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In re Spansion by US Third Circuit on 21 December 2012

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.

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.

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)

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).

Related pages on ESP Wiki

External links

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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