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In license agreement, right to "have made" implicitly granted with right to make
June 15, 2009
In a recent decision, the Federal Circuit affirmed a district court's dismissal of a patent licensor's claims for breach of a license agreement and patent infringement. The non-exclusive licensee arranged to have third parties manufacture the licensed product, but the product was sold by the licensee. The patent owner argued this was a breach of the license because the license stated the only rights granted were the rights to "make, use, and sell," with all rights not explicitly granted reserved to the patent owner. The district court held this language did not prevent the licensee from having a third party make the product, because the grant of the right to make implicitly grants the right to "have made."

The Federal Circuit affirmed. The court noted the controlling authority on point was a 1964 Court of Claims case, Carey v. United States. There, the Court of Claims held the right to "make" includes the right to engage others to do all of the work connected with its production absent express language to the contrary. Here, the Federal Circuit held because such a right is implicitly granted, the reservation of rights did not prevent the "have made" rights from being granted. As a result, utilizing a third party manufacturer did not constitute a breach of the license agreement such that the licensee may be subject to an infringement action, and the Federal Circuit affirmed the district court's dismissal of the case.

More detail on Corebrace, LLC v. Star Seismic, LLC after the jump.

Corebrace owns a patent directed to a brace for use in fabrication of earthquake-resistant steel-framed buildings. Before Corebrace acquired the patent from the inventor, the inventor granted Star Seismic, a structural engineering firm, a non-exclusive license under the patent. The license agreement had four key provisions:

  1. Star had the right to "make, use, and sell" licensed products, but there is no explicit right to have products made by a third party
  2. Star may not "assign, sublicense, or otherwise transfer" its rights to any party (other than related companies)
  3. All rights not expressly granted to Star were reserved to the licensor (originally the inventor, later Corebrace)
  4. Star owned the rights to any improvements made "by a third party whose services have been contracted" by Star
The license also provided that it could be terminated if breached but only after written notice of the breach and after a thirty-day cure period.

CoreBrace contended that Star's subsequent use of third-party contractors to manufacture licensed products for its Star's use was a breach of the license because Star lacked the right to do so. On January 4, 2008, CoreBrace sent a letter to Star stating the license was terminated (without the required 30 day notice and cure period) and sued Star for breach of the license (due to Star's use of third-party contractors) and for patent infringement (based on its purported termination of the license). Star moved to dismiss under Rule 12(b)(6), contending it did not breach the license, and even if it had, the notice provisions for termination had not been followed making termination ineffective. The district court granted the motion to dismiss, agreeing with Star on both counts. CoreBrace appealed.

The Federal Circuit affirmed.

Corebrace advanced four arguments for reversal:

  1. The district court held "have made" rights were not expressly granted under the license, so because the license reserves all rights to Corebrace not expressly granted, Star did not obtain "have made" rights under the license
  2. "Have made" rights are not inherently granted when rights to "make, use, and sell" are granted because a licensee can make the product itself
  3. The district court improperly relied upon Carey v. United States and Advanced Micro Devices, Inc. v. Intel Corp. and improperly distinguished Intel Corp. v. U.S. International Trade Commission, as a case that was primarily about "foundry" rights (a licensee's rights to make a product and sell it under a third party's name) and on parol evidence of the parties' intent to not grant such foundry rights
  4. Although "third parties" are mentioned in the agreement, it mentions specific third parties, not third party manufacturers, and thus the parties did not intend third party manufacturers to be utilized.

The Federal Circuit rejected each of these arguments. The court first observed a patent licensee's right to "make" an article includes the right to engage others to do all of the work connected with its production under Carey. The fact that Star did not have a right to sublicense was irrelevant: A right to have made is not a sublicense because the contractor who makes for the licensee does not receive a sublicense from the licensee. Intel v. ITC did not help Corebrace, because there the parties did not dispute "have made" rights were excluded from the license agreement in that case. As stated by the court: "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."

Here, there were no such indications of express contrary intent. The court noted the license's apparent acknowledgement of third-party manufacturers in the context of ownership of improvements, showing the parties contemplated third party manufacturers when the license was executed. There was also a specific provision enabling Star to contract with third parties to exercise its rights (which necessarily includes contracting with third-party manufacturers), and the requirement that Star allow an "audit of its books and records relating to manufacturing . . . [and] supply contracts" as evidence that third-party manufacture was allowed. The reservation of rights clause could not express a contrary intent, because the right to "have made" was implicitly granted, not impliedly granted. The court therefore concluded Star had the right to engage third parties to make licensed products under the agreement, and therefore had not breached the license. Corebrace's termination was therefore ineffective because there was no breach. Because of this, the court did not reach the issue of whether the notice period was required, and affirmed the district court.

To read the full opinion in Corebrace, LLC v. Star Seismic, LLC, click here.

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