Federal Circuit: When are Subsidiaries Covered in a License Agreement?

Imation v. Koninklijke Philips Electronics200911040909.jpg (Fed. Cir. 2009)

At its heart, this case is simply one of contract interpretation.

Philips and Imation (via 3M) had originally cross-licensed a set of patents relating to CD and DVD technology. The agreement expired in 2000, although the licenses themselves were irrevocable and continued. After 2000 several subsidiaries were formed (GDM and Memorex), and Philips argued that those companies activities were not licensed because the companies were formed after expiration of the agreement.

On appeal, the Federal Circuit held that the later-formed subsidiaries were included within the original grant of rights just like future inventions are included within properly drafted assignment agreements. In the license states that Philips “agrees to grant and does hereby grant to [Imation] and its Subsidiaries a personal, non-exclusive, indivisible, nontransferable, irrevocable, worldwide, royalty-free license.” According to the court, that grant is a ” singular, present grant to a class composed of Imation and its Subsidiaries of rights to existing and future patents that fall within the definition of ‘Licensed Patents.’” Philips (losing) argument was that the grant language formed “multiple licenses over time.” Under that theory, no license would be granted to subsidiaries formed after 2000.

Reversed and Remanded

Notes:

  • Read the Decision: 09-1208.pdf
  • Oddly in July 2009, the parties announced that the litigation had been settled. Link.

16 thoughts on “Federal Circuit: When are Subsidiaries Covered in a License Agreement?

  1. Patrick, also consider that the definition of Licensed Patent referred to Agreement’s expiration date while the definition of Subsidiary did not.

    But as I said, the Philips definition is nonsensical from a practical point of view. Had the issue ever come up during negotiation, no company would have agreed that the paid up license would have been effective only to the exact corporate structure in place at the expiration of the capture period.

    Philips is clearly overreaching here, which will be noted to those who do business with that company in the future.

  2. Patrick says:

    “Only pre-existing license obligations continued in perpetuity”

    Yes, that’s correct, but was there a pre-existing license obligation to extend the license to anyone who became a subsidiary hereafter? That’s all that’s required to reach the CAFC’s result and that’s how I read the contract.

    I don’t believe hereafter meant up until March 2000. Why even use that word without qualification?

  3. Ned, check out my post for more detail on my argument. Too much to reprint here…

    And the “term” ended the agreement (“[t]he term of this Agreement shall expire on March 1, 2000″). Seems clear to me. Only pre-existing license obligations continued in perpetuity. As I pointed out in my post, the CAFC effectively re-wrote the contract to capture what the panel decided the parties intended. This was inappropriate. Enforce the agreement as it is written; if the intent is unclear, that’s what trials are for.

  4. Off-topic, perhaps, but are the shortened URLs really necessary? We have no way to tell from those URLs whether the site we’re about to visit might be safe-for-work or not.

  5. Patrick, the “term” ended the capture period for new patents. This is typical of cross licenses. But, since the patent licenses continue for the life of the patents, it would make no sense whatsoever for the licenses to be frozen to the exact corporate structure that existed on the date of expiration. Had either side ever proposed such during negotiation, I assure you that a provision would have been added to clarify that the expiration date went only to the capture period and it did not affect corporate structure.

  6. My guess is that the settlement is similar to the one that was in place in Microsoft v. AT&T. By the time that case got to the Supreme Court the only issue was the amount that Microsoft would pay AT&T and the parties had privately agreed that Microsoft would pay X if AT&T won and Y (where Y

    Presumably, there are settlement terms that will or won’t kick in because of the CAFC’s decision. Imitation might also be entitled to a rebate under the terms of the settlement.

  7. Someone please help me.

    If this case settled in July why was this decision even issued?

    I agree with the decision on the merits, I just don’t understand the procedure.

  8. Note to Mooney,

    As noted by Mr. Heller, contracts are a place where draftsmanship CAN make a difference. Different draftsmanship on the new rules would have been lipstick on a Mooney, the rules would have been just as ugly and just as worthy of being stricken down…

  9. Without getting too deeply into the issue, it appears that Philip’s real complaint here was that these so-called subsidiaries were really joint ventures Imation formed with third parties that Philips did not want to license for its own reasons.

    Phillips could’ve prevented the situation if it had drafted its license agreements more carefully. The Federal Circuit is correct in its textual analysis.

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