The relatively recent case of Imation v. Koninklijke Philips Electronics (CAFC November 2009) provides an important reminder that dealmakers need to be mindful of how terms such as affiliate and subsidiary are treated in IP agreements.
In Imation the overall license agreement had a termination clause, except to the license itself which survived for the life of licensed patents (“the term of this Agreement shall expire on March 1, 2000, except that any patent license which has been granted under Article 2 shall continue thereafter for the term provided in Article 3” – – some of the patents-at-issue reportedly have terms lasting at least until 2020).
- The grant clause specifically included the provision that Phillips “agrees to grant and does hereby grant to [Imation] and its SUBSIDIARIES a personal, non-exclusive, indivisible, nontransferable, irrevocable, worldwide, royalty-free license” under the licensed patents.
- The agreement defined “Subsidiary” as “any . . . form of business organization as to which the party now or hereafter has more than a fifty percent (50%) ownership interest.”
GDM and Memorex became subsidiaries of Imation after March 1, 2000.
The issue – – are GDM and Memorex included in the license granted under the Agreement?
The district court said no, finding that because GDM and Memorex “did not become Imation subsidiaries until after the CLA expired, they could not have been granted a license as of the date of the expiration.” The district court held that although the singular term “license” was used in the grant, it plainly contemplates the grant of multiple “personal” licenses. The district court also found support in the heading “Grant of Royalty Free Licenses,” and the reference in Article 3 to “[t]he term of the licenses granted under Article 2 (consistency can matter!). As such, the district court held that the phrase “now or hereafter” in Section 13 “refers to any time up until the expiration of the agreement”
Phillips also focused on the dual nature of the grant clause contending that “each party grants some licenses at the time of execution (‘does hereby grant’) and some in the future (‘agrees to grant’),” as new patents or Subsidiaries come into existence.
Imation took the position that the grant clause “effects” a present grant to Imation and its Subsidiaries as a group – and the term of these licenses is the life of the licensed patents. The CAFC agreed.
Finding no NY state law precedent, the CAFC panel noted that it had previously considered similar “agrees to grant and does hereby grant” language in the context of patent assignments and found it to effect a present assignment of rights in future inventions.
CAFC also held the unambiguous language of the “Subsidiary” definition allows class membership to grow (or shrink) over time, and so the non-existence of GDM and Memorex at the time of the license grant did not prevent either entity from receiving the benefits of the fully vested licenses. This exemplifies a commonly overlooked trap for dealmakers – – boilerplate subsidiary and affiliates clauses will play out in future scenarios where companies acquire other entities or are acquired (e.g., by current potential competitors).
The “personal” limitation in the license grant did not save the day for Phillips, evidencing an important lesson about the meaning of “personal” in patent licensing. “Personal”, CAFC holds, merely refers to “the absence of a property right”. Again, this legal twist has general importance. Consider, for example, how inclusion of “personal” in a license grant could impact the ability of the licensee to enforce a patent without the patent owner (in view of standing issues).
CAFC found “now or hereafter” connotes that Subsidiaries may come into existence at some unspecified future time. The parties could have used “now” or a list to fix the scope of Subsidiaries. Note for my BD readers, the lawyerly “hereafter” can in fact matter. Read and consider such phrases carefully.
Further facts that CAFC held buffeted its holding included (1) use of a time limitation in the definition of “Licensed Patents” (“Where one provision of an agreement contains a particular reference, the omission of this reference from any similar provision ‘must be assumed to have been intentional under accepted canons of contract construction’”) and (2) the singular use of “license” (brushed off by the district court) and in the fact that license “shall commence” (rather than the agreement providing a mechanism for multiple commencement dates to multiple individual licenses).