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Federal Circuit Case Law

Sandisk Corporation, v. Stmicroelectronics, Inc. and Stmicroelectronics NV.
Decided March 26, 2007 pdf
Judge Linn with Judges Bryson and Dyk, Bryson concurring separately

A party does not need “reasonable apprehension” of a lawsuit from a patentee to assert a declaratory judgment action against the patentee.

ST contacted a competitor (Sandisk) in the flash memory chip market for possible cross licensing. During negotiations, ST’s technical experts identified specific claims of ST’s patents and identified SanDisk’s products that are covered by those claims. Discussions broke off and SanDIsk sued ST at the U.S. District Court for the Northern District of California for summary judgment of non-infringement and patent invalidity. Judge Jeremy Fogel, noting that ST had orally assured SanDisk that ST would not sue, dismissed the case for lack of reasonable apprehension on the part of SanDisk as needed to establish jurisdiction for a declaratory judgment suit.

SanDisk appealed to the Federal Circuit, which reversed because the Supreme Court recently (MedImmune v. Genentech) rejected the federal circuit’s legal requirement of a “reasonable apprehension of immediate lawsuit” to establish jurisdiction for a preemptive declaratory judgment action. The Supreme Court clarified that merely a “substantial controversy” is required. In his concurring opinion, Judge Bryson repeated that “where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without a license, the party may bring a declaratory judgment action.”

A would be licensee now can more easily attack a patentee by filing a declaratory judgment action at a court of its choosing, and a patentee has to be more careful when contacting a possible infringer. Under the new rule, a patentee might still avoid trouble by: 1. not identifying any ongoing or planned activity of the other party when informing the other side of the patent; and/or by 2. executing a confidentiality agreement with the other party before identifying any ongoing or planned activity by the other party. In other words, a patentee might still provide notice of a patent to a possible infringer, but should not “assert rights under” the patent” by identifying any specific product or activity of the other party. Furthermore, an unwillingness of the other party to execute a confidentiality agreement with a patentee should be an early sign that the other side prefers to litigate instead of licensing an infringed patent.

Incorporation of “the American Arbitration Association Rules” into a license agreement gives the arbitrator “the power to rule on his or her own jurisdiction.”

Qualcomm’s license agreement with Nokia granted rights to wireless CDMA system patents but specified that “any dispute…arising out of or relating to this Agreement” …”shall be settled by arbitration in accordance with (the American Arbitration Association) rules.” Qualcomm sued Nokia 4 years later at the U.S. District Court for the Southern District of California for allegedly infringing claims to other patents that cover a later (GSM) system technology. Nokia initiated arbitration and appealed judge Rudi Brewster’s decision not to stay the district court litigation, after the judge opined that the GSM technology issues differed from CDMA issues.

The Federal Circuit vacated the district court’s denial of the stay and instructed the district court to first inquire whether the parties “clearly and unmistakably” delegated “arbitraility decisions to an arbitrator, and if so, whether the assertion to arbitrate is wholly groundless.” Unfortunately for Qualcomm, the license agreement specifically incorporated “the AAA rules,” which specify that the arbitrator decides whether or not something is subject to the arbitration.

Negotiators should be wary of incorporating rules en masse (such as from an arbitration association) into a license agreement. Such license terms can yield unintended consequences.

Sicom Systems Ltd., v. Agilent Technologies, Inc. et al.
Decided October 18, 2005 pdf copy
Judge Prost with Judges Mayer and Rader

* An exclusive licensee that is not free to sublicense or assign lacks standing to sue without joining the licensor.

Sicom, an exclusive "commercial" licensee of the Canadian government, sued Agilent at the U.S. District Court for the District of Delaware for allegedly infringing patent claims to digital transmission systems that use eye patterns. Judge Joseph Farnan, Jr. dismissed the suit for lack of standing because Canada had withheld the right to sue for non-commercial infringement, maintained control over sublicensing and did not participate in the litigation. Sicom appealed to the Federal Circuit.

The Federal Circuit affirmed because Canada did not transfer substantially all rights to Sicom. In particular, the Federal Circuit noted that "the restriction on Sicom's right to assign was a fatal reservation of rights by Canada."

The Federal Circuit outlined license terms that transfer substantially all rights and that support standing. Notably, such license should: a) transfer all rights including the right to assign and can merely oblige the licensee to inform the licensor in the event of suit; b) include a reversionary right to the patentee in the event of bankruptcy or production termination; and c) include a right to share infringement damages.

U.S. Philips Corporation v. International Trade Commission et al.
Decided September 21, 2005 pdf copy
Judge Bryson with Judges Gajarsa and Linn

* A "package patent license" that includes patents to other unneeded technologies is
"not anticompetitive in the way that a compelled purchase of a tied product would be."

Philips licensed four different pools of patents to a number of companies. Each pool included "essential" patents and "non-essential" patents for producing compact discs. Some of the licensees stopped paying fees and Philips filed a complaint with the International Trade Commission ("ITC"), alleging violation of section 337(a)(1)(B) of the Tariff Act. The respondents, however, convinced the ITC that the asserted patents were unenforceable on patent misuse grounds because needed patents were tied to un-needed patents, which violates an antitrust law principle. Philips appealed to the Federal Circuit.

The Federal Circuit reversed because "Philip's package licenses do not require that licensees actually use the technology covered by any of the patents that the Commission characterized as nonessential." Philips' "package licenses" were not anticompetitive because they did not involve "a compelled purchase of a tied product." In fact, the Federal Circuit pointed out that "package license agreements in which the royalty was based on the number of units produced, not the number of patents used to produce them, can resolve in advance all potential patent disputes" and may be a good thing.

We live in a patent proliferation world, where even trying to figure out which patents in a portfolio really cover a product can chew up significant legal resources. This Federal Circuit decision favors patent pooling, which if done properly, can lower the cost of doing business.

Storage Technology Corp. v. Custom Hardware Engineering & Consulting, Inc. et al.
Decided August 24, 2005 pdf copy
Judge Bryson with Judges Rader and Schall

* 17 U.S.C. 117(c)(2) may allow 3^rd party maintenance vendors to copy and temporarily use non-essential software that automatically loads upon computer startup.

Storage licenses its copyrighted computer code, which manages tape libraries, to its customers, but excludes the "maintenance code" portion of the software from the licenses. Custom, which lacked a license, repairs data libraries for these customers by turning on their computers and reading diagnostics codes after defeating a security function. This prompted Storage to sue Custom at the U.S. District Court for the District of Massachusetts, for alleged copyright infringement and other alleged misdeeds. Judge Rya Zobel granted Storage a preliminary injunction and Custom appealed to the Federal Circuit.

Custom’s primary defense was the safe harbor provision of 17 U.S.C. 117(c), which allows use of software "for purpose only of maintenance or repair" of a machine if the software copy "is made solely by virtue of activation of (the) machine." The Federal Circuit vacated the injunction because the maintenance software was intertwined with essential (and licensed) operating software and the computer could not be turned on without loading both types. The Federal Circuit also clarified that "the term ’maintenance’ has a much broader temporal connotation…including ‘checking the proper functioning of …components.’" This clarification may broaden the availability of section 117(c) as a defense for unlicensed software users.

Judge Rader dissented because "the maintenance code as such is incidental, not indispensable, to activation" and opined that the majority opinion turns the safe harbor provision of 117(c) into "a carte blanche license to use any program loaded into a computer’s RAM when a machine is turned on."

Unfortunately, the software vendor had blended user software with maintenance software yet only licensed the user portion. Software blending often is difficult to avoid. The Federal Circuit however, hinted that a software license could be written to authorize use by "a particular person" instead of being "tied to a particular machine" to prevent third party vendor use.

Mark Thatcher et al. v. Kohl's Department Stores, Inc. et al.
Decided February 10, 2005 pdf copy
Judge Mayer with Judges Michel and Linn

* Consent judgments must be carefully drafted because they "are fundamentally different from contracts" and reflect "a compromise of contested legal positions."

Thatcher and Kohl's settled their patent litigation dispute over Kohl's sale of shoes, at the U.S. District Court for the Northern District of Illinois, by executing a consent decree that specified "Kohl's obligation to avoid infringing activity" including all "successors-in interest" of Kohls. The consent decree unfortunately (for Thatcher), lacked "language of assignability, such as the 'successors-in-interest' languge used when discussing Kohl's obligations." Deckers acquired Thatcher's property rights and then discovered an alleged violation by Kohls of the consent decree. As the purported successor in interest to Thatcher, Deckers attempted to enforce the consent decree against Kohls but judge George Marovich dismissed because Deckers was not a party to the consent decree but was merely a beneficiary. Thatcher and Deckers appealed to the Federal Circuit.

The Federal Circuit affirmed because the consent judgment was "silent" on the issue of enforceability by Thatcher's successors in interest, despite explicit language pertaining to Kohl's successors in interest. The court pointed out that consent agreements do not necessarily follow contract law principles, which otherwise would have allowed Deckers to proceed. A consent agreement drafter should be aware of this difference and should explicitly include conditions that otherwise might not be mentioned in a regular contract.

Stewart Lamle, v. Mattel, Inc.
Decided January 7, 2005 pdf copy
Judge Dyk with Judges Newman and Clevenger, Newman dissenting

* Under state law, a typed name on an email may represent a signature for contract purposes.

Lamle invented a board game "Farook," that he patented and negotiated with Mattel for licensing outside of the United States. During those license negotiations, Mattel "promised that it would sign a formal, written contract," as affirmed in an email from a Mattel employee. Following a subsequent marketing study, however, Mattel decided not to pursue a license and Lamle sued Mattel at the U.S. District Court for the Central District of California. After a first litigation and appeal, Judge Terry Hatter on remand held summary judgment that no contract had existed been Lamle and Mattel. Lamle appealed again.

A majority Federal Circuit panel determined that the "only question" in this case was whether a Mattel employee's "name on an email is a valid writing and signature to satisfy the Statute of Frauds." Because a "record or signature may not be denied legal effect or enforceability solely because it is in electronic form," the email created a genuine issue of material fact that precluded summary judgment. Judge Newman dissented from this view with an opinion that the parties had agreed "that any obligation would be contained in a formal written contract."

An email is easily written and sent, yet can convey a signed agreement. Such communication, particularly from an employee who is not a primary negotiator, should be carried out with great care.

Caterpillar Inc. v. Sturman Industries, Inc. Oded E. Sturman and Carol K. Sturman
Decided October 28, 2004 pdf copy
Judge Prost with Judges Newman and Dyk

* "Fraudulent inducement can serve to vitiate a release (from a contract) even when the release language was unequivocal."

Caterpillar and Sturman co-developed technology through a "Joint Development Agreement" ("JDA") for magnetic fuel injection switches. During that effort, Sturman came up with a new switch idea, which Caterpillar rejected. Subsequently Caterpillar induced Sturman to sign an amended JDA that paid Sturman cash for a "release of any claims" under the JDA. Sturman "repeatedly sought to determine which intellectual property" was covered by the release and Caterpillar indicated that the release would cover two patent applications. Caterpillar continued work on the idea, however, and both parties filed patent applications on the same subject, finally suing each other at the U.S. District Court for the Central District of Illinois over correction of inventorship, conversion and trade secret violations. Judge Joe Billy McDade entered summary judgment in favor of Caterpillar on a fraudulent inducement claim regarding the release executed with Sturman, final judgment in favor of Sturman for inventorship of Sturman's patent application and in Caterpillar's favor on other claims. Both sides appealed to the Federal Circuit.

The Federal Circuit reversed the summary judgment on fraudulent inducement because Sturman produced a contemporaneous note showing Sturman's understanding that the (settlement) JDA would "cover only the two patent applications and not" Sturman's new switch idea. Much of this decision concerned a non-patent issue of whether the district court improperly allowed a juror, whose husband was a Caterpillar employee, to sit on the jury, which prompted the Federal Circuit to vacate the jury verdict.

A theme of this case, is that joint technology development can be very messy. For example, one side may not reveal the true extent of its exploitation of ideas from the other, and may discount the relationship, while negotiating a settlement to part ways. License negotiators should be careful of providing all information in good faith, particularly when executing a final settlement agreement that disposes of all issues.

Microchip Technology Incorporated v. U.S. Philips Corporation et al.
Decided May 13, 2004 pdf copy
Judge Dyk with Judges Michel and Lourie

* "Unless the parties (to a contract) clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court."

Philips granted GI a license to Philips' patents, which included a mandatory arbitration clause in the event of a dispute. GI then "spun off" Microchip from a wholly owned subsidiary. During patent litigation with GI at the U.S. District Court for the District of Arizona, Microchip relied on its relationship with GI to argue that Microchip had a license to the litigated patents. While denying that Microchip was a party to the contract, Philips started an arbitration against Microchip in the International Court of Arbitration. Judge Paul Rosenblatt of the Arizona court granted Microchip a stay of the arbitration until the court could determine the parties to the license agreement and Philips appealed.

The Federal Circuit affirmed the lower court's decision to determine the existence of an arbitration agreement between Philips and Microchip before allowing arbitration. Citing several Supreme Court cases, the Federal Circuit panel pointed out that "the question of whether a party is bound by an agreement containing an arbitration provision is a 'threshold question' for the court (and not an arbitrator) to decide."

Contracts often include agreements to submit disputes to arbitration. However, the sale or transfer of assets, including license rights, from one company to a subsidiary or other party can create ambiguity regarding the enforcement of an arbitration provision. As a result, litigation at a court may be needed anyway. To combat this, a license drafter should consider specifying such possible transfers of license rights when writing a mandatory arbitration clause in a contract.

Intel Corporation, v. VIA Technologies, Inc.
Decided February 14, 2003 pdf copy
Judge Michel with Judges Mayer and Clevenger

* An ambiguous license agreement may be construed against a drafter of the agreement that is solely responsible for the license terms

Intel created an industry computer communication protocol standard and provided royalty-free licenses for companies having devices that "comply" with the standard "provided that such license shall not extend to features of a product which are not required to comply" with the standard. Intel later filed suit against VIA in the District Court for the Northern District of California, alleging that VIA's interfaces use Intel's invention outside of the license scope. Judge William Alsup agreed with VIA's expansive interpretation of the single one page license, decided that VIA's accused activities were allowed, and granted summary judgment of non-infringement. Alternatively, the court held that the license otherwise is ambiguous and under Delaware state law, should be construed against the drafter. Both sides appealed to the Court of Appeals for the Federal Circuit ("CAFC").

The CAFC affirmed. Although both Intel's interpretation and VIA's interpretation of the short agreement were "reasonable," Intel "alone drafted the agreement and had complete control over the language of its terms…..(and) [t]here was no negotiation between the parties." Thus, under Delaware contract law, when a contract ambiguity concerns "critical terms" of the license, the ambiguity is construed against the drafter without consideration of extrinsic evidence. Under this rule of "contra proferentum," a contract drafter that does not negotiate but presents the contract on a make it or leave it basis may be unable to present expert testimony during litigation to support the drafter's desired construction.

A party who drafts and offers an agreement to another with no negotiation must be particularly careful to make the agreement clear, or risk losing rights under the agreement. This is not Federal Circuit Law, but is state contract law in Delaware and in other states.