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Cross-License Agreement Covers

09-1208
November 03, 2009

Decision icon Decision

Last Month at the Federal Circuit - December 2009

Judges: Bryson, Garjasa, St. Eve (author, District Judge sitting by designation)

[Appealed from: D. Minn., Judge Frank]

In Imation Corp. v. Koninklijke Philips Electronics N.V., Nos. 09-1208, -1209 (Fed. Cir. Nov. 3, 2009), the Federal Circuit reversed the district court’s holding that two subsidiaries of Imation Corporation (“Imation”) were not licensed under a patent cross-license agreement between Imation and Koninklijke Philips Electronics N.V. (“Philips”). The Court analyzed the agreement under New York contract law, found that the two
subsidiaries were licensed, and remanded for further proceedings.

In 1995, Minnesota Mining and Manufacturing Corporation (“3M”) and Philips entered into a patent cross-license agreement (the “Agreement”) related to optical and magneto optical information storage and retrieval
technology. In 1996, 3M spun off Imation, which took 3M’s place in the Agreement. Under the Agreement, each party granted licenses covering certain of its patented products and processes to the other party and subsidiaries of the other party. Specifically, the Agreement stated that Philips “agrees to grant and does hereby grant to [Imation] and its SUBSIDIARIES” a license that included a set of specifically defined patents. Slip op. at 3 (alteration in original).

“Subsidiary” was defined as including any “business organization as to which the party now or hereafter has more than a fifty percent (50%) ownership interest.” Id. at 6. The set of licensed patents included patents (1) owned by Philips, (2) related to a particular technical field, and (3) having a fi ling or priority date on or before the expiration date of the Agreement on March 1, 2000.

The Agreement also provided that “any patent license which has been granted” as to a certain set of patents “shall continue thereafter for the term provided in ARTICLE 3.” Id. at 4. Article 3 explained that such licenses would “commence on the effective date of [the] Agreement and shall continue as to each Licensed Patent for its life.” Id.

After the expiration of the Agreement, between 2003 and 2006, Imation formed two subsidiaries, Global Data Media FZ-LLC (“GDM”) and Memorex International, Inc. (“Memorex”). Imation then brought a DJ action against Philips in 2007, asking the district court to declare that GDM and Memorex were licensed under the Agreement. After the district court ruled on the pleadings in favor of Philips and certifi ed a partial final judgment under Fed. R. Civ. P. 54(b), Imation appealed.

On appeal, the Federal Circuit applied New York law in reviewing the Agreement, in accordance with the Agreement’s choice-of-law provision. The parties disputed whether the Agreement should be construed as a single, one-time grant of a license to a group of entities with fluid membership or, alternatively, as an agreement to grant multiple licenses over time as new patents and subsidiaries appeared. Taking the latter position, Philips argued that the expiration clause, which referred to “any patent license which has been granted” (emphasis added), provided a cut-off date after which a newly created subsidiary would not qualify for a license, and further provided a cut-off date after which new entities could not qualify as subsidiaries at all. Thus, according to Philips, because GDM and Memorex did not exist as of the March 1, 2000, expiration date, no new patent licenses were issued to GDM and Memorex. Furthermore, Philips asserted, GDM and Memorex would not qualify as “subsidiaries” under the Agreement.

The Federal Circuit instead agreed with Imation that (1) the Agreement included licenses to future subsidiaries, and (2) GDM and Memorex qualifi ed as “subsidiaries” under the Agreement. The Court reasoned that the Agreement’s recitation that Philips “agrees to grant and does hereby grant” a license operated as a “single, present grant to a class composed of Imation and its Subsidiaries of rights to existing and future patents,” so long as those patents “claim priority to a date on or before the expiration date.” Id. at 10. Thus, the licenses (one for products and one for processes) vested immediately as of the Agreement’s effective date and included any companies that qualify as subsidiaries, even if formed after the expiration date of the Agreement. The Court further explained that the Agreement’s description of the licenses as “personal” did not mean “unique to the individual grantee,” instead distinguishing the license as a personal right as compared to a property right. Id. at 11.

Furthermore, the Court found that the Agreement’s definition of “subsidiary” was not limited by the March 1, 2000, expiration date. The Court focused on the defi nition of “subsidiary” as a “business organization as to which the party now or hereafter has more than a fifty percent (50%) ownership interest.” Because the definition explicitly contemplated that a business entity could qualify as a “subsidiary” “hereafter,” the Court held that the Agreement did not limit the set of subsidiaries to those existing at the Agreement’s effective date. The Court also noted that the plain language of the Agreement did not include any temporal limitation in the definition of “subsidiary” and that principles of parallelism suggest that the expiration date was not intended to have a broader scope. In light of the limited scope of the March 1, 2000, expiration date in the overall Agreement, the Court held that GDM and Memorex fell within the definition of “subsidiary” and therefore qualified as licensees.

Summary authored by John S. Sieman, Esq.