Licensing & Intellectual Property Cases

Territorial Scope of Licenses
The territorial scope of a technology license should be carefully defined.  In Mid- West Conveyor Co. v. Jervis B. Webb Co., 39 USPQ2d 1754 (CA 10 1996), the defendant, which owned a U.S. patent and corresponding foreign patents for a conveyor system, licensed the technology to the plaintiff.  The license did not limit the license right to the United States patent, nor define the territory or the geographic scope of the license.

Since the license was ambiguous, the U.S. Court of Appeals examined evidence of the parties' intent, including conduct during negotiations and the post agreement conduct of the parties.  The court also referred to defendant's numerous foreign licenses, which contained territorial limitations and concluded that the defendant knew how to define the geographical territory and limit the license rights to the geographical scope of the defined territory.  Based on such evidence, the court concluded that that the parties intended a license with unlimited geographical scope.

License Rights
The Court of Appeals for the Federal Circuit interpreted a "have made" provision in a patent license in Cyrix Corp. v. Intel Corp., 37 USPQ2d 1884 (CAFC 1996).  The plaintiff designed and sold microprocessors and had contracts with other companies to manufacture the IC chips containing the microprocessors.  Cyrix used manufacturing facilities licensed under Intel's patents, including IBM and ST as manufacturers.  Because ST was unable to meet Cyrix's demands, ST arranged for its Italian affiliate to manufacture the chips.  Since ST-Italy was legally not a subsidiary of ST, it was not licensed under the ST-Intel agreement.  ST relied upon its "have made" rights under its Intel agreement to obtain products from ST-Italy, which it then sold to Cyrix.  Cyrix filed a declaratory judgment against Intel, alleging a reasonable apprehension that it would be sued for patent infringement.  Cyrix requested a declaration that it did not infringe Intel patents, based on the position that IBM and ST each had licenses under Intel's patents.  With regard to the IBM-Intel agreement, Intel argued that the IBM-Intel agreement did not support a grant of foundry rights.

The license granted IBM the right to make and sell "IBM Licensed Products" which the court decided were not limited to IBM-designed products.  Therefore, IBM acted within the scope of the Intel agreement in making and selling to Cyrix microprocessors designed by Cyrix.  The court also rejected Intel's argument that the "have designed" provision of the IBM agreement limits the products IBM is entitled to make to those designed by IBM.  With regard to the ST-Intel agreement, Intel argued that the ST and ST-Italy arrangement was in effect a sublicense, which was not permitted under the ST-Intel license.  The court rejected this argument because the ST-Intel agreement allowed ST to have licensed products made by others.  The ST affiliate properly manufactured the microprocessors under ST’s “have made” rights and ST then sold the microprocessors directly to Cyrix;  hence, the arrangement was a valid exercise of ST’s “have made” rights under the Intel agreement.

Most-Favored-Licensee Clauses
In Houdstermaatschappij BV v. Standard Microsystems Corp., 39 USPQ2d 1528 (S.D.N.Y. 1996), the District Court for the Southern District of New York reviewed the application of a "most-favored-licensee" clause in a patent license.  The Plaintiff had granted to defendant SMC a non-exclusive license to manufacture and distribute data communication systems within the scope of the plaintiff's patent, as well as certain other auxiliary products.  The license included a clause that provided that if the plaintiff were to grant another license under the licensed patent with a royalty less than provided for in the SMC license, plaintiff would promptly notify the defendant, and the defendant would be entitled, upon written request, to substitute for its royalty provision the corresponding provisions of the other license, but only if the defendant agreed to accept any other terms and conditions of the other license.  The parties agreed to submit any claims arising under the agreement to arbitration.

Several years earlier, Willermijn and Proteon, another licensee, had arbitrated the question of whether Willemijn's patent covered token ring systems manufactured by Proteon.  The arbitration panel concluded that Willemijn's patent did not cover Proteon's token ring data communication system.  Willemijn and Proteon entered into an agreement in which Willemijn granted Proteon immunity from suit under its patent.  SMC sought arbitration, alleging Willemijn had breached the agreement by granting Proteon a royalty-free license to manufacture products covered by the patent without notifying SMC and offering it equally favorable terms.  SMC claimed that Willemijn had fraudulently induced it to enter into the agreement by failing to disclose the arbitration with Proteon.  The arbitration panel held in favor of Willermijn.  SMC petitioned to vacate the award.

The district court found that SMC had bargained for and received a most-favored-licensee clause and was entitled to no less than a royalty-free license when Proteon was released from the royalty obligation because SMC would have otherwise been placed at a severe competitive disadvantage.

The court rejected Willemijn's arguments that the Proteon agreement did not trigger SMC's most-favored licensee clause, holding that the licensor's grant of immunity from suit in a dispute settlement under a prior license is the equivalent of a license and may trigger another party's most-favored-licensee clause.  The court also rejected Willemijn's argument that SMC was not entitled to a substitution of royalty provisions, because it could not accept the terms and conditions of the Proteon arrangement.  The court concluded that the arbitrators disregarded and failed to honor the well-defined terms of the parties' agreement.  SMC's petition to vacate arbitration award was granted and the award vacated.

Licensee Standing to Sue for Infringement       
The District Court for New Hampshire reviewed the question of who has standing to sue for patent infringement in Ricoh Co. Ltd. v. Nashua Corp., 40 USPQ2d 1306 (D.C. N.H. 1996).  Plaintiffs Ricoh Ltd. and Ricoh Corp. sued the defendant, Nashua Corp., for patent infringement.  During the trial, the plaintiffs moved to join their wholly-owned subsidiary, Ricoh Electronics, Inc. (REI) as a plaintiff in order to avoid potential difficulties related to damages.  Nashua opposed the plaintiffs' motion because it did not have an exclusive license to manufacture the toner cartridge described by the patent and lacked standing to sue for infringement.  The plaintiffs argued that REI had standing due to its exclusive right to manufacture the cartridge.

The court agreed with the plaintiff, concluding that, although a party must hold legal title to the patent at the time of infringement to sue for patent infringement, the party need not hold all proprietary rights to the patent to have standing as a co-plaintiff with the patentee. For example, an exclusive licensee may possess sufficient interest in the patent to have standing to sue as a co-plaintiff, although a non-exclusive licensee would not.  To be an exclusive licensee for standing purposes, the court decided that a party must have received the patentee's express or implied promise that others shall be excluded from practicing the invention.  The plaintiffs established that REI had an implied exclusive license to manufacture the toner cartridge technology demonstrated by a technical assistance contract, the corporate relationship among the plaintiffs and REI, and the fact that REI was the sole manufacturer of the toner cartridges.  Hence, REI was held to have standing to sue for infringement.  The court rejected Nashua's argument that it would be prejudiced by the delay in seeking to add REI as a plaintiff.

International Protection for Trade Secrets
In Litton Systems, Inc. v. Ssangyong, Corp., 1997 U.S. App. LEXIS 2386 (Fed. Cir. February 13, 1997), Ssangyong (SSY), a Korean company, was held liable for unfair competition (trade secret misappropriation) under Section 44 of the Lanham Act for misappropriation of Litton’s radar and microwave technology.  The original action was filed against SSY, M-Square, and two of M-Square’s officers (former Litton employees).

It was determined that SSY’s chairman directed a representative to meet with one of Litton’s employees.  After the meeting, M-Square prepared its business plan, including a SSY investment in M-Square.  The trial court held that SSY was liable for the actions of M-Square because SSY was the "alter ego" of M-Square based upon SSY’s control of M-Square and M-Square’s undercapitalization.

Using the SSY business plan, the trial court awarded $27,496,000 as unjust enrichment based upon the expected stream of income set forth in the business plan.  The Federal Circuit vacated this damages award because in trade secret misappropriation cases, unjust enrichment is normally measured by the defendant’s profits on sales attributable to the trade secret.  The defendant’s gain may also be measured by the cost savings which the defendant realized from using the trade secret.  However, in unfair competition cases, the district court’s theory of unjust enrichment as defendant’s "unrealized expected gain" is not a valid basis for a  damage award.  The trial court held that Litton, as a U.S. citizen, had a federal right to sue SSY, a foreign company of a signatory country, for unfair competition. The Treaty of Friendship, Commerce and Navigation between the United States and Korea ensures "nationals and companies" of either country "national treatment" with respect to patents, trademarks and "industrial property of every kind.

Based on the decision in Toho Co. v. Sears, Roebuck & Co., 645 F.2d 788 (9th Cir. 1981), the Federal Circuit affirmed the trial court’s decision that Section 44 creates a federal cause of action which “incorporates state law” rights and remedies (e.g. trade secret misappropriation) in addition to the remedies of the Lanham Act to repress acts of unfair competition.  Section 44 of the Lanham Act creates a federal cause of action for unfair competition/trade secret misappropriation by or against foreign companies.

IP Laws in the Far East

Various intellectual property laws have been passed in recent years in the People’s Republic of China to protect creative ideas in technology.  The PRC’s first statute protecting trade secrets is The Law Against Unfair Competition.  “Trade secrets” are defined as technical and business operating information, unknown to the public, which may produce economic benefit to its owner and which is practical and maintained in secrecy.  Since computer software is a product which usually provides economic benefit to its owner, it may be protected under the Law Against Unfair Competition.

Potentially protectable matter includes computer programs, computer-software documentation, computer software design and manufacturing information, algorithms, mathematical models and formulae and computer files and data.  A business operator may misappropriate a trade secret by any of the following:  unlawful acquisition, disclosure or use or permitting others to use a trade secret improperly acquired, breaching a contractual provision prohibiting disclosure, use or permitting disclosure.  Misappropriation may also occur if a third party, who knows or should have known of illegal acts, acquires, uses or discloses another’s trade secret.

A number of laws and regulations, state and provincial, govern trade secret protection in technology transfers in the PRC.  These include the Law of the PRC on Technology Contracts;  Regulations for Technology Import Contract Administration and corresponding rules.       

Recent developments verify that intellectual property rights in the PRC are starting to be recognized and enforced.  For example, Beijing Gaoli Computer Company was ordered to pay to the Business Software Alliance U.S. damages and court costs for illegally reproducing and selling copyrighted software products.  As China improves its legal and enforcement infrastructure, investments in computer technology which benefit from these protections will accelerate.

The Internet and Licensing
As the Internet continues to double in size each year, it is essential to redefine the scope of license agreements, particularly in the area of copyright.  Courts carefully examine the language of licenses to determine parties’ rights and obligations.  There have been numerous lawsuits filed in U.S. courts as parties seek to define the scope of pre-existing license agreements as they pertain to the Internet.

In ProCD, Inc. v. Matthew Zeidenberg 86 F. 3d 1447 (7th Cir. 1996), the court held that the terms of the license were enforceable and not preempted by federal copyright law.  The court decided that copyright law did not preempt contract law. The Supreme Court held preiously that a telephone directory was not protectable via copyright. In ProCD case, the court held the database of a telephone directory was not protectable. But, the court held that a contract could allocate rights between the parties and held the license was an enforceable contract. The court referred to UCC sections 2-204 describing a valid contract and 2-606 describing acceptance of a contract. The court decided that Zeidenberg accepted the offer by clicking through the license on the computer on the computer screen. The license was accepted because the software did not let the user proceed without accepting the license. The user had the option of rejecting the terms of the license and returning the software similar to the right to return goods under the UCC.

There is serious potential for extensive abuse on the Internet.  The most effective way for a licensor to protect itself is to include carefully drafted provisions in the license agreement.

Legislative Changes
The U.S. signed the General Agreement on Tariffs and Trade (GATT) Treaty Implementation Act on December 8, 1994.  The World Trade Organization (WTO) was established as the successor to GATT on January 1, 1995.  The TRIP’s Agreement became effective on January 1, 1996.  In October 1994, 35 countries signed the new Trade Mark Law Treaty.  These and other comparable new laws in the U.S. and other countries constitute dynamic legislative changes which are having critical impacts on the intellectual property rights of businesses.

Home | Our Mission | Newsletters | Resources | About Us | Contact Us

1750 11th Avenue, San Francisco, CA 94122 | (415) 571.8880
Copyright © 2009, Fukuda Law Firm     Disclaimer

Our newsletters do not provide legal advice or opinions. Legal questions may be complicated and experienced counsel
should be consulted in connection with particular cases.  Advice should be given relative to specific facts and conditions.