Federal Circuit Finds That Patent Sublicenses Do Not Automatically Terminate Upon Termination Of The Main License Agreement
On October 17, 2019, the Court of Appeals for the Federal Circuit (“CAFC”) vacated the judgement of the United States District Court for the District of Delaware granting a motion to dismiss for failure to state a claim on the ground that the defendant had a valid license to the patents-in-suit. Fraunhofer-Gesellschaft v. Sirius XM Radio Inc., __ F.3d __ (Fed. Cir. Oct. 17, 2019). The CAFC found that the license defense could not be resolved on a motion to dismiss because the license was ambiguous, and remanded to the district court.
In March 1998, Fraunhofer-Gesellschaft (Fraunhofer) and WorldSpace International Network Inc. (“WorldSpace”) entered into an exclusive patent-license agreement to several patents (Master Agreement). The Master Agreement granted WorldSpace the right to sublicense the patents, and WorldSpace entered into a sublicense agreement (“Sublicense”) with Sirius XM Radio Inc. (“SXM”).
In October 2008, WorldSpace entered into bankruptcy under Chapter 11 of the Bankruptcy Code. At the bankruptcy court, WorldSpace rejected the Master Agreement, thereby breaching the agreement. WorldSpace’s breach of the Master Agreement gave Fraunhofer the right to terminate the Master Agreement, but Fraunhofer did not do so at the time. The bankruptcy court then approved a settlement agreement between WorldSpace and SXM preserving the Sublicense between the parties.
In October 2015, Fraunhofer sent a letter to SXM alleging it infringed four of its patents. One month later, Fraunhofer sent a letter to WorldSpace claiming that the Master Agreement was terminated when WorldSpace rejected the Master Agreement during the bankruptcy proceedings, and purported to reaffirm the termination.
In February 2017, Fraunhofer brought suit against SXM alleging infringement of its patents. SXM brought a motion to dismiss on the grounds that it had a valid license to the patents-in-suit. The district court granted SXM’s motion to dismiss on the ground that the Sublicense was a complete defense to infringement. Fraunhofer appealed.
The first question on appeal was whether the Master Agreement was properly terminated. The CAFC noted that “[a] rejection [in bankruptcy] breaches a contract but does not rescind it.” OpMission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652, 1657–58 (2019). As such, “WorldSpace’s rejection does not terminate the contract or vaporize SXM’s rights.” Fraunhofer-Gesellschaft, slip op. at *10 (internal citations omitted). Moreover, the CAFC found the record unclear as to whether Fraunhofer had terminated the Master Agreement with WorldSpace through its November 2015 letter, and therefore remanded to the district court.
Second, the CAFC held that the survival of the Sublicense upon termination of the Master Agreement depends on the interpretation of the Master Agreement. The law does not provide for an automatic survival or termination of a sublicense upon termination of the main license. A sublicense agreement may survive the termination of the main license agreement if the sublicense grant was complete and irrevocable before the termination of the main license agreement. In the instant case, because the Master Agreement was ambiguous on this point, the district court could not resolve the issue on a motion to dismiss, and thus remanded to the district court.
In a note to practitioners, the CAFC advised that in the future license drafters should “resolve this issue by including contract language specifically addressing the survival of sublicense rights.” Id. at *15.