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Court Reverses Parent Company’s Release from Liability

March 31, 2004

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Last Month at the Federal Circuit - April 2004

Judges: Lourie (author), Clevenger, and Schall

In Unova, Inc. v. Acer Inc., No. 03-1244 (Fed. Cir. Mar. 31, 2004), the Federal Circuit reversed the district court’s SJ in favor of Hewlett-Packard Company’s (“HP”) affirmative defense of release, because a settlement agreement at issue did not release HP from liability for patent infringement.

Unova, Inc. (“Unova”) owns patents that relate to “smart battery” management technology. In other litigation, Unova had sued Compaq Computer Corporation (“Compaq”) for infringement of its smart-battery patents and entered into a settlement agreement to resolve those claims. Pursuant to that agreement, Unova granted a license and a covenant-not-to-sue for “Compaq products,” and released Compaq and its parents from liability for infringement.

After entry of the settlement agreement, HP became Compaq’s parent. Unova then filed suit against HP for infringement of its smart-battery patents. The district court granted HP’s motion for SJ, concluding that the release in the Unova/Compaq settlement agreement applied to HP because the release of Compaq’s “parents” was not limited to Compaq’s parents at the time of the agreement.

On appeal, the Federal Circuit concluded that the district court’s construction of the settlement agreement was incorrect and consequently did not release HP from liability for infringement of Unova’s patents. Applying California contract law, the Federal Circuit found that HP bore the burden of showing that the contracting parties intended to release HP in order to establish rights under the release agreement. According to the Federal Circuit, however, the plain meaning of the settlement agreement language could not be read as releasing HP from liability for infringement prior to its acquisition of Compaq. For instance, the release provision was written in the present tense and referred to acts of past infringement, and consequently did not refer to Compaq’s future parent. Furthermore, whereas other provisions of the agreement specifically made reference to future entities, such as “past, present, and future officers . . . ,” the release provision lacked such modification of the term “parents” and consequently did not reference future entities.

In addition, the Federal Circuit noted that its interpretation of the release provision was consistent with the structure of the settlement agreement as a whole. In particular, the covenant-not-to-sue and license provisions expressly applied only to Compaq-branded products, whereas the release provision was not similarly restricted to Compaqbranded products. The Federal Circuit found it unlikely that Unova reserved its right to sue HP for acts of infringement that occurred after it became Compaq’s parent, but also released HP from liability for identical acts that occurred before it became Compaq’s parent. Furthermore, other provisions demonstrated that Unova and Compaq had contemplated that Unova and HP might reach a separate agreement in that they set forth terms applicable in the event that Unova and HP reached a thirdparty license.

In addition to the four corners of the settlement agreement, the circumstances surrounding the settlement agreement also supported the Federal Circuit’s interpretation of the release provision. In particular, the fact that Unova and HP were engaged in a separate litigation at the time of the Unova/Compaq agreement further suggested that Unova and Compaq would not have intended to release HP from its past infringement liability in an unrelated action.

Given that the settlement agreement, read as a whole, expressed Unova’s and Compaq’s intent to not release HP from liability for patent infringement, the Federal Circuit concluded that consideration of extrinsic evidence was unnecessary. For those reasons, it held that Unova was entitled to partial SJ on HP’s affirmative defense of release and remanded the case for further proceedings.