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Is it Licensed? Or is it Memorex?

The hunger for blog fodder is apparent today, as writers were quick to jump on yesterday’s decision in Imation Corp. v. Koninklijke Philips Electronics N.V.,  the first substantive patent opinion from the CAFC in more than a month.   Patent Hawk, PatentlyO and even the usually slow IP360 have all reported the decision as of this morning, with Hawk crossing the finish line first, at least by my count.  Even more interesting is the amount of coverage already given to this case, despite the fact that it largely relates to a state-law contract issue.

Briefly resetting the facts, Philips and Imation were parties to an agreement, where licenses were granted to LICENSED PATENTS between the parties and their SUBSIDIARIES.  The agreement expressly expired on March 1, 2000.  As you might have guessed, the capitalized words are defined terms.   LICENSED PATENTS was defined roughly as (1) patents owned or controlled by the parties or their SUBSIDIARIES that (2) relate to specific subject matter and (3) have a filing date, or are entitled to an effective filing date that is prior to the expiration of the agreement.  The term SUBSIDIARIES was defined as a business organization in which the parties “now or hereafter” have more than a 50% ownership interest.

The present dispute dealt with whether two Imation subsidiaries (including Memorex) were licensed under the terms of the agreement.  Perhaps fearful of an infringement suit, Imation and Memorex filed a declaratory judgment action seeking an order that the subsidiaries are licensed under the aforementioned agreement.  Much of the case dealt with whether the grant language consisted of a single, unitary grant or multiple grants over time.  Surprisingly, the CAFC claimed that it did not find analogous cases from New York state courts construing language similar to the grant language in the license agreement.  However, the language at issue—agrees to grant and does hereby grant—should have been recognized as being similar to language from commercial sales agreements—agrees to sell and does hereby sell.  Is it possible that the New York courts lack a sufficient repository of commercial disputes?  The fact that this language conveys a singular grant is not controversial.

However, this does not sufficiently answer the question of whether the Imation subsidiaries are properly licensed under the agreement.  Importantly, the subsidiaries were not acquired until after the March 1, 2000 expiration of the cross-license agreement.  According to the CAFC, “the use of the phrase ‘now or hereafter’ connotes that Subsidiaries may come into existence at some unspecified future time.”

Of course, the mere fact that the parties contemplated future subsidiaries says nothing about whether the parties agreed to be bound by the contract’s definition of SUBSIDIARIES beyond the March 1, 2000 expiration date of the agreement.  The CAFC avoids this point, by arguing instead that “[t]he plain language of Section 13 [the SUBSIDIARY DEFINITION] contains no explicit temporal limitation.”  That is, because the parties did not expressly discuss whether the definition survives the agreement, the Court held that the parties’ intention was that the definition controls this dispute:

Further, the absence of a temporal limitation in the Section 13 “Subsidiary” definition is especially apparent when compared to the Section 12 “Licensed Patents” definition that immediately precedes “Subsidiary” in the Agreement. Unlike the “Subsidiary” definition, the “Licensed Patents” definition explicitly references the Agreement’s expiration date. Where one provision of an agreement contains a particular reference, the omission of this reference from any similar provision “must be assumed to have been intentional under accepted canons of contract construction. [citations omitted]  Although the parties could have referenced the expiration date in the definition of “Subsidiary,” they did not.”

The CAFC’s reasoning suggests that, because an expiration provision was referenced in one section of the agreement, it must be referenced in all other sections in which the expiration provision applies.  However, Section 12 specifically mentions expiration because it is contradicting the otherwise obvious effect of the expiration provision.  Apparently, under the CAFC’s rule, it would also be the drafter’s duty to point out where the expiration provision is supposed to apply, at least if it is contradicted in a “definition that immediately precedes” it.

In addition, the CAFC focuses on what “the parties could have” referenced rather than on what they did.  After all, it is equally apparent that the parties could have allowed the agreement to continue in perpetuity while defining the scope of the licensed patents so as to not allow new patents to become licensed if they are filed after some specific date.  In fact, had the parties written the contract in such a manner, with all other things being equal, the CAFC’s decision would undoubtedly be correct.  Instead, the parties drafted an agreement that expressly expired, with only pre-existing license obligations to continue in perpetuity.  Thus, reading the agreement “as a harmonious, integrated whole, as New York law requires” might equally compel the conclusion that the parties contemplated closing the door, at a specified future date, in order to provide finality and certainty as to the scope and coverage of the license.  Meanwhile, the language contravening the expiration date in the LICENSED PATENTS definition was designed specifically to avoid permitting a party using a continuation application to nullify the entire purpose and spirit of the contract.

In other words, one does not contradict the agreement by bringing later filed, related patents into the scope of the license while simultaneously excluding patents owned by subsidiaries that do not come into existence until after the expiration of the contract.  Rather, such an interpretation gives the contract its full meaning, without rendering the expiration provision meaningless, which is the court’s obligation.  In the meantime, attorneys should add this case to their ever growing library of contract drafting rules, and should consider whether the likely interpretation of an expiration provision is consistent with what the client intends.

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