United States: Breach Of Terms In A Patent License Agreement May Not Give Rise To Infringement Claims Unless Terms Are A Condition Of The License

Abstract

An Illinois District Court ruled that breach of a patent license agreement does not automatically give rise to patent infringement claims. Instead, whether the breach gives rise to patent infringement or contract claims depends on which term was allegedly violated and whether the term is a condition to the license or merely a contractual promise. The former can result in a patent infringement claim, whereas the latter can result in a breach of contract claim.

Background

Kenall Manufacturing Company ("Kenall") sued Cooper Lighting, LLC and Eaton Corporation (together, "Cooper") for patent infringement and breach of contract based on a license agreement that resolved a prior lawsuit between the parties. The license agreement gave Cooper a "worldwide, nonexclusive license" to manufacture and sell certain "Single" and "Continuous" products subject to some restrictions. In return, Cooper agreed to place a patent notice on every licensed product and make a one-time royalty payment as well as quarterly payments for sales of Continuous products starting on January 1, 2008 through the expiration of the last licensed patent. Cooper also agreed to redesign the Single product by January 1, 2008 and if Cooper needed additional time, it could continue selling the Single product until April 1, 2008, subject to a separate royalty payment. The agreement also included other provisions, including a termination clause and an Illinois choice of law provision.

Kenall alleged Cooper had not placed the required patent notices on its products, failed to make royalty payments, had not redesigned the Single products, and continued to sell the Single products after the period allowed under the license, leading to a breach of the license agreement and a patent infringement cause of action. Cooper, in turn, argued the presence of a license precluded Kenall from alleging patent infringement, and Kenall's only remedy could be under contract law. Both parties moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). Kenall sought judgment in all its claims and Cooper sought judgment only on Kenall's patent infringement claims.

TheKenallDecision

Cooper argued that, by giving Cooper a "worldwide, nonexclusive license" to manufacture and sell certain products, Kenall relinquished its right to sue Cooper for patent infringement and could only assert breach of contract claims. Kenall disagreed, arguing that because the license was "subject to the terms, conditions, and limitations," and because Cooper violated those terms, all associated sales of the products were outside the license's scope and therefore gave rise to patent infringement claims.

The court rejected both all-or-nothing positions, finding that courts should assess each breach individually to ascertain whether the terms allegedly breached are limitations on the scope of the license giving rise to patent infringement claims, or contractual covenants to be resolved through breach of contract actions. Applying Illinois law, the court explained that when the intent of the parties is less than clear, courts will construe terms as independent covenants.

Here, while the license granted Cooper a worldwide, nonexclusive license "subject to the … limitations" in the agreement, the "subject to" language did not overcome the presumption in favor of covenants over conditions. First, the separate enumeration of "terms, conditions, and limitations" suggested that not every term in the agreement was a condition. Second, an agreement "subject to" certain limitations is different than an agreement "conditioned on" those limitations. Third, because the license included a termination clause, interpreting the "subject to" language as a condition (the breach of which could nullify the agreement) would render the termination clause superfluous.

The court explained that the patentee can delineate the scope of the license by restricting the "who, what, when, and where" of an authorized sale. Such restrictions protect the patentee's bundle of rights and a breach can give rise to patent infringement claims. On the other hand, restrictions that do not inform whether a sale is authorized and have nothing to do with the patentee's rights do not limit the license's scope, and can be resolved under contract law.

Turning to Kenall's allegations, the court found Cooper's failure to place patent-notice labels on its products or pay royalties for its products did not make the sale of such products unlicensed. Therefore, those breaches did not give rise to patent infringement claims. Similarly, any obligation on Cooper to redesign the Single products was a contractual covenant that did not affect the license's scope. Thus, this also did not give rise to a claim of patent infringement. In contrast, Cooper's continued sales of Single products after April 1, 2008 would be outside the scope of the license. Thus, those salesdidgive rise to patent infringement claims. Therefore, the court denied Kenall's motion and granted Cooper's motion in part, dismissing Kenall's infringement claims except those pertaining to sales of the Single products after April 1, 2008.

Strategy and Conclusion

When drafting agreements, parties should consider whether they intend certain provisions to be conditions of the license or mere contractual obligations, and use corresponding language in both the specific provisions and the entirety of the agreement. The language used and the meaning of those provisions can later dictate whether breach of those provisions will be resolved under patent infringement or breach contract claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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