By Brian Craig, J.D.
The district court erred by dismissing the infringement suit against the satellite radio company based on a license agreement.
The U.S. Court of Appeals for the Federal Circuit has held that the federal district court in Delaware erred in dismissing a patent infringement suit brought by a German company against Sirius XM Radio Inc. over satellite radio technology. The Federal Circuit reversed the Delaware district court’s decision to dismiss the suit based on Sirius XM Radio’s claim that is has a valid sublicense agreement. The district court failed to consider the validity of the exclusive license agreement related to the sublicense agreement and extrinsic evidence as to whether the exclusive license agreement was terminated (Fraunhofer-Gesellschaft Zur Forderung Der Angewandten Forschung E.V. v. Sirius XM Radio Inc., October 17, 2019, Dyk, T.).
Fraunhofer-Gesellschaft zur Forderung der angewandten Forschung E.V. ("Fraunhofer") sued Sirius XM Radio Inc. ("SXM") alleging infringement of claims of four of Fraunhofer’s patents. Fraunhofer is a partially state-funded non-profit research organization headquartered in Munich, Germany. Over the past three decades, Fraunhofer has developed and patented several inventions related to multicarrier modulation. In 1998, Fraunhofer and a third party, WorldSpace International Network Inc. ("WorldSpace"), entered into an exclusive license agreement ("the Master Agreement") related to Fraunhofer’s multicarrier modulation technology. Later in 1998, WorldSpace entered into a sublicense agreement with SXM granting SXM a license to use the WorldSpace licensed technology in the United States. In 2015, Fraunhofer sent a letter to WorldSpace claiming that the Master Agreement was terminated. The district court granted SXM’s motion to dismiss for failure to state a claim on the ground that it had a valid license to the patents-in-suit as a complete defense to infringement. The district court also denied Fraunhofer’s motion to amend the complaint on ground of futility. Fraunhofer appealed.
Choice of law. As a threshold question, the Federal Circuit decided that U.S. law, rather than German law, governs. Both Fraunhofer and SXM relied on U.S. law in their briefings before the Federal Circuit. At oral argument, both parties conceded that the German law issue was never properly raised before the district court. Therefore, the Federal Circuit held that U.S. law applies for purposes of the appeal.
Validity of license. The Federal Circuit then held that the district court improperly dismissed Fraunhofer’s complaint for failure to state a claim based on the sublicense agreement. The appeals court first examined whether the Master Agreement was properly terminated. It is unclear whether Fraunhofer, assuming that it had a right to terminate the Master Agreement, properly terminated the agreement. For example, it is a general rule of contract law that a party exercising the right to terminate the contract must give notice within a reasonable. In the present case, the district court never considered whether the Master Agreement was properly terminated.
If the Master Agreement was properly terminated, the next question is whether SXM’s sublicense rights nonetheless survived. The district court held that even if the Master Agreement was terminated, that termination only barred WorldSpace from granting future licenses and did not affect the sublicense it had already granted to SXM. The Federal Circuit observed that the survival of the sublicensee’s rights depends on the interpretation of the Master Agreement, or original license agreement. On its face, the Master Agreement is ambiguous as to whether the sublicensee’s rights survive the termination of the Master Agreement. Where, as here, a contract is ambiguous, courts must consider extrinsic evidence of the surrounding circumstances to determine the intent of the parties.
The Federal Circuit held that the issue concerning the validity of the agreement cannot be properly resolved on a motion to dismiss and remand is necessary to enable the parties to establish an appropriate record and for the district court to make necessary factual findings. Thus, the Federal Circuit vacated the order dismissing the complaint for failure to state a claim and remanded to the district court for further proceedings. The Federal Circuit directed the district court to consider extrinsic evidence whether the sublicensee’s rights survive the termination of the Master Agreement.
Amendment of complaint. Finally, the Federal Circuit held that the district court erred in denying Fraunhofer’s motion to amend the complaint on ground of futility. Fraunhofer’s proposed amendment included factual allegations as to the circumstances surrounding the Master Agreement and the sublicense agreement. Fraunhofer also attached relevant documents that the district court could not otherwise have considered on a motion to dismiss, including the termination letter and a technical consulting contract with SXM. The district court erred by not considering extrinsic evidence of the parties’ intent—evidence that Fraunhofer attempted to offer in its proposed amended complaint. Under these circumstances, the Federal Circuit found that the district court should have allowed amendment of the complaint.
Therefore, the Federal Circuit reversed the district court’s denial of Fraunhofer’s motion to amend the complaint and remanded the case for further proceedings.
This case is No. 2018-2400.
Attorneys: David C. McPhie (Irell & Manella LLP) for Fraunhofer-Gesellschaft Zur Forderung Der Angewandten Forschung E.V. Mark Baghdassarian (Kramer Levin Naftalis & Frankel LLP) for Sirius XM Radio Inc.
Companies: Fraunhofer-Gesellschaft Zur Forderung Der Angewandten Forschung E.V.; Sirius XM Radio Inc.
MainStory: TopStory Patent FedCirNews
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