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Assigning Premerger Agreements to the Merged Entity Does Not Change the Scope of the Obligation, Only the Identity of the Obligated Party

May 22, 2009

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Last Month at the Federal Circuit - June 2009

Judges: Rader (author), Archer, Dyk

[Appealed from: ITC]

In Epistar Corp. v. International Trade Commission, No. 07-1457 (Fed. Cir. May 22, 2009), the Federal Circuit affirmed the ITC’s claim construction but reversed the ITC’s estopping Epistar Corporation (“Epistar”) from arguing invalidity of the patent-in-suit and remanded for reconsideration. The Court also vacated and remanded the limited exclusion order (“LEO”) issued by the ITC. 

Intervener Philips Lumileds Lighting Company, LLC (“Lumileds”) owns U.S. Patent No. 5,008,718 (“the ’718 patent”), which is directed to light-emitting diodes (“LEDs”) with an electrically conductive window layer. The patent claims an LED comprising a semiconductor substrate, active layers of AlGaInP overlying the substrate, a transparent window layer of a semiconductor different from AlGaInP, and an electrical contact on top of the window layer. The window layer distributes current from the front contact to the active layers and serves to generate a more uniform light emission, improve efficiency, and avoid “current crowding.” Two exemplary embodiments are provided.

Lumileds asserted the ’718 patent in separate actions against United Epitaxy Company (“UEC”) and Epistar. First, in 1999, Lumileds brought an infringement suit against UEC. After a grant of SJ that the ’718 patent claims were not invalid and not unenforceable, and a denial of SJ of noninfringement, indefiniteness, obviousness, and misjoinder, the parties settled. As part of the settlement, Lumileds granted a license to UEC, and UEC covenanted on behalf of itself and its successors not to challenge the ‘718 patent’s validity.

Lumileds later brought an infringement suit against Epistar. The parties settled, with Lumileds granting a license to the ’718 patent for the manufacture of absorbing-substrate LEDs. With respect to the licensed products, Epistar convenanted not to challenge the ’718 patent’s validity while retaining the right to challenge validity if sued for infringement. The agreement, which was silent with respect to nonlicensed products, did not foreclose Epistar’s right to contest the validity of the ’718 patent if asserted against nonlicensed products.

In 2005, Lumileds filed suit in the ITC under 19 U.S.C. § 1337 against UEC and Epistar. The suit sought to prevent, inter alia, the importation into the United States of certain LED products due to infringement of claims 1 and 6 of the ’718 patent. Shortly thereafter, UEC merged into Epistar. UEC ceased to exist, and Epistar assumed UEC’s assets and liabilities, as well as contractual and patent-related rights and obligations. Epistar continued to manufacture UEC’s products, including those accused in the suit, as well as its own products.

Lumileds moved for a summary determination that Epistar could not challenge the validity of the ’718 patent, arguing that the merger bound Epistar to the UEC agreement prohibiting validity challenges in defense of infringement assertions against both UEC and Epistar products. The ALJ agreed and issued an order barring an invalidity defense on behalf of any Epistar product. The ITC declined review and the order became final.

The ITC also construed several claims and determined that the accused Epistar products infringed claims 1 and 6 of the ’718 patent. Based on the infringement determination, the ITC issued in 2007 an LEO excluding the infringing LED products from entry into the United States, including downstream-packaged LEDs containing the infringing LEDs, regardless of the manufacturer or importer.

Epistar appealed the order precluding its invalidity defense and the constructions of the claim terms “transparent window layer” and “substrate.” While the appeal was pending, Epistar moved for temporary remand and an order to modify the LEO in view of the decision in Kyocera Wireless Corp. v. International Trade Commission, 545 F.3d 1340 (Fed. Cir. 2008).

On appeal, the Federal Circuit first addressed the validity estoppel order. Lumileds argued that the UEC settlement agreement applied to its successors, and, thus, the merger with Epistar bound Epistar to the agreement not to challenge validity. The Court disagreed, holding that UEC’s settlement agreement is binding on the merged entity only to the same extent as it would be on UEC itself. The preclusive effect is limited to UEC’s premerger products. Epistar’s right to contest the validity of the ’718 patent with respect to its own products is governed instead by its own separate settlement agreement with Lumileds, which preserved (premerger) Epistar’s right to challenge validity. The Court concluded that it could not allow Lumileds to escape its agreements due to a merger that did not disturb its contract with Epistar, thereby allowing Lumileds to gain rights against Epistar that it could not secure premerger. Upon assignment of the UEC settlement agreement to the merged entity, Epistar became the obligated party, but the scope of the obligation did not change. The scope did not expand to include the products of (premerger) Epistar; it remained an agreement not to contest validity solely with respect to an infringement assertion against (premerger) UEC’s products.

The Court next reviewed claim construction. The ALJ construed “transparent window layer” as “a transparent layer that spreads current, composed of semiconductor material different from AlGaInP, where the material has a bandgap greater than the bandgap of the active layers and a resistivity lower than the active layers.” Epistar argued on appeal that the inventors disclaimed the use of indium-tin oxide (“ITO”) as the semiconductor material in the window layer. Epistar asserted that the purpose of the ’718 patent was to overcome problems with the use of ITO and highlighted a passage in the specification noting the shortcomings of using ITO as a transparent front electrical contact. The Federal Circuit affirmed the ITC’s construction that the ’718 patent does not disclaim the use of ITO. First, that Court found that neither the ‘718 patent nor the prosecution history suggests that ITO cannot or should not be used. Second, the Court found that the passage in the specification cited by Epistar refers to modifying the front contact (by using a transparent material) to overcome the current crowding problem, whereas the ’718 patent uses an opaque front contact and adds a “transparent window layer.” The Court noted that the ’718 patent consistently treated the front contact and window layer as separate and distinct elements. “[W]here two steps (or structures) are ‘entirely different concepts and procedures’ and identified as separate steps in the claims, no skilled artisan could reasonably construe them as a single element.” Slip op. at 21. The disparaging remark about ITO as a front contact is therefore not a disclaimer as to its use in the window layer. Third, even if the patent specification did disparage the use of ITO as a window layer, the criticism does not rise to the level of a disavowal of claim scope because disparaging comments alone do not necessarily amount to an express disavowal. Here, “the single, passing reference to ITO as a relatively unsatisfactory transparent electrical contact in the specification does not disavow the use of ITO as a transparent window layer.” Id. at 23. Lastly, the Court rejected Epistar’s argument that the claim cannot encompass ITO because its use is not enabled by the ‘718 patent. Because the use of ITO as a transparent conductive layer was already known in the art, further disclosure in the specification was not required.

The ITC construed “substrate” as “the supporting material in an LED upon which the other layers of an LED are grown or to which those layers are attached,” including the case in which “the supporting material functioning as the substrate is grown on top of, or attached to, the other layers.” Epistar disputed the construction, arguing—based on the embodiments presented in the specification—that a “substrate” (1) must provide adequate mechanical support to make the device large and sturdy enough to manipulate, and (2) is limited to a single layer. The Federal Circuit affirmed the ITC’s rejection of these arguments, holding that the construction is consistent with precedent that declines to limit a claim to only read on an exemplary embodiment. Despite the description that a “thicker layer” is a “substrate,” the specification also explains that the thickness of the substrate is merely exemplary and, thus, the construction should not be so limited. Similarly, although the embodiments depicted a single layer, “substrate” may include one or more layers because there is no intrinsic evidence to support a more limited construction. Lastly, the Court rejected Epistar’s argument that the ITC’s construction rendered the term “substrate” meaningless because it would also encompass other defined layers, such as “confining layers.” The Court found that claim 1 and the specification define these other layers as part of the active p-n junction layers, and they are further defined to be “on top of” and “over” the substrate.

Finally, the Federal Circuit addressed Epistar’s motion for temporary remand and an order to modify the LEO. Epistar argued that it was improper to include in the LEO the downstream products manufactured and imported by others because these parties were not before the ITC. This issue was not previously raised, but it was not ripe until Kyocera Wireless was decided. Under the holding in Kyocera Wireless that the ITC lacks statutory authority to issue an LEO excluding imported products by entities not named as respondents before the ITC, the Court vacated and remanded the LEO for reconsideration.

Summary authored by David Albagli, Ph.D., Esq.