A patent provides the right to exclude others from practicing the patented invention. In other words, a patentee can demand that competitors stop selling a device that infringes on the patent. This is the traditional offensive aspect of a patent. However, patents have other purposes. For example, when a company is accused of infringement, the company can look to its own patent portfolio to determine whether a counterclaim of patent infringement can be made based on one of their own patents. This illustrates the defensive aspect of patent protection that may be overlooked compared to the traditional offensive aspect (i.e., the right to exclude others) of patent protection. In making the counter claim of patent infringement, the parties may be motivated to enter into a cross license wherein each party grants a license to their pool of patents to the other party.

In Imation v. Philips, the parties had previously entered into a cross license that enabled the parties and its subsidiaries to operate in a given area of techology, free of the risk that the other party would threaten patent infringemnet. Although it is unclear how the original cross license arose, it could have arisen through prior litigation as discussed above in our hypothetical. Eventually, Philips sued Imation for breach of the cross license after Imation acquired two companies “after” execution of the cross license. These companies did not pay a royalty to Philips because Imation considered them to be subsidiaries under the cross license agreement even though they were acquired “after” execution of the cross license agreement. Most likely, the later acquired subsidiaries may have been infringing on Philips patents, and thus, either considered a source of unwanted competition by Philips or a potential source of royalty revenue for Philips. It is possible that these “subsidiaries” were acquired for the sole purpose of avoiding infringement liability of the Philips patents by coming under the rubric of the cross license agreement. Philips argued that these companies are not “subsidiaries” under the cross license agreement because the cross license agreement only grants a license to companies that were subsidiaries existing at the time of execution of the cross license agreement.

The Court held that these later acquired companies are subsidiaries under the cross license agreement. The gist of the court’s holding is that the cross license expressly stated that philips “agrees to grant and does hereby grant” a license which is a present grant of rights that vests immediately to Imation and its existing subsidiaries but also a future grant to subsidiaries acquired after execution of the cross license agreement. Imation v. Philips 2009-1209 (Fed. Cir. 2009).

When entering into a license, it is important to determine how subsidiaries should be treated and whether future companies can be grandfathered into the license agreement. On one hand, the licensee wants to run business as usual. On the other hand, the licensor does not want an end run around their patent by having the licensee acquire third parties in the future that may be potential streams of royalty revenue for the patentee or unwanted competition.

I invite you to contact me with your patent questions at (949) 433-0900 or James@OCPatentLawyer.com. Please feel free to forward this article to your friends. As an Orange County Patent Attorney, I serve Orange County, Irvine, Los Angeles, San Diego and surrounding cities.