Federal Circuit Says Motion to Dismiss Stage Too Early to Use Patent License Defense

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Last week, the Federal Circuit revived a patent infringement suit brought by Fraunhofer-Gesellschaft zur Forderung der angewandten Forschung E.V. against Sirius XM Radio Inc. in the District of Delaware when it vacated the lower court’s dismissal. The entire opinion can be found here, but, briefly, the appellate court held that Sirius’ patent license defense could not be resolved on a motion to dismiss and remanded to the lower court for further proceedings. 

In March 1998, Fraunhofer, a European-based applied research organization, granted WorldSpace International Network, a global satellite radio operator, a worldwide, exclusive, irrevocable license to several of its patents related to multicarrier modulation (MCM) technology (controlling license). In accordance with its right to sublicense under the controlling license, WorldSpace sublicensed the patents to American Mobile Radio Corp., a predecessor of Sirius, soon thereafter (Sirius sublicense). Per its terms, the Sirius sublicense was also irrevocable. 

A decade later, with debts of over $2 billion, WorldSpace declared bankruptcy. In 2010, the bankruptcy trustee rejected the controlling license. Since a rejection under bankruptcy law is treated as a court-authorized breach of the contract, Fraunhofer arguably had the right to terminate the controlling license. However, Fraunhofer did not terminate either the controlling license or the Sirius sublicense at that time. Instead, Fraunhofer waited until 2015 to send a letter to WorldSpace alleging that the controlling license was terminated during the bankruptcy.  Around that time, Fraunhofer also sent a cease and desist letter to Sirius alleging infringement of the patents covered in the Sirius sublicense. When Sirius did not comply with Fraunhofer’s demands, Fraunhofer sued Sirius for patent infringement in the District of Delaware. Sirius moved to dismiss the complaint for failure to state a claim under 12(b)(6) on the basis that it had rights to use the MCM technology via the Sirius sublicense. While Fraunhofer argued that the rejection of the controlling license during bankruptcy invalidated not just WorldSpace’s rights under the license, but also any sublicenses granted under the controlling license (including the Sirius sublicense), the district court granted the motion to dismiss.

On appeal, the Federal Circuit explained that, at the time of the dismissal, it had not been determined whether Fraunhofer properly terminated the controlling license. In addition, even if Fraunhofer had successfully terminated the license, the language in the controlling license was ambiguous as to whether the sublicensee’s rights survived such termination. Indeed, there is no provision in the controlling license that directly addresses the question of sublicense survival. Accordingly, the court concluded that the lower court erred in granting the motion to dismiss since resolving the open questions related to Sirius’ license defense required consideration of extrinsic evidence. 

 On remand, the lower court has a fair amount of guidance from the Federal Circuit’s opinion as to how to approach these questions. In fact, the court noted that Fraunhofer’s theory that the controlling license was terminated as a result of the rejection during bankruptcy was without merit and explained that a rejection of the controlling license during bankruptcy did not unilaterally terminate the controlling license. Rather, a rejection merely breaches the contract but does not rescind it. While the Federal Circuit appears to suggest that Fraunhofer has plausible arguments that it at least had the right to terminate the controlling agreement, assuming the lower court agrees, it will have to determine whether Fraunhofer properly terminated. Again, the Federal Circuit seems to insinuate that the timing of the termination may not have been reasonable. Second, the Federal Circuit made it clear that there is no “automatic survival” of a sublicense and that determining whether Sirius’ rights under the sublicense survive requires consideration of extrinsic evidence from the parties to resolve the ambiguity in the controlling license concerning the survival of the sublicense. In this vein, the opinion provides a suggested roadmap of relevant facts for the lower court to consider including, but not limited to, the fact that Sirius had performed all of its obligations under the Sirius sublicense, that Fraunhofer was aware of the Sirius sublicense, and commercial practices and custom.  Moreover, the Federal Circuit suggest that resolution on summary judgment may be appropriate in this context even though extrinsic evidence is at play.

While there are still open questions that will need to be determined by the district court on remand, this opinion highlights how important it is to use clear and unequivocal language in a patent license to define a party’s termination rights (in the event of bankruptcy or otherwise) and any sublicensee rights upon termination.