Abstract
A New York district court recently held that a retroactive license agreement allowed a licensee to grant a retroactive sublicense to corporate subsidiaries. The court also found that product sales from a supplier to a sublicensed affiliate exhausted the patent owner's right to prevent the products from being resold through an unlicensed affiliate.
In Canon Inc. v. Tesseron Ltd.,1 the District Court for the Southern District of New York held that a patent licensee could grant a retroactive sublicense to its subsidiaries. The court rejected the patent owner's argument that retroactive licenses are invalid. The court also found that product sales from a supplier to a sublicensed affiliate exhausted the patent owner's enforcement rights, and that reselling the products through an unlicensed affiliate did not constitute patent infringement.
Background
Tesseron and Canon, Inc. entered into a license agreement (1)
granting Canon, Inc. a license under Tesseron's patents, (2)
releasing suppliers of Canon, Inc and its affiliates from liability
for infringing Tesseron's patents, and (3) granting Canon, Inc.
the right to grant sublicenses to current or future affiliates that
were not "major competitors" of Tesseron.
Canon, Inc. subsequently granted a retroactive sublicense under the
Tesseron patents to its wholly-owned subsidiary, Canon USA, which
was in the middle of a distribution chain for printing systems: (1)
Océ Printing Systems GmbH supplied products to Canon USA,
(2) which in turn supplied products to CSA, (3) which in turn sold
those same products to consumers. However, Canon, Inc. could not
sublicense Océ and CSA under the agreement with Tesseron
because both Océ and CSA were "major competitors"
of Tesseron.
In litigation for patent infringement, Tesseron argued that federal
law bars retroactive patent licenses and, as a result, Canon USA
did not have a valid retroactive sublicense to Tesseron's
patents.
The Decision
The court found that the retroactive sublicense was valid.
It first distinguished prior cases prohibiting retroactive licenses
by pointing out they involved jointly-owned patents and the policy
prohibiting a co-owner from undercutting the rights of another
co-owner by retroactively licensing the patents. Determining when
and if infringement has occurred is not difficult for a sole owner
because the sole owner has the exclusive right to license; past
infringement cannot be "undone" by someone with an equal,
unrestricted right to license. And the problem of knowing all
authorized users or licensors "at any given time" need
not arise when sole owners voluntarily grant retroactive licenses.
The out-of-control spread of retroactive sublicenses, and hence
uncertainty about the number of authorized users, can be controlled
by a sole owner, who may impose contractual limitations on the
right of a licensee to grant a sublicense or a sublicense with
retroactive effect." Therefore, in the present case, because
Tesseron was a sole owner of the patents and the policy
considerations for joint owners did not apply.
Next, the court concluded that reading the agreement between
Tesseron and Canon, Inc. as a whole permitted Canon, Inc. to grant
retroactive sublicenses. The agreement provided a retroactive
license to Canon, Inc., acknowledging that it applies retroactively
to an earlier date. And the agreement also limited Canon,
Inc.'s right to sublicense in two specific ways: it may
sublicense only to Affiliates and may not grant those Affiliates
the right to sublicense further. Having two sublicensing
restrictions and no provision prohibiting retroactive sublicensing
demonstrated that these sophisticated parties chose not to include
one.
Additionally, the court found that the ability to sublicense
retroactively was "woven into the fabric of the
agreement" because the agreement extinguishes any liability
for past infringement on the part of both Canon, Inc. and its
affiliates and Canon, Inc. may issue a sublicense to affiliates it
acquires at any time during the term of the agreement as long as
later-acquired affiliates were not major competitors of Tesseron as
of the agreement's effective date.
Tesseron also argued that even if the sublicense from Canon, Inc.
to Canon USA was valid and retroactive, it did not cover sales of
products from CSA to customers in the United States. The court
responded that a valid and retroactive sublicense would cause the
sale of products from Océ Printing Systems GmbH to Canon USA
to be licensed and therefore exhaust Tesseron's ability to
assert those its patent rights in CSA's subsequent sale of the
products it purchased from Canon USA.
Strategy and Conclusion
This case highlights the complexities of negotiating and
drafting provisions of licenses related to affiliates in light of
the possible future sublicense grants, acquisitions or other
changes in ownership or affiliation, and distribution chains.
Footnote
1 The Canon opinion can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2015/CanonIncvTesseronLtdetal_Nov.19.2015.pdf.
Previously published by LES Insights
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