Tag: sublicensee

Supreme Court Set to Tackle Key IP/Insolvency Issue

In the fall of 2018, the  United States Supreme Court agreed to review the January 2018 decision of the First Circuit Court of Appeals in  Mission Product Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC).  In Tempnology,  the First Circuit ruled that a trademark owner that files for bankruptcy can deprive a  nondebtor licensee from any rights to use trademarks of the owner licensed to the licensee.

Although the First Circuit’s opinion cites with approval the Fourth Circuit’s  1985 decision  in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. as supporting  the stripping away of a  licensee’s rights, more recent authority from the  Seventh Circuit in  2012 in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC  cut the other way and provided protection to a trademark licensee.

Last Friday, the Supreme Court set February 20, 2019 as the date for oral argument in the Tempnology case.  Within the past month, no fewer than six briefs have been filed by various neutral parties urging the Court to reverse the First Circuit and protect the rights of a trademark licensee upon rejection by a debtor licensor.  Briefs have been filed by the Intellectual Property Owners Association,  American Intellectual Property Law Association,  International Trademark Association and New York Intellectual Property Law Association.  In addition to those organizations,  the United States of America also weighed in with a brief as did a group of several law professors.   Copies of all the briefs and other documents pending before the Supreme Court are available here.

An example of the practical issue before the Supreme Court is evident in an opinion issued by the United States Bankruptcy Court for the District of Connecticut in May, 2018.  In In re SIMA International Inc.,  a chapter 7 trustee sought to reject a debtor licensor’s trademark license on the grounds that rejection would benefit creditors by yielding a higher sale price for the trademarks if no continued rights existed for the licensee.   Not surprisingly, the licensee argued that it should have continued rights to the trademarks it had previously licensed.  In ruling for the licensee, the Bankruptcy Court in Connecticut  (which is located in the Second Circuit and not bound by opinions from the First Circuit) rejected the First Circuit’s Tempnology decision.   The SIMA decision  cited with approval the Seventh Circuit’s Sunbeam decision that rejection did not “abrogate” the licensee’s right to use the trademarks or somehow make the license agreement “disappear.”

In sum, in agreeing to review the Tempnology case, the Supreme Court is poised to deliver much needed clarity to all parties with an interest in trademarks in distressed situations including licensors, licensees, buyers, creditors and others.   In addition to resolving the particular dispute that has divided the lower courts, the Supreme Court decision may also shed light on what role  equity can or should play in the context of interpreting plain statutory language concerning intellectual property issues in insolvency matters.

A Cautionary Tale For Sublicensees

Law 360 recently published the following analysis I contributed concerning ongoing patent infringement litigation involving four patents licensed by Sirius. Any party currently sublicensing technology or thinking of doing so should understand the issues that Sirius has confronted in litigation brought by the master licensor of the patents at stake.

In a venue not that far away — just south of New Jersey — Sirius Radio has been defending itself against a patent infringement suit that deserves the attention of any party that has ever sublicensed rights or is thinking of doing so. Sirius fully paid for an irrevocable sublicense of certain patents. Moreover, Sirius has been using the technology for approximately 20 years. Yet, it has been accused of infringement by the master licensor that granted rights to the sublicensor that licensed to Sirius. The nuance to the story is that the sublicensor commenced bankruptcy, which resulted in a rejection of the license between the master licensor and sublicensor. That development led to the master licensor contending that Sirius’ rights under its sublicense were forfeited as a result of that rejection.

On March 29, 2018, U.S. Magistrate Judge Sherry Fallon issued a decision in the litigation that is sure to be welcome news to any sublicensee.[1] Specifically, the decision recommends dismissal of the suit. The decision alone does not put the matter to rest, however. Rather, the decision takes the form of a report and recommendation to the U.S. District Court for the District of Delaware, which will have to determine whether to adopt the report and dismiss the case or reject the report and let the litigation continue. No matter the determination of the district court, an appeal to the U.S. Court of Appeals for the Third Circuit could of course follow. In other words, this litigation is sure to have at least one sequel beyond Magistrate Judge Fallon’s recent determination.

The Delaware Litigation

The facts are relatively straightforward. Plaintiff Fraunhofer-Gesellschaft Zur Förderung der angewandten Forschung e.V. developed patented multicarrier modulation technology (the “MCM IP”) to four patents for use in satellite radio broadcasting. Thereafter, Fraunhofer licensed the MCM IP to WorldSpace International Network Inc. (the “MCM license”).

WorkSpace in turn granted a sublicense, on an irrevocable basis, to a firm that later merged to become Sirius Satellite Radio, and which used the sublicensed technology to develop its own technology.

WorldSpace subsequently commenced a Chapter 11 proceeding under the U.S. Bankruptcy Code. During the course of those proceedings, the bankruptcy court approved a settlement agreement under which Sirius paid WorldSpace funds in full satisfaction of all sums owed under the sublicense agreement.

Eventually, the Chapter 11 proceeding was converted to a Chapter 7 liquidation proceeding, in which the trustee did not move to assume the MCM license for the benefit of the estate, resulting in automatic rejection of the MCM license.

Approximately three years later, Fraunhofer notified Sirius of its position that Sirius was infringing. Fraunhofer alleged that the rejection of the MCM license in the WorldSpace bankruptcy proceeding operated to deny Sirius any continuing rights under its sublicense.

As noted above, the magistrate judge disagreed, concluding that the rejection of the MCM license in bankruptcy did not impact the continuation of the irrevocable sublicense previously granted to Sirius by WorldSpace. To support this conclusion, the magistrate judge relied on a Seventh Circuit opinion[2] holding that “[w]here a sub-licensee has lived up to the terms of the license it is inequitable that his license should be revoked because the main licensee has failed to do the same, especially where the sub-licensee has made extensive investments on the strengths of his license.”

The magistrate judge rejected Fraunhofer’s arguments, which were based on decisions issued in the context of nonresidential real property that when a lease is deemed rejected pursuant to Section 365(d)(4) of the Bankruptcy Code, subleases associated with the property must also be deemed rejected because the rights of the sublessee are extinguished when the rights of a debtor are extinguished with respect to the property.[3]

Implications

Although the determination of the magistrate judge should be welcome news for any sublicensee, no such party should believe that the decision paves a clear path forward. As noted, the decision will be reviewed by the district court and then will be subject to the normal opportunities for appeal. Fraunhofer instituted suit against Sirius in February 2017, and oral argument on the motion to dismiss was heard in August 2017, with the magistrate judge’s determination issued in late March 2018. No matter the ultimate outcome of this particular litigation, Sirius has experienced the burden of more than a year of litigation expense and uncertainty with the guarantee of more to follow.

Thus, although sublicensees should keep an eye open for future developments in this case, sublicensees should also consider obtaining contractual certainty at the time of entering into a sublicense agreement. Specifically, a sublicensee should consider obtaining the affirmative consent of the master licensor that the sublicenee’s rights under the sublicense shall continue despite the rejection of the master license agreement in bankruptcy or in the event of any termination of the master license. This same approach should also be used by subleases of real property leases to avoid the draconian result imposed by the case law relied on by Fraunhofer noted above.

Moreover, a sublicensee whose licensor commences bankruptcy should pay close attention to the proceedings and take appropriate action to preserve its rights and position itself to guard against similar attacks. In the case of Sirius, for example, the opportunity should have existed in the WorldSpace bankruptcy proceeding to explore potentially acquiring the MCM license from the bankruptcy trustee rather than just allowing that license to be rejected in the proceeding. In short, sublicensees should anticipate the exact scenario that Sirius confronts and then craft binding contractual provisions to address as well as monitor legal proceedings affecting the validity of the rights granted by the sublicensor. Both of those steps should provide more control and certainty at a cheaper cost than defending litigation from a master licensor lodging an infringement attack.

Notes

[1] Fraunhofer-Gesellschaft Zur Förderung Der Angewandten Forschung E.V., Plaintiff, v. Sirius XM Radio Inc. (Civil Action No. 17-184-JFB-SRF).

[2] Rhone Poulenc Agro SA v. DeKalb Genetics Corp., 284 F.3d 1323, 1332 n.7 (Fed. Cir. 2002)

[3] In Chatlos Systems Inc. v. Kaplan, 147 B.R. 96, 100 (D. Del. 1992), aff’d sub nom In re TIE Commc’ns Inc., 998 F.2d 1005 (3d Cir. 1993).