Property, intangible

a blog about ownership of intellectual property rights and its licensing

Paying Royalties in the Hereafter

Contract cases (like patent cases) often come down to one word. In Imation Corp. v. Koninklijke Philips Electronics N.V., it was the little word “hereafter.”

In 1995 Imation’s predecessor 3M and Philips entered into a patent cross-license for CD and DVD technology. The license terminated on March 1, 2000, except that the patent licenses granted in it survived for the life of the patents.

The grant clause said:

PHILIPS agrees to grant and does hereby grant to [Imation] and its SUBSIDIARIES a personal, non-exclusive, indivisible, nontransferable, irrevocable, worldwide, royalty-free license under PHILIPS LICENSED PATENTS to make, have made, make for others, use, lease, distribute, offer to sell, sell, import, or otherwise dispose of LICENSED PRODUCTS . . . .

SUBSIDIARIES were defined as:

[A]ny corporation, firm, partnership, proprietorship or other form of business organization as to which the party now or hereafter has more than a fifty percent (50%) ownership interest . . . .

There was one other use of the word “hereafter,” which was in the clause defining the licensed patents:

“LICENSED PATENTS” shall mean any and all patents . . . which:
(1) are owned or controlled by the granting party or any of its SUBSIDIARIES such that such party or its SUBSIDIARIES now has or hereafter obtains the right to grant the licenses within the scope of this Agreement;
(2) relate to optical or magneto-optical information storage and retrieval technology; and
(3) have a filing date, or claim priority from a date, or are or were entitled to claim priority from a date, on or before the expiration date of this Agreement . . . .

Imation acquired two subsidiaries after the expiration of the agreement on March 1, 2000: in February, 2003 it created a joint venture named Global Data Media FZ-LLC of which it was a 51% owner, and in 2006 it acquired Memorex International as a wholly-owned subsidiary.

Imation brought (for the second time) a suit for declaratory judgment. Imation claimed that these two subsidiaries were direct licensees under the cross-license because they were subsidiaries of which it “hereafter” had ownership; the termination clause was only to limit the patents in the pool. It argued that had Philips meant to cut off the time frame for subsidiaries “hereafter” acquired it would have done so expressly, as it did in the definition of Licensed Patents. Philips countered that the license was only for subsidiaries in existence during the life of the agreement.

On a motion for judgment on the pleadings, Philips’ argument won the day. There was no suggestion that the termination clause (in an article entitled “Expiration of This Agreement” – did the agreement disclaim the meaning of headings, BTW?) did not terminate the agreement for all purposes except for any patent licenses “which ha[d] been granted.” Since the two subsidiaries were not in existence at the termination of the contract, they had not been granted licenses that could survive.

The reference to future “hereafter” subsidiaries in the definition of “Subsidiary” meant only those subsidiaries that came into existence during the term of the agreement, not those that came into existence afterwards. It was an question of expectation; one could not reasonable expect rights to spring into existence after an agreement ended.

Two counts of the complaint dismissed on the pleadings, the remaining patent infringement counts remain.

It’s curious that the prospect of after-acquired subsidiaries was not more clearly contemplated in the agreement since it’s such a foreseeable possibility. Perhaps Philips thought the agreement was clear enough – it was right, the Imation arguments were a stretch. It would also be interesting to find out how much of Imation’s budget and strategy, in creating a JV and acquiring Memorex, were based on an assumption (or hope) that these entities had a royalty-free license to the patents.

Justia entry for the first case here.

Justia entry for the second case here.

Imation Corp. v. Koninklijke Philips Electronics N.V., Civ. No. 07-3668 (DWF/AJB), 2008 U.S. Dist. LEXIS 96357 (D. Minn. Nov. 26, 2008).

© 2008 Pamela Chestek

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2 responses to “Paying Royalties in the Hereafter”

  1. At least for the Memorex subsidiary, it would seem to be trivial to merge it into a pre-existing entity (which could then change it’s name to Memorex, if it matters). While it’s possible not to have such an entity hanging around, and it might create a complicated issue with novations and such, if the alternative is millions in royalties it might be worth the effort.

  2. Good point. More reason to wonder about the legal decisionmaking that went into the strategy. The decision also didn’t mention whether Memorex might have had its own pre-acquisition license and Imation was just taking a long shot at a more favorable royalty rate.