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In re Spansion by US Third Circuit on 21 December 2012

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In re Spansion dealt with the important issues of whether a "promise not to sue" is the same as a "licence", and thus whether such a promise still exists if the patent is transferred to another entity. The case was heard by the Third Circuit, which is a Federal appeals court and is particularly influential on commercial matters because its geographical zone includes the state of Delaware, which is where a lot of US organisations choose to register.

In this case, Spansion promised not to sue Apple, but tried to cancel this promise after filing for bankruptcy.

Contents

[edit] Does this ruling deal with patent transfer?

The Patently-O blog summarised the outcome as "Thus, Apple retains its license regardless of who buys the patent rights."[1]

But the court's ruling doesn't mention anyone buying Spansion's patent rights, so how does Patently-O draw this conclusion?

The ruling also doesn't mention any "trustee", but this may be an entity that is automatically created during chapter 11 bankruptcy.

[edit] Timeline and facts

From pages 2 and 3:

  • "In November 2008 Spansion filed a patent infringement complaint (...) against Samsung and Apple"
  • "In a letter agreement dated February 10, 2009 between Spansion and Apple, Spansion (...) promised to refrain from filing future actions related to those patents."
  • When Spansion filed for bankruptcy, it "moved to reject the letter agreement as an executory contract"
  • "The Bankruptcy Court granted the motion"
  • "Apple then filed under 11 U.S.C. § 365(n) (...) contending the agreement was a license."
  • "The Bankruptcy Court denied Apple’s § 365(n) election, finding the agreement was not a license"
  • "Apple appealed (...). The District Court of Delaware held the agreement was a license because it was a promise not to sue, and held § 365 permits Apple to retain its rights under the patent license."
  • Spansion appealed to the Court of Appeals for that region, the "Third Circuit"
  • The Third Circuit rejected Spansion's arguments: "we will affirm the judgment of the District Court" (end of page 7)

[edit] The substance

Section II B and C, from pages 6 and 7:

B

“[A] license ... [is] a mere waiver of the right to sue by the patentee.” De Forest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927) (quotations omitted). A license need not be a formal grant, but is instead a “consent[] to [the] use of the patent in making or using it, or selling it ... and a defense to an action for a tort.” Id. at 241. The Court of Appeals for the Federal Circuit explained that the inquiry focuses on what the agreement authorizes, not whether the language is couched in terms of a license or a covenant not to sue; effectively the two are equivalent. TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271, 1275-76 (Fed. Cir. 2009).

In the letter agreement, Spansion promised “to dismiss the ITC action against Apple, and [to] not re-file the ITC action or another action related to one or more of the same patents against Apple.” This was a promise not to sue Apple for its use of Spansion’s patented products. Accordingly, as the District Court found, the letter agreement is a license. Since all the evidence before the Bankruptcy Court showed the agreement was a license, the District Court properly held the Bankruptcy Court finding was clear error.

C

After a debtor rejects a contract under § 365(a), section 365(n) allows the holder of an intellectual property license to elect to retain its rights under the contract. 11 U.S.C. § 365(n)(1)(B). The Bankruptcy Court denied Apple’s § 365(n) election because of the “cessation of business between Spansion and Apple” after Spansion moved to reject the agreement. But § 365(n)(1)(B) allows a licensee “to retain its rights... as such rights existed immediately before the case commenced.” 11 U.S.C. § 365(n)(1)(B), see also 2 William L. Norton Jr., Norton Bankruptcy Law & Practice 3d § 46:57 (“The rights which may be retained are those existing ‘immediately before the case commenced.’”). Accordingly, cessation of business after Spansion filed for bankruptcy is irrelevant to the § 365(n) analysis. Since the letter agreement was a license, Spansion’s rejection of the license under § 365(a) triggered Apple’s right to elect to retain its licensing rights under § 365(n).

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[edit] References

  1. http://www.patentlyo.com/patent/2013/01/3rd-circuit-covenant-not-to-sue-is-a-license-and-therefore-not-dischargeable-in-bankruptcy.html


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