Does A Patent License Cover All Future Subsidiaries?

Imation Corp. v. Koninklijke Philips Electronics, N.V., Nos. 2009-1208, -1209 (Fed. Cir. Nov. 3, 2009):

Holding:

The use of the phrase “now or hereafter” in the “Subsidiary” definition precludes an implicit, temporal limitation in a patent license. Slip op. at 20.

The “agrees to grant and does hereby grant" language creates singular, present grant of rights to existing and future patents that fall within the definition of “Licensed Patents.” Slip op. at 10.

Relevant Facts:

Philips entered a paid-up cross-license agreement with 3M, which later spun off Imation. The agreement continues between Philips and Imation, in which Philips “agrees to grant and does hereby grant to [Imation] and its SUBSIDIARIES a personal, non-exclusive, indivisible, nontransferable, irrevocable, worldwide, royalty-free license under PHILIPS LICENSED PATENTS.” The term “SUBSIDIARIES” is defined as “business organization as to which the party now or hereafter has more than a fifty percent (50%) ownership interest.” Imation later formed or acquired two subsidiaries after the expiration of the agreement (note that the license is still valid for the life of the patents despite the expiration of the agreement). The dispute is whether these two new subsidiaries are covered by the license agreement. The Federal Circuit sided with Imation.

Comments:

This case illustrates the risks of any patent license agreement (or, really, any agreement). The risks arise because the drafters cannot possibly anticipate all future disputes. As a result, the agreement will inevitably fail to anticipate some scenarios. Accordingly, the drafters must try to minimize the risks by (i) learning from prior cases and (ii) considering as many scenarios as possible.

Because most lawyers never worked in the business world before, it could be difficult for them to fully understand business risks. The knowledge can only come from experience, in practicing law or otherwise.

In this case, the parties must have failed to consider the situation whether one party acquires subsidiaries after the agreement expires.

On the one hand, it appears that the definition of “subsidiaries” is ambiguous, and should be decided by the jury. Because the parties likely failed to anticipate this scenario, however, I doubt any extrinsic evidence exists or can guide the jury.

On the other hand, the Court cleverly found that the language is not ambiguous and made a ruling as a matter of law. It makes sense from a law and economics standpoint. It would have been such a waste of resources if the jury has to decide this issue and the relevant extrinsic evidence either does not exist or does not help.

One thing for sure, however, is that after this case, the drafters will know to further define “subsidiaries” in response to this decision.