Property, intangible

a blog about ownership of intellectual property rights and its licensing

Patent Infringement Versus Breach of Contract

Something that license drafters need to think through is how a license grant works, as a permission, not a prohibition. If there is conduct that a licensor wants to prohibit, then it has to ensure that it addresses that need in the agreement. The licensor also needs to think through what remedies will be available depending on the character of the wrongdoing.

I have two cases to report that demonstrate how license grant language didn’t do all the lifting that the patentee thought it should. First up is AU New Haven, LLC v. YKK Corp. YKK is a famous zipper company and AU New Haven developed a patented method for creating a water-resistant zipper. YKK had an exclusive patent license for a particular field of use:

YKK was therefore licensed to the patent “except for zippers placed in finished goods in the high end outerwear, marine, military and luggage (excluding sports bags and cosmetic bags) markets.”

The plaintiffs came to believe that YKK was selling zippers into the unlicensed market and ultmately sued YKK for breach of contract. YKK moved for summary judgment on the claim, arguing that the license gave it permission to sell into non-excluded markets but the license didn’t operate to prohibit it from sale into the excluded markets. The court’s view? “Defendants’ construction of the agreement is correct.”

The language of the ELA is unambiguous; it provides the licensees the right to use the intellectual property. It does not contain a negative covenant requiring that the licensees not compete in the excluded markets. The clause reads in full as follows:

[Plaintiff] hereby grants to the Company an exclusive, worldwide right to manufacture, use, sell, offer for sale and otherwise use and practice the invention … except for zippers placed in finished goods in the high end outerwear, marine, military and luggage (excluding sports and cosmetic bags) markets (collectively hereafter “Zippers”).

In this provision, the licensors grant the licensee a license to use the intellectual property. The grant defines the scope of the license: the licensee can sell the patented zipper worldwide with the exception of zippers in finished goods in the specified markets. The “except for” clause in this text is part of the definition of the scope of permitted use. That is the clear, natural construction of this language. There is no verb in the sentence other than the “grant,” which makes it plain that the “except for” clause is an exclusion from the preceding grant. If the “except for” clause were to be read as a covenant [not to sell], as Plaintiffs argue, there would need to be an additional verb in this provision.

There would also need to be an additional subject. Because the quoted language from the contract contains a grant by the licensors, but does not require any action by the licensee. As described above, the licensee (the “Company”) passively accepts the right. There is no provision of the license that expressly requires “the Company” not to sell in the excluded markets.

(Emphasis in original.)

The plaintiff wasn’t without any remedy though:

The Court’s finding that the contract provides a license only, and that it does not give rise to a negative covenant does not mean that Plaintiffs cannot take action against Defendants for selling zippers in a way that exceeded the scope of their license—the absurd result that Plaintiffs claim. Instead, it simply means that they must do so under patent law, rather than through a breach of contract claim.

Second, we have a situation where the scope of the license was exceeded but other terms in the agreement foreclosed the infringement claim. Defendant St. Lawrence Communications LLC (SLC) had previously sued LG Electronics Inc. for infringement of a patent covering a speech coding standard. They settled and entered into a Patent License Agreement that gave LG a license for use of the patent for the AMR-WB standard. SLC’s successor-in-interest later sued LG for patent infringement for its products that implemented a different standard, EVS. LG then sued SLC for breach of the Patent License Agreement, arguing that the covenant not to sue in the agreement barred the patent infringement claim even though the license grant wasn’t for the EVS standard.

Section 2 of the Patent License Agreement was titled “Grant of Licenses; Mutual Releases; Dismissal and Costs.” Section 2.1 said

If you can’t read it, it says

Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee and its Affiliates, a limited, non-transferable, fully paid-up and non-exclusive license during the Term, within the Territory to use, make have made in accordance with Section 3.3, import, distribute, offer for sale, Sell, Sale (Sold), develop, advertise, support, update, maintain or otherwise dispose of Licensed Products, under the Licensed Patents, for the purpose of encoding and/or decoding data in accordance with the AMR-WB Standard. The license granted herein specifically excludes any rights under the Licensed Patents to practice any standard other than the AMR-WB Standard.

Section 2.8 was titled “Covenant” and said

Licensor, on behalf of itself, its subsidiaries, and their successors and assigns, hereby covenants not to sue Licensee, its Afflilates, their successors and assigns, direct or indirect customers, users, licensees, service providers, distributors, retailers, or direct and indirect suppliers for infringement of any patents owned or controlled or licenseable by Licensor during the Term of this Agreement (“Covenant Patents”) solely with respect to LG Products for the life of such patents.

“LG Products” were defined as

any service or product (including any technology or component within such product) commercially available to an End-User as of the Effective Date and any upgrades, enhancements and natural evolutions thereof now or hereafter made, have made, manufactured, used, sold, offered for sale, leased, purchased, licensed, imported, have imported, exported, have exported, supplied, distributed and/or otherwise disposed of by or on behalf of [LG] and/or its Affiliates.

(Emphasis by the court.)

SLC moved for summary judgment that the covenant not to sue did not preclude the patent infringement suit. But while LG was licensed only for products that implemented the AMR-WB standard, the covenant not to sue stated that LG would not be sued for any “upgrades, enhancements and natural evolutions” to those products. SLC argued that applying the covenant to prevent the suit against LG for patent infringement would render the license grant in Section 2.1 meaningless, but the court disagreed:

Not so. A covenant not to sue is not the same as a license. As SLC acknowledges in its reply brief, a license and a covenant not to sue may have different scopes, although appearing in the same contract. LG’s preferred reading of the Covenant does not, as SLC argues, expand the scope of the license. Rather, it provides LG with litigation peace. The license remains limited to the AMR-WB standard by the clear terms of Section 2.1. This action, however, does not depend on the scope of the patent license in Section 2.1. Rather, it is a simple breach of contract action for breach of an entirely different provision — the Covenant.

AU New Haven, L.L.C. v. YKK Corp., No. 1:15-cv-3411-GHW-SN (S.D.N.Y. Mar. 31, 2019).

LG Elecs. Inc. v. St. Lawrence Comms., LLC, No. 18cv11082(DLC) (S.D.N.Y. April 15, 2019).

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One response to “Patent Infringement Versus Breach of Contract”

  1. Could you please share your views regarding Covenant v. Scope Limitation in FLOSS licenses? TIA.

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