- The Law of Unintended Consequences -- US Court of Appeals for the Federal Circuit Finds Patent Licenses Can Carry an Implied License to Have the Licensed Product Made by a Third Party
- June 22, 2009 | Authors: Joseph A. Mahoney; Deborah Schavey Ruff
- Law Firm: Mayer Brown LLP - Chicago Office
Patent license grants can assume many forms and cover a variety of rights. Typically, a grant in a patent license will give the Licensee the right to “make, use, sell or import” the patented invention. When a Licensor-patent owner enters into a license with a Licensee, it is generally only the activities allowed by the license that are operative; silence as to any particular activity, as a general rule, prohibits the Licensee from engaging in that particular activity. However, the US Court of Appeals for the Federal Circuit, continuing with its recent trend, expanded the Licensee’s rights by finding an implied license, absent any specific language to the contrary, which should serve as a caution for companies engaged in licensing activities.
In CoreBrace LLC v. Star Seismic LLC, No. 08-1502, (Fed. Cir. May 22, 2009), the Federal Circuit held that patent licenses to make, use and sell a patented product carry an implied license to have the product made by a third party, unless the license explicitly states that the Licensee is prohibited from doing so. CoreBrace LLC (CoreBrace) was the owner of a patent directed to a brace for use in the fabrication of earthquake-resistant buildings. Star Seismic LLC (Star) had previously received a license to the patent from the prior patent owner. The license granted to Star the non-exclusive right to “make, use, and sell” the patented building brace. The license further contained a provision that Star could not “assign, sublicense, or otherwise transfer” its rights to any party except to an affiliated, parent or subsidiary company. Finally, the license also explicitly reserved to the Licensor (CoreBrace) “all rights not expressly granted” to Star. The license did not, however, explicitly provide that Star had the right to have the licensed product made by a third party.
Star did not manufacture the patented building brace itself, but instead contracted with a third-party manufacturer to produce the patented product. CoreBrace subsequently sued Star for patent infringement and breach of contract claiming that the license grant only granted Star the right to “make, use, and sell” the patented building brace and not to have the brace manufactured by a third party.
CoreBrace argued that “have made” rights were not specifically included in the language of the license grant. CoreBrace also asserted that “have made” rights were not inherently included in the right to “make, use, and sell” the patented product as the Licensee could make the product itself rather than have the product made by a third party manufacturer. Finally, as additional support for its position that “have made” rights were not to be included in the license grant, CoreBrace pointed to provisions in the license which prohibited Star from granting sublicenses, as well as reserving for CoreBrace all rights not expressly granted to Star. The US District Court for the District of Utah dismissed CoreBrace’s claims for breach of the patent license and patent infringement.
The Court of Appeals for the Federal Circuit affirmed and specifically found that Star had not breached the license by contracting with third parties to have the licensed products made. The Federal Circuit made clear that the rights granted in the license to “make, use, and sell” a product inherently included the right to have the product made by a third party, absent a clear indication of intent to the contrary.
The Federal Circuit was not swayed that the license prohibition against the grant of sublicenses or the reservation of rights clause was evidence of CoreBrace’s intent not to grant “have made” rights. According to the Federal Circuit, the grant to have the product made by a third-party contractor is not a sublicense, as the contractor who makes the product for the Licensee does not receive a sublicense. Additionally, because the right to “make, use, and sell” a product inherently includes the right to have the product made by others, “have made” rights are included in the license and are not excluded by the reservation of rights clause.
This recent interpretation by the Federal Circuit should provide a cautionary tale to companies that license patented technology, either as Licensor or as a Licensee, to make sure that the intent of the parties and the specific rights granted to the patented technology, and more importantly, the specific rights which are excluded, are specifically set forth in clear language in the license agreement. The rights of the parties, and indeed, in some cases the entire business transaction, can be inadvertently adversely affected by a poorly crafted grant clause in a license agreement.