Licensee's Former Subsidiary Retains a License Because the License Extends to Entities Who Were Subsidiaries as of the Effective Date of the Agreement

Authored by D. Brian Kacedon, Daniel A. Lev, Ph.D., and John C. Paul

An accused infringer successfully defended against a claim of infringement by asserting that a prior settlement agreement granted a patent license to the accused infringer's former parent corporation. The court held that the original license grant, which included subsidiaries, irrevocably granted the accused infringer (as a former subsidiary) a license to practice the patents.

Background

Technology Licensing Corp. ("TLC") previously sued Matsushita Electric Industrial Company Ltd. (and others) for infringing its patents. The lawsuit ended in 2005 with a Patent License and Settlement Agreement granting patent rights to "Matsushita . . . and its Subsidiaries." The agreement defined "subsidiary" as follows:

"Subsidiary(ies)" shall mean . . . any corporation . . . in which a Party . . . now or hereafter, directly and/or indirectly, owns or controls . . . fifty percent (50%) or greater . . . of the stock . . . entitled to vote for the election of directors.

At the time of the agreement, JVC Americas was a wholly owned subsidiary of JVC Japan, and Matsushita directly controlled more than 50% of JVC Japan, making JVC Americas a subsidiary of Matsushita under the agreement. Later, in mid-2007, Matsushita ceased to control a majority of JVC America's stock.

In a new case, Tech. Licensing Corp. v. JVC Americas Corp.,¹ TLC sued JVC Americas for infringement of six of TLC's patents, which had been previously asserted against Matsushita in the earlier litigation and were included in the settlement agreement. The agreement granted a license to four of the six patents and a covenant not to sue for the other two patents (collectively, the "license rights").

The Tech. Licensing Decision

JVC Americas moved for summary judgment, arguing that it had a license or non-assertion covenant for each of the six asserted patents. There was no dispute that JVC Americas was a "subsidiary" of Matsushita when the agreement was signed, but TLC argued that, at the time of the lawsuit, JVC Americas was no longer a "subsidiary" under the agreement because, as noted above, Matsushita had ceased to control a majority of JVC America's stock.

According to TLC, the term "now" in the definition of "subsidiary" should be interpreted to mean at the time when the agreement is invoked, i.e., at the time of JVC America's alleged infringement. In TLC's view, only Matsushita's current subsidiaries hold the license rights, and JVC America's license rights ended when it ceased to be a Matsushita subsidiary. In rejecting TLC's argument, the court stated that "it is impossible to credit the proposition . . . that the term 'now' in a contract executed in December 2005 means not the day of execution in December 2005, but any given day in the future on which the Agreement is invoked."

The court determined that the agreement unambiguously granted JVC America the license rights and that the grant was "irrevocable" and/or "perpetual"—terms interpreted under controlling New York law to mean that a license cannot be terminated, even in the case of breach. The court further noted that nothing in the agreement suggested that a subsidiary could lose its rights under the agreement. Because the court found the disputed terms unambiguous, it also rejected TLC's assertion that a letter from Matsushita to TLC showed that Matsushita agreed with TLC's understanding of the terms. Thus, for the four patents covered by the license granted in the agreement, the court granted JVC's motion for summary judgment.

Turning to the covenant not to sue, which related to two of the six patents-in-suit, the court noted that the covenant did not extend to all products made by JVC Americas. Rather, the agreement made clear that the covenant not to sue applied only to products made before December 15, 2006, and "substantially similar" products made after that date. JVC Americas argued that the accused products were indisputably "substantially similar" to products made before December 15, 2006. But because this question presented a genuine issue of fact, the court found that JVC Americas was not entitled to summary judgment on the two patents covered by the covenant not to sue.

Finally, because the Agreement had an arbitration clause applying to the covenant not to sue, JVC argued in a footnote that the court should stay or dismiss the case in favor of arbitration. The court recognized this clause of the Agreement and invited JVC to file a formal motion to compel arbitration, which, under Seventh Circuit law, would result in a stay of the case under Section 3 of the Federal Arbitration Act.

Strategy and Conclusion

This case illustrates the importance of carefully reviewing seemingly "boiler plate" provisions such as definitions of affiliates and subsidiaries, and carefully using absolute terms like "irrevocable" and "perpetually" to avoid unintended future consequences.

Endnotes

¹ The Tech. Licensing order can be found here.

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