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IP Alert: Federal Circuit Issues Significant Decision on Licensing Rights

October 21, 2019

On October 17, in Fraunhofer-Gesellschaft zur Förderung der angewandten Forschung e.V. v. Sirius XM Radio Inc., the Federal Circuit issued a noteworthy opinion affecting the rights of sublicensees to patent licenses. Although some aspects of the case arose from federal bankruptcy law, the court’s guidance appears to be applicable to patent licenses more generally, so the case may be relevant to others who are or will be parties to a patent license.

In March 1998, plaintiff Fraunhofer granted an exclusive license to WorldSpace International Network, a third party, under certain patents. Later that year, WorldSpace granted a sublicense to Sirius, and in 1999 the agreement was amended to make the sublicense “irrevocable.”

WorldSpace declared bankruptcy in 2008. A bankruptcy trustee may accept or reject contracts in bankruptcy, and in this case the trustee rejected the license agreement with Fraunhofer. Under bankruptcy law, the rejection of the license was tantamount to a breach of the license agreement occurring immediately before the filing of bankruptcy. This breach gave Fraunhofer the right to terminate its license with WorldSpace, but Fraunhofer did not immediately do so, nor did it terminate the sublicense with Sirius.

In October 2015, Fraunhofer wrote to Sirius to assert infringement of four of its patents. The following month, Fraunhofer sent WorldSpace a letter purporting to terminate the license.

In February 2017, Fraunhofer sued Sirius for patent infringement in district court, arguing its sublicense was tied to the master agreement with WorldSpace, and that master agreement had terminated. Sirius moved to dismiss, arguing that because its sublicense from WorldSpace was intact, Sirius was licensed under the asserted patents. The district court agreed and granted Sirius’s motion to dismiss, and Fraunhofer appealed.

On appeal, the Federal Circuit reversed and remanded, stating that factual issues precluded the district court from granting the motion to dismiss. The court first concluded that it was unclear whether Fraunhofer had in fact terminated the license. More significantly, the court observed that even if Fraunhofer had successfully terminated the license, the license was ambiguous as to whether the sublicensee’s rights remained intact despite the termination. The court noted that Federal Circuit law “does not provide for automatic survival of a sublicense,” and observed that whether a sublicensee’s rights survived must be determined on a case-by-case basis. For instance, the court suggested, a sublicensee who stands as a bona fide purchaser of the sublicense might retain rights even after termination of the master license. With regard to Sirius, the court concluded that the irrevocable nature of the sublicense might survive termination of the master license: “Under such circumstances the sublicensor, at the time of the grant of the sublicense, would not be conveying more to the sublicensee than it had received from the master licensor.”

Ultimately, the court concluded, “the survival of the sublicensee’s rights depends on the interpretation of the Master Agreement.” Although the agreement at issue here was ambiguous in this regard, the court expressed confidence that “in the future, parties to license contracts will resolve this issue by including contract language specifically addressing the survival of sublicense rights.” Because the license in question was ambiguous, the court remanded with instructions to the district court to consider extrinsic evidence.

The guidance from the Federal Circuit on inclusion of sublicensee provisions on termination is explicit and should be considered by both licensors and licensees when drafting patent license agreements. Licenses can terminate in ways other than bankruptcy, so the court’s guidance appears applicable outside the bankruptcy context. For more information, or with questions on any existing patent licenses in this regard, please contact Fitch Even partner Allen E. Hoover, author of this alert.

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