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November 3, 2009

License Crossed

Philips and 3M inked a patent cross license in 1995. The next year, 3M spun off Imation. The agreement, which granted license to subsidiaries, continued. In 2003, Imation formed a joint venture that created GDM. In 2006, Imation acquired Memorex. In 2007, Imation filed a declaratory judgment action seeking a finding that GDM and Memorex are licensed subsidiaries under the agreement. The district court ruled against Imation, and so Imation appealed.

Imation v. Koninklijke Phillips et al (CAFC 2009-1208, 1209) precedential

This is a basic contract dispute, governed by state law. In this case, New York state law.

As the Agreement provides that it shall be "construed, governed, interpreted and applied in accordance with the laws of the State of New York," and as the parties do not dispute that New York law governs the Agreement, this court will apply New York substantive law in interpreting the Agreement. See Parental Guide of Texas, Inc. v. Thomson, Inc., 446 F.3d 1265, 1269 (Fed. Cir. 2006); see also Power Lift, Inc. v. Weatherford Nipple-Up Sys., Inc., 871 F.2d 1082, 1085 (Fed. Cir. 1989) ("A license agreement is a contract governed by ordinary principles of state contract law.").

The four-corners rule for contracts applies.

Under New York law, "[c]onstruction of an unambiguous contract is a matter of law, and the intention of the parties may be gathered from the four corners of the instrument and should be enforced according to its terms." Beal Sav. Bank v. Sommer, 8 N.Y.3d 318, 324, 834 N.Y.S.2d 44, 47-48, 865 N.E.2d 1210, 1213-14 (2007). New York courts construe contracts "so as to give full meaning and effect to the material provisions," mindful that a proper "reading of the contract should not render any portion meaningless." Id. "Further, a contract should be 'read as a whole, and every part will be interpreted with reference to the whole; and if possible it will be so interpreted as to give effect to its general purpose.'" Id. (quoting Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358, 763 N.Y.S.2d 525, 794 N.E.2d 667, 670 (2003)). With this guidance in mind, we consider the plain language of the Agreement.

The nut of the case is whether the agreement was a single license grant, or an agreement to grant multiple licenses over time. Philips argued that the grant was over time, with the window to grant licenses closing with the expiration date of the agreement, and not extending through the life of the licensed patent. This is the argument that the district court bought into.

Underlying both the district court's Rule 12(c) opinion and the instant appeal is the issue of whether the court should construe each of the Agreement's license grants as a single, unitary grant of a license or an agreement to grant multiple licenses over time. Philips maintains that the language in Article 2, which states that "Philips agrees to grant and does hereby grant," is a grant of multiple licenses over time. In other words, Philips contends that "each party grants some licenses at the time of execution ('does hereby grant') and some in the future ('agrees to grant')," Appellees' Br. 23, as new patents or Subsidiaries come into existence. Under this theory, which the district court adopted, the time frame during which additional licenses may be granted closes with the expiration date, and licenses that "had been granted" prior to the expiration date, pursuant to Article 4, would continue for the life of the licensed patents. Appellants, on the other hand, argue that Article 2 effects a present grant to Imation and its Subsidiaries as a group--and the term of these licenses is the life of the licensed patents. Under this logic, once GDM and Memorex became "Subsidiaries," as defined in the Agreement, they automatically received the benefits of the group licenses granted to all Imation "Subsidiaries." Consequently, this court must interpret the license grants in Article 2, and specifically the language that "Philips agrees to grant and does hereby grant."

But the CAFC panel considered the license a single grant.

Applied to this case, each of the Article 2 licenses in which Philips "agrees to grant and does hereby grant to [Imation] and its SUBSIDIARIES a personal, non-exclusive, indivisible, nontransferable, irrevocable, worldwide, royalty-free license" 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" (emphasis added). As discussed above, "Licensed Patents" includes patents filed after the expiration date as long as they claim priority to a date on or before the expiration date. As of the effective date of the Agreement, each license to Imation and its Subsidiaries vested immediately, and thus the licenses "had been granted" prior to the expiration date, pursuant to Article 4. As discussed in the next section, the unambiguous language of the "Subsidiary" definition allows class membership to grow (or shrink) over time, and so the non-existence of GDM and Memorex at the time of the license grant did not prevent either entity from receiving the benefits of the fully vested licenses.

Philips' contention that each Article 2 license grant is a grant of multiple licenses over time also conflicts with the plain language of Article 2's use of the singular form of "license." In addition, the plain language of Article 3 provides that the term of the licenses granted under Article 2 "shall commence on the effective date of this Agreement."

Naturally, contract interpretation hinges on term definitions; in this case, 'subsidiary,' which was "unambiguous", and 'hereafter,' which the CAFC took for its plain meaning, but which Philips wanted something narrower.

One problem here, as with many contested contracts, is not just what was put in, but also what was left out.

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."  U.S. Fid. & Guar. Co. v. Annunziata, 67 N.Y.2d 229, 233, 501 N.Y.S.2d 790, 792, 492 N.E.2d 1206, 1208 (1986); see also Sterling Investor Servs., Inc. v. 1155 Nobo Assoc., L.L.C., 30 A.D.3d 579, 581, 818 N.Y.S.2d 513, 516 (App. Div. 2006). Although the parties could have referenced the expiration date in the definition of "Subsidiary," they did not.

And so Imation was right: its subsidiaries are covered for the life of the patents licensed.

Indeed, the licenses granted here do not terminate with the Agreement's expiration but rather extend for the life of each relevant patent. As the parties clearly contemplated receiving the benefits of the licenses for the life of each licensed patent, there is no reason to deny this benefit to the Subsidiaries formed or acquired after the Agreement's expiration.

Reversed and remanded.

Posted by Patent Hawk at November 3, 2009 2:05 PM | Case Law

Comments

Welcome back Hawkie - we missed you.
IS this a one-time update or can we look forward to, once again, enjoying almost-daily updates of your excellent blog.

Posted by: anonymousAgent at November 4, 2009 9:39 AM

Hawk,

Hopefully this is a sign that the CAFC has ended its month of silence.

For what it's worth, I don't think the CAFC's interpretation is consistent with what the drafters intended. They specifically drafted an agreement that expired. If they had wanted to achieve the result that the CAFC reached, they could have just as easily written an agreement that persisted for the life of the patents and closed off entry of new patents after the March 1 date ...

Posted by: Patrick at November 5, 2009 8:19 AM