Federal Circuit Holds a Sublicense Does Not Automatically Survive the Termination of a Master License

The Federal Circuit considered choice-of-law, bankruptcy, and contract law in vacating the district court’s grant of a motion to dismiss in Fraunhofer-Gesellschaft zur Förderung der Angewandten Forschung E.V. v. Sirius XM Radio Inc., No. 2018-2400 (Fed. Cir. Oct. 17, 2019).

In 1998, Fraunhofer-Gesellschaft zur Förderung der Angewandten Forschung E.V. (“Fraunhofer”) granted an exclusive, irrevocable license to a third party, WorldSpace International Network Inc. (“WorldSpace”), regarding Fraunhofer’s patents directed to multicarrier modulation.  WorldSpace then granted Sirius XM a sublicense.  A decade later, WorldSpace filed for bankruptcy, and rejected its patent license agreement with Fraunhofer under 11 U.S.C. § 365(d)(1) (bankruptcy statute allowing rejection of certain executory contracts).  Many years later, Fraunhofer sent a letter to WorldSpace claiming termination of the original licensing agreement.  Fraunhofer then sued Sirius XM alleging infringement of its multicarrier modulation patents.  Sirius XM claimed that its sublicense was a complete defense to the patent infringement charge; the district court agreed and granted Sirius XM’s motion to dismiss.

The Federal Circuit disagreed.  It first held that the parties waived the right to argue that German law should apply by failing to raise the issue at the district court.  Under U.S. law, the Federal Circuit then determined that WorldSpace’s rejection of the original license agreement did not necessarily terminate the agreement, noting the Supreme Court’s recent decision in Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019), which held that a rejection of an executory contract in bankruptcy had the same effect as a breach of contract outside of bankruptcy proceedings.  Fraunhofer offered several other arguments that the original agreement had been terminated, but since the district court did not decide this question, the Federal Circuit remanded the issue.

The Federal Circuit then held that Sirius XM’s sublicensee rights would not necessarily survive if the master agreement had been terminated.  Remanding, the Court held that the sublicense’s survival would depend on resolving ambiguity in the original license agreement between Fraunhofer and WorldSpace.  Because this issue would require consideration of extrinsic evidence, the Federal Circuit held it could not properly be resolved on a motion to dismiss.  Thus, the Federal Circuit vacated the district court’s grant of Sirius XM’s motion to dismiss.