The Federal Circuit recently affirmed a district court’s holding that a merger clause in a patent license settlement agreement did not extinguish a prior covenant not to sue on the same patent because the agreement did not involve the same subject matter as the covenant.

In 2004, Molon Motor and Coil Corporation (“Molon”) sued Merkle-Korff Industries, Inc. (“Merkle-Korff”), the predecessor of Nidec Motor Corporation (“Nidec”), alleging infringement of U.S. Patent 6,054,785. In response, Merkle-Korff filed declaratory judgement counterclaims against two other patents owned by Molon—U.S. Patents 6,465,915 (“the ’915 patent”) and 6,617,726 (“the ’726 patent”). In 2006, to divest the court of jurisdiction over the counterclaims, Molon unilaterally granted Merkle-Korff a covenant not to sue (“the 2006 Covenant”) with respect to the ’915 and ’726 patents. In 2007, the parties settled the lawsuit and entered into an agreement (“the 2007 Settlement”), in which Molon granted an exclusive license to Merkle-Korff to practice more than a dozen patents, including the ’915 and ’726 patents, in a limited market. The 2007 Settlement contained a merger clause, stating that “prior and contemporaneous conversations, negotiations, possible and alleged agreements and covenants concerning the subject matter hereof, are merged herein.” In 2016, Molon sued Nidec in the U.S. District Court for the Northern District of Illinois, alleging infringement of the ’915 patent. The district court granted summary judgement in favor of Nidec based on the 2006 Covenant barring suit, and Molon appealed.

The primary question on appeal was whether the merger clause in the 2007 Settlement extinguished the 2006 Covenant because they both concerned the same “subject matter.” Molon argued the two agreements concern the same subject matter because they both concern the right to practice the ’915 patent. Interpreting the agreement under Illinois state law, the Federal Circuit disagreed because there were substantive differences between the two agreements that did not conflict. The 2006 Covenant was a unilateral, forever promise not to sue for infringement of two patents, and the 2007 Settlement was a bilateral contract granting exclusive rights under more than a dozen patents. The 2006 Covenant was not limited to any specific market and covered only existing products, while the 2007 Settlement was limited to a specific market and covered existing and future products. The court reasoned it would be too sweeping to deem that two agreements have the same subject matter merely because of an overlapping patent.

Molon also argued that the existence of the merger clause is itself evidence that the parties intended to extinguish the 2006 Covenant. The Federal Circuit, however, read the clause as merging all previous negotiations leading to the 2007 Settlement itself. Neither party argued that the 2006 Covenant was part of the negotiations for the 2007 Settlement, which the court saw as a concession that the 2006 Covenant was a separate agreement. The court also found that the absence of any reference to the 2006 Covenant in the 2007 Settlement was further evidence of the lack of intent to merge the two agreements. Hence, the court held that the 2006 Covenant remained operable and barred Molon’s suit against Nidec for infringement of the ’915 patent.

In a dissent, Judge Reyna reasoned that both agreements concerned the same subject matter because the “heart of the subject matter” of both agreements is the right to practice the ’915 patent. He also found that the two agreements had key inconsistencies. Thus, according to Judge Reyna, the 2007 Settlement extinguished the 2006 Covenant via the merger clause.

Molon Motor and Coil Corporation v. Nidec Motor Corporation, 2019-1071 (Fed. Cir. Jan. 10, 2020).

Practice Tip: When drafting a settlement or license agreement, a merger clause seeking to extinguish prior agreements and covenants concerning the same subject matter may not be interpreted as extinguishing a prior covenant not to sue where the agreement is consistent with, and otherwise silent as to, the prior covenant. Merely concerning the same patent may not be sufficient for the two agreements to be viewed as concerning the same subject matter. In such instances, expressly referring to the prior covenant in the merger clause may be supportive of an intent to merge the agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.