• What Went Wrong?

    by  • November 30, 2015 • patent • 0 Comments

    Recently I’ve been thinking about the US rules of contract interpretation versus the approach used in other countries, UK law in particular. As I understand it, under UK law the courts have more latitude in interpreting the language of the agreement to derive what the parties intended than what we allow under US law.

    Which brings me to Canon Inc. v. Tesseron Ltd. I am puzzled by the case; I have no doubt that the outcome was the diametric opposite of what one party, Tesseron, intended.

    Tesseron licensed Canon Inc. (“CINC”) to some patents for printing presses. CINC and its affiliates were licensed for sales made to them by their suppliers and released them for past infringement. CINC was allowed to sublicense the patents to future affiliates so long as the future affiliate was not a “major competitor” of Tesseron.

    Canon U.S.A., Inc. (“CUSA”) was at all relevant times an affiliate of CINC. CINC claimed to have orally licensed the patents to CUSA and after the suit was filed CINC licensed CUSA in writing retroactively.

    In March 2010 CINC acquired majority ownership of Océ N.V. and in 2013 merged it into new Canon entity, Canon Solutions America, Inc. (“CSA”). Océ and its two subsidiaries were major competitors of Tesseron, so CSA could not be sublicensed to the Tesseron patents. Instead, in order to sell the printers, CSA ordered Océ printers from CUSA and CUSA purchased the computers from subsidiary Océ GmbH.

    So what we have is CINC doing exactly what Tesseron tried to preclude in the agreement, that is, directly competing with Tesseron and claiming that the competing products were licensed under the Tesseron patents. Did it work?

    Yes. To start, the concept of retroactive license was perfectly fine. Tesseron argued that under Ethicon, Inc. v. U.S. Surgical Corp. a license could not be granted retroactively, but Ethicon, its predecessor, Shering Corp. v. Roussel-UCLAF SA, and its successor, STC.UNM v. Intel Corp., (blogged here) were all cases involving licenses from co-owners of the patents, not sublicensing arrangements. And, “Ethicon was careful to acknowledge that certain retroactive licenses of patent rights have been enforced for patents with sole owners,” citing Studiengesellschaft Kohle, m.b. H. v. Hercules, Inc., 105 F.3d 629, (Fed. Cir. 1997).

    Since there was no legal bar to a retroactive license, “whether a license or sublicense may have retroactive effect depends upon whether the licensor has conferred that right. That is a question of contract interpretation.” Here, the agreement did indeed contemplate that CINC would be allowed to grant licenses retroactively:

    Section 3.01 of the Agreement extinguishes liability for any claims against CINC “and all of the Affiliates [that] have been made, might have been made or might be made at any time prior to the Effective Date.” Indeed, since CINC may issue a sublicense to Affiliates it acquires at any time during the term of the Agreement (as long as later-acquired Affiliates were not major competitors of Tesseron as of the Agreement’s effect date), and the Agreement grants such an Affiliate the full measure of rights under Section 2.01, the Agreement necessarily authorizes retroactive sublicenses.”

    Now that CUSA is properly sublicensed under the patents, exhaustion steps in to bring it home for CINC. There was no dispute that the products were sold by CUSA to CSA and any subsequent sales were protected by the doctrine of patent exhaustion. However, CSA made offers to sell before actually purchasing the printers:

    The defendants are correct that an offer to sell is a distinct act of infringement separate from an actual sale. Making the offer a separate act of infringement serves to prevent generating interest in a potential infringing product to the commercial detriment of the rightful patentee.

    CSA’s offers to sell the patented systems did not violate 35 U.S.C. § 271(a) so long as all of the systems it did sell were purchased from CUSA or another licensed entity. Any other result would eviscerate CUSA’s license, in particular its retroactive effect. The defendants’ argument is premised on its contention that CUSA was not a properly licensed seller of the patented products. Accordingly, since the sales by CUSA were non-infringing sales, these sales exhausted defendants’ patent rights in the printers. Any offer to sell the printers was an offer to sell non-infringing printers.

    So CSA’s printers did not infringe the Tesseron patents, despite the clear intention of Tesseron to avoid exactly this situation.

    I can’t figure out where this went off the rails, if it did. I also wonder whether the outcome would have been different under a different legal system’s rules for contract interpretation, like the UK. Thoughts? Or was there an obvious mistake in the contract drafting that you would have caught?

    Canon Inc. v. Tesseron Ltd., No. 14cv5462(DLC) (S.D.N.Y. Nov. 19, 2015).

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