Fifth Circuit Holds That Assignee of Deferred License Payments Can Enforce the Provisions of the Agreement, and That Fixed, Bargained-For Payments Do Not Generally Constitute a "Royalty"

Authored by John C. Paul, D. Brian Kacedon, and Michael E. Kudravetz

A recent decision from the Fifth Circuit found that deferred payments from a settlement and license agreement were not "royalties and other patent damages" in the context of a release in a later settlement between two related parties. Applying Texas contract law, the Fifth Circuit ruled that an assignee of the deferred license payments could enforce the payment provisions of the agreement and that the fixed payments were not "royalties" in the traditional sense, when reading the agreement in context.

In Tekelec, Inc. v. Verint Systems, Inc.,¹ at issue was a 2006 settlement and cross-license agreement between Blue Pumpkin (now a subsidiary of Verint) and Tekelec's former subsidiary IEX (now a subsidiary of NICE Systems, Inc.). Under the Blue Pumpkin-IEX agreement, Blue Pumpkin agreed to pay IEX an initial settlement fee of $8.25 million, followed by six annual payments of $500,000 each. Shortly after that settlement, Tekelec sold IEX to NICE, at which time IEX assigned to Tekelec the right to receive the six deferred payments under the Blue Pumpkin-IEX agreement. With the assignment of payments to Tekelec, IEX promised it would not terminate the Blue Pumpkin-IEX agreement without Tekelec's permission. Blue Pumpkin was ultimately acquired by Verint, with Verint assuming Blue Pumpkin's rights and obligations under the Blue Pumpkin-IEX agreement and making the required scheduled payments.

Separately, Verint and NICE later engaged in a series of unrelated patent litigations, which resulted in a 2008 settlement agreement and covenant not to sue. In that Verint-NICE settlement agreement, NICE agreed that "any royalties or other patent damages that may have otherwise accrued . . . shall not accrue as to [Verint]" during the pendency of the covenant; that covenant included all patents held by NICE or its subsidiaries.

After the Verint-NICE settlement took effect, Verint made one further payment to Tekelec (which it later claimed was made in error and sought to recover) and then stopped making payments, claiming that the payment obligations under the Blue Pumpkin-IEX agreement were extinguished by the Verint-NICE settlement. Tekelec sued to enforce the terms of the Blue Pumpkin-IEX agreement and collect the remaining payments.

The Fifth Circuit first examined whether the Blue Pumpkin-IEX agreement was enforceable under Texas law. Verint offered three separate arguments that it was not: (1) that Tekelec had only the right to receive—but not to enforce payment of—the scheduled payments; (2) that IEX itself did not have the right to enforce the agreement and that Tekelec could have no greater rights than IEX; and (3) that IEX's termination right nullified Tekelec's right to sue for nonpayment. The Fifth Circuit considered and rejected all three arguments.

The court first found that IEX's assignment to Tekelec was a properly formed promise to pay, and Texas law has no additional requirement that the promise be accompanied by an express grant of enforcement authority. Thus, the court held that "as Tekelec thereby stepped into IEX's shoes . . . Tekelec has the right to enforce the Payments against Blue Pumpkin's successor Verint."

The court next considered Verint's claim that IEX itself did not have the right to enforce the payments provision of the agreement and that Tekelec, as the assignee, could have no greater rights than IEX. According to Verint, the termination provision of the Blue Pumpkin-IEX agreement gave IEX the right to terminate the license, and therefore this termination right was the exclusive remedy for nonpayment. The Fifth Circuit, however, rejected this argument, agreeing with Tekelec that it "misses the obvious additional enforcement right inherent with any contract: the right to sue for breach." The court went on to observe that under Texas law, a construction that renders a remedy exclusive should not be made unless the intent of the parties that it be exclusive is clearly indicated or declared. And finding no suggestion—let alone a clear indication or declaration—that termination was IEX's exclusive remedy for nonpayment, the court rejected this argument.

The court then examined Verint's claim that IEX's termination right nullified Tekelec's right to sue for nonpayment. Verint argued that IEX retained the right to terminate the Blue Pumpkin-IEX agreement when it assigned the right to receive the payments to Tekelec, and that it would therefore be inconsistent to allow Tekelec to sue for the nonpayment of payments that IEX was entitled to extinguish. According to Verint, unless IEX had a unilateral termination right, there would have been no reason for IEX to promise Tekelec that IEX would not terminate the agreement. But the court dismissed this argument because the agreement between Tekelec and IEX was extrinsic evidence that could not be used to show the existence of a unilateral termination right never mentioned in the Blue Pumpkin-IEX agreement. In addition, the nontermination provision also protected Tekelec from the risk of IEX's terminating the agreement without an affirmative right to do so and, even if there were a unilateral right to extinguish the payments, that would not conflict with its agreement not to do so unless IEX actually extinguished the payments—which the court noted was "the central issue disputed in this case."

Having determined that Tekelec had the power to enforce the Blue Pumpkin-IEX agreement, the court then turned to the substantive issue: whether the later Verint-NICE settlement ended Verint's obligation to make the payments required by the Blue Pumpkin-IEX agreement. Under the nonaccrual clause of the Verint-NICE settlement, NICE agreed to extinguish "royalties or other patent damages that may have otherwise accrued" against Verint throughout the pendency of the covenant not to sue. Verint argued that the license payments from the Blue Pumpkin-IEX agreement were "royalties" and were therefore extinguished. Tekelec disagreed, arguing that the payments were not royalties, but rather a deferred component of the price Blue Pumpkin paid to settle IEX's claims for past infringement.

The court stated that "the principal question presented by this appeal is not whether the Payments serve as ‘royalties' in some abstract, economic sense, but whether they fall within the scope of the ‘royalties or other patent damages' extinguished by the Non-Accrual Clause in the subsequent Verint/NICE Settlement." Reading the words of the contract in context, the court determined that the qualifying phrase "or other patent damages" indicated that the term "royalties" did not include Verint's contractually bargained-for payment obligations under the Blue Pumpkin-IEX Agreement, but instead to the "reasonable royalties" that may be awarded by a court as compensation for patent infringement. This reading, according to the court, is bolstered by the immediately succeeding phrase "that may have otherwise accrued," which reinforces the conclusion that the phrase "royalties or other patent damages" refers to potential patent damages a court might find accrued against Verint on patents held by NICE or its subsidiaries during the pendency of the covenant not to sue.

On the distinction between the payments required by the Blue Pumpkin-IEX agreement and a royalty, the court noted that "a ‘royalty' is generally defined as a payment that fluctuates with the licensee's actual usage of the licensor's intellectual property, such as a payment based on the number of patented articles sold. A fixed-fee licensing arrangement such as the one at issue here is conceptually distinct from a royalty." Thus, the court concluded that "Verint's fixed, contractual payment obligations under the Blue Pumpkin/IEX Agreement unambiguously fall outside the scope of the subsequent Verint/NICE Settlement's boilerplate Non-Accrual Clause."

Strategy and Conclusion

This case serves as a good reminder of the importance of considering the terms of earlier settlements and license agreements, including from predecessors-in interest, when crafting subsequent settlements and license agreements. This decision also offers a number of important insights into the rights and obligations of successors-in-interest and assignees, as well as the construction of contract and settlement terms. A few important examples include:

• under Texas law, an assignee of payments from a contract does not require an express grant of authority to enforce the contract;
• under Texas law, a specified remedy is not read as an exclusive remedy unless the intent of the parties that the remedy is exclusive is clearly indicated or declared;
• courts may interpret nonspecific references to royalties in nonaccrual clauses as referring to the "reasonable royalties" measure of patent damages
  under 35 U.S.C. § 284; and
• courts may be disinclined to consider fixed payments for a patent license as a "royalty."

Endnotes

¹ The Tekelec decision can be found here.

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