United States: Purchaser Of Patents Barred From Asserting Patents Against Practicing Entity Led To Believe It Would Not Be Sued By Prior Owner

Abstract

Within a few days of purchasing several patents for $2 million, a patentee began sending demand letters to potential infringers and filed a patent infringement suit within the year. The U.S. Court of Appeals for the Federal Circuit, however, affirmed the decision of a Kansas district court that the prior owner of the patents, by working with the defendants for years through unlicensed activity, led the defendants into inferring that the patents would not be asserted against them. Based on this conduct, the Court held that the new patent owner was equitably estopped from asserting the patents.

Under Supreme Court precedent, parties to a contract are released from their contractual obligations when a contract expires. But a court will compel arbitration under an expired contract if a dispute falls within the scope of the arbitration clause of that contract.

High Point purchased patents relating to CDMA communications network technology from Avaya, a spin-off of Lucent Technologies, which spun off of AT&T. Within three days of acquiring the patents, High Point began sending demand letters asserting infringement, including to Sprint and its corporate affiliates. Sprint had worked with Lucent and AT&T to build a communications network for years through licensed and unlicensed activity.

High Point filed a patent infringement suit against Sprint, accusing Sprint of violating licensing agreements entered into with High Point's predecessors and alleging that Sprint's network operated through a combination of licensed and unlicensed equipment in an infringing manner. The United States Court of Appeals for the Federal Circuit affirmed the district court's determination that High Point's lawsuit was barred by equitable estoppel, a doctrine in patent law that bars a patentee's lawsuit where it would be unfair to allow the lawsuit to proceed. The Federal Circuit agreed.

Background

In the early 1990s, AT&T's Bell Labs ("AT&T") developed patents relating to standards for CDMA communications networks around the world. AT&T spun off and assigned the patents to Lucent Technologies ("Lucent"), and Lucent spun off and assigned the patents to Avaya, Inc. ("Avaya").

Around 1995, Sprint Nextel Corp. ("Sprint") decided to build a nationwide CDMA network. To do so, Sprint contracted with Nortel, Motorola, and other vendors to supply equipment for the network. In 1996 and 1997, Sprint executed supply agreements with Nortel and Motorola, respectively, for equipment for the CDMA infrastructure.

In 1996 and 1999, AT&T (and later Lucent) also agreed to supply Sprint with equipment. The supply agreements with AT&T and Lucent included limited licenses for several patents, including the patents that High Point ultimately purchased from Avaya. Later, Sprint signed a Memorandum of Understanding with Lucent to develop multi-vendor interoperability within Sprint's CDMA network. That same year, Lucent entered a similar licensing arrangement with Nortel, which was later cross-licensed to Sprint. Avaya did not discuss licensing the patents after Lucent assigned them.

Initially, the zones in Sprint's network were covered by a patent license, either by the license in the Lucent-Sprint supply agreement, or by a cross-license that originated from an agreement with Lucent and Nortel (which applied to Sprint's use of Nortel equipment). But as the network grew, Sprint began to purchase and use unlicensed equipment.

In March 2008, Avaya sold the CDMA patents to High Point. Within three days of acquiring the CDMA patents, High Point began sending demand letters asserting infringement, including to Sprint and its affiliates. High Point filed a patent infringement suit against Sprint for violating its licensing agreements and infringing its CDMA patents.

A Kansas district court entered summary judgment in favor of Sprint, finding that Sprint suffered economic and evidentiary prejudice because Lucent and Avaya remained silent as to any patent rights while Sprint actively tried to establish its CDMA network through the sale, purchase, and licensing of network equipment. High Point appealed.

The High Point Decision

Sprint and the other defendants argued that High Point's predecessors, including AT&T, Lucent, and Avaya, communicated through their actions and silence that Sprint would not be disturbed in establishing a CDMA network with equipment from multiple vendors. They also argued that High Point's predecessors could have sued much earlier, but chose not to. Instead of suing, High Point's predecessors expressly agreed to help Sprint integrate the equipment from other vendors. The defendants argued they relied on the conduct of High Point's predecessors in investing in interoperable CDMA infrastructure and foregoing the pursuit of non-infringing alternatives, and would now be prejudiced economically if High Point was permitted to continue with the suit.

High Point argued that preventing it from asserting the CDMA patents because the previous patent owners failed to do so for several years is an extraordinary remedy that should not apply without a statement of intent not to do so given the complexity of the business transactions involved and the sophistication of the parties. High Point also argued that under the various licensing agreements, it was prevented from asserting infringement until more recently.

The Federal Circuit held that that the district court ruled appropriately to preclude High Point from prosecuting its lawsuit against the defendants. The court first outlined the three elements required to establish whether High Point's lawsuit should be barred by equitable estoppel: (1) the patentee, through misleading conduct (or silence), leads the alleged infringer to reasonably infer that the patentee does not intend to enforce its patent against the alleged infringer; (2) the alleged infringer relies on that conduct; and (3) the alleged infringer will be materially prejudiced if the patentee is allowed to proceed with its claim.

The Federal Circuit concluded that the misleading conduct of High Point's predecessors caused Sprint to reasonably infer that they would not assert the CDMA patents while Sprint purchased unlicensed equipment to build its network. The court noted that the conduct of High Point's predecessors included both silence and active conduct. The court noted that High Point's predecessors repeatedly did nothing to assert their patent rights when the patent licenses were not in effect. The court also dismissed High Point's argument that bad faith must be present to establish intent, particularly in view of the active participation of High Point's predecessors in building Sprint's CDMA network. The Federal Circuit also agreed with the district court's determination that the defendants detrimentally relied on the conduct of High Point's predecessors and that the defendants were prejudiced by the delay.

Accordingly, the Federal Circuit affirmed the district court's ruling.

Strategy and Conclusion

This case illustrates how the relationships and course of conduct between prior owners of patents and practicing entities can affect the ability of a subsequent owner to assert the patents against those practicing entities, and how it can be difficult for purchasers of patents to know and evaluate how their rights to assert the patents against practicing entities are affected by such relationships and course of conduct between the prior owners and those entities against which the patents may be asserted.

Footnotes

1 The High Point  opinion may be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/HighPointSARLvSprintNextelCorp15129820160405.PDF.

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