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Federal Circuit Affirms SJ of Patent Exhaustion Based on a Valid License Assignment

April 18, 2011

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Last Month at the Federal Circuit - May 2011

Judges: Gajarsa (author), Linn, Dyk

[Appealed from: E.D. Va., Judge Lee]

In Rembrandt Data Technologies, LP v. AOL, LLC, No. 10-1002 (Fed. Cir. Apr. 18, 2011), the Federal Circuit affirmed the district court’s determination that Rembrandt Data Technologies, LP’s (“Rembrandt”) right to enforce the patents-in-suit was extinguished by patent exhaustion.  In addition, the Federal Circuit affirmed the district court’s grant of SJ of indefiniteness for some of the claims, but reversed the district court’s indefiniteness judgment for other claims and remanded the case for further proceedings consistent with its opinion.

Rembrandt is the owner by assignment of U.S. Patent Nos. 5,251,236 (“the ’236 patent”) and 5,311,578 (“the ’578 patent”), which claim certain types of computer modems and methods of identifying modems.  The ’236 and ’578 patents were initially owned by AT&T Corporation (“AT&T”) and were subsequently assigned or transferred via various license agreements.  In 1988, Rockwell International Corporation (“Old Rockwell”) and AT&T cross-licensed the patents-in-suit (“the 1988 License Agreement”).  In 1995, the 1988 License Agreement was amended through a Side Letter Agreement (“the 1995 Side Letter Agreement”), which granted Rockwell additional rights, including sublicensing rights.  In 1996, Rockwell reorganized its corporate structure and conveyed substantially all of its businesses and assets to the post-1996 reorganized Rockwell (“New Rockwell”).  Later that year, Lucent Technologies, Inc. (“Lucent”), which had since acquired the patents-in-suit from AT&T, acknowledged Rockwell’s reorganization and Old Rockwell’s assignment of its rights and notification obligations to New Rockwell.  New Rockwell subsequently paid royalties to Lucent.  Thereafter, New Rockwell spun off its Semiconductor Systems unit, including its modem business, to Conexant Systems, Inc. (“Conexant”).  Conexant manufactures modem chipsets that are incorporated into products sold by its customers Canon U.S.A., Inc., Canon Business Solutions, Inc., and Canon Information Technology Services, Inc. (collectively “Canon”), and Hewlett-Packard Company (“HP”).  Rembrandt ultimately acquired rights to the patents-in-suit and accused the Canon and HP products of infringement.

After construing several claim terms, the district court granted Canon’s motion for SJ of exhaustion of the patents-in-suit because Conexant, Canon and HP’s modem chipset supplier, was properly sublicensed under the 1988 License and 1995 Side Letter Agreements.  The district court also held claims 3-11 of the ’236 patent invalid as indefinite for improperly mixing method and apparatus elements.  Later, Canon filed a motion to amend the district court’s findings to include claims 1 and 2.  In response, the district court held that claims 1-11 of the ’236 patent were invalid for failing to disclose algorithms corresponding to functions set forth in the claims.  Rembrandt appealed.

The Federal Circuit found that “[b]ecause Conexant is licensed, Rembrandt’s rights are exhausted and it cannot recover from Canon and HP.”  Slip op. at 10.  First, the Court found that the sublicense rights were properly assigned from Old Rockwell to New Rockwell.  Under the 1988 License Agreement, Old Rockwell licensed numerous patents, including the patents-in-suit, from AT&T.  The 1995 Side Letter Agreement recognized that the licenses and rights granted in the 1988 License Agreement may be sublicensed to any future divested present business of Rockwell.  Thus, the Federal Circuit found that in 1996, when Old Rockwell reorganized, it divested its agreements and licenses to New Rockwell, including its rights and obligations under the 1988 License and 1995 Side Letter Agreements, including its right to sublicense.

Second, the Federal Circuit rejected Rembrandt’s argument that an assignment required AT&T’s written consent because the 1995 Side Letter Agreement specifically provided that assignments were applicable to divested present businesses of Old Rockwell.  With respect to Conexant, the Court noted that, in 1988, New Rockwell divested its modem business to Conexant and granted it a royalty-free, worldwide, irrevocable, nonexclusive license under all intellectual property rights, including the patents-in-suit.  Further, although a nonexclusive licensee usually does not have the right to assign the license or further sublicense, the 1995 Side Letter Agreement specifically permitted an assignment when a present business was divested. 

Finally, the Federal Circuit rejected Rembrandt’s argument that the sublicense did not apply to the modem chipsets-at-issue because they were not the exact types of modems in production at the time of the sublicense and/or divestiture.  The Court noted that neither the 1988 License Agreement nor the 1995 Side Letter Agreement referred to specific models of modems; rather, the agreements specified product types using general functional terms, such as “data communication station systems” and “digital transmission systems.”  Thus, because these and other sublicensing conditions in the 1995 Side Letter Agreement were satisfied, the license and rights could be assigned to New Rockwell and Conexant.

The Federal Circuit also addressed the district court’s SJ findings of invalidity.  The Federal Circuit agreed with the district court’s ruling that claim 3 and dependent claims 4-11 of the ’236 patent were invalid as indefinite for reciting an apparatus and a method of using that apparatus in the same claim.  The Court rejected Rembrandt’s argument that its omission of an apparatus limitation in the method element of the claims was an obvious administrative or typographical error not subject to reasonable debate, and thus correctable by the Court.  Instead, the Federal Circuit noted that it “repeatedly and consistently has recognized that courts may not redraft claims, whether to make them operable or to sustain their validity.”  Id. at 16 (quoting Chef Am., Inc. v. Lamb-Weston, Inc., 358 F.3d 1371, 1374 (Fed. Cir. 2004)).  Thus, because the correction suggested by Rembrandt was “not minor, obvious, free from reasonable debate or evident from the prosecution history,” the Court refused to redraft the claims.  Id. at 17 (citation omitted).

The Federal Circuit, however, found the district court’s SJ finding of indefiniteness of claims 1 and 2 of the ’236 patent erroneous because there was a genuine issue of material fact regarding the patent’s disclosure.  The Federal Circuit noted that the district court erred in interpreting the recited “fractional rate encoding means” and “trellis encoding means” as means-plus-function elements governed by 35 U.S.C. § 112, ¶ 6.  Instead, the Court found that the terms themselves conveyed sufficient structure to one of ordinary skill in the art to overcome the presumption that claim limitations containing the term “means” should be construed pursuant to § 112, ¶ 6.  Specifically, the parties did not dispute that the phrases “fractional rate encoding” and “trellis rate encoding” defined algorithms known to skilled artisans at the time of invention.  The parties, however, disputed whether the algorithms needed for two other claim elements, “buffer means” and “combining means,” were disclosed.  Based on expert testimony put forth by Rembrandt, the Federal Circuit found that there were genuine disputes of material fact regarding whether those algorithms were sufficiently disclosed such that SJ was inappropriate.

Accordingly, the Federal Circuit affirmed the district court’s holding regarding exhaustion and SJ of invalidity of claims 3-11 of the ’236 patent for indefiniteness, but reversed the district court’s SJ of invalidity of claims 1 and 2 of the ’236 patent and remanded for further proceedings consistent with its opinion.


Summary authored by Kelly B. McClellan, Ph.D., Esq.