 In general, a transfer of ownership of goods that constitute a copy of the informational property, that are sold under a trademark, that are a copy of a work of authorship, or that embody an invention, does not in itself transfer ownership of intellectual property interests.240 Possession (even ownership) of a tangible thing does not in itself communicate much or anything about the right of the possessor to use or claim ownership of the intellectual property rights involved. While ownership of the intellectual property rights remains intact, an authorized first transfer of the good embodying the patent or containing the copyrighted work or bearing the trademark allows the transferee to put such good to use without fear of infringement claims from the patent, copyright or trademark owner.241 In essence, an authorized sale terminates the power of the patent, trademark, or copyright owner to control certain uses of the item that was sold.242 The theory is that a sale without restrictions means that the purchaser has
239 For a general description of copyright first sale, patent exhaustion, implied licenses upon sale, and trademark first sale see discussion in Sections 2:35-2:39 and 10:27-10:32 of MODERN LICENSING LAW by Raymond Nimmer and Jeff Dodd. 240 See, e.g., Chamberlain v. Cocola Associates, 958 F.2d 282, 23 U.S.P.Q.2d 1153 (9th Cir. 1992) (applying California law making that premise explicit in reference to art works). See also 17 U.S.C.A. §202: “[Nor] in the absence of an agreement, does transfer of ownership of a copyright or of any exclusive rights under a copyright convey property rights in any material object.” UCITA §501(b) (2000 Official Text). See also Symantec Corp. v. CD Micro, Inc., 286 F. Supp. 2d 1265, 1270-72 (D. Or. 2003) (first-sale doctrine does not apply to copies illegally obtained). 241 See 17 U.S.C.A. §106. This doctrine has been applied as to patents, copyrights, and trademarks. It may apply to other forms of intellectual property as well. Thus, in Dow Jones & Company, Inc. v. International Securities Exchange, Inc., 451 F.3d 295, 79 U.S.P.Q.2d 1225, Comm. Fut. L. Rep. (CCH) P 30257 (2d Cir. 2006) the Second Circuit applied a form of exhaustion analysis to defeat state-law misappropriation claims relating to “intellectual property” that Dow Jones and Standard & Poors claimed they owned in their stock indexes and related exchange traded funds that tracked those indexes. Without deciding whether “each of the plaintiffs possesses an exclusive intellectual-property right in the index it created and in the exchange-traded fund (ETF) which has been structured to duplicate the index,” the Second Circuit stated, “By authorizing the creation of ETFs using their proprietary formulas, and the sale of the ETF shares to the public, the plaintiffs have relinquished any right to control resale and public trading of those shares, notwithstanding the fact that plaintiffs’ intellectual property may be embedded in the shares. Owners and would-be owners of ETF shares are free to negotiate with one another for the purchase and sale of the ETF shares plaintiffs have sold to the public.” Dow Jones & Company, Inc. v. International Securities Exchange, Inc., 451 F.3d 295, 79 U.S.P.Q.2d 1225, 1330, Comm. Fut. L. Rep. (CCH) P 30257 (2d Cir. 2006). 242 The Copyright Act sets forth its first-sale doctrines, where patent exhaustion and trademark first sale doctrines have developed by judicial interpretation. The basic principle of all these doctrines is captured in Section 202 of the Copyright Act in the following terms: Ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied. Transfer of ownership of any material object, including the copy or phonorecord in which the work is first fixed, does not of itself convey any rights in the copyrighted work embodied in the object; nor, in the absence of an
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already compensated the owner for the use of intellectual property bound into the item.243 As the Supreme Court explained in Bowman v. Monsanto Co.,244 “patent exhaustion limits a patentee’s right to control what others can do with an article embodying or containing an invention. Under the doctrine, ‘the initial authorized sale of a patented item terminates all patent rights to that item.’… We have explained the basis for the doctrine as follows: ‘[T]he purpose of the patent law is fulfilled with respect to any particular article when the patentee has received his reward ... by the sale of the article”; once that “purpose is realized the patent law affords no basis for restraining the use and enjoyment of the thing sold.”’245 The separation of tangible and intangible property highlighted by this language is a central feature of licensing law and practice.246 Under the property-rights first-sale and exhaustion doctrines, an unconditional, but authorized, transfer of ownership of a tangible item (copy) does not convey rights in the intellectual property itself; rather, those doctrines do prevent the owner of the information right to sue a purchaser of a tangible item (copy) for infringement of the information right as to certain limited uses of that tangible item (or copy).247 Thus,
agreement, does transfer of ownership of a copyright or of any exclusive rights under a copyright convey property rights in any material object. 17 U.S.C.A. §202. The same proposition is set out as a matter of contract law in UCITA §501 (2000 Official Text). For a general description of copyright first sale, patent exhaustion, implied licenses upon sale, and trademark first sale see discussion in Sections 2:35-2:39 and 10:27-10:32 of MODERN LICENSING LAW by Raymond Nimmer and Jeff Dodd. 243 See, e.g., Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 497, 84 S. Ct. 1526, 12 L. Ed. 2d 457, 141 U.S.P.Q. 681 (1964). Cf. Ansul Co. v. Uniroyal, Inc., 448 F.2d 872, 880, 169 U.S.P.Q. 759, 1971 Trade Cas. (CCH); 73568, 1971 Trade Cas. (CCH); 73638 (2d Cir. 1971) (“each sale of MH-30 constituted an implied license to use the product”). Cyrix Corp. v. Intel Corp., 846 F. Supp. 522, 538, 32 U.S.P.Q.2d 1890 (E.D. Tex.1994), aff’d, 42 F.3d 1411 (Fed. Cir. 1994). 244 Bowman v. Monsanto Co., U.S., 133 S.Ct. 1761 (2013). 245 Bowman v. Monsanto Co., U.S. , 133 S.Ct. 1761, 1766 (2013). 246 It is also one basis for the rejection of ideas of bona fide purchaser status stemming from mere possession and control of a copy. See, e.g., Symantec Corp. v. CD Micro, Inc., 286 F. Supp. 2d 1265, 1270-72 (D. Or. 2003) (not first sale where copy acquired from unauthorized party); Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208, 31 U.S.P.Q.2d 1135 (E.D. N.Y. 1994); Microsoft Corp. v. Maryland Micro.com, Inc., 2003 Copr. L. Dec. P 28647, 2003 WL 21805213 (D. Md. 2003) (redistributors liable for infringement where acquired from unauthorized party); Novell, Inc. v. Unicom Sales, Inc., 2004 Copr. L. Dec. P 28899, 2004 Copr. L. Dec. P 28900, 2004 WL 1839117 (N.D. Cal. 2004) (no business and facilities planning of software where licensee not owner); PracticeWorks, Inc. v. Professional Software Solutions of Illinois, Inc., 72 U.S.P.Q.2d 1691, 2004 WL 1429955 (D. Md. 2004) (dealers not owners of software copies because subject to restrictions; copying in machine is copy; 117c does not apply to this use of copies). 247 See Quality King Distributors, Inc. v. L’anza Research Intern., Inc., 523 U.S. 135, 118 S. Ct. 1125, 140 L. Ed. 2d 254, 26 Media L. Rep. (BNA) 1385, 45 U.S.P.Q.2d 1961 (1998) (“[T]he first sale doctrine would not provide a defense to ... any non-owner such as a bailee, a licensee, a consignee, or one whose possession of the copy was unlawful.”). For example, in a number of industries, patented products are transferred to a “buyer” for a single or limited use only; such conditional transfers typically do not constitute a sale that results in patent exhaustion as to the item if the conditions are part of the contract. Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 24 U.S.P.Q.2d 1173 (Fed. Cir. 1992); Monsanto Co. v. McFarling, 302 F.3d 1291, 64 U.S.P.Q.2d 1161 (Fed. Cir. 2002). Compare
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• Patent exhaustion allows the “authorized sale of an article that substantially embodies a patent [to exhaust] the patent holder’s rights and prevents the patent holder from invoking patent law to control post-sale use of the article.”248 The privileges relating to the use of an item as to which patents have been exhausted are covered by related doctrines of implied license (e.g. the privileges of using, selling and repairing, but not reconstructing or recreating, the item).249 • Trademark first sale: common-law right for owner of a product to use trademark in connection with resale of that product so long as the use does not suggest sponsorship by the mark owner or otherwise create confusion as to source250
Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 S. Ct. 2109, 170 L. Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008) (exhaustion doctrine applies to method patent claims; in this case, license authorized Intel to make unconditional sales to third parties, but with notice that there was no license to use the product in practicing patent, the notice was not part of the contract and the authorized sales created an exhaustion as to the third parties); TransCore, LP v. Electronic Transaction Consultants Corp., 563 F.3d 1271, 90 U.S.P.Q.2d 1372 (Fed. Cir. 2009) (unconditional covenant not to sue created exhaustion where covenantee sold product within scope of the covenant). 248 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 638 (2008). 249 See discussion in Sections 10:27 to 10:29 of the MODERN LICENSING LAW treatise by Raymond Nimmer and Jeff Dodd. See also Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 S. Ct. 2109, 170 L. Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008) (exhaustion doctrine applies to method patent claims; in this case, sale of product that largely embodied method claim exhausted patent where sale was unconditional even though licensee- seller notified buyer that there was no resulting license to practice the patents); Bowman v. Monsanto Co., ___U.S.____, 133 S.Ct. 1761 (2013)(“patent exhaustion limits a patentee’s right to control what others can do with an article embodying or containing an invention. Under the doctrine, “the initial authorized sale of a patented item terminates all patent rights to that item.” ….And by “exhaust[ing] the [patentee’s] monopoly” in that item, the sale confers on the purchaser, or any subsequent owner, “the right to use [or] sell” the thing as he sees fit. …. We have explained the basis for the doctrine as follows: “[T]he purpose of the patent law is fulfilled with respect to any particular article when the patentee has received his reward …Consistent with that rationale, the doctrine restricts a patentee’s rights only as to the “particular article” sold; …it leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item. …Rather, “a second creation” of the patented item “call[s] the monopoly, conferred by the patent grant, into play for a second time.”; purchaser of seed could resell or consume seed but exhaustion doctrine did not allow making additional patented seeds by replanting seeds that the patent owner only sold pursuant to license forbidding replanting without patent owner permission); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 24 U.S.P.Q.2d 1173 (Fed. Cir. 1992); Monsanto Co. v. McFarling, 302 F.3d 1291, 64 U.S.P.Q.2d 1161 (Fed. Cir. 2002). 250 See discussion in Section 10:30 of the MODERN LICENSING LAW treatise by Raymond Nimmer and Jeff Dodd . See also Beltronics USA, Inc. v. Midwest Inventory Distribution, LLC, 562 F.3d 1067, 90 U.S.P.Q.2d 1228 (10th Cir. 2009) (In a trademark case, “‘the essence of the ‘first sale’ doctrine [is] that a purchaser who does no more than stock, display, and resell a producer’s product under the producer’s trademark violates no right conferred upon the producer by the Lanham Act.’ It logically follows that the first sale doctrine is not applicable ‘when an alleged infringer sells trademarked goods that are materially different than those sold by the trademark owner.’”); Au- Tomotive Gold Inc. v. Volkswagen of America, Inc., 603 F.3d 1133, 94 U.S.P.Q.2d 1873 (9th Cir. 2010) (The “first sale” doctrine does not provide a defense to trademark infringement when the products create a likelihood of confusion as to their origins; “The Court reasoned that activities creating a likelihood of post-purchase confusion are not protected, and selling altered goods under the original trademark creates trademark infringement.”); National Business Forms & Printing, Inc. v. Ford Motor Co., 2009 WL 3570387 (S.D. Tex. 2009), judgment aff’d in part, rev’d in part on other grounds, 671 F.3d 526, 101 U.S.P.Q.2d 1746, 81 Fed. R. Serv. 3d 1285 (5th Cir. 2012)
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• Copyright Act section 109: limited exemption for an owner of a copy to distribute that copy without infringing the distribution right (certain types of distribution, such as software leasing, not permitted).251 Thus, this version of the first sale doctrine (though it really relates to transfers of ownership not only sales) allows the rightful owner of a copy to sell or otherwise dispose of that copy notwithstanding the copyright owner’s exclusive distribution right252 • Copyright Act section 117: limited exemptions from infringement for the owner of a copy of a computer program to make backup, make a copy essential to its use, make some modifications, and transfer the copy253 The first-sale and exhaustion doctrines do not involve transfers of rights ownership. They do not come into existence unless the unrestricted sale was authorized by the rights owner.254 Nor do the doctrines deal with or limit the enforceability of contractual terms.255 Indeed, the reverse relationship exists: the terms of the contract determine when or whether a first sale or sale establishing exhaustion occurs.256 The first-sale and exhaustion rules merely set out limited defenses to claims of property rights infringement, but those exemptions can be important in determining the remedies available to a licensor or property rights owner, especially with respect to claims against remote third parties. Moreover, and quite importantly, even after an authorized sale, exhaustion and first sale doctrines do not accord unfettered uses of the product sold. I have already noted one significant
(Trademark violation on some, but not all of uses of Ford mark; first sale does not protect user of marks where these were counterfeit goods.). 251 17 U.S.C.A. §109. See Action Tapes, Inc. v. Mattson, 462 F.3d 1010, 79 U.S.P.Q.2d 1856 (8th Cir. 2006) (“A century ago, the Supreme Court held that a copyright owner’s exclusive right to distribute a copyrighted product does not include the power to control a purchaser’s subsequent disposition of the purchased copy.” This “first sale” principle is now codified at 17 U.S.C.A. §109(a), and Congress has resisted efforts to alter the balance of competing interests it reflects. However, in enacting the Computer Software Rental Amendments Act of 1990, Congress decided that short-term rentals of copyrighted computer software were depriving copyright owners of an appropriate return on their creative investments. The response was a limited statutory exception to the first sale principle that prohibits a person in possession of “‘a particular copy of a computer program’ from disposing of that copy for commercial gain by ‘rental, lease, or lending,’ unless authorized to do so by ‘the owner of copyright in [the] computer program.’“) 17 U.S.C.A. §109(b)(1)(A). 252 However, Section 109(b) limits the copy owner’s right to make distributions by “rental, lease, or lending, or by any other act or practice in the nature of rental, lease, or lending.” 253 17 U.S.C.A. §117. 254 See, e.g., Apple Inc. v. Psystar Corp., 658 F.3d 1150, 100 U.S.P.Q.2d 1338 (9th Cir. 2011), cert. denied, 2012 WL 1658507 (U.S. 2012) (Licensee not an owner of a copy); Microsoft Corp. v. Software Wholesale Club, Inc., 129 F. Supp. 2d 995, 1006 (S.D. Tex. 2000) (“the first-sale doctrine does not apply to an admittedly counterfeit unit”). 255 See DaimlerChrysler Services North America, LLC v. Summit Nat., Inc., 144 Fed. Appx. 542, 2005 FED App. 0724N (6th Cir. 2005) (Contract and copyright claims are separate; first sale does not affect contract claim.). See also discussion in Nimmer, Breaking Barriers: The Relationship Between Contract and Intellectual Property Law, 13 Berkeley Technology Law Journal 827 (1998). 256 See e.g., Nimmer, Copyright First Sale and the Over-riding Role of Contract, 51 Santa Clara L. Rev. 101 (2011).
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limitation: the loosening of an owner’s right to regulate use runs only as to the item purchased. But, as we will see, this is not the only limitation. So the issue is: how does one reconcile the continuing existence of the intellectual property rights with the privileges concerning use that the owner of an item obtains as to that item? Where copyright deals with this issue by statute, patent and trademark law deal with it through case law.257 Let us examine how, in particular, patent case law and the Copyright Act, address the balance between continuing ownership of the intellectual property rights in the original owner (licensor) with the rights of purchaser after an authorized first sale. (b) Patents. As to patents, here is where the interrelated doctrines of implied licensing and “patent exhaustion” or first sale come into play. The courts have effectively created a series of default rules that imply a license based on the singular fact of an authorized and unrestricted sale in the United States.258 The basic principles bound up in these interrelated doctrines are as follows: (i) Authorized sales. For the exhaustion or first sale doctrine to apply in patent cases, the sale must be authorized. In Quanta Computer, Inc. v. LG Electronics, Inc.,259 the Supreme Court held that an authorized sale, resulting in exhaustion, occurred where Intel sold LG patented products pursuant to a license from LG. In the case, Intel entered into a License Agreement pursuant to which it: (i) took a license under LG Electronics’ patents authorizing Intel to “make, use, sell (directly or indirectly), offer to sell, import and otherwise dispose of all Intel Licensed Products” and (ii) agreed to make a disclaimer to buyers of any express or implied license for infringement if Intel’s customers combined Intel Licensed Products with non-Intel products. The components Intel manufactured had no reasonable purpose or use than to be included in computer systems that would include non-Intel products. LG Electronics and Intel also entered into a Master Agreement that incorporated the License Agreement by reference. This separate contract required Intel to send its customers a notice that stated: “Please note however that while the patent license that [respondent] granted to
257 Indeed, the Patent Act itself, strictly read, would impose infringement liability on a purchaser of a patented item and on a purchaser of a nonpatented item that could not make use of the item as designed and intended other than by infringing a patent. See 35 U.S.C.A. §271(a) (“Whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.”). Exhaustion ameliorates that result. 258 See also Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 S. Ct. 2109, 170 L. Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008) (License did not restrict sales terms of licensee; exhaustion applies to buyer from licensee). Fuji Photo Film Co., Ltd. v. Jazz Photo Corp., 394 F.3d 1368, 73 U.S.P.Q.2d 1678 (Fed. Cir. 2005). (The scope of the doctrine is limited; “To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent….The patentee’s authorization of an international first sale does not affect exhaustion of that patentee’s rights in the United States.”). 259 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 S. Ct. 2109, 170 L. Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008). See also TransCore, LP v. Electronic Transaction Consultants Corp., 563 F.3d 1271, 90 U.S.P.Q.2d 1372 (Fed. Cir. 2009) (unconditional covenant not to sue created exhaustion where covenantee sold product within scope of the covenant).
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Intel covers Intel’s products, it does not extend, expressly or by implication, to any product that you may make by combining an Intel product with any non-Intel product.” Intel complied with the notice requirement, but the issue was whether the purchaser from Intel nevertheless had purchased at a transaction covered by the exhaustion doctrine. The Court held that it did.260 The real issue was “authorization.” Did the petitioners really acquire the items in an authorized sale-- i.e., did the sales by Intel pursuant to its license trigger the exhaustion doctrine? Here, the Court emphasized that exhaustion occurred only when there was an authorized and unconditional sale of a product. Thus, the decision about whether there was exhaustion turned on whether the Intel-LG arrangement authorized unconditional sales. The Court held that it did do so. The key to this conclusion was that the license to Intel simply authorized sales of product and that the separate, Master Agreement between the parties merely required Intel to give notice to buyers that the sale did not create an implied license to use the product with non- licensed other products. This did not create a condition on Intel’s sale authorization. The sales of product were not conditional. The distinction between authorized sales and patent restrictions is absolutely crucial here. The Supreme Court found that the
260 In fact there were three primary issues. The first was whether the doctrine of exhaustion applied to “method patents.” The Court held that it did apply--at least in any case where the product sold in an authorized sale. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 628-29, 128 S. Ct. 2109, 2117, 170 L. Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008) (“ It is true that a patented method may not be sold in the same way as an article or device, but methods nonetheless may be ‘embodied’ in a product, the sale of which exhausts patent rights. Our precedents do not differentiate transactions involving embodiments of patented methods or processes from those involving patented apparatuses or materials. To the contrary, this Court has repeatedly held that method patents were exhausted by the sale of an item that embodied the method. In Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 446, 457, 60 S.Ct. 618, 84 L.Ed. 852 (1940), for example, the Court held that the sale of a motor fuel produced under one patent also exhausted the patent for a method of using the fuel in combustion motors. Similarly, as previously described, Univis held that the sale of optical lens blanks that partially practiced a patent exhausted the method patents that were not completely practiced until the blanks were ground into lenses. [United States v. Univis Lens Co., 316 U.S. 241, 248–251, 62 S.Ct. 1088, 86 L.Ed. 1408 (1942)]”). The second was whether a product had to embody all of the physical attributes required to practice the patents in order for exhaustion to attach. The Supreme Court held that it did not need to do so as long as the article substantially embodied the patented invention and the article is capable only on practicing the patent. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 630-34, 128 S. Ct. 2109, 2118-2120, 170 L. Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008) (“We next consider the extent to which a product must embody a patent in order to trigger exhaustion. Quanta argues that, although sales of an incomplete article do not necessarily exhaust the patent in that article, the sale of the microprocessors and chipsets exhausted LGE's patents in the same way the sale of the lens blanks exhausted the patents in Univis. Just as the lens blanks in Univis did not fully practice the patents at issue because they had not been ground into finished lenses, Quanta observes, the Intel Products cannot practice the LGE Patents—or indeed, function at all—until they are combined with memory and buses in a computer system. ….We agree with Quanta that Univis governs this case. As the Court there explained, exhaustion was triggered by the sale of the lens blanks because their only reasonable and intended use was to practice the patent and because they “embodie[d] essential features of [the] patented invention.” 316 U.S., at 249–251, 62 S.Ct. 1088. Each of those attributes is shared by the microprocessors and chipsets Intel sold to Quanta under the License Agreement.”). The third issue, of course, was authorization, which I address above.
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longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item. …. In Adams v. Burke, 17 Wall. 453, 21 L.Ed. 700 (1873), the Court affirmed the dismissal of a patent holder's suit alleging that a licensee had violated postsale restrictions on where patented coffin-lids could be used. ‘[W]here a person ha[s] purchased a patented machine of the patentee or his assignee,’ the Court held, ‘this purchase carrie[s] with it the right to the use of that machine so long as it [is] capable of use.’… Although the Court permitted postsale restrictions on the use of a patented article in Henry v. A.B. Dick Co., 224 U.S. 1, 32 S.Ct. 364, 56 L.Ed. 645 (1912), that decision was short lived. …[In] Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 518, 37 S.Ct. 416, 61 L.Ed. 871 (1917), the Court explicitly overruled A.B. Dick. In that case, a patent holder attempted to limit purchasers' use of its film projectors to show only film made under a patent held by the same company. The Court noted the ‘increasing frequency’ with which patent holders were using A.B. Dick-style licenses to limit the use of their products and thereby using the patents to secure market control of related, unpatented items. …..[The] Court held that ‘the scope of the grant which may be made to an inventor in a patent, pursuant to the [patent] statute, must be limited to the invention described in the claims of his patent.’ ….Accordingly, it reiterated the rule that ‘the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it.’261 While some may read this passage as forbidding or invalidating restrictions or conditions relating to downstream sales of patented items, such as restricting the channels of distribution, this is not what the Supreme Court, in fact, said or decided. Note that it referred to an “unconditional sale” and referred to restrictions that would limit uses of a patented product to use with unpatented items. In fact it distinguished its prior decisions in the General Talking Pictures Corp. cases,262 in which the Supreme Court dealt with a caser where “the manufacturer sold patented amplifiers for commercial use, thereby breaching a license that limited the buyer to selling the amplifiers for private and home use. The Court held that exhaustion did not apply because the manufacturer had no authority to sell the amplifiers for commercial use, and the manufacturer ‘could not convey to petitioner what both knew it was not authorized to sell.’”263
261 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 625-26, 128 S. Ct. 2109, 2115-16, 170 L. Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008). 262 General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, 58 S.Ct. 849, 82 L.Ed. 1273 (1938), and General Talking Pictures Corp. v. Western Elec. Co., 305 U.S. 124, 59 S.Ct. 116, 83 L.Ed. 81 (1938). 263 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 636, 128 S. Ct. 2109, 2121, 170 L. Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008).The question of notice and knowledge of the downstream purchaser is an interesting one. In General Talking Pictures, American Transformer was a licensee under a license allowing it to sell amplifiers for noncommercial radios but not allowing it to sell amplifiers for use in theaters. American Transformer affixed a notice to the amplifiers noting the restrictions on use. The Supreme Court specifically drew attention to the knowledge of the purchaser of the nature of the restriction, adding “That a restrictive license is legal seems clear…. [T]he patentee
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Here, however, nothing “in the License Agreement restricts Intel's right to sell its microprocessors and chipsets to purchasers who intend to combine them with non-Intel parts. It broadly permits Intel to “ ‘make, use, [or] sell’ ” products free of LGE's patent claims.”264 Thus, according to the Supreme Court, since the License Agreement authorized Intel’s sale of products practicing the LGE patents and since no “conditions limited Intel's authority to sell products substantially embodying the patents” patent exhaustion prevented LGE from “further asserting its patent rights with respect to the patents substantially embodied by those products.”265 But what of the notice? The notice merely blocked any implied license argument, but did not become a limiting part of the contract with the buyer, or a condition on Intel’s right to make an authorized sale. The Supreme Court elided the issue by holding that implied license doctrines were unnecessary, for the defense was based on exhaustion of the patent by an unconditional sale. The fairest reading of this decision is that the sales of the products that could only be used as the purchasers used them were authorized and that was enough. This reading would make the decision truly inconsequential--not even fit for Supreme Court consideration. Narrowly read, the decision simply pointed to the authorization of sales of the Licensed Products in the License Agreement and the express statement that such sales would “limit or alter the effect of patent exhaustion” that would otherwise apply. Thus, LG Electronics authorized sales of components as to which it acknowledged patent exhaustion principles would apply and the statement that the license did not expressly or impliedly extend to combination use by purchasers was not an affirmative statement that such uses were prohibited even if patent exhaustion would otherwise apply. Arguably, then, no true “condition” had been imposed on the use and the Federal Circuit panel in Quanta incorrectly applied the Federal Circuit’s precedent dealing with express conditions where the purchasers or users had agreed to the limited use.
may grant a license “upon any condition the performance for which is reasonably within the reward is the patentee by the grant of the patent is entitled to secure” and the practice of “granting licenses restricted use is an old one ... [and] its legality has never been questioned.” General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 127, 59 S. Ct. 116, 83 L. Ed. 81, 39 U.S.P.Q. 329 (1938). However, the Supreme Court also stated that, on rehearing, it was not considering, “what the rights of the parties would have been if the amplifier had been manufactured ‘under the patent’ and ‘had passed into the hands of the purchaser in the ordinary channels of trade.’ Nor have we occasion to consider the effect of a ‘licensee’s notice’ which purports to restrict the use of articles lawfully sold.” General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 127, 59 S. Ct.116, 83 L. Ed. 81, 39 U.S.P.Q. 329 (1938). 264 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 636, 128 S. Ct. 2109, 2121, 170 L. Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008). 265 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 637, 128 S. Ct. 2109, 2122, 170 L. Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008). Interestingly, the Supreme Court stressed that even if exhaustion would prevent assertion of patent claims, that would not “necessarily” present the assertion of contract claims in the appropriate case. It then cited and quoted the decision in Keeler v. Standard Folding Bed Co., 157 U.S. 659, 666, 15 S.Ct. 738, 39 L.Ed. 848 (1895) as follows: ‘“Whether a patentee may protect himself and his assignees by special contracts brought home to the purchasers is not a question before us, and upon which we express no opinion. It is, however, obvious that such a question would arise as a question of contract, and not as one under the inherent meaning and effect of the patent laws.”’
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The Supreme Court avoided the most disturbing problems with the concept of authorization. The License Agreement authorized Intel to sell components, but did not authorize any subsequent use by the purchasers and, indeed, had a disclaimer as to the combination uses to which the components were put. If sales are authorized, is that sufficient to trigger exhaustion regardless of what else the License Agreement says? Would that make any difference if the scope clause stated that sales were authorized only to the extent that the use by purchasers would not be for combination uses? The sales in such cases would be authorized in some senses, but the authorized sales are limited. Does the case really turn on the notion that the scope clause could- without any notice to third party purchasers--be crafted in such a way that it would render their uses infringing, but that a disclaimer on the scope of the license as to subsequent uses by purchasers coupled with notice is ineffective? (ii) Scope of Exhaustion. Keurig, Inc. v. Sturm Foods, Inc.266 applied the exhaustion doctrines after Quanta. Keurig, sued Sturm for infringing claim 29 of its ‘488 patent and claims 6–8 of its ‘938 patent, both of which related to its single serve coffee brewers and the methods for using them (including through the use of beverage cartridges in the brewers). As all sentient beings in the United States who drink coffee know all too well, consumers use Keurig brewers by inserting a “cartridge into the brewer, hot water is forced through the cartridge, and a beverage is dispensed.”267 Other claims in the asserted patents and other patents were not asserted in this case, evidently held in reserve for the future. Strum did not manufacture or sell brewers, but it did manufacture and sell cartridges to use in Keurig's brewers under Strum’s brand name “Grove Square.” Keurig sued Strum for infringement (of course, or why would I be discussing the case?), alleging that “the use of Sturm's Grove Square cartridges in certain Keurig brewer models directly infringed method claim 29 of the '488 patent and method claims 6–8 of the '938 patent, and that Sturm induced and contributed to that infringement.”268 The district court found Keurig’s patents had been exhausted. The Federal Circuit affirmed. It began by well-rehearsed principles of exhaustion doctrine: Patent exhaustion is an affirmative defense to a claim of patent infringement…The longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.” …. The rationale underlying the doctrine rests upon the theory that an unconditional sale of a patented device exhausts the patentee's right to control the purchaser's use of that item thereafter because the patentee has bargained for and received full value for the goods.269
266 Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013). 267 Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1371, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013). 268 Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1372, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013). 269 Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1373, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013) (citing or quoting Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 S.Ct. 2109 (2008); Princo Corp. v. ITC, 616 F.3d
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It also noted that the two leading cases dealing with exhaustion of methods claims were the Supreme Court’s decisions in Univis270 and Quanta.271 It described the holdings of Univis and Quanta as follows: In Univis, the Supreme Court determined that claims to methods for manufacturing eyeglass lenses, and to the finished lenses themselves, were exhausted when the patent holder sold unpatented lens blanks (unpolished blocks of glass) to a manufacturer and distributor that polished and shaped the blanks into finished lenses by practicing the patented methods. … The Court held that the method claims were exhausted because the patent holder sold an unpatented, “uncompleted article” that embodied essential features of the patented method. … In Quanta, the Court held that method claims for managing and synchronizing data transfers between computer components were exhausted when the patent holder licensed a manufacturer to produce and sell unpatented microprocessors and chipsets that performed the patented methods when incorporated with memory and buses in a computer system. …The Court compared the subject items to the lens blanks in Univis … As in Univis, the Court concluded that exhaustion was triggered by sale of the components because their only reasonable and intended use was to practice the patent and because they embodied essential features of the patented invention.272 The Federal Circuit noted that these holdings related to a situation where the sale of an unpatented component item exhausted the method claims of embodied in the item. Hence: The [Supreme] Court thus established that method claims are exhausted by an authorized sale of an item that substantially embodies the method if the item (1) has no reasonable noninfringing use and (2) includes all inventive aspects of the claimed method. … Both of the Univis and Quanta opinions emphasized the unpatented nature of the products sold. Thus, the substantial embodiment test provided a framework for determining whether the sale of an unpatented component (e.g., lens blanks that are further ground and polished or microprocessors and chipsets that are further attached to memory and buses in a computer system), which by itself does not practice the patented method, is still sufficient for exhaustion. The Court held that it is.273 Those principles did not apply here because the product sold by Keurig was, in fact, patented and Keurig’s brewers were commercial embodiments of the apparatus claims of the '488 and '938 patents. No one questioned---neither the Federal Circuit, nor, indeed, Keurig--whether
1318, 1328 (Fed.Cir.2010) (en banc); and ExcelStor Technology, Inc. v. Papst Licensing GMBH & Co. KG, 541 F.3d 1373, 1376 (Fed.Cir.2008). 270 United States v. Univis Lens Co., 316 U.S. 241, 62 S.Ct. 1088 (1942). 271 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 S.Ct. 2109 (2008). 272 Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1373, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013). 273 Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1373, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013).
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Keurig’s rights in its brewers were exhausted with respect to such apparatus claims. Keurig argued instead that purchasers of its--that is Keurig’s--brewers infringe the Keurig brewer patents when they used Sturm cartridges to practice the claimed methods. Now, of course, Keurig did not sue its own customers who used the cartridges. Rather is sued the source for its customers, alleging that Sturm was liable for induced infringement. The Federal Circuit held that as the Supreme Court long ago held, “[W]here a person ha[s] purchased a patented machine of the patentee or his assignee, this purchase carrie[s] with it the right to the use of the machine so long as it [is] capable of use.” … Keurig sold its patented brewers without conditions and its purchasers therefore obtained the unfettered right to use them in any way they chose, at least as against a challenge from Keurig. We conclude, therefore, that Keurig's rights to assert infringement of the method claims of the '488 and '938 patents were exhausted by its initial authorized sale of Keurig's patented brewers.274 As the Federal Circuit observed, ruling otherwise would allow exhaustion doctrine to be circumvented. If one could claim methods and the apparatus practicing the methods and merely make downstream purchasers of the apparatus liable for infringement of the method claims, then the exhaustion doctrine would be of little moment. As the Federal Circuit noted, such “a result would violate the longstanding principle that, when a patented item is ‘once lawfully made and sold, there is no restriction on [its] use to be implied for the benefit of the patentee.’ ”275 So here Keurig wanted to prevent purchasers of its brewers from using non-Keurig cartridges by invoking patent law to enforce restrictions on the post-sale use of its patented product. …We agree with the district court that a consumer's potential use of different types of cartridges, viz., cartridges that would not infringe the claimed methods, cannot save Keurig's method claims from exhaustion. Such an outcome would also be counter to the spirit of the doctrine of patent exhaustion because Keurig could control use of the brewers after it sold them. The claims of both the '488 patent and the '938 patent are directed to the brewers and the use of the brewers; therefore, Keurig cannot preclude an individual who purchased one of its brewers from using a non-Keurig cartridge with that brewer.276 Even more intriguingly, a majority of the panel hearing the case found that an argument that “patent exhaustion must be adjudicated on a claim-by-claim basis is unavailing. The [Supreme] Court's patent exhaustion jurisprudence has focused on the exhaustion of the patents at issue in their entirety, rather than the exhaustion of the claims at issue on an individual basis. …. Keurig's decision to have sought protection for both apparatus and method claims thus means that those
274 Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1374, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013). 275 Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1374, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013). 276 Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1374, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013).
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claims are judged together for purposes of patent exhaustion.”277 (i) Scope of rights of purchaser. Even if the sale is authorized, that leaves open the question of what, exactly, the scope of uses an authorized purchaser may make of a patented, trademarked, or copyrighted item. As we have indicated above, with respect to copyrighted works, Congress has resolved the scope of permitted use by statute. As to patented and trademarked items, many cases wrestle with the precise contours of the range of permitted action afforded to the purchaser of that item and the purchaser’s successors obtain implied licensees to take certain actions with respect to that tangible item.278 For reasons of policy, a rights owner’s decision to authorize an unrestricted sale is treated as giving an implied license to allow purchasers to take limited actions with respect to that item unless those are excluded by agreement. As a matter of law, the nature of a sale of a physical good in itself gives rise to a host of privileges as to that item though the parties say or do nothing other than transfer title in an unrestricted sale. The terms of the relationship are
277 Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1374, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013). As the majority explained, to “permit a patentee to reserve specific claims from exhaustion would frustrate the purposes of the doctrine, one of which is to provide an efficient framework for determining when a patent right has been exhausted. If Keurig were allowed to assert its claims to methods of brewing a beverage using the subject brewers of its apparatus claims of the same patent, the effect would be to vitiate the doctrine of patent exhaustion. The confusion that would be created by Keurig's approach would produce uncertainty regarding the rights of both third parties and end users. The doctrine of patent exhaustion has the effect of providing an efficient means for ensuring the termination of the patent right. … Permitting Keurig to recover multiple times on its patented brewers by holding Sturm or any other cartridge manufacturer liable for direct, induced, or contributory infringement based on the independent manufacture and sale of cartridges for use in those brewers would be contradictory to these policies and the law.” Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1374, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013). Judge O’Malley concurred in the judgment that the asserted patent rights were exhausted by the sale of the patented brewers (for all this required application of a single principle: “[t]he longstanding [rule] ... that the initial authorized sale of a patented item terminates all patent rights to that item,” including “all rights to claims which recite methods which involve the normal and intended use of the patented item.”). But Judge O’Malley would not have decided “that exhaustion should not be assessed on a claim-by-claim basis,” arguing that if such a conclusion was not dicta Judge O’Malley would have dissented. 278 See Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 497, 84 S. Ct. 1526, 12 L. Ed. 2d 457, 141 U.S.P.Q. 681 (1964); Bottom Line Management, Inc. v. Pan Man, Inc., 228 F.3d 1352, 56 U.S.P.Q.2d 1316, 1319 (Fed. Cir. 2000); Hewlett-Packard Co. v. Repeat-O-Type Stencil Mfg. Corp., Inc., 123 F.3d 1445, 43 U.S.P.Q.2d 1650, 1655 (Fed. Cir. 1997) (“Generally, when a seller sells a product without restrictions, it in effect promises the purchaser that in exchange for the price paid it will not interfere with the purchaser’s full enjoyment of the product purchased. The buyer has an implied license under any patents of the seller that dominates the product or any uses of the product to which the parties might reasonably contemplate the product will be put.”); Carborundum Co. v. Molten Metal Equipment Innovations, Inc., 72 F.3d 872, 37 U.S.P.Q.2d 1169 (Fed. Cir. 1995); McCoy v. Mitsuboshi Cutlery, Inc., 67 F.3d 917, 36 U.S.P.Q.2d 1289, 1291, 27 U.C.C. Rep. Serv. 2d 1134 (Fed. Cir. 1995); Sidel v. Uniloy Milacron, Inc., 61 U.S.P.Q.2d 1480, 1484, 2001 WL 1772918 (N.D. Ga. 2001), dismissed, 35 Fed. Appx. 874 (Fed. Cir. 2002) (“the purchasers ... ha[ve] an implied licenses for certain further uses under the patent”); Zenith Electronics Corp. v. PDI Communication Systems, Inc., 522 F.3d 1348, 86 U.S.P.Q.2d 1513 (Fed. Cir. 2008) (Implied license not limited to goods with no non-infringing uses; flows from unconditional transfer.). See also Leitch Mfg. Co. v. Barber Co., 302 U.S. 458, 461, 58 S. Ct. 288, 82 L. Ed. 371, 36 U.S.P.Q. 35 (1938) (sale of nonpatented item gives use to authority to practice patented process practiced by using nonpatented item).
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supplied by implied terms (“gap fillers” or “default rules”) that come into play unless the parties otherwise agree. The contours of such privileges have been etched by a long series of cases that attempt to strike a sensible balance reconciling the continuing existence of the intellectual property rights with the reasonable expectations of buyers of tangible items. Analyzing these privileges as licenses based on default rules--as some, but not all, cases do--furnishes important insights about how that balance has been struck. By virtue of being based on the concept of a license, these privileges are limited. So, cases routinely hold that an authorized sale terminates the power of the patentee only as certain uses of a product. For example, just because someone buys an item covered by a patent does not give the buyer the privilege to recreate that item as often he would like. Thus, in Bowman v. Monsanto Co.279 the Supreme Court explained why recreation of a patented article was not permitted by exhaustion doctrine. In the case, Monsanto, the patent owner with respect to Roundup Ready soybean seeds, allowed others to sell, Roundup Ready soybean seeds to growers who assent to a license (to which Bowman was a party) permitting a grower to plant the purchased seeds in one (and only one) season. He can then consume the resulting crop or sell it as a commodity, usually to a grain elevator or agricultural processor. … But under the agreement, the farmer may not save any of the harvested soybeans for replanting, nor may he supply them to anyone else for that purpose. These restrictions reflect the ease of producing new generations of Roundup Ready seed. Because glyphosate resistance comes from the seed’s genetic material, that trait is passed on from the planted seed to the harvested soybeans: …The agreement’s terms prevent the farmer from co-opting that process to produce his own Roundup Ready seeds, forcing him instead to buy from Monsanto each season. Bowman started buying Roundup Ready seeds from prior harvests that farmers sold to a grain elevator and replanting that seed he purchased from the grain elevator for his second crop. The grain elevator was only authorized to sell seed for human or animal consumption but was not authorized to sell the seed as agricultural seed. Bowman’s replanting of the seed was, for patent purposes, a recreation of the patented seed and thus outside of the boundaries of exhaustion. … Consistent with that rationale, the doctrine restricts a patentee’s rights only as to the “particular article” sold, …; it leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item. …. [A]…’a second creation’ of the patented item ‘call[s] the monopoly, conferred by the patent grant, into play for a second time.’ ... That is because the patent holder has “received his reward” only for the actual article sold, and not for subsequent recreations of it.
279 Bowman v. Monsanto Co., ___ U.S. ___, 133 S.Ct. 1761 (2013).
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… If the purchaser of that article could make and sell endless copies, the patent would effectively protect the invention for just a single sale. … Unfortunately for Bowman, that principle decides this case against him. Under the patent exhaustion doctrine, Bowman could resell the patented soybeans he purchased from the grain elevator; so too he could consume the beans himself or feed them to his animals. …. But the exhaustion doctrine does not enable Bowman to make additional patented soybeans without Monsanto’s permission (either express or implied). And that is precisely what Bowman did. He took the soybeans he purchased home; planted them in his fields at the time he thought best; applied glyphosate to kill weeds (as well as any soy plants lacking the Roundup Ready trait); and finally harvested more (many more) beans than he started with. That is how “to ‘make’ a new product,” to use Bowman’s words, when the original product is a seed. …Because Bowman thus reproduced Monsanto’s patented invention, the exhaustion doctrine does not protect him.280 However, although the purchaser of a patented item cannot recreate that item, in the parlance of most cases, the purchaser has an implied license to repair the item purchased;281 to use the item as designed and intended;282 and to sell it.283 Also, since they operate unless agreements, conditions, or restrictions to the contrary are in place, these implied licensees are the result of “default rule” or principles. Under current Federal Circuit doctrine, the privileges depend on the sale not being “conditional” or subject to restrictions. To illustrate these points, let us briefly consider the privilege to repair. The purchaser of an article has the power to repair but does not have the privilege to replace it by reconstruction because that would directly impinge on the patent owner’s right to preclude others from “making” the patented item. The distinction between repair and reconstruction defines the scope
280 In footnote 3, the Court went on to say, “This conclusion applies however Bowman acquired Roundup Ready seed: The doctrine of patent exhaustion no more protected Bowman’s reproduction of the seed he purchased for his first crop (from a Monsanto-affiliated seed company) than the beans he bought for his second (from a grain elevator). The difference between the two purchases was that the first—but not the second—came with a license from Monsanto to plant the seed and then harvest and market one crop of beans. We do not here confront a case in which Monsanto (or an affiliated seed company) sold Roundup Ready to a farmer without an express license agreement. For reasons we explain below, we think that case unlikely to arise. … And in the event it did, the farmer might reasonably claim that the sale came with an implied license to plant and harvest one soybean crop.” 281 See Bottom Line Management, Inc. v. Pan Man, Inc.,228 F.3d 1352, 56 U.S.P.Q.2d 1316, 1317-19 (Fed. Cir. 2000); Aktiebolag v. E.J. Co., 121 F.3d 669, 674, 43 U.S.P.Q.2d 1620 (Fed. Cir. 1997). 282 Hewlett-Packard Co. v. Repeat-O-Type Stencil Mfg. Corp., Inc., 123 F.3d 1445, 43 U.S.P.Q.2d 1650, 1655 (Fed. Cir. 1997) (“Generally, when a seller sells a product without restrictions, it in effect promises the purchaser that in exchange for the price paid it will not interfere with the purchaser’s full enjoyment of the product purchased. The buyer has an implied license under any patents of the seller that dominates the product or any uses of the product to which the parties might reasonably contemplate the product will be put.”); Ansul Co. v. Uniroyal, Inc., 448 F.2d 872, 880, 169 U.S.P.Q. 759, 1971 Trade Cas. (CCH); 73568, 1971 Trade Cas. (CCH); 73638 (2d Cir. 1971) (“each sale of MH-30 constituted an implied license to use the product”). 283 Cyrix Corp. v. Intel Corp., 846 F. Supp. 522, 38, 32 U.S.P.Q.2d 1890 (E.D. Tex. 1994), aff’d, 42 F.3d 1411 (Fed. Cir. 1994).
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of the owner’s privilege here. What is the difference? The Supreme Court in Aro Manufacturing Co. v. Convertible Top Replacement Co.,284 stated: [Impermissible reconstruction] of a patented entity, comprised of unpatented elements, is limited to such a true reconstruction of entity as “in fact make a new article” ... after the entity, viewed as whole, has become spent. In order to call the monopoly, conferred by the patent grant, into play for a second time, it must, indeed, be a second creation of the patented entity…. Mere replacement of individual unpatented parts, one at a time, whether of the same part repeatedly or different parts successively, is no more than the lawful right of the owner to repair his property.285 This language sets a narrow reading of when repair becomes reconstruction and allows relatively substantial latitude for the owner of the product to deal with it as its own property. The Federal Circuit noted in Jazz Photo Corp. v. International Trade Commission286 that: [underlying] the repair-reconstruction dichotomy is the principle of exhaustion of the patent right. The unrestricted sale of a patented article, by or with the authority of the patentee, “exhausts” the patentee’s right to control further sale and use of that article by enforcing the patent under which it was first sold. [Exhaustion] of the patent right depends on “whether or not there has been such a disposition of article that it may be fairly said that the patentee has received his reward for the use of the article.” ... Thus, when a patented device had been lawfully sold in the United States, subsequent purchasers inherit the same immunity under the doctrine of patent exhaustion. However, the prohibition that the product may not be the vehicle for a “second creation of the patented entity” continues to apply, for such re-creation exceeds the rights that accompanied the initial sale.287 No bright-line test exists for determining where a permissible repair ends and an impermissible reconstruction begins. The Federal Circuit determines whether a repair or a reconstruction occurs based on a totality of the circumstances including the nature of the actions taken, the nature of the device, how it was designed (whether one component has a shorter useful life than the whole), whether a market had developed the manufacturer or service the part, and the intention of the patentee (based on objective evidence).288 The party claiming that its
284 Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336, 81 S. Ct. 599, 5 L. Ed. 2d 592, 128 U.S.P.Q. 354 (1961). 285 365 U.S. at 346. See also Dawson Chemical Co. v. Rohm and Haas Co., 448 U.S. 176, 217, 100 S. Ct. 2601, 65 L. Ed. 2d 696, 206 U.S.P.Q. 385, 1980-2 Trade Cas. (CCH); 63494 (1980). 286 Jazz Photo Corp. v. International Trade Com’n, 264 F.3d 1094, 59 U.S.P.Q.2d 1907 (Fed. Cir. 2001). 287 Jazz Photo Corp. v. International Trade Com’n, 264 F.3d 1094, 59 U.S.P.Q.2d 1907 (Fed. Cir. 2001). 288 For a complete description of the repair/reconstruction doctrine see Section 10:28 of MODERN LICENSING LAW by Raymond Nimmer and Jeff Dodd.
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activities constitute a repair, not reconstruction, bears the burden of proving it; a failure to prove that the activities involved meet the test of repair will lead a court to presume reconstruction.289 (iii) Contract and licenses. Now everything we just said about patent exhaustion and the privileges attaching to a first sale is subject to one major caveat: all of these doctrines are subject to the contrary agreement of the parties. A sale for exhaustion purposes must be an authorized one. If a license forbids certain sales or uses, such forbidden sale or use would not be authorized. The issue is whether a license (or other restriction) is binding in any given case. By and large, this is a matter of contract law. B. Braun Medical, Inc. v. Abbott Laboratories290 illustrates the point that the first sale doctrine will not apply in the face of enforceable restrictions. The case involved a reflux value covered by a patent held by Braun, which agreed to sell the values to Abbott subject to the following restrictions (which Abbott expressly assented to): “We will honor your company’s demand that we not use the valve in question for list numbers other than our primary and primary piggyback sets.”291 after many sales, the parties had a falling out. Abbott arranged for the development of a substitute valve, which Braun claimed infringed its patent. One of the issues was whether Braun had misused its patents by reason of the restrictions to which Abbott agreed. The court noted: As a general matter, ... an unconditional sale of a patented device exhausts the patentee’s right to control the purchaser’s use of the device thereafter ….This exhaustion doctrine, however, does not apply to an expressly conditional sale or license. In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the “use” rights conferred by the patentee. As a result, express conditions accompanying the sale or license of a patented product are generally upheld…. Such express conditions, however, are contractual in nature and are subject to antitrust, patent, contract, and any other applicable law, as well as equitable considerations such as patent misuse…. Accordingly, conditions that violate some law or equitable consideration are unenforceable. On the other hand, violation of valid conditions entitles the patentee to a remedy for either patent infringement or breach of contract.292 The issue is whether and to what extent simple restrictions will be given effect. Consider the so-called label license. The question here is whether restrictions in a label license can effectively impose limitations on a transferee, even if not part of a contract. The court in Mallinckrodt, Inc. v. Medipart, Inc.293 dealt with the sale of a medical device accompanied by a “single-use only” notice on the device. Many hospitals ignored the label restriction and shipped
289 See Fuji Photo Film Co., Ltd. V. Jazz Photo Corp., 394 F.3d 1368, 7 U.S.P.Q.2d 1678 (Fed. Cir. 2005). 290 See B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 43 U.S.P.Q.2d 1896 (Fed. Cir. 1997). 291 See B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1422, 43 U.S.P.Q.2d 1896 (Fed. Cir. 1997). 292 B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1426, 43 U.S.P.Q.2d 1896 (Fed. Cir. 1997). 293 Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 24 U.S.P.Q.2d 1173 (Fed. Cir. 1992).
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used devices to Medipart, which had a third-party sterilize and recondition it (adding a new filter, tubing, mouthpiece, and nose clip). These “reconditioned” units were then returned (for a fee) to the hospitals. The devices still bore the inscription “Single-Use Only.” The parties did not dispute that notice of the restriction and reuse had been given. The Federal Circuit held that the restriction on use could be enforced.294 The court stated that “restrictions on use are judged in terms of the relation of the patentee’s right to exclude from all or part of the patent grant.”295 The court rejected the idea that the label license restrictions would contravene the principle that an unconditional sale of a patented device exhausts the right to control the purchaser’s use of that device. After a canvass of precedent, the Federal Circuit found that the Supreme Court had applied the rule of contract law that sale may be conditioned296 and cited cases where label restrictions apparently were enforced.297 Thus the right of a purchaser to use, sell, modify, or repair a patented article could be limited by contract.298 It cited the General Talking Pictures case.299 In General Talking Pictures, American Transformer was a licensee under a license allowing it to sell amplifiers for noncommercial radios but not allowing it to sell amplifiers for use in theaters. American Transformer affixed a notice to the amplifiers noting the restrictions on use. The Supreme Court specifically drew
294 Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 703, 24 U.S.P.Q.2d 1173 (Fed. Cir. 1992). 295 The district court had relied on a group of cases based on resale price fixing of patented goods, the so-called “Bauer trilogy”--Bauer & Cie v. O'Donnell, 229 U.S. 1, 33 S. Ct. 616, 57 L. Ed. 1041 (1913); Straus v. Victor Talking Mach. Co., 243 U.S. 490, 37 S. Ct. 412, 61 L. Ed. 866 (1917); Boston Store of Chicago v. American Graphophone Co., 246 U.S. 8, 38 S. Ct. 257, 62 L. Ed. 551 (1918)--and on a tying case. Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 37 S. Ct. 416, 61 L. Ed. 871 (1917). The Federal Circuit treated these cases as merely antitrust cases, even though they set their principles on footings much broader than antitrust law. The Federal Circuit, however, declined to extend them beyond their facts. See Mallinckrodt, 976 F.2d at 705-06. 296 Interestingly, the Court thought Uniform Commercial Code §2-207(c) would allow a license restriction on use if not objected to within a reasonable time, even if it was not part of the original transaction. See Mallinckrodt, 976 F.2d at 708 n.7. 297 See Providence Rubber Co. v. Goodyear, 76 U.S. 788, 19 L. Ed. 566, 1869 WL 11599 (1869) (Goodyear granted a restricted license to Chaffy to make and sell a certain cloth to be used in a place and for specialized purposes; Goodyear could sue Providence Rubber when used for a different purpose, since the license “availed authority only to this extent [for the specified use] and nothing more”); American Cotton-Tie Co. v. Simmons, 106 U.S. 89, 1 S. Ct. 52, 27 L. Ed. 79 (1882) (metal ties for cotton balls were sold with the notice “license to use once only” stamped on the ties). 298 Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 709, 24 U.S.P.Q.2d 1173 (Fed. Cir. 1992). See Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 480, 84 S. Ct. 1526, 12 L. Ed. 2d 457, 141 U.S.P.Q. 681 (1964) (“the reconstruction-repair distinction is decisive, however, only when the replacement is made in a structure whose original manufacture and sale [was authorized] by the patentee ... when the structure is only licensed, the traditional rule is even repair constitutes infringement”); Hewlett-Packard Co. v. Repeat-O-Type Stencil Mfg. Corp., Inc., 123 F.3d 1445, 43 U.S.P.Q.2d 1650 (Fed. Cir. 1997); Keeler v. Standard Folding Bed Co., 157 U.S. 659, 666, 15 S. Ct. 738, 39 L. Ed. 848 (1895) (whether “a patentee may protect himself and his assignees by special contracts brought home to the purchaser's attention ... would arise as a question of contract, and not as one under the inherent meaning and effect of the patent laws.”). 299 General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 59 S. Ct. 116, 83 L. Ed. 81, 39 U.S.P.Q. 329 (1938).
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attention to the knowledge of the purchaser of the nature of the restriction, adding “That a restrictive license is legal seems clear…. [T]he patentee may grant a license “upon any condition the performance for which is reasonably within the reward is the patentee by the grant of the patent is entitled to secure” and the practice of “granting licenses restricted use is an old one ... [and] its legality has never been questioned.”300 However, the Supreme Court also stated that, on rehearing, it was not considering, “what the rights of the parties would have been if the amplifier had been manufactured ‘under the patent’ and ‘had passed into the hands of the purchaser in the ordinary channels of trade.’ Nor have we occasion to consider the effect of a ‘licensee’s notice’ which purports to restrict the use of articles lawfully sold.”301 So, while General Talking Pictures did not support the Federal Circuit’s holdings, the Federal Circuit essentially decided that which the Supreme Court had left open. It held that since the users in Mallinckrodt admitted that they had notice of the restriction, the restriction could be enforced regardless of and whether the purchaser acquired a device from a licensee or the patentee directly in the ordinary channels of trade.302 Jazz Photo Corp. v. International Trade Commission303 took up where Mallinckrodt left off, and steered back towards traditional contract doctrine and analysis--which, as we will see, is exactly where the copyright cases are heading. Challenging Jazz Photo’s reconditioning for reuse of single-use cameras, Fuji argued that the right to repair was limited by the circumstances of sale, pointing to the instructions and warnings printed on the covers of the cameras. Fuji argued that these limitations created a license limited to a “single use.” The court held that notices and information on the box containing the camera were insufficient to restrict use. It held that a license is governed by the law of contract, but in this case no express conditions of sale, license terms, or restrictions attended the sale of the cameras. There was no express contractual undertaking by the purchaser. In those circumstances: a seller’s intent, unless embodied in an enforceable contract, does not create a limitation on the right of the purchaser to use, sale, or modify a patented product as long as a reconstruction of the patented combination is avoided.” ... We do not discern an enforceable restriction on the reuse of these cameras based on the
300 General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 127, 59 S. Ct. 116, 83 L. Ed. 81, 39 U.S.P.Q. 329 (1938). 301 General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 127, 59 S. Ct. 116, 83 L. Ed. 81, 39 U.S.P.Q. 329 (1938). 302 The Federal Circuit found the distinction between purchasers directly from the patentee versus a licensee to be “formalistic.” Mallinckrodt, 976 F.2d at 705. The Federal Circuit also drew attention to two cases that made the efficacy of restrictions turn on the particular facts. It compared Munters Corp. v. Burgess Industries Inc., 450 F. Supp. 1195, 194 U.S.P.Q. 146, 1977-1 Trade Cas. (CCH); 61475, 25 Fed. R. Serv. 2d 274 (S.D. N.Y. 1977), adhered to, 201 U.S.P.Q. 756, 1978-2 Trade Cas. (CCH); 62149, 1978 WL 1367 (S.D. N.Y. 1978) (refusing to enforce a license restriction on the goods where manufactured by the patentee, sold to the licensee, and then resold into “general channels of trade”) with Chemagro Corp. v. Universal Chemical Co., 244 F. Supp. 486, 146 U.S.P.Q. 466 (E.D. Tex. 1965) (label license effective against a purchaser with notice). 303 Jazz Photo Corp. v. International Trade Com'n, 264 F.3d 1094, 59 U.S.P.Q.2d 1907 (Fed. Cir. 2001).
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package statements. These statements are instructions and warning of risk, not mutual promises or conditions placed on the sale….304 The court went further, signaling (perhaps) that something more than a label would be required: These packing instructions are not in the form of a contractual agreement by the purchaser to limit reuse of the cameras. There is no showing of a “meeting of the minds” whereby the purchaser, and those obtaining the purchaser’s discarded camera, may be deemed to have breached a contract or violated a license limited to a single use of a camera…. We conclude that no license limitation may be implied from the circumstances of the sale.305 Both B. Braun, Mallinckrodt and Jazz Photo relied on contract doctrine to determine whether a label licensee should be given effect. Where they differed somewhat was on the question the extent to which restrictions would be given contractual effect. In that light, consider the decision in Arizona Cartridge Remanufacturers Association Inc. v. Lexmark International Inc.306 For years Lexmark ignored the remanufactured Lexmark toner cartridge market, choosing instead to sell only new replacement cartridges. When it decided to enter the market, however, it did so with a vengeance, targeting competitive discount services that would retrieve and recharge Lexmark toner cartridges. Lexmark started selling its patented cartridges with postsale restriction on a label appearing on the outside of the box containing Lexmark cartridges: RETURN EMPTY CARTRIDGE TO LEXMARK FOR REMANUFACTURING AND RECYCLING. Please read before opening. Opening of this package or using the patented cartridge inside confirms your acceptance of the following license agreement. The patented cartridge is sold at a special price subject to a restriction that it may be used only once. Following this initial use, you agree to return the empty cartridge only to Lexmark for remanufacturing and recycling. If you don’t accept these terms, return the unopened package to your point of purchase. A regular price cartridge without these terms is available.307 ACRA--an association composed of competitors to Lexmark in the remanufacturing market--claimed that “Lexmark engages in false advertising and unfair competition by telling consumers they have a legal obligation to honor the post-sale restriction printed on the outside of the cartridge package, when in fact they are not legally compelled to do so.”308 Note that ACRA did not contest the power of Lexmark to condition the use of its patented cartridges; rather,
304 Jazz Photo Corp. v. International Trade Com'n, 264 F.3d 1094, 1108, 59 U.S.P.Q.2d 1907 (Fed. Cir. 2001). 305 Jazz Photo Corp. v. International Trade Com'n, 264 F.3d 1094, 1108, 59 U.S.P.Q.2d 1907 (Fed. Cir. 2001). 306 Arizona Cartridge Remanufacturers Ass'n, Inc. v. Lexmark Intern., Inc., 421 F.3d 981, 77 U.S.P.Q.2d 1995 (9th Cir. 2005). 307 Arizona Cartridge Remanufacturers Ass'n, Inc. v. Lexmark Intern., Inc., 421 F.3d 981, 77 U.S.P.Q.2d 1995 (9th Cir. 2005). 308 Arizona Cartridge Remanufacturers Ass'n, Inc. v. Lexmark Intern., Inc., 421 F.3d 981, 77 U.S.P.Q.2d 1995 (9th Cir. 2005).
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ACRA argued that no valid contract between Lexmark and consumers imposed that condition. The Ninth Circuit rejected that argument. We agree with the district court that Lexmark has presented sufficient unrebutted evidence to show that it has a facially valid contract with the consumers who buy and open its cartridges. Specifically, the language on the outside of the cartridge package specifies the terms under which a consumer may use the purchased item. The consumer can read the terms and conditions on the box before deciding whether to accept them or whether to opt for the non-Prebate cartridges that are sold without any restrictions. …The district court found that the ultimate purchasers of the cartridge-consumers-had notice of the restrictions on use and had a chance to reject the condition before opening the clearly marked cartridge container…. These findings support the conclusion that the consumer accepts the terms placed on usage of the Prebate cartridge by opening the box.309 These conclusions would be unexceptional and would fit well within the doctrine elaborated in the B. Braun--Mallinckrodt--Jazz Photo line of cases, save for one disturbing fact: the consideration supporting the restriction was not stated to be opening and use. Rather, the license stated that the license was sold at “a special price” and there was no evidence that, in fact, that consideration had been provided. The court attempted to address this point as follows: The privity requirement is met here, because the consumer is a party to the contract with Lexmark. As described above, the contract is formed when the final purchaser opens the cartridge box with notice of the restriction on reuse. ACRA contends, however, that the lack of privity is shown by Lexmark’s inability to ensure that consumers will receive the price-reduction benefit of the Prebate program. We have already explained why ACRA has failed to show that consumers do not pay a reduced price.310 Yet, this dodged the issue. The court found that the consumers received consideration in the form of the price discount, even though “Lexmark distributes its cartridges through wholesalers ... [and had] no way to ensure that consumers actually receive the price discount, but offers no factual support for this contention.”311 Indeed, the court evidently bought Lexmark’s speculation that “market forces” would lead manufactures to pass along the discount. Should speculation about whether the stated consideration had been received really be a substitute for proof? Lexmark set the considerations as a price reduction; speculation about how consideration might have flowed is no proof that a third party actually provided the consideration on Lexmark’s behalf. That said, this was not a case where the ultimate consumer challenged enforceability; perhaps the burden should have been on ACRA. In addition, of course, Lexmark
309 Arizona Cartridge Remanufacturers Ass'n, Inc. v. Lexmark Intern., Inc., 421 F.3d 981, 77 U.S.P.Q.2d 1995 (9th Cir. 2005). 310 Arizona Cartridge Remanufacturers Ass'n, Inc. v. Lexmark Intern., Inc., 421 F.3d 981, 77 U.S.P.Q.2d 1995 (9th Cir. 2005). 311 Arizona Cartridge Remanufacturers Ass'n, Inc. v. Lexmark Intern., Inc., 421 F.3d 981, 77 U.S.P.Q.2d 1995 (9th Cir. 2005).
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could have taken care of this issue by expressly stating that the consideration was the permitted use. Then the notice of the restriction on the outside of the box and the opening of the package, coupled with use, would have established the contract. 6. Patent misuse doctrine—Per se misuse: royalty duration beyond patent duration Per se misuse as compared to “competitive effects” misuse, today is largely based on remnants of the misuse case law from the 1960s in cases that have not been revisited by the Court since that time. Per se misuse is narrowly confined.312 The most significant per se case is Brulotte v. Thys Company313 decided in 1964. In that case the respondent held various patents for hop-picking machines. It “sold a machine to each of the petitioners for a flat sum and issued a license for its use.” The licenses required payment of royalties at the original rates even after the expiration of all of the patents covering the machines. The licensees, however, refused to pay royalties accruing before and after the expiration of the patents, defending their breach on the grounds of patent misuse “through extension of the license agreements beyond the expiration date of the patents.”314 The Supreme Court agreed and reversed “the judgment below … insofar as it allows royalties to be collected which accrued after the last of the patents incorporated into the machines had expired.”315 As in other misuse cases during the era in which Brulotte was decided, the Supreme Court rooted its decision in an implicit view of the patent grant as a limited interest: “Any attempted reservation or continuation in the patentee or those claiming under him of the patent monopoly, after the patent expires, whatever the legal device employed, runs counter to the policy and purpose of the patent laws.”316 The Supreme Court turned to whether the license extended the patent. It rejected the lower court view and found that “[the] royalty payments due for the post-expiration period are by their terms for use during that period, and are not deferred payments for use during the pre- expiration period.”317 Also, the license agreements prevented assignment of the machines or their removal from this location both before and after the expiration of the patents.318 Thus, although Brulotte is typically cited as holding that mere extension of royalties beyond the patent terms is misuse, other restrictions, not just payment terms, had been extended beyond the patent
312 B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 43 U.S.P.Q.2d 1896 (Fed. Cir. 1997), the Federal Circuit apparently limited per se misuse to employing the patent beyond its term. Note how that type of misuse did not require proof of anticompetitive effect, but the tradeoff is that it limits per se misuse to temporal broadening of the patent (i.e., by seeking benefits beyond the patent term). 313 Brulotte v. Thys Co., 379 U.S. 29, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964). 314 Brulotte v. Thys Co., 379 U.S. 29, 30, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964). 315 Brulotte v. Thys Co., 379 U.S. 29, 30, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964). 316 Brulotte v. Thys Co., 379 U.S. 29, 31, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964) (quoting Scott Paper Co. v. Marcalus Mfg. Co., 326 U.S. 249, 256, 66 S. Ct. 101, 90 L. Ed. 47, 67 U.S.P.Q. 193 (1945)). 317 Brulotte v. Thys Co., 379 U.S. 29, 31, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964). 318 Brulotte v. Thys Co., 379 U.S. 29, 31–32, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964).
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terms. The Supreme Court found that while the “applicability [of these restrictions] to the postexpiration period is a telltale sign that the licensor was using the licenses to project its monopoly beyond the patent period,” negating the “suggestion that we have here a bare arrangement for a sale or a lease at an undetermined price based on use.”319 According to the Court “a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se. If that device were available to patentees, the free market visualized for the post-expiration period would be subject to monopoly influences that have no proper place there.”320 Thus: …[W]e conclude that a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se. If that device were available to patentees, the free market visualized for the post-expiration period would be subject to monopoly influences that have no proper place there…. A patent empowers the owner to exact royalties as high as he can negotiate with the leverage of that monopoly. But to use that leverage to project those royalty payments beyond the life of the patent is analogous to an effort to enlarge the monopoly of the patent by tieing the sale or use of the patented article to the purchase or use of unpatented ones. The exaction of royalties for use of a machine after the patent has expired is an assertion of monopoly power in the post- expiration period when, as we have seen, the patent has entered the public domain. [after] expiration of the last of the patents incorporated in the machines “the grant of patent monopoly was spent” and that an attempt to project it into another term by continuation of the licensing agreement is unenforceable.321 Notice that the Supreme Court's analysis was based on two interlaced notions. If a patentee could extract royalties beyond the patent term the patentee would be making use of its patent after its monopoly expired, and therefore, (1) the patentee would effectively be extending its rights beyond what Congress intended; and (2) the free market for inventions after patent would be subject to monopoly influences regardless of whether the patentee had market power in the sense contemplated by antitrust law.322
319 Brulotte v. Thys Co., 379 U.S. 29, 32, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964). 320 Brulotte v. Thys Co., 379 U.S. 29, 32–33, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964). It also distinguished Automatic Radio Mfg. Co. v. Hazeltine Research, 339 U.S. 827, 70 S. Ct. 894, 94 L. Ed. 1312, 85 U.S.P.Q. 378 (1950) (overruled in part on other grounds by, Lear, Inc. v. Adkins, 395 U.S. 653, 89 S. Ct. 1902, 23 L. Ed. 2d 610, 162 U.S.P.Q. 1 (1969))) because in that case, while some of the patents under license expired, “the royalties claimed were not for a period when all of them had expired.” The “license covered several hundred patents and the royalty was based on the licensee's sales, even when no patents were used. The Court held that the computation of royalty payments by that formula was a convenient and reasonable device. We decline the invitation to extend it so as to project the patent monopoly beyond the 17-year period.” Brulotte v. Thys Co., 379 U.S. 29, 33, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964). 321 Brulotte v. Thys Co., 379 U.S. 29, 33, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964). 322 The Court rejected the argument that spreading of payments was all that the license contemplated: As we have seen, the purchase price in each case was a flat sum, the annual payments not being part of the purchase price but royalties for use of the machine during that year. The royalty
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Ten years later, in Aronson v. Quick Point Pencil Co.,323 the Court distinguished both Lear and Brulotte in holding that there was no preemption of a license term requiring that a licensee continue to pay royalties with respect to sales of an item covered by a patent application even if a patent on the underlying technology failed to issue. The Supreme Court noted that no patent policy was at play, distinguishing Brulotte on the grounds that Brulotte was based on the putative “leverage” of a patent that allowed a patentee to exact postexpiration royalties.324 Since no patent was present, leverage was absent. According to the Court, unlike in Brulotte, there was no illicit leveraging of a patent and no conflict with federal property law policy. Instead, the Court said:325 Commercial agreements traditionally are the domain of state law. State law is not displaced merely because the contract relates to intellectual property which may or may not be patentable; the states are free to regulate the use of such intellectual property in any manner not inconsistent with federal law. In this as in other fields, the question of whether federal law preempts state law involves a consideration of whether that law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” review … Enforcement of Quick Point's agreement … is not inconsistent with any of these aims. Permitting inventors to make enforceable agreements licensing the use of their inventions in return for royalties provides an additional incentive to invention.
payments due for the post-expiration period are by their terms for use during that period, and are not deferred payments for use during the pre-expiration period. Nor is the case like the hypothetical ones put to us where non-patented articles are marketed at prices based on use. The machines in issue here were patented articles and the royalties exacted were the same for the post- expiration period as they were for the period of the patent. That is peculiarly significant in this case in view of other provisions of the license agreements. The license agreements prevent assignment of the machines or their removal from Yakima County after, as well as before, the expiration of the patents….Those restrictions are apt and pertinent to protection of the patent monopoly; and their applicability to the post-expiration period is a telltale sign that the licensor was using the licenses to project its monopoly beyond the patent period.
Brulotte v. Thys Co., 379 U.S. 29, 31-32, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964). 323 Aronson v. Quick Point Pencil Co., 440 U.S. 257, 99 S. Ct. 1096, 59 L. Ed. 2d 296, 201 U.S.P.Q. 1, 1979-1 Trade Cas. (CCH) ¶ 62477 (1979). For a later further narrowing, see Zila, Inc. v. Tinnell, 502 F.3d 1014, 84 U.S.P.Q.2d 1090 (9th Cir. 2007) (Under Brulotte, only that portion of a license agreement that demands royalty payments beyond the expiration of the patent for which the royalties are paid is rendered unenforceable, but the entire contract is not rendered void and unenforceable merely because it includes an invalid licensing agreement.). 324 Aronson v. Quick Point Pencil Co., 440 U.S. 257, 265, 99 S. Ct. 1096, 59 L. Ed. 2d 296, 201 U.S.P.Q. 1, 1979-1 Trade Cas. (CCH) ¶ 62477 (1979). 325 Aronson v. Quick Point Pencil Co., 440 U.S. 257, 262, 99 S. Ct. 1096, 59 L. Ed. 2d 296, 201 U.S.P.Q. 1, 1979-1 Trade Cas. (CCH) ¶ 62477 (1979).
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Though lower courts dutifully follow Brulotte,326 this has not always been done without complaint.327 In Scheiber v. Dolby Laboratories, Inc.,328 Judge Posner excoriated Brulotte and invited the Supreme Court to put an end to it. Specifically, he criticized the Brulotte court's rationale that a post-expiration royalty extended the patent term. Posner returned to the argument made most elegantly by Justice Harlan's dissent in Brulotte. Essentially, the argument has two elements: first, post-patent royalty schemes are merely credit arrangements, allowing parties to spread the burden of royalties over a longer period of time. Second, on expiration of a patent, “anyone can make the patented process or product without being guilty of patent infringement …. For a licensee in accordance with a provision in the license agreement to go on paying royalties after the patent expires does not extend the duration of the patent either technically or practically, because, as this case demonstrates, if the licensee agrees to continue paying royalties after the patent expires the royalty rate will be lower.”329 We are not defenders of Brulotte, but we believe that any challenge to Brulotte must address the fair implications of Brulotte on the broadest base possible. Judge Posner’s second point stretches the argument too far. For if the royalty rate does extend beyond the patent term the licensor is under no compulsion to lower the rate in recognition of market dynamics that
326 Meehan v. PPG Industries, Inc., 802 F.2d 881, 883, 231 U.S.P.Q. 400, 1986-2 Trade Cas. (CCH) ¶ 67301 (7th Cir. 1986); Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860, 869, 45 U.S.P.Q.2d 1225 (Fed. Cir. 1997); Boggild v. Kenner Products, Div. of CPG Products Corp., 776 F.2d 1315, 1318–19, 228 U.S.P.Q. 130, 1985-2 Trade Cas. (CCH) ¶ 66852 (6th Cir. 1985). 327 See USM Corp. v. SPS Technologies, Inc., 694 F.2d 505, 510–11, 216 U.S.P.Q. 959, 1982-83 Trade Cas. (CCH) ¶ 65077 (7th Cir. 1982). 328 Scheiber v. Dolby Laboratories, Inc., 293 F.3d 1014, 63 U.S.P.Q.2d 1404 (7th Cir. 2002). For a later narrowing, see Zila, Inc. v. Tinnell, 502 F.3d 1014, 84 U.S.P.Q.2d 1090 (9th Cir. 2007) (Under Brulotte, only that portion of a license agreement that demands royalty payments beyond the expiration of the patent for which the royalties are paid is rendered unenforceable, but the entire contract is not rendered void and unenforceable merely because it includes an invalid licensing agreement.). 329 To support his position, Judge Posner referenced See & Caprio, The Trouble with Brulotte: the Patent Royalty Term and Patent Monopoly Extension, 1990 Utah L. Rev. 813, 814, 851: The Brulotte rule incorrectly assumes that a patent license has significance after the patent terminates. When the patent term ends, the exclusive right to make, use or sell the licensed invention also ends. Because the invention is available to the world, the license in fact ceases to have value. Presumably, licensees know this when they enter into a licensing agreement. If the licensing agreement calls for royalty payments beyond the patent term, the parties base those payments on the licensees' assessment of the value of the license during the patent period. These payments, therefore, do not represent an extension in time of the patent monopoly …. Courts do not remove the obligation of the consignee to pay because payment after receipt is an extension of market power—it is simply a division of the payment-for-delivery transaction. Royalties beyond the patent term are no different. If royalties are calculated on post-patent term sales, the calculation is simply a risk-shifting credit arrangement between patentee and licensee. The arrangement can be no more than that, because the patentee at that time has nothing else to sell. Judge Posner also pointed to Jahn v. 1-800-FLOWERS.com, Inc., 284 F.3d 807, 811–12 (7th Cir. 2002). Really, however, in the final analysis he needed to go no further than Justice Harlan's pointed dissent. Brulotte v. Thys Co., 379 U.S. 29, 34–39, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 3 A.L.R.3d 761 (1964).
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allow other competitors to enter without the burden of a royalty. We think Justice Harlan's argument is closer to the mark. Justice Harlan’s dissent recognizes that pricing of the use of the patent is a complex, market-driven matter. The fact that payments are to be made post-expiration (perhaps even based on post-expiration uses), based on a package of licenses, geared to total sales, cover a variety of intellectual property or products—all of which were suspect or condemned at one time—do not reflect patent leverage or coercion in and of themselves. Nor do they expand the claims or the scope of the patent. Decisions about price reflect market calculations of value. What is at issue is not whether the patent is being used beyond its boundaries, but whether the assessment of value is skewed by the presence of market power, by a set of actions beyond the pale of the rule of reason, or by actual coercion. The long and short of the matter is that modern antitrust principles and rule of reason analysis, coupled with traditional judicial tools to confront fraud and coercion, are much better suited than per se or artificial rules that presume a harm or use of leverage that may not in fact be present. Kimble v. Marvel Enterprises Inc.330 reminds us, however, that Brulotte is alive and well, no matter what the criticism that it has weathered. In this case, the Ninth Circuit noted that it previously had acknowledged that Brulotte had “been read to require that any contract requiring royalty payments for an invention either after a patent expires or when it fails to issue cannot be upheld unless the contract provides a discount from the alternative, patent-protected rate.”331 While it again registered its complaint about Brulotte,332 it followed other Circuits by “holding that a so-called “hybrid” licensing agreement encompassing inseparable patent and non-patent rights is unenforceable beyond the expiration date of the underlying patent, unless the agreement provides a discounted rate for the non-patent rights or some other clear indication that the royalty at issue was in no way subject to patent leverage.”333 The facts in Kimble, however, were quite strange and, in fact, fairly raised a question of whether a hybrid license was, in fact, involved at all. But more importantly for our purposes it will allow us to ask what, precisely, is a hybrid license for the purposes of the Brulotte rule. But first let us look at the Kimble case itself. Kimble sued Marvel for misappropriating an idea that he shared for allowing a Spider–Man toy to mimic “Spider–Man's web-shooting abilities with foam string.” The mechanism allowing this foam shooting was the subject of a patent application at the time of Kimble’s discussions with Marvel, during which, Kimble alleged, Marvel agreed to pay him if it used his ideas. The ‘856 patent later issued based on the application; it expired in May 2010. After Marvel later manufactured and distributed a Spider-
330 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 (9th Cir. 2013). 331 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *1 (9th Cir. 2013) (citing. Zila, Inc. v. Tinnell, 502 F.3d 1014, 1021 (9th Cir.2007)). 332 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *1 (9th Cir. 2013) (citing. Zila, Inc. v. Tinnell, 502 F.3d 1014, 1021 (9th Cir.2007), the Ninth Circuit stated, “We acknowledged that the Brulotte rule is counterintuitive and its rationale is arguably unconvincing.”). 333 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *1 (9th Cir. 2013) (citing. Meehan v. PPG Indus., Inc., 802 F.2d 881, 884–86 (7th Cir.1986); Boggild v. Kenner Prods., 776 F.2d 1315, 1319–20 & n. 5 (6th Cir.1985); Pitney Bowes, Inc. v. Mestre, 701 F.2d 1365, 1371–72 (11th Cir.1983)).
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Man toy that shot foam string (albeit with a mechanism shot the string without relying on a glove, unlike Kimble’s device), Kimble sued Marvel for patent infringement and breach of contract. While the district court found for Marvel on the patent infringement claim, after a jury verdict finding breach of the contract, the court awarded Kimble damages contract in the form of an ongoing royalty of “3.5% of past, present, and future Web Blaster “net product sales” (excluding sales of foam string refills).”334 Kimble appealed the summary judgment on the patent infringement claim, but then the parties agreed to settle by the claims pursuant to a Settlement Agreement that provided for Marvel’s purchase of the patent under the following terms: ‘“The purchase price for the Patent shall be payable to the Patent Holders as follows: a. $516,214.62 upon execution and delivery of this Agreement; and b. 3% of “net product sales” (as such term is used in the Judgment) excluding refill royalties made after December 31, 2000. For purposes of this paragraph 3.b, “net product sales” shall be deemed to include product sales that would infringe the Patent but for the purchase and sale thereof pursuant to this Agreement as well as sales of the Web Blaster product that was the subject of the Action and to which the Judgment refers.”335 Kimble released his claims, save for those arising under the Settlement Agreement and for ‘“for those obligations under the alleged verbal agreement that was the subject of the Action.”’336 The Settlement Agreement did not have an expiration date, including as to Marvel’s payment obligations. Later, the parties fell into another dispute, including as to the scope of the royalty obligation as to new toys, with Kimble initially taking the “position that royalties were due for these products under the Settlement Agreement because they ‘“would infringe the Patent.”’337 Kimble sued for breach of contract and Marvel defended by arguing that it owed no royalties after the patent expired based on the rule in Brulotte, though it maintained that its Web Blaster did not infringe the patent anyway. The Ninth Circuit canvassed the state of the law and then concluded: The rule that follows, in relevant part, is that a license for inseparable patent and non-patent rights involving royalty payments that extends beyond a patent term is unenforceable for the post-expiration period unless the agreement provides a discount for the non-patent rights from the patent-protected rate. This is because— in the absence of a discount or other clear indication that the license was in no way subject to patent leverage—we presume that the post-expiration royalty payments are for the then-current patent use, which is an improper extension of the patent monopoly under Brulotte.338
334 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *2 (9th Cir. 2013). 335 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *2 (9th Cir. 2013). 336 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *2 (9th Cir. 2013). 337 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *2 (9th Cir. 2013). 338 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *7 (9th Cir. 2013). The Ninth Circuit observed that in Zila, Inc. v. Tinnell, 502 F.3d 1014 (9th Cir.2007), it reluctantly followed what it thought the other circuits had agreed were the rules in Brulotte and Aronson, to wit “(1) If a patent ever issues on an invention, Brulotte applies, and no contract can properly demand royalty payments after the patent expires; and (2) a contract that provides for royalties either when a patent expires or when it fails to issue cannot be upheld unless it provides a
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In this case the Ninth Circuit found that the Settlement Agreement did not distinguish between patent and non-patent rights--the '856 Patent and so-called Web Blaster rights. But what were the Web Blaster rights? Note that if the idea disclosed to Marvel originally were covered by the ultimately issued patent, was there any other intellectual property at all? To be sure, Kimble thought that there were other rights339 and the net product definition covered both products that otherwise would “infringe the Patent” and to “sales of the Web Blaster product that was the subject of” Kimble’s original breach of contract and infringement action, but that does not mean the Web Blaster product incorporated any of Kimble’s intellectual property other than the patent rights. Indeed, the Ninth Circuit itself stated that the royalty provision was structured the way it was “because, at that time, it was unclear whether Web Blaster sales infringed the patent, violated the verbal agreement, or both.”340 So, the claims involved infringement and breach of contract claims and the reference to Web Blaster products was to the contractual claim. The settlement was thus hardly a hybrid agreement in the traditional sense, which typically are considered to refer to a license agreement covering more than one type of intellectual property right. Indeed, this leads to a larger question: what are hybrid licenses anyway? What if a licensor merely granted a license as to whatever information rights it had as to, say a software product, without calling out patent, copyright, trade secret or other claims? If patents were, in fact, part of the mix of intellectual property covered in the scope, should Brulotte apply? In any event, the agreement in Kimble did not provide that the royalties would end upon the expiration of that patent and that would be enough under Brulotte. That said, the Ninth Circuit found that the settlement agreement was a hybrid and since the no separate royalty was provided for the patent and the Web Blaster rights, such as they were, the royalty provisions were unenforceable once the patent expired. Interestingly, the court questioned whether Brulotte would mandate rate differential in every case:
discount from the alternative, patent-protected rate.” Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *6 (9th Cir. 2013). This despite its view that “Brulotte and Aronson did not necessarily compel these rules. We suggested that Brulotte turned on the existence of the onerous use restrictions unrelated to the royalty. …. It was those restrictions that showed that the unchanging royalty rate was significant and that the patent owner “was acting in all respects as if the patent remained in place.” … Aronson, in contrast, involved a sale of pure intellectual property that had value apart from the patent. … The language in Aronson suggesting that the patent owner in that case could not have received the full patent royalty beyond the patent term ‘was counterfactual dicta, neither supported by any analysis nor necessary for the decision.’ …. Nonetheless, we reluctantly followed the other circuits' “consensus” in light of the “particularly strong national uniformity concerns” present in patent cases.” Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *7 (9th Cir. 2013). 339 Indeed he argued that the patent and non-patent rights actually had two separate rates, each 3% of net product sales, Kimble's primary contention is that the Settlement Agreement provided two separate royalty rates (which were both 3%) for the patented rights and the non-patented Web Blaster rights. Putting aside for the moment the fact that there is admittedly no discounted rate for non-patent rights, Kimble's argument is not supported by the language of the Settlement Agreement. Cf. Meehan, 802 F.2d at 885–86 (rejecting a similar argument that a royalty merely related to trade secrets based on the terms of the agreement). The Settlement Agreement provided that Marvel would purchase the '856 Patent for a lump sum plus a continuing royalty of “3% of ‘net product sales.’ “ The agreement then defined “net product sales” as including “product sales that would infringe the Patent but for the purchase and sale thereof pursuant to this Agreement as well as sales of the Web Blaster product.” 340 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *8 (9th Cir. 2013).
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The Settlement Agreement also did not include a discounted rate for the alleged non-patent rights. Some language in prior opinions suggests that the failure to include a discounted rate is a per se violation of Brulotte. See Zila, 502 F.3d at 1021 …. Of course, the point of requiring a discount from the patent-protected rate is that it shows that the royalty at issue was not subject to patent leverage. … We do not think that the “discount” requirement should be applied inflexibly without reference to its purpose. Consequently, even though a discounted rate may not be necessary to avoid Brulotte in every case, in the absence of a discounted rate, there must be some other clear indication that the royalty was in no way subject to patent leverage.341 Since there was no such clear indication here, the Ninth Circuit applied Brulotte. However, following Scheiber’s lead, the Ninth Circuit indicated that Kimble might have another claim that might allow him to recover something without violating Brulotte. The Ninth Circuit noted that Kimble separately had sued for breach of the “verbal agreement by failing to compensate him after the expiration of the patent for its use of his ideas,” a claim that was still pending since the settlement agreement had been found ambiguous on that point.342 The Ninth Circuit added:
341 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *8 (9th Cir. 2013). In a footnote, the court added, “We note, for example, that had the parties explicitly indicated, in a separate section of the agreement, that royalty payments for sales of non-patented products, including the Web Blaster, were to be paid in settlement of Kimble's claims that Marvel used the ideas and know-how he verbally disclosed at the 1990 meeting without compensation, it would arguably be immaterial if the rate were the same as the rate for sales of allegedly patent- infringing products.” Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 note 5 (9th Cir. 2013). But here when the parties were negotiating the settlement agreement, they could not know whether the district court’s summary judgment of non-infringement in the initial case would be upheld, though Marvel maintained that its toy was non-infringing and the real leverage that Kimble had in settlement negotiations was the jury finding on breach of contract claims. As the Ninth Circuit said, Kimble's primary leverage in negotiating the settlement was undoubtedly the jury verdict on the contract claim. Generally speaking, a party who prevailed before the district court has the better chance of prevailing on appeal. …. However, contrary to Kimble's recent suggestion that he agrees that the Web Blaster never infringed the '856 Patent, at the time of the negotiations, he was challenging the district court's decision and likely derived some amount of leverage from his patent infringement appeal. Even if this patent leverage was significantly less than the leverage that Kimble derived from the jury verdict on his contract claim, Brulotte applies because it is impossible to tell “what the bargaining position of the parties might have been and what resultant arrangement might have emerged had the provision for post-expiration royalties been divorced from the patent and nowise subject to its leverage.” …. Thus, the patent rights and any non-patent rights were intertwined and Brulotte 's presumption must apply. Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 *9 (9th Cir. 2013). 342 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 note 8 (9th Cir. 2013) (“The district court granted summary judgment for Marvel, finding that the Settlement Agreement unambiguously barred the claim. In an unpublished decision, we reversed, finding the agreement ambiguous under New York law. Marvel Entmt., LLC v. Kimble, ––– Fed. App'x ––––, No. 12–15315 (9th Cir. July 16, 2013).”).
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Indeed, Kimble's claim under the verbal agreement may be consistent with the Seventh Circuit's suggestion that a patent holder might be able to recover under a quantum meruit theory if the amount of royalties paid was lower than the fair market value of the defendant's use of the license given that illegal contracts are treated as rescinded, placing the parties back in the positions they would have occupied had the contract never been made in the first place. … In that case, much like a quantum meruit plaintiff, Kimble is essentially asking to be placed in the position that he would have occupied had the Settlement Agreement never been made. Like the Seventh Circuit, we do not read Brulotte to preclude such a claim.343 7. Licensor as Bankrupt: Rejecting Licenses in Bankruptcy344 (a) General Principles. A bankruptcy petition creates an estate consisting of all legal and equitable rights of the debtor in property. Among the interests that pass to the estate are the contract rights of the debtor. These contracts are included in the estate whether or not the contract has been fully performed. As to contract rights that are “executory” as that word is interpreted in bankruptcy law,345 the Bankruptcy Code gives the trustee or the debtor in possession the right to reject or assume the contract. Almost all licenses extant at the commencement of bankruptcy proceedings are generally considered to be executory for bankruptcy purposes.346 Section 365 of the Bankruptcy Code allows a debtor to reject an executory contract. The right to reject does not hinge on there being a default in the license. “Rejection” constitutes a breach of the contract and a refusal to continue performing promises under the contract. Rejection must be approved by the bankruptcy court. However, standards for judicial approval focus on the assuring merely that there was a plausible exercise of business judgment by the debtor (or trustee) and on the resulting benefit to the debtor's estate, rather than on alleged harm caused to the nonbankrupt party. Thus, in the case of a licensor debtor, the debtor (or trustee), as a general rule, is given the ability to reject or to assume the license. Rejection, in contrast, reflects a decision by the bankrupt to not perform, but rather to breach the agreement.347 The claim for damages for breach that the nonbreaching licensee may have is treated as a pre- petition, general claim against the estate. “Assumption” implies a decision to take on the contract obligations under the license. In general, this requires assumption of all relevant contract terms,
343 Kimble v. Marvel Enterprises Inc. --- F.3d ----, 2013 WL 3621763 note 8 (9th Cir. 2013). 344 This Section is based on Sections 15:21, et seq. of MODERN LICENSING LAW by R. Nimmer and J. Dodd. 345 The term “executory” ordinarily means that substantial performance remains on both sides of the agreement such that breach by either party would be material and excuse performance by the other party. The term thus excludes completed transactions or contract rights where the ability to accept or reject the contract is immaterial. 346 See, e.g. In re Sunterra Corp., 361 F.3d 257 (4th Cir. 2004); In re CFLC, Inc., 89 F.3d 673, 677 (9th Cir. 1996); Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985); In re Select-A- Seat Corp., 625 F.2d 290 (9th Cir. 1980). 347 11 U.S.C.A. §365(g).
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but the Bankruptcy Code grants the bankrupt debtor a right to cure defaults and, if it so desires, to assign the contract with court approval to a third party. 348 The purpose of creating these rights is to enable the debtor in possession in bankruptcy or the trustee to achieve maximum value from the assets of the estate, which may require assuming beneficial contracts and rejecting burdensome contracts. While court approval is required, the standard for assumption or rejection is generally at the business judgment of the debtor or the trustee as long as the proposed action complies with statutory standards regarding cure of defaults and the like.349 (b) Rejection of Executory Contracts: Interrelated Agreements. Generally, the trustee or debtor-in-possession must accept or reject an executory contract in full. In practice, rejecting an executory contract only affects the executory portions of the agreement; fully executed portions are not altered. This is especially important where a contract clearly contemplates that the executed part would survive termination. That intent bears on whether the two elements should be considered severable: "Determination of the issue depends primarily on the intention of the parties, the subject matter of the agreement, and the conduct of the parties."350 Consider here In re Physiotherapy Holdings, Inc.,351 which raised the question of whether debtors could assume a license agreement (which in this case related to software that they truly needed) while rejecting other agreements that were interrelated with the license agreement. In particular, Huron, the licensor, and the debtors were not only parties to the License Agreement, but also to an Assessment Engagement Letter and a related Business Associate Letter and other agreements signed in connection with the license agreement--a Master Agreement, a Project Arrangement Letter and a Sustained Performance Services Agreement. The agreements other than the license agreement contained provisions that the debtors did not want to be burdened with, most particularly certain indemnification obligations that were broader in the Master Agreement than those contained in the license agreement.352 After determining that the license agreement could be assumed because it could be assigned,353 the Bankruptcy Court determined
348 11 U.S.C.A. §§365(a), (c), (f). 349 See Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 12 Bankr. Ct. Dec. (CRR) 1281, 12 Collier Bankr. Cas. 2d (MB) 310, 226 U.S.P.Q. 961, Bankr. L. Rep. (CCH) P 70311 (4th Cir. 1985). See also In re Bank of New England Corp., 210 B.R. 404 (Bankr. D. Mass. 1997) (Court held that an indemnity provision in a bankruptcy assignment of a software contract covered claim against both the estate and the trustee when the trustee subsequently decided not to assume and, therefore, not to assign the contract.). 350 See, Sheline v. Dun & Bradstreet Corp., 948 F.2d 174, 177 (5th Cir. 1991) (finding that unenforceable covenant not to compete could not be severed from remainder of severance agreement because severability "is governed by the intent of the parties"). 351 In re Physiotherapy Holdings, Inc., 506 B.R. 619 (Bkrtcy.D.Del., 2014). 352 In re Physiotherapy Holdings, Inc., 506 B.R. 619, 622, 623 (Bkrtcy.D.Del., 2014). 353 In re Physiotherapy Holdings, Inc., 506 B.R. 619, 623 (Bkrtcy.D.Del., 2014)(“Huron's argument that intellectual property law prohibits the assignment without its consent is unpersuasive given the terms of the License Agreement
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that the debtors could also assume the license agreement without assuming the other agreements. It acknowledged that principle that when “a debtor assumes a contract, it does so with all of the burdens of the contract. Thus, a debtor cannot pick and choose among contract terms, taking what it likes and eliminating what it does not. Huron opposes Debtors' position that the provisions of the License can be read alone, wholly separate from the Master Agreement. Huron views the Agreements as an integrated whole. If Huron is correct, Debtors must assume the Agreements in their entirety, including all of their obligations, or reject them all.”354 The Master Agreement and the License Agreement each contained provisions incorporating the terms of the Master Agreement into the License Agreement (at least to the extent not inconsistent with the terms of the License Agreement) and the Master Agreement stated that it and the License Agreement (as well as the other agreements described above) “represent the entire, final and complete agreement between Client and Huron with regard to the services Huron will perform. This Agreement supersedes and replaces any prior discussions, representations or agreements, written or oral, as to its subject matter. In the event an issue is addressed both in this Agreement and in a Project Arrangement Letter or other document that relates to a specific Project, the terms of that Project Arrangement Letter or other Project-specific document shall govern to the extent they are not inconsistent and in conflict with the terms of this Agreement.”355 Distinguishing In re Buffets Holdings, Inc.356 in a not very convincing manner, the court found that all of the designated agreements did not “constitute an integrated arrangement which the Court should consider singular. For one, they were not executed at the same time. [Although the Master Agreement and License Agreement evidently were.] The Agreements were signed at three different times. Two, in the event of a contradiction in terms between the License Agreement or one of the Other Agreements, the Master Agreement takes the back seat. … Three, the integration clause in the Master Agreement does not reduce the separate License Agreement to a mere component of the Master Agreement. Instead, the integration clause simply means all of the Agreements between the parties are reflected in the Agreements as written, thereby eliminating parol evidence. …The Court concludes from the foregoing that the License Agreement and Master Agreement are independent agreements, and therefore Debtors may assume the License Agreement and reject the Other Agreements.” 357 (c) Rejection and Section 365(n). Generally, licensees holding valid licenses not in default can continue to use the licensed property at least until the licensor assumes or rejects their contracts. Section 365(n), which deals
and the Master Agreement which permit assignment. The law is well settled in this Circuit that the right to assign by necessity creates the right to assume. See, e.g., In re Midway Airlines, Inc., 6 F.3d 492, 497 (7th Cir.1993)”). 354 In re Physiotherapy Holdings, Inc., 506 B.R. 619, 624 (Bkrtcy.D.Del., 2014)(citing In re Fleming Cos., 499 F.3d 300, 308 (3rd Cir.2007)). 355 In re Physiotherapy Holdings, Inc., 506 B.R. 619, 625 (Bkrtcy.D.Del., 2014). 356 In re Buffets Holdings, Inc., 387 B.R. 115 (Bankr.D.Del.2008). 357 In re Physiotherapy Holdings, Inc., 506 B.R. 619, 622, 627 (Bkrtcy.D.Del., 2014).
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with “intellectual property” licenses (a term that does not include trademark licenses358) provides explicit protection for a licensee in context of a licensor's bankruptcy.359 It states: Unless and until the trustee [or debtor in possession] rejects such contract, on the written request of the licensee, the trustee [or debtor in possession] shall— (A) to the extent provided in such contract or any agreement supplementary to such contract— (i) perform such contract; or (ii) provide to the licensee such intellectual property (including any embodiment of such intellectual property to the extended protected by applicable nonbankruptcy law) held by the trustee [or debtor in possession]; and (B) not interfere with the rights of the licensee as provided in such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment), including any right to obtain such intellectual property (or such embodiment) from another entity. But note the important qualifying words, unless and “until the trustee rejects such contract.” Suppose the licensor is the bankrupt and decides to reject the license. What is the effect of rejection? If a licensor in bankruptcy (or its trustee) rejects a license, the licensee will certainly have a claim for damages for breach (though such a claim will be treated as an unsecured claim),360 but in many cases the licensee desires to continue to use the licensed
358 In Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), cert. denied, --U.S.—133 S.Ct. 790 (2012), the Seventh Circuit cautioned bankruptcy courts from assuming that the omission of trademarks from the definition of “intellectual property” codified the decision of Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir.1985) as to trademarks. The Seventh Circuit observed that “an omission is just an omission. The limited definition in § 101(35A) means that § 365(n) does not affect trademarks one way or the other. According to the Senate committee report on the bill that included § 365(n), the omission was designed to allow more time for study, not to approve Lubrizol. See S.Rep. No. 100–505, 100th Cong., 2d Sess. 5 (1988), 1988 U.S.C.C.A.N. 3200. See also In re Exide Technologies, 607 F.3d 957, 966–67 (3d Cir.2010) (Ambro, J., concurring) (concluding that § 365(n) neither codifies nor disapproves Lubrizol as applied to trademarks).” Id.at 375. 359 11 U.S.C.A. §101(35A) (“'Intellectual Property' means--(A) trade secret; (B) invention, process, design, or plant protected under title 35; (C) patent application; (D) plant variety; (E) work of authorship protected under title 17; and (F) mask work protected under chapter 9 of title 17, to the extent protected by applicable nonbankruptcy law.”) 360 At minimum, rejection of an executory contract constitutes a breach of that contract by the bankrupt party consisting of a stated, and legally permitted, intent to not perform its remaining executory obligations. Section 365(g) says so. 11 U.S.C.A. §365(g) (“Except as provided in subsections (h)(2) and (i)(2) of this section, the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease-- (1) if such contract or lease has not been assumed under this section or under a plan confirmed under chapter 9, 11, 12, or 13 of this title, immediately before the date of the filing of the petition; or (2) if such contract or lease has been assumed under this section or under a plan confirmed under chapter 9, 11, 12, or 13 of this title-- (A) if before such rejection the case has not been converted under section 1112, 1208, or 1307 of this title, at the time of such rejection; or (B) if before such rejection the case has been converted under section 1112, 1208, or 1307 of this title-- (i) immediately before the date of such conversion, if such contract or lease was assumed before such conversion; or (ii) at the time of such rejection, if such contract or lease was assumed after such conversion.”)
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subject matter pursuant to the license. Whether it has the right to do so depends on bankruptcy law and its interpretations of what the meaning of “rejection” of a contract is and what the effects of rejection are. In some contexts, courts and commentators have argued that rejection should not dislodge already transferred property rights. With some explicit exceptions, however, the Bankruptcy Code does not so provide. In any event, in a nonexclusive license, no property rights are conveyed to the licensee. Instead, at least under one analysis, rejection of the contract by the licensor is a rejection of its promise to not sue for infringing acts and, therefore, rejection excludes any right to use without a threat of infringement liability. In other words, the licensee no longer can freely use the licensed intellectual property. A somewhat different analysis, though coming to a similar result, was adopted by a Fourth Circuit panel in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc.361 It found that “the district court was under a misapprehension of controlling law in thinking that by rejecting the agreement the debtor could not deprive Lubrizol of all rights to the process. Under 11 U.S.C. § 365(g), Lubrizol would be entitled to treat rejection as a breach and seek a money damages remedy; however, it could not seek to retain its contract rights in the technology by specific performance even if that remedy would ordinarily be available upon breach of this type of contract. … Even though § 365(g) treats rejection as a breach, the legislative history of § 365(g) makes clear that the purpose of the provision is to provide only a damages remedy for the non-bankrupt party. … For the same reason, Lubrizol cannot rely on provisions within its agreement with RMF for continued use of the technology by Lubrizol upon breach by RMF. Here again, the statutory “breach” contemplated by § 365(g) controls, and provides only a money damages remedy for the non-bankrupt party.” Some courts reject this analysis. For example, in a footnote involving a dicta discussion, the court in In re Gucci,362 reserved judgment on the effect that a rejection of a trademark license would have on the “rights” created by that rejected license. The court commented: The effects of a rejection of a trademark licensing agreement are a matter that remains to be litigated. To date, this Court has not addressed whether a §365 rejection operates as a kind of avoiding power to bring back into the estate a license of the debtor's trade name or trademark that was conferred by the debtor prior to its bankruptcy filing.363 This is a curious conception of rejection. A view that rejection could “bring back” rights assumes that there are rights that have been transferred. Yet, as to a nonexclusive license at least, the traditional view of intellectual property licenses is that no rights are transferred and the licensor merely promised to not sue. Under this view, by rejecting the non-exclusive license, the bankrupt licensor expresses its future intent to not perform that promise.
361 Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). 362 In re Gucci, 126 F.3d 380 (2d Cir. 1997). 363 In re Gucci, 126 F.3d 380, 394 (2d Cir. 1997).
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In Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC,364 a Seventh Circuit panel took a different approach.365 Lakewood authorized CAM to practice Lakewood's patents and put Lakewood’s trademarks on box fans CAM manufactured for Lakewood and also agreed that CAM could sell the 2009 run of box fans for its own account if Lakewood failed to purchase the fans. Bankruptcy proceedings were commenced against Lakewood, and the bankruptcy trustee decided to sell Lakewood’s business to Jarden, who bought the assets, including Lakewood's patents and trademarks. Since Jarden “did not want the Lakewood- branded fans CAM had in inventory, nor did it want CAM to sell those fans in competition with Jarden's products. Lakewood's trustee rejected the executory portion of the CAM contract under 11 U.S.C. § 365(a).”366 CAM challenged the rejection. As to the portion of the license dealing with patents, Section 365(n) protected CAM as licensee for reasons that we describe below, but since that section did not cover trademark licenses, the issue was whether the portion of CAM’s license relating to Lakewood’s marks could be rejected and its right to continued use extinguished (even if it could claim damages). The Seventh Circuit rejected Lubrizol and held that what “§ 365(g) does by classifying rejection as breach is establish that in bankruptcy, as outside of it, the other party's rights remain in place. After rejecting a contract, a debtor is not subject to an order of specific performance. …The debtor's unfulfilled obligations are converted to damages; when a debtor does not assume the contract before rejecting it, these damages are treated as a pre-petition obligation… But nothing about this process implies that any rights of the other contracting party have been vaporized. Consider how rejection works for leases. …[A] lessor that enters bankruptcy could not, by rejecting the lease, end the tenant's right to possession and thus re-acquire premises that might be rented out for a higher price. The bankrupt lessor might substitute damages for an obligation to make repairs, but not rescind the lease altogether. …Bankruptcy law does provide means for eliminating rights under some contracts. … But Lakewood's trustee has never contended that Lakewood's contract with CAM is subject to rescission. The trustee used § 365(a) rather than any of the avoiding powers—and rejection is not “the functional equivalent of a rescission, rendering void the contract and requiring that the parties be put back in the positions they occupied before the contract was formed.” …It ‘merely frees the estate from the obligation to perform’ and ‘has absolutely no effect upon the contract's continued existence.’ …Lubrizol does not persuade us. Because the trustee's rejection of Lakewood's contract with CAM did not
364 Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), cert. denied, - -U.S.—133 S.Ct. 790 (2012). 365 The panel did note at the end of its opinion, however, that this “which creates a conflict among the circuits, was circulated to all active judges under Circuit Rule 40(e). No judge favored a hearing en banc.” Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372, 378 (7th Cir. 2012), cert. denied, --U.S.—133 S.Ct. 790 (2012). 366 Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372, 374 (7th Cir. 2012), cert. denied, --U.S.—133 S.Ct. 790 (2012).
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abrogate CAM's contractual rights, this adversary proceeding properly ended with a judgment in CAM's favor.”367 Jaffe v. Samsung Electronics Co., Ltd.,368 dealt with an important issue in international insolvency law. Licensing transactions are increasing international. What happens if a debtor commences a case in, say the UK, and has licensees in the U.S. with respect to US intellectual property? Do the licensees in the US get the benefit of the protections of Section 365(n), at least as to the US intellectual property? This was the question that Jaffe addressed. In this case, Qimonda commenced insolvency proceedings in Germany and Jaffe was appointed as the insolvency administrator. Jaffe began liquidating the estate, the principal assets of which were 10,000 patents (including 4,000 US patents), mostly relating to DRAM technologies. The patents were burdened with a welter of cross-licenses with other semi- conductor companies, quite convenient and necessary when Qimonda was an operating company. As the court noted cross-licensing was quite prevalent in the semiconductor industry given the patent thicket that a semiconductor company faced. A semiconductor company seeking to build a fabrication plant would spend $5 billion in doing so, only to find that its products would invariably infringe someone’s patents. This created a patent holdup problem: “… if a new product were ultimately found to infringe someone else's patent, with the patent's owner being able to extract a substantially higher royalty after the investment had been made than if a license had been negotiated beforehand. Thus, to avoid this holdup premium and enhance their design freedom, competitors in the semiconductor industry have routinely entered into broad, non-exclusive cross-license agreements with each other, ‘sometimes with the addition of equalizing payments (either up-front payments or so-called running royalties) to account for differences in the size and breadth of the respective patent portfolios.”’369 But as much sense as that the strategy of entering into cross licenses made for a company actively engaged in the semiconductor business, the cross licenses burdening Qimonda’s patents granted to obtain licenses in return now proved obnoxious and improvident to a company in liquidation that was pursuing a strategy to maximize the amount to be harvested from the patents. After Jaffe took charge as administrator he initiated a Chapter 15 proceeding under the United States Bankruptcy Code370 seeking recognition of the Germany insolvency proceeding as
367 Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372, 377-78 (7th Cir. 2012), cert. denied, --U.S.—133 S.Ct. 790 (2012). The Seventh Circuit also noted that scholars “uniformly criticize Lubrizol, concluding that it confuses rejection with the use of an avoiding power. See, e.g., Douglas G. Baird, Elements of Bankruptcy 130–40 & n.10 (4th ed.2006); Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding “Rejection”, 59 U. Colo. L.Rev. 845, 916–19 (1988); Jay Lawrence Westbrook, The Commission's Recommendations Concerning the Treatment of Bankruptcy Contracts, 5 Am. Bankr.Inst. L.Rev. 463, 470–72 (1997). Lubrizol itself devoted scant attention to the question whether rejection cancels a contract, worrying instead about the right way to identify executory contracts to which the rejection power applies.” Id. at 377. 368 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 108 U.S.P.Q.2d 1942 (4th Cir. 2013). 369 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 19, 108 U.S.P.Q.2d 1942 (4th Cir. 2013). 370 The Fourth Circuit described the background to Chapter 15 as follows: Congress enacted Chapter 15 of the Bankruptcy Code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109–8, 119 Stat. 23, stating that its
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the “foreign main proceeding” and also seeking under Section 1521 a variety of powers in addition to those specified in Section 1520 of Chapter 15. In its order, the bankruptcy court included the power under Section 365 to assume or to reject executory contracts.371
purpose was “to incorporate the Model Law on Cross–Border Insolvency,” which had been developed in 1997 by the United Nations Commission on International Trade Law (“UNCITRAL”), “so as to provide effective mechanisms for dealing with cases of cross-border insolvency.” 11 U.S.C. § 1501(a)… In this respect, Chapter 15 replaced former 11 U.S.C. § 304, which authorized bankruptcy courts to award appropriate relief in a case ancillary to a foreign proceeding but which was largely discretionary…..Chapter 15 authorizes the representative of a foreign insolvency proceeding to commence a case in a U.S. bankruptcy court by filing a petition for recognition of the foreign proceeding. …. If the petition meets the requirements listed in § 1517, the court must enter an order granting recognition of the foreign proceeding. And if that foreign proceeding “is pending in the country where the debtor has the center of its main interests,” it is recognized as a “foreign main proceeding.” 11 U.S.C. § 1517(b)(1)….. With the entry of an order recognizing a foreign main proceeding, the foreign representative of the proceeding automatically receives relief as stated in § 1520, including the automatic stay created by § 362 with respect to the debtor and its property within the United States and the ability to operate the debtor's business within the United States under § 363, as well as the right to sue and be sued and the right to “intervene in any proceedings in a State or Federal court in the United States in which the debtor is a party.” …. Moreover, the statute provides that following entry of a recognition order, “a court in the United States shall grant comity or cooperation to the foreign representative,” thereby implementing a principal purpose of Chapter 15…. In addition to the automatic relief that comes with the entry of an order granting recognition of a foreign main proceeding, § 1521 authorizes the bankruptcy court to grant discretionary relief. Specifically, § 1521 provides that “where necessary to effectuate the purpose of this chapter and to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief.” …. This discretionary relief may include “entrusting the administration or realization of all or part of the debtor's assets within the territorial jurisdiction of the United States to the foreign representative,” … as well as “entrust[ing] the distribution of all or part of the debtor's assets located in the United States to the foreign representative…”. The bankruptcy court, however, may only grant discretionary relief under § 1521 if it determines that “the interests of the creditors and other interested entities, including the debtor, are sufficiently protected.” Id. § 1522(a). It may also subject the discretionary relief it grants under § 1521 “to conditions it considers appropriate, including the giving of security or the filing of a bond.”… Finally, all of the actions authorized in Chapter 15 are subject to § 1506, which provides that “[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.” … Chapter 15 thus authorizes an “ancillary” proceeding in a United States bankruptcy court that is largely designed to complement and assist a foreign insolvency proceeding by, among other things, “bring[ing] people and property beyond the foreign main proceeding's jurisdiction into the foreign main proceeding through the exercise of the United States' jurisdiction.” … Thus, taken as a whole, Chapter 15—like the Model Law on which it was based—takes “several modest but significant” steps toward implementing “a modern, harmonized and fair framework to address more effectively instances of cross-border insolvency.” Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 23-25, 108 U.S.P.Q.2d 1942 (4th Cir. 2013). 371 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 19-20, 108 U.S.P.Q.2d 1942 (4th Cir. 2013).
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The recognition and sought-after powers were duly conferred by the bankruptcy court. Jaffe then embarked upon a program of rejecting the obnoxious cross licenses burdening the US patents. In his letters to cross licensees with licenses as to US patents, he noted that Section 103 of the German Insolvency Code allowed the administrator to determine whether to the perform the licenses--which, of course, he would be happy to do for new, monetary consideration. Some licensees pointed out that under Section 365(n) protected US licensees, even if Section 103 of the German Insolvency Code did not. They also pointed out that the bankruptcy court had conferred on Jaffe the power to assume or reject under Section 365 and, of course, tucked away in Section 365 was Section 365(n). So, Jaffe sought modification of the order either to eliminate incorporation of Section 365(n) or to make that section applicable only if he actually rejected a license.372 After the US licensees lost and the bankruptcy court acceded to Jaffe’s request, they appealed to the district court, which reversed and remanded the case to the bankruptcy court, instructing it that in conferring powers to the administrator under Section 1521(a) the bankruptcy court had to “ensure that ‘the interests of the creditors and other interested entities, including the debtor, [were] sufficiently protected.’ The district court explained that § 1522(a) required the bankruptcy court ‘to balance the relief granted to the foreign representative and the interests of those affected by such relief, without unduly favoring one group of creditors over another.”’373 The district court also held that Section 1506 of the Bankruptcy Code required determination of whether Section 365(n) embodied a fundamental public policy of the United States so that Section 365(n) could not be subordinated to Section 103 of the German Insolvency Code. Not leaving the import of its remand to be mistaken, the district court “concluded that there were two primary circumstances in which a bankruptcy court should invoke § 1506: first, when ‘the foreign proceeding was procedurally unfair;’ and second, when ‘the application of foreign law or the recognition of a foreign main proceeding under Chapter 15 would severely impinge the value and import of a U.S. statutory or constitutional right, such that granting comity would severely hinder United States bankruptcy courts' abilities to carry out ... the most fundamental policies and purposes of these rights.’ …Finding the application of that standard ‘unclear on [the] record,’ the court also directed the bankruptcy court on remand to consider ‘whether conditioning the applicability of § 365(n) was a prohibited action ‘manifestly contrary to the public policy of the United States' under § 1506.”’374 So back to the bankruptcy court the case went with clear directives from the district court.375
372 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 20, 108 U.S.P.Q.2d 1942 (4th Cir. 2013). 373 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 21, 108 U.S.P.Q.2d 1942 (4th Cir. 2013). 374 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 21, 108 U.S.P.Q.2d 1942 (4th Cir. 2013). 375 Jaffe sought to cut his losses, offering to provide licenses on RAND (reasonable and non-discriminatory) terms as to royalties, a formulation frequently used under standard setting arrangements. Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 21, 108 U.S.P.Q.2d 1942 (4th Cir. 2013). For a description of standard setting, see Chapter 15 of Modern Licensing Law. The licensees demurred, arguing that the vague RAND standard would not adequately protect their interests under existing contracts or eliminate the holdup problem.
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So instructed, on remand the bankruptcy court found that the balancing test under Section 1522(a) as interpreted by the district court required Section 365(n) to be applied to the cross- licenses of the US patents.376 In balancing the interests of creditors/licensees and the debtor, the court noted the consequences that unfettered power to disrupt the balance struck by the cross licensing scheme would have. For the licensee semiconductor manufacturers had made substantial investments in reliance on the cross licenses and would not have the luxury of designing around Qimonda’s patents if a deal could not be struck (even under RAND terms) as to the rejected licenses.377 The bankruptcy court also found that Section 365(n) embodied fundamental US public policy and so, under Section 1506, could not be subordinated to Section 103 of the German Insolvency Code in this case. Note how narrowly the bankruptcy court framed its decision: both the Section 1522(a) balancing test and Section 1506 public policy test compelled the imposition of Section 365(n) because of the harm that would be visited on the semiconductor industry if the particular cross licenses in question could be rejected without regard to Section 365(n). The bankruptcy court did not hold that in all cases all licenses of US intellectual property granted by a debtor invoking Chapter 15 would be always subject to Section 365(n). The determination was to be made case by case. Jaffe was permitted to appeal directly to the Fourth Circuit. He did and the Fourth Circuit affirmed the bankruptcy court’s opinion. Rejecting an analysis that would make Section 1522’s “sufficient protection” requirement dependent solely on whether a foreign representative requested that relief, the Fourth Circuit stated that,
376 The Fourth Circuit noted that the decision by the bankruptcy court would not affect the fate of licenses as to non- US intellectual property: We note as well that the United States has appeared as amicus curiae to express its concern that the bankruptcy court overstepped its authority below. Specifically, it criticizes the bankruptcy court as “approach[ing] this case as though it were empowered to decide whether the Foreign Administrator should be permitted to reject appellees' license agreements” based on an erroneous assumption that it could “superimpose Section 365(n) on the operation of German insolvency law in a German proceeding.” …As already made clear, however, we take a different view of the scope of the bankruptcy court's holding. Rather than purporting to “constrain the operation of German insolvency law in Germany,” the bankruptcy court conditioned its grant of power to Jaffé to “administer the assets of Qimonda AG within the territorial jurisdiction of the United States ” with the limitation that he was taking the company's U.S. patents subject to the preexisting licenses, which he was obliged to treat in a manner consistent with § 365(n). As a result, Jaffé is precluded from rejecting the U.S. patent licenses as a matter of U.S. law. Although this limitation may have indirect effects in the German proceeding, it does not represent an impermissible application of U.S. law extraterritorially, which we understand to be the main concern animating the United States' position in this case. Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, note 3, 108 U.S.P.Q.2d 1942 (4th Cir. 2013). 377 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 22-23, 108 U.S.P.Q.2d 1942 (4th Cir. 2013).
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While it is true that Jaffé ‘never affirmatively requested rejection authority under § 365,’ he did request several forms of discretionary relief under § 1521, among which was the privilege, pursuant to § 1521(a)(5), to have the bankruptcy court entrust him with ‘[t]he administration or realization of all or part of the assets of [Qimonda] within the territorial jurisdiction of the United States,’ specifically identifying the company's U.S. patents as among the U.S. assets he sought to control. And, as a prerequisite to awarding any § 1521 relief, the court was required to ensure sufficient protection of the creditors and the debtor. Section 1522(a) states this explicitly, providing in relevant part, ‘The court may grant relief under section ... 1521 ... only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected.’ 11 U.S.C. § 1522(a) (emphasis added). Additionally, the court was authorized to ‘subject’ any § 1521 relief “to conditions it considers appropriate.’ …This is precisely what the bankruptcy court did here. It granted discretionary relief under § 1521 and, as mandated, considered the question of sufficient protection under § 1522(a). Upon such consideration, it conditioned its § 1521 relief on application of § 365(n), finding that such protection was appropriate in the circumstances presented…. The bankruptcy court's consideration of § 1522(a) was thus undoubtedly appropriate when authorizing relief under § 1521.378 The Fourth Circuit also invoked UNICTRAL’s Model Law--upon which Chapter 15 was based--and the related Guide to Enactment to find that Section 1522(a) required balancing tests to be applied in protecting both the foreign debtor and its creditors: Section 1522(a) requires the bankruptcy court to ensure the protection of both the creditors and the debtor. ….The provision thus requires the court to ensure that the relief a foreign representative requests under § 1521 does not impinge excessively on any one entity's interests, implying that each entity must receive at least some protection. And because the interests of the creditors and the interests of the debtor are often antagonistic, as they are here, providing protection to one side might well come at some expense to the other. The analysis required by § 1522(a) is therefore logically best done by balancing the respective interests based on the relative harms and benefits in light of the circumstances presented, thus inherently calling for application of a balancing test….Informed by the Guide to Enactment's description of the relationship between Articles 22 and 6 of the Model Law (§§ 1522 and 1506 in the U.S. Bankruptcy Code), we do not share Jaffé's view that § 1506's public policy exception forecloses use of a balancing analysis under § 1522. Contrary to Jaffé's position, Chapter 15 does not require a U.S. bankruptcy court, in considering a foreign representative's request for discretionary relief under § 1521, to blind itself to the costs that awarding such relief would impose on others under the rule provided by the substantive law of the State where the foreign insolvency proceeding is pending. Instead, Chapter 15,
378 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 26-27, 108 U.S.P.Q.2d 1942 (4th Cir. 2013).
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like the Model Law, anticipates the provision of particularized protection, as stated in § 1522(a). …We therefore conclude, through interpretation of § 1522(a)'s text and consideration of Chapter 15's international origin, that the district court correctly interpreted § 1522(a)'s sufficient protection requirement as requiring a particularized balancing analysis that considers the “interests of the creditors and other interested entities, including the debtor,” … and, in this case in particular, a weighing of the interests of the foreign representative (the debtor) in receiving the requested relief against the competing interests of those who would be adversely affected by the grant of such relief (here, the Licensees). And we also agree that § 1506 is an additional, more general protection of U.S. interests that may be evaluated apart from the particularized analysis of § 1522(a).379 Jaffe also attacked the balancing process as undertaken, arguing that as applied it did not take into account the interests of all creditors (much less the interests of the debtors), but rather only a subset of creditors, the licensees of U.S. patents. The Fourth Circuit replied, It should be noted that after hearing four days of evidence, the bankruptcy court considered the outcome of its balancing analysis to be a close one. But in the end it concluded, reasonably we believe, “that the balancing of debtor and creditor interests required by § 1522(a), Bankruptcy Code, weigh[ed] in favor of making § 365(n) applicable to Dr. Jaffé's administration of Qimonda's U.S. patents.” ….The court recognized Jaffé's claim that the “application of § 365(n) [would] result in less value. being realized by the Qimonda estate.” … But it noted that “Qimonda's patent portfolio [would] by no means be rendered worthless” because the “U.S. patents [could] still be licensed to parties that [did] not already have a license, and Dr. Jaffé, to the extent permitted by German law, [would] be able to fully monetize the non-U.S. patents.” …Additionally, the bankruptcy court found it significant that “[a]pplication of § 365(n) ... [would impose] no affirmative burden on Dr. Jaffé,” …but instead would merely limit his ability—and, importantly, the ability of the patents' subsequent owners—to bring infringement actions against the very entities that Qimonda had previously promised not to sue. …In considering and weighing the Licensees' interests, the bankruptcy court largely credited their evidence indicating that entrusting Jaffé with the right to administer Qimonda's U.S. patents without making § 365(n) applicable to the preexisting licenses under those patents would have broad-ranging ill effects. It explained that “the risk to the very substantial investment the [Licensees]— particularly IBM, Micron, Intel, and Samsung—[had] collectively made in
379 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 26-28, 108 U.S.P.Q.2d 1942 (4th Cir. 2013). The Fourth Circuit also stated that in “in reaching this conclusion, we join the Fifth Circuit, which interpreted § 1522(a) similarly, based largely on the language in the Guide to Enactment. See In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1060, 1067 n. 42 (5th Cir.2012); see also In re Int'l Banking Corp. B.S.C., 439 B.R. 614, 626–27 (Bankr.S.D.N.Y.2010); In re Tri–Cont'l Exch. Ltd., 349 B.R. 627, 637 (Bankr.E.D.Cal.2006).” Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 29, 108 U.S.P.Q.2d 1942 (4th Cir. 2013).
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research and manufacturing facilities in the United States in reliance on the design freedom provided by the cross-license agreements, though not easily quantifiable, [was] nevertheless very real.” …We find the bankruptcy court's thorough examination of the parties' competing interests to have been both comprehensive and eminently reasonable….At bottom, we affirm the decision of the bankruptcy court, finding reasonable its exercise of discretion in conducting the balancing analysis under § 1522(a) and concluding that attaching the protection of § 365(n) was necessary when granting Jaffé the power to administer Qimonda's U.S. patents. 380 The Fourth Circuit majority panel also addressed the public policy implications of Section 1506 (thought the concurring judge would have refrained from doing so): It is important, we think, to recognize… the importance of Chapter 15 to a global economy, in which businesses needing bankruptcy protection increasingly have assets in various countries. …But the United States' commitment is not untempered, as is manifested in both Chapter 15 and the Model Law on which it was based. Thus, § 1522(a) requires that a bankruptcy court, when granting the discretionary relief authorized by § 1521, ensure sufficient protection of creditors, as well as the debtor. And at a more general level, § 1506, which covers any action under Chapter 15, authorizes a bankruptcy court to refuse to take an action that would be manifestly contrary to U.S. public policy. In this case, it is sufficient for us to affirm the bankruptcy court, based on its application of §
380 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 30-31, 108 U.S.P.Q.2d 1942 (4th Cir. 2013). As to Jaffe’s offer to re-license on RAND terms, the Fourth Circuit stated, Jaffé relies heavily on the mitigation that would result from his commitment to re-license Qimonda's patents to the Licensees on RAND terms, arguing that it would provide sufficient protection for their interests. …. But just because the RAND proposal would reduce the Licensees' risks does not mean that their interests would be sufficiently protected by Jaffé's promise to re- license. The bankruptcy court expressly recognized this, explaining that “the hold-up risk is lessened by Dr. Jaffé's offer to re-license the patents on RAND terms,” but emphasizing that “even if the WIPO expert determination process were to arrive at the same figure that would have been agreed to in an ‘ex ante’ scenario, the [Licensees], because of their sunk costs, [would] not have the option of avoiding royalties altogether by designing around the patent.” … We conclude that the bankruptcy court's findings in this regard are not unreasonable and that the bankruptcy court was justified in its skepticism of Jaffé's claim that the Licensees' interests would now be “sufficiently protected” by his commitment not to charge them an exorbitant rate during their re- licensing negotiations…Moreover, the bankruptcy court also noted that it remained an “open question” whether any new license issued by Jaffé on RAND terms would itself be secure…The court's recognition of this concern was also reasonable, as it is far from clear whether, having once facilitated the termination of license rights in a foreign insolvency proceeding, the genie could ever be put back into the bottle. Rather, as indicated by expert testimony that the bankruptcy court credited, it would seem all too likely that such a result would introduce a dangerous degree of uncertainty to a licensing system that plays a critically important role in the semiconductor industry, as well as other high-tech sectors of the global economy. Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 30-31, 108 U.S.P.Q.2d 1942 (4th Cir. 2013).
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1522(a). But in doing so, we understand that, by affirming the bankruptcy court's application of § 365(n) following its balancing analysis under § 1522(a), we also indirectly further the public policy that underlies § 365(n). The Senate Report accompanying the bill that became § 365(n) explicitly recognized that licensees have a strong interest in maintaining their right to use intellectual property following the licensor's bankruptcy and that to deny them that right would ‘impose[ ] a burden on American technological development that was never intended by Congress.’381
381 Jaffe v. Samsung Electronics Co., Ltd., 737 F.3d 14, 31, 108 U.S.P.Q.2d 1942 (4th Cir. 2013).
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