CoreBrace v. Star Seismic (CAFC 2008-1052) precedential

Star used third-party contractors to manufacture licensed products for its own use. CoreBrace contends that such use of third parties was a breach of the License because Star lacked the right to have a third party make products for Star. On January 4, 2008, CoreBrace sent a letter to Star stating that the License was terminated. The License provides that it can be terminated if it is breached, after written notice of the breach and after a thirty-day opportunity to cure. CoreBrace has not alleged that it provided notice of a breach or that it gave Star thirty days to cure such breach.

On January 4, 2008, the same day that it sent the termination letter, CoreBrace sued Star for breach of the License due to Star's use of third-party contractors and for patent infringement based on Star's use of patented products under a terminated License. Star moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a claim, and the district court granted Star's motion. The court held that Star did not breach the License by having third-party contractors make the licensed products.

According to the court, under Carey v. United States, 326 F.2d 975 (Ct. Cl. 1964), a patent licensee's right to "make" an article includes the right to engage others to do all of the work connected with its production. The court also relied on similar reasoning in Advanced Micro Devices, Inc. v. Intel Corp., 885 P.2d 994 (Cal. 1994). The court further reasoned that, even when a license prohibits sublicensing, as in this case, "have made" rights are granted unless they are expressly prohibited. The court distinguished Intel Corp. v. U.S. International Trade Commission, 946 F.2d 821 (Fed. Cir. 1991), as a case that was primarily about "foundry" rights, or a licensee's rights to make a product and sell it under a third party's name, and as having been based on the parol evidence of the parties' intent in that case not to grant such foundry rights. The court also examined the License and, based on its apparent acknowledgement of third-party manufacturers, concluded that nothing in the License precluded Star from having a third party manufacture the licensed product for Star. Thus, the court held that Star had the right to have a third party manufacture the licensed product for it.

The court then held that, even if Star had breached the License, CoreBrace did not properly terminate it because CoreBrace failed to follow the License's termination provisions. CoreBrace had conceded that it had not followed the termination provisions, but had argued that Star's breach of the License was incurable, so notice was not required prior to termination. According to the court, however, Star's alleged breach was not incurable, as CoreBrace could have notified Star that it should make the product itself, cease using a third party, or have the third party obtain a license. Such action, according to the court, would not have been impossible or futile. Furthermore, the court found that the alleged breach did not frustrate the purpose of the License, as the inventor collected a royalty from Star on each product, no matter who manufactured it. Thus, according to the court, CoreBrace should have followed the prescribed procedure for terminating the License, and the failure to properly terminate it meant that Star retained its rights under the License.

Finally, the court held that, because the License was neither breached nor terminated, Star could not have infringed the patent under which it was licensed.

Needless to say, CoreBrace appealed.

We conclude that in granting the 12(b)(6) motion the district court correctly determined that Star was entitled to have contractors make the licensed product and did not breach the patent license in doing so. "The question . . . whether a Rule 12(b)(6) motion was properly granted is a purely procedural question not pertaining to patent law, to which this court applies the rule of the regional [] circuit," in this case the Tenth Circuit. Gen. Mills, Inc. v. Kraft Foods Global, Inc., 487 F.3d 1368, 1373 (Fed. Cir. 2007) (quotation marks omitted). "A complaint is subject to dismissal for failure to state a claim if the allegations, taken as true, show the plaintiff is not entitled to relief." Jones v. Bock, 549 U.S. 199, 215 (2007).

State law covers contracts. In this case, Utah.

In Carey, the Court of Claims, one of our predecessor courts, whose decisions bind us, see South Corp. v. United States, 690 F.2d 1368, 1370-71 (Fed. Cir. 1982), held that a license to "produce, use, and sell" a product inherently includes the right to have it made by a third party. The court stated that a license to produce, use, and sell "is not restricted to production by the licensee personally or use by him personally or sales by him personally. It permits him to employ others to assist him in the production, and in the use and in the sale of the invention. Nor need he take any personal part in the production." Carey, 326 F.2d at 979. Thus, "his license permits him to engage others to do all the work connected with the production of the article for him." Id.; see also Advanced Micro, 885 P.2d at 1009 n.15 ("'[H]ave-made' rights--the right of a licensee to have a chip made for it by a third party foundry--were not expressly excluded under the 1982 contract, and in the absence of any finding by the arbitrator we cannot say they were not included in the contractual right to make and sell a licensed product."). Thus, one of our predecessor courts and the California Supreme Court have both persuasively held that a "have made" right is implicit in a right to make, use, and sell, absent an express contrary intent. We consider that the Utah Supreme Court would therefore likely arrive at the same conclusion were it to consider the issue.

Star did not breach the License by contracting with third parties to have the licensed products made for it. The right to "make, use, and sell" a product inherently includes the right to have it made by a third party, absent a clear indication of intent to the contrary.

A clear intent shown in a contract to exclude "have made" rights can negate what would otherwise be inherent.

Nothing in the disputed license indicated an intent to exclude "have made" rights.

Accordingly, the judgment of the district court dismissing the case for failure to state a claim is affirmed.