Patent Licenses Include Inherent Rights Allowing Third-Party Manufacture

Corebrace, LLC. v. Star Seismic LLC (Fed. Cir. 2009) 08-1502.pdf

Corebrace's patent covers an earthquake-resistant brace for steel framed buildings. The original rights-holder (the inventor, Benne Murthy Sridhara from Bangalore) first licensed patent rights to Star. Later, the patent rights were assigned to Corebrace.

Star's nonexclusive license from the inventor grants a right to “make, use, and sell” licensed products. The license also includes a restriction that Star may not "assign, sublicense, or otherwise transfer" its rights - except to an affiliated company. The inventor did already have a relationship with CoreBrace and reserved for that company "all rights not expressly granted" including any improvements created “by a third party whose services have been contracted."

The question on appeal is whether the license grants Star the right to use third-party contractors to manufacture licensed products for its own use. The Federal Circuit answered in the affirmative - holding that absent a clear disclaimer, a patent license includes a right to use a third party manufacturer.

The right to “make, use, and sell” a product inherently includes the right to have it made by a third party, absent a clear indication of intent to the contrary. (Following Utah law)

Patent licensing is complicated because the contracts are interpreted under state law. Here, the contract indicates that Utah law should be followed. There is not Utah decision on point. However, the Federal Circuit noted its own precedent as well as California Supreme Court cases that "have both persuasively held that a 'have made' right is implicit in a right to make, use, and sell, absent an express contrary intent. We consider that the Utah Supreme Court would therefore likely arrive at the same conclusion were it to consider the issue."

Often, exclusive licensees are implicitly granted greater rights than their non-exclusive counterparts. In the non-exclusive setting - allowing the licensee to subcontract undercuts the patent-holder's rights; while in an exclusive licensee scenario, the patentee is presumed to have fully exploited its patent rights in that one contract. In this case, however, the Federal Circuit ruled that the implicit right to sub-contract manufacturing does not depend on any exclusive license status.

Comments

[gigi]

Does Utah have a procedure for a federal court to seek input from the state supreme court regarding how that state court would answer a question of that state's law?

[Just an ordinary inventor(TM)]

Re: “... an affiliated company.”

It is my understanding that an “affiliated” company has no legal significance.

At my wrong?

[Just an ordinary inventor(TM)]

Please pardon the speech to text error.
I'll have to improve my proofreading skills.
Here's the question:

Am I wrong?

[Leopold Bloom]

No, you're not wrong. The contract likely included a definition for "affiliated company." Or at least it should have.

[Dennis Crouch]

RE Affiliated Company.

I think JAOI is right that an "affiliated" is about as meaningful as the "natural" label that I see on processed food. The CAFC indicated that the license granted permission to sublicense to an "affiliated, parent, or subsidiary company."

Although a broad interpretation of those terms would tend to open the license, the CAFC's decision here did not depend upon that language.

[OutWithTheOld]

Leopold Bloom is right. Typically, the contract will define affilates, subsidiaries, and subdivisions, and maybe even more entities. They might do affiliates as an entity that has $x/yr in transactions with the primary company, subsidiaries as those the primary company has %y ownership of voting stock or board presence with, and so on.

This is important with the really big entities because companies like GM/GE/IBM have tons of smaller entities that they do business with/as.

[Admiral]

So what is the rule here? That this implicit right, without any exclusive bar in the license, allows the product to be made by others, and this does not constitute a) an assignment, b) a sublicense, or, more importantly, c) any other transfer of rights?

[Anonymous]

There is one thing i don't understand. A patent gives the holder the right to exclude others from making, using, selling.... and a patent license is basically a covenant not to sue for infringement. Thus, I was under the impression the inventor/holder can not grant the right to make, use, and sell.... he can only promise not to sue them. Am I missing something?

[Steven Fox]

the grant (or permission) is the right to make, use, and sell products covered by the license

[Josh Kay]

This will certainly be a choice of law issue. If there is ambiguity in the contract the court may be more likely to consider it in favor of the licensee since the licensor probably had the burden of drafting a clear contract.

For more information on patent litigation see www.generalpatent.com/patent-litigation

[Patentguy]

So do any obligations of confidentiality/restricted use also pass to the "have made by" company if the same existed in the license? Always wondered about that. Otherwise, nothing new.

[Leopold Bloom]

"So do any obligations of confidentiality/restricted use also pass to the 'have made by' company if the same existed in the license?"

Not by virtue of the license agreement, because the 3rd-party manufacturer is not privy to the license agreement. The licensee is responsible to the licensor for controlling the conduct of the manufacturer. If the licensee is paying attention, a contract between the licensee and the manufacturer will include confidentiality and use restrictions that are at least as restrictive as those in the license.

[Shannon]

What about the right to "make, use, sell, and maintain"? Does "maintain" pass to a third-party manufacturer?

[Leopold Bloom]

"What about the right to 'make, use, sell, and maintain'? Does 'maintain' pass to a third-party manufacturer?"

Shannon, this is probably a question of contract law, not patent law (although there might be a threshold question of whether "maintaining" would be an infringing activity absent a license), so it will depend on the specifics of the contract and the relevant state law for interpreting contracts. As a result, it's impossible to make any general statements, other than that a judicial outcome would likely focus on attempting to discern the intent of the parties.

[Dennis Crouch]

Shannon - Generally, a patent includes the right to exclude others from making or using a device. However, it does not come with a right to stop others from "maintaining" or repairing a device. While repairs are permissible, "reconstruction" of a device is seen as infringing. Thus, there is a long line of cases that try to distinguish from permissible repair and infringing reconstruction.

[MaxDrei]

As to that theme, Dennis, may I ask, what about "keeping" products that are patented. Suppose a warehouse is full of infringing articles, ready for sale. Once they're out on the streets, they're gone. You don't know who is paying the warehouseman. The warehouseman isn't making the products, using them or selling them. But he's keeping them, that's for sure. Is he an infringer? Is his "keeping" actionable?

[Dennis Crouch]

Keeping, storing, transporting (except importation), disassembling, repairing, giving away, ...

None of these activities create a cause of action for patent infringement - something usually defined as making, using, or offering-to-sell, or selling.

Of course, they may be actionable if those activities somehow induce or contribute to the underlying infringement.

[MaxDrei]

So, Dennis, was it a good idea for the UK to introduce "keeping" as a cause of action in the 1977 Patents Act. Or a mistake?