Patent Sublicense Does Not Automatically Survive Termination of Principal License
The US Court of Appeals for the Federal Circuit reversed a dismissal based on a license defense, explaining that it was improper to dismiss until the district court had interpreted the license agreement. Fraunhofer-Gesellschaft zur Fӧrderung der angewandten Forschung E.V. v. Sirius XM Radio Inc., Case No. 18-2400 (Fed. Cir. Oct. 17, 2019) (Reyna, J).
In 1998, Fraunhofer entered into an agreement granting exclusive licensing rights to its patents, which covered multicarrier modulation in communication signals, to a company named WorldSpace. Under the agreement, WorldSpace could grant sublicenses and in exchange was obligated to make payments to Fraunhofer for patent prosecution expenses. The next year, WorldSpace granted Sirius a sublicense to practice the patents. WorldSpace entered bankruptcy proceedings in 2008, during which it rejected its agreement with Fraunhofer and stopped making payments.
In 2015, Fraunhofer sent a letter to WorldSpace noting that the agreement had already been terminated during the bankruptcy proceeding, and terminating the agreement again for good measure. Two years later, Fraunhofer sued Sirius for alleged infringement of four of its multicarrier modulation patents. Sirius filed a motion to dismiss for failure to state a claim based on its sublicense from WorldSpace. The district court cited a previous Federal Circuit case for the proposition that a patent sublicense automatically survives termination of the principal license, and on that basis granted the motion to dismiss. Fraunhofer appealed.
The Federal Circuit disagreed that its previous case set forth a rule that sublicenses automatically survive termination, and explained that termination was a matter of contract interpretation. The Court concluded that Fraunhofer’s agreement was ambiguous and consequently reversed the district court’s dismissal with instructions to interpret the contract in view of the extrinsic evidence. The Federal Circuit also questioned whether Fraunhofer’s agreement had actually been terminated. Since the district court had not needed to address this issue in the first instance, the Federal Circuit instructed the district court to consider it on remand.