SEVENTH CIRCUIT REVIEW Volume 2, Issue 2 Spring 2007 LICENSEE BEWARE: THE SEVENTH CIRCUIT HOLDS THAT A PATENT LICENSE BY ANY OTHER NAME IS NOT THE SAME ∗ CAMERON R. SNEDDON Cite as: Cameron R. Sneddon, Licensee Beware: The Seventh Circuit Holds That a Patent License by Any Other Name Is Not the Same, 2 SEVENTH CIRCUIT REV. 796 (2007), at http://www.kentlaw.edu/7cr/v2-2/sneddon.pdf. INTRODUCTION Intellectual property licensing has grown significantly over the years with a global market estimated at more than $100 billion.1 In fact, “intellectual property assets account for 40% of the net value of all corporations in America.”2 Notwithstanding the likelihood of more and more licensing transactions, a complex area of the law, patent licensing has not received much attention in legal journals and scholarly publications.3 As companies increasingly license and cross- ∗ J.D. Candidate May 2007, Chicago-Kent College of Law, Illinois Institute of Technology; B.S. Chemical Engineering, April 1999, Brigham Young University. Cameron R. Sneddon would like to thank his family, namely his wife Rachel and son Eric, for their unconditional love and support, and his parents, Roy and Kathleen Sneddon for their example of pursuing higher education and emphasizing the importance of scholarship. The author also wishes to thank Assistant Professor Tim L. Field for his many helpful comments and criticisms of previous drafts. Of course, any remaining errors or omissions belong to the author. 1 Kenneth L. Port, Jay Dratler, Jr., Faye M. Hammersley, Terence P. McElwee, Charles R. McManis & Barbara A. Wrigley, LICENSING INTELLECTUAL PROPERTY IN THE INFORMATION AGE xvii (2d ed. 2005). 2 Id. 3 Rachel Clark Hughey, Licensee by Estoppel, 14 ALB. L.J. SCI. & TECH. 53, 54 (2003). 796 SEVENTH CIRCUIT REVIEW Volume 2, Issue 2 Spring 2007 license technologies, issues arising about the nature and meaning of license agreements will likely be litigated,4 particularly because licensing agreements combine matters governed by state contract law and federal patent law.5 One area of patent licensing not discussed in depth is if a settlement for patent infringement may ever be considered a patent license agreement. The legal designation of a patent settlement as a patent license agreement will have implications for licensees with a “most favored licensee” status, a legal clause granting deferential treatment to a licensee in order to prevent a “competitive disadvantage resulting from more-favorable terms granted to another licensee.”6 Although some courts have decided this issue, they have decided differently what effect, if any, a patent settlement agreement has on an existing third party licensee with a “most favored licensee” clause in the license agreement.7 In Waterloo Furniture Components Ltd. v. Haworth, Inc.,8 a case of first impression9, the Seventh Circuit recently held that “[a] settlement for past infringement entered into after [a patent expires is not] a license.”10 Additionally, the Seventh Circuit acknowledged that federal appellate courts are divided on whether a settlement agreement 4 See eBay Inc. v. MercExchange, L.L.C., 126 S. Ct. 1837, 1841 (2006). 5 See Rhone-Poulenc Agro v. DeKalb Genetics Corp., 284 F.3d 1323, 1327-28 (Fed. Cir. 2002). 6 Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 103 F.3d 9, 13 (2d Cir. 1997). 7 See Ransburg Electro-Coating Corp. v. Spiller & Spiller, 489 F.2d 974 (7th Cir. 1973) and Studiengesellschaft Kohle v. Novamont Corp., 704 F.2d 48, (2d. Cir. 1983) (each case finding that a patent settlement agreement may not be construed as a license); Shatterproof Glass Corp. v. Libbey-Owens-Ford Co., 482 F.2d 317 (6th Cir. 1973) and Studiengesellschaft Kohle v. Hercules, 105 F.3d 629 (Fed. Cir. 1997) (each ruling that a patent settlement agreement may be considered a license). 8 Waterloo Furniture Components Ltd. v. Haworth, Inc. (“Waterloo II”), 467 F. 3d 641 (7th Cir. 2006). 9 For the first time, a court explicitly held that a settlement agreement is not a license in the context of an expired patent. Other courts, including the Seventh Circuit, have resolved the issue (albeit differently) in the context of an unexpired patent, see supra note 7. 10 Waterloo II, 467 F.3d at 647 (emphasis added). 797 SEVENTH CIRCUIT REVIEW Volume 2, Issue 2 Spring 2007 entered into before a patent expires constitutes a license.11 The linchpin in any of the regional appellate court’s reasoning on the issue boils down its their correct or incorrect understanding of what essentially a patent license constitutes. For example, what ultimate effect does a patent license serve and is a license solely prospective in nature with no retroactive qualities? Part I of this Note describes the relevant background of patent law, patent infringement, and patent licenses. Part II explains the circuit split among the Federal Regional Courts of Appeal, including the Waterloo decision. Part III of this Note contends that patent licenses have a unique nature given their purpose, including retroactive qualities, and that a settlement for past patent infringement, regardless of whether the patent has expired or not, may constitute a license, especially when the settlement implicates a “most favored licensee” clause.12 Part IV of this Note explains the implications of the Seventh Circuit’s Waterloo decision, especially because of the increasing importance of patent law and licensing agreements. I. BACKGROUND A. Patent Law A patent grants the patentee13 a right to exclude others from making, using, selling, or offering to sell the patented invention within the United States, or importing the invention to the United States.14 Frequently the right to exclude is commonly misunderstood. Many 11 Id. at 647 n.1. 12 Although sometimes referred to as a “most favored nation” clause, see, e.g., id. at 643-48, to be more accurate, this Note uses only the phrase “most favored licensee”. 13 The word patentee as used in this Note has the same meaning as its statutory definition in 35 U.S.C. § 100 (d) (2000) (“The word ‘patentee’ includes not only the patentee to whom the patent was issued but also the successors in title to the patentee”). 14 35 U.S.C. § 154(a) (2000). 798 SEVENTH CIRCUIT REVIEW Volume 2, Issue 2 Spring 2007 people, including those in the legal profession,15 experts on patent law,16 and even judges,17 conflate the statutory right to exclude with a permissive and exclusive right of the patentee to actually make, use, or sell the patented invention. The resulting confusion is understandable, however. Over the years, Congress has changed the language of the statute specifying the rights granted a patentee,18 and it is common for people to assume that intellectual property ownership, like other types of property ownership, carries with it the three basic property rights: the right to use, the right to exclude, and the right to transfer.19 Patent laws have existed since 1790, but Congress enacted the current patent statute in 1952 under Title 35 of the United States Code.20 Because a patent grants an exclusive right to the mental concept of the invention, “a patent protects no single physical embodiment of an invention as such; rather it controls the abstract information in the invention, as expressed in the patent’s claims.”21 In 15 For instance, the well-known and generally respected Black’s Law Dictionary defined the rights a patent grants as “the exclusive right to make, use or sell an invention for a specified period” in the 7th edition. BLACK’S LAW DICTIONARY 1147 (7th ed. 1999). However, the 8th edition defines the rights a patent grants as the “right to exclude.” BLACK’S LAW DICTIONARY 1156 (8th ed. 2004). 16 See, e.g., Arthur R. Miller & Michael H. Davis, INTELLECTUAL PROPERTY: PATENTS, TRADEMARKS AND COPYRIGHT IN A NUTSHELL 11 (1983) (describing the right a patent grants as “giving the patentee the exclusive right to make, use, or sell the invention”). 17 United States v. Univis Lens Co., 316 U.S. 241, 250 (1942) (“The full extent of the monopoly is the patentee's “exclusive right to make, use, and vend the invention or discovery”). 18 See Part IIIA1, infra. 19 See Kenneth L. Port, Jay Dratler, Jr., Faye M. Hammersley, Terence P. McElwee, Charles R. McManis & Barbara A. Wrigley, LICENSING INTELLECTUAL PROPERTY IN THE INFORMATION AGE 5-6 (2d ed. 2005). 20 Patent Act of 1952, ch. 950, § 1, 66 Stat. 792 (1952) (current version at 35 U.S.C. §§ 1-351 (2000). 21 Kenneth L. Port, Jay Dratler, Jr., Faye M. Hammersley, Terence P. McElwee, Charles R. McManis & Barbara A. Wrigley, LICENSING INTELLECTUAL PROPERTY IN THE INFORMATION AGE 6 (2d ed. 2005) (citing SRI Int’l v. Matsushita Elec. Corp., 775 F.2d 1107, 1121 (Fed. Cir. 1985) (en banc) (“If structural claims 799 SEVENTH CIRCUIT REVIEW Volume 2, Issue 2 Spring 2007 exchange for disclosing the patented invention in sufficient detail within the patent application, the Government grants the patentee a twenty-year monopoly from the filing date of the patent to exercise any of the exclusionary rights.22 The monopolistic rights give the patentee the ability to gain financially from the patent in various ways.23 The patentee may sell the invention or rights to the invention at monopolistic prices to recoup any investment costs into research of the patented technology, or simply to realize a profit.24 The patentee may assign or license all or some of the patent rights to another in exchange for any price or even no price at all.25 A patentee may license use of the patented technology to another in exchange for royalties, rights to use another patented technology (cross-licensing agreements), or for just about anything that the parties agree upon.26 In short, a patent grants rights similar in function to holders of tangible property27—except the right to use.28 were to be limited to devices operated precisely as a specification-described embodiment is operated, there would be no need for claims”).