Court Finds an Agreement Not-to-Sue Is a Patent License Despite Language to the Contrary

Authored by D. Brian Kacedon, Matthew J. Luneack, and John C. Paul  

Abstract

A Minnesota court required a patent owner to provide the accused infringer with documents relating to an agreement after finding that the agreement was a patent license despite explicit language to the contrary.

While parties to an agreement may try to characterize a contract as a specific type of agreement, a court might ignore such language if it conflicts with the purpose and essence of the agreement.  Recently, in Luminara Worldwide, LLC v. Liown Electronics Co. Ltd., a Minnesota court required a patent owner to turn over documents relating to an agreement regarding the asserted patents and a third party. While the agreement itself expressly stated that it was not a license, the court determined that it needed to be produced because it was, in fact, a license and within the scope of the written discovery requests.

Background

Luminara Worldwide, LLC brought suit in the District of Minnesota against Liown Electronics Co., Ltd., and other defendants ("Liown") for infringing patents directed to flameless candles. During discovery, Liown sent Luminara discovery requests seeking any licenses involving the patents-in-suit.

Prior to filing suit against Liown, Luminara took action to prevent third-party, Flipo Group, Ltd., from selling a flameless candle that allegedly infringed one or more of Luminara's patents. As a result, Flipo agreed to stop selling the accused product, and instead to sell a flameless candle that Luminara agreed did not infringe its patents.  But one of Flipo’s resellers still had allegedly infringing candles in inventory. Consequently, Flipo and Luminara signed a "Memorandum of Understanding" ("MOU"), that recited Luminara’s belief that the accused candles infringed one or more of its patents, and agreed to release both Flipo and its resellers from liability for the sale of candles currently in the reseller’s possession. Under the MOU, Luminara retained the right to prevent Flipo from selling or manufacturing accused candles that were not already in its reseller’s inventory. The MOU also stated: “This limited waiver does not constitute a license to any of the  . . .  intellectual property rights of Luminara.”

Luminara and Flipo also negotiated a subsequent "Waiver Agreement." Unlike the MOU, the Waiver Agreement only applied to the Flipo candles that Luminara agreed were non-infringing.  uminara waived its right to enforce its current patents against Flipo. Like the MOU, the Waiver Agreement also stated that it did not constitute a patent license.

Initially, Luminara did not produce any information related to the MOU or the Waiver Agreement in response to Liown's discovery requests. After learning from Flipo’s CEO that Flipo had licensed one of Luminara’s patents, Liown followed up with Luminara. In response, Luminara produced the MOU and Waiver Agreement, which prompted Liown to request production of all related documents as well. After Luminara refused to produce the additional documents, Liown filed a motion asking the court to compel Luminara to produce all of the documents related to the Flipo agreements. Liown also requested that the court sanction Luminara for withholding the agreements.

Order

The court first considered whether Luminara's agreements with Flipo amounted to licenses. Both the MOU and the Waiver Agreement expressly stated that their "limited waiver [did] not constitute a license." Relying on Federal Circuit precedent holding that "a non-exclusive patent license is equivalent to a covenant not to sue," however, the court found that both the MOU and the Waiver Agreement were, for all intents and purposes, licenses.  Specifically, the court pointed to the fact that both the MOU and Waiver Agreement released Flipo from any and all liability for selling certain flameless candles.  Thus, the court concluded that both the MOU and Waiver Agreement were agreements by Luminara that it would not sue Flipo for selling potentially infringing products.  The court also found that Luminara’s failure to characterize them as "licenses" did not alter their purpose.

Having concluded that both the MOU and Waiver Agreement were licenses, the court next considered whether to compel Luminara to produce the requested discovery relating to each of the agreements. With respect to the MOU, the court found that because it applied to products that Luminara claimed infringe the patents-in-suit, and because Luminara explicitly released Flipo from any liability for certain infringing acts, Luminara should have disclosed the MOU in response to the Defendants’ discovery requests. Thus, the court ordered Luminara to disclose any relevant and responsive documents relating to the MOU.

As to the Waiver Agreement, however, the court found that because it only applied to candles that Luminara did not claim infringed the patents-in-suit, the Waiver Agreement was not relevant to Defendants’ discovery requests.  The court therefore declined to compel Luminara to provide any additional discovery relating to the Waiver Agreement.

The court also considered Liown's request that Luminara be sanctioned for withholding the agreements with Flipo.  The court denied the Liown's motion for sanctions because Liown received the MOU in sufficient time to address it in expert reports and to use it to challenge the opinions of Luminara's experts at deposition and at trial.  But because the Flipo agreements may never have been produced if not for the chance encounter with Flipo's CEO, the court ordered Luminara to reimburse the Liown for their costs and fees associated with investigating and requesting the agreements.

Strategy and Conclusion

This case illustrates that regardless of how parties choose to characterize an agreement, courts may construe it as a license if its purpose is consistent with that of a license. Thus, even if the agreement includes an express disclaimer that it is not a license, if its purpose is to waive liability for acts that allegedly constitute infringement, the agreement may be treated as a license.  

Endnotes
¹ The Luminara Worldwide, LLC opinion may be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/mnd-0-14-cv-03103-555.pdf.