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Absent Clear Intent to the Contrary, Patent License Implicitly Includes “Have Made” Rights

May 22, 2009

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Last Month at the Federal Circuit - June 2009

Judges: Lourie (author), Friedman, Prost

[Appealed from: D. Utah, Judge Kimball]

In CoreBrace LLC v. Star Seismic LLC, No. 08-1502 (Fed. Cir. May 22, 2009), the Federal Circuit held that a nonexclusive license to make, use, and sell a patented product inherently included the right to have a third party manufacture that product for the licensee (i.e., “have made” rights) in the absence of a clear intent to exclude that right.

U.S. Patent No. 7,188,452 (“the ’452 patent”) is directed to a brace for use in the fabrication of earthquake-resistant, steel-framed buildings. Star Seismic LLC (“Star”) originally entered into a license agreement (“License”) with the inventor of the ’452 patent, by which Star received a nonexclusive right to “make, use, and sell” licensed products. The inventor later transferred his interest to CoreBrace LLC (“CoreBrace”). The License states that Star may not “assign, sublicense, or otherwise transfer” its rights to any party except an affiliated, parent, or subsidiary company. The License does not explicitly provide a right to have the licensed product made by a third party. It also reserves to CoreBrace “all rights not expressly granted to [Star].” Slip op. at 2 (alteration in original). It does provide, however, that Star owns any technological improvements “by a third party whose services have been contracted by [Star].” Id. (alteration in original).

Star used third-party contractors to manufacture licensed products for its own use. On January 4, 2008, CoreBrace sent a termination letter to Star, taking the position that Star did not have the right under the License to use third parties to manufacture licensed products and that by doing so, Star breached the License. The License allows the licensor to terminate in case of a breach after providing written notice of the breach and a thirty-day opportunity to cure.

CoreBrace did not allege that it did either. CoreBrace also sued Star for breach of the License and for patent infringement based on Star’s use of patented products under a terminated License. The district court granted Star’s motion to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. The district court reasoned that, even when a license prohibits sublicensing, as in this case, “have made” rights are granted unless they are expressly prohibited. The district court also found that CoreBrace did not properly terminate the License and, as a result, Star maintained its rights under the License and could not infringe the patent under which it was licensed.

On appeal, the Federal Circuit applied Tenth Circuit law, which reviews de novo a district court’s grant of a motion to dismiss pursuant to Rule 12(b)(6), applying the same standards as the district court. The Court concluded that Star did not breach the License by contracting with third parties to have the licensed products made. Specifically, the Court held that “[t]he 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.” Slip op. at 6.

To construe the terms of the License, the Court looked to Utah law, which governed the agreement. Utah follows general principles of contract law, namely, that a court should look to the plain language of the agreement to determine the parties’ intent and should attempt to harmonize the provisions in the agreement. Because the Utah Supreme Court had not addressed the scope of a right to “make, use, and sell” a product, the Federal Circuit had to determine what decision the state court would reach if faced with the same facts and issues. In so doing, the Federal Circuit looked for guidance to decisions of other courts that have addressed the scope of the right to “make, use, and sell” a product.

The Federal Circuit first considered Carey v. United States, 326 F.2d 975 (Ct. Cl. 1964), which held that a patent licensee’s right to “produce, use, and sell” an article inherently includes the right to have a third party produce that article. The Court also looked to the California Supreme Court’s opinion in Advanced Micro Devices, Inc. v. Intel Corp., 885 P.2d 994 (Cal. 1994), in support of the principle reached by the Carey court. The Federal Circuit concluded that the Utah Supreme Court would likely also find that “a ‘have made’ right is implicit in a right to make, use, and sell, absent an express contrary intent.” Slip op. at 7.

The Federal Circuit rejected CoreBrace’s attempt to distinguish Carey on the basis that Carey involved an exclusive license with a right to sublicense. The Federal Circuit concluded that the Carey court derived the existence of the right to “have made” from the licensee’s right to “produce, use, and sell” rather than its right to sublicense. The Court noted that “a right to have made is not a sublicense, as the contractor who makes for the licensee does not receive a sublicense from the licensee.” Id. at 8. The Court also rejected CoreBrace’s argument that the holding of Carey was limited to an exclusive license, finding that whether a license is exclusive or nonexclusive has no bearing on a licensee’s right to use a third party to manufacture the licensed product.

The Court also found Intel Corp. v. International Trade Commission, 946 F.2d 821 (Fed. Cir. 1991), inapplicable. The Intel case addressed a licensee’s “foundry” rights, i.e., its right to make a product and sell it under a third party’s name, and held that the agreement there excluded such a right, as it limited its grant of “make, use, and sell” rights to products bearing the licensee’s trade name. Although part of the analysis in Intel addressed “have made” rights, the Federal Circuit distinguished the findings in Intel as specific to the language of the license agreement at issue there and the case’s primary focus on foundry rights rather than “have made” rights.

The Federal Circuit turned next to the language of the License. The Court found that the fact that the License reserved to CoreBrace those rights not expressly granted to Star had no effect on Star’s “have made” rights. Slip op. at 10. The Court concluded that, “[b]ecause the right to ‘make, use, and sell’ a product inherently includes the right to have it made, ‘have made’ rights are included in the License and not excluded by the reservation of rights clause.” Id.

The Court next considered whether the License contained a clear intent to exclude “have made” rights, without which a grant of a right to “make, use, and sell” would inherently include a right to have made. The Court identified several provisions in the License that could plausibly refer to third-party manufacturers and noted that these provisions indicate that the parties to the License contemplated that Star may have the product made by a third party. Of primary significance to the Court, however, was the absence in the License of a clear intent to exclude “have made” rights from the rights granted to Star. The Court discounted the License’s reference to “[Star’s] manufacture” of the licensed products in an indemnification provision, especially in light of the License’s references to third parties that could also be involved in the manufacture of licensed products.

Because the Federal Circuit concluded that Star had not breached the License and therefore could not infringe the patent under which it was licensed, the Court affirmed dismissal for failure to state a claim. 

Summary authored by Michael Skopets, Esq.