In Seoul Laser Dieboard System Co., Ltd. v. Computerized Cutters, Inc.,1 an action for breach of contract and patent infringement, accused infringer Computerized Cutters, Inc. (CCI) moved for summary judgment that it could not be sued for patent infringement. CCI argued that despite its termination of a license agreement with patent owner Seoul Laser Dieboard System Co., Ltd. (SDS), a survival provision in the agreement kept in force a covenant not to sue. The U.S. District Court for the Southern District of California, however, denied CCI's motion, finding the record incomplete and that questions remained concerning whether some or all of the license agreement continues in effect.

Background

In 2007, SDS sued CCI, alleging that CCI's "Accu-Bend" machine, which bends letters for use in sign manufacturing, infringed several of its patents. The parties resolved this suit by entering a settlement agreement and a license agreement, the existence of which the parties agreed would remain confidential. In particular, SDS granted CCI a nonexclusive, worldwide, royalty-bearing license for the Accu-Bend machine. SDS also covenanted not to sue CCI for infringement of the asserted patents "or any other patents now or hereafter owned or controlled by SDS based on any Accu-Bend Machine" made or sold by or for CCI. In exchange, CCI made a onetime payment for all past royalties and to settle the litigation, followed by a per-unit royalty for each Accu-Bend machine sold during the agreement term, for at least the first 47 machines sold. CCI reserved the right to terminate the license agreement after selling 47 units, "upon any redesign of the Accu-Bend Machine's Bending Apparatus," (i.e., the redesign provision). CCI's payments and royalty reports were due quarterly, and failure to pay royalties according to the agreement would be a material breach.

SDS and CCI also agreed that if one party materially breached, the other could terminate the agreement by providing written notice and a 60-day cure period. If the agreement terminated "other than by material breach," some provisions would continue "in full force and effect," including SDS's covenant not to sue.

In March 2012, CCI notified SDS that SDS had breached the license by disclosing the existence of the agreement, attaching a copy of an SDS distributor's email as evidence. Later that month, SDS sent letters to its executives and others, reminding them of SDS's continuing confidentiality obligation, and subsequently notified CCI that it had done so.

In December 2012, SDS sent CCI a request for unpaid royalties. CCI responded in February 2013 that SDS had not cured its breach, SDS's breach was not a onetime occurrence, and CCI was continuing to evaluate the extent of its damages. CCI enclosed three royalty checks, two for payments through May 7, 2012—the end of the cure period—and the third as payment under protest pending potential litigation of the impact of SDS's alleged failure to cure.

Later, in April 2015, SDS notified CCI that it intended to sue for breach of contract and patent infringement if CCI did not make royalty payments for 2013 and 2014. According to CCI's letter in May 2015, however, SDS's demand for royalty payments was improper in light of SDS's 2012 breach of the confidentiality agreement and subsequent breach of confidentiality at a 2014 trade show. CCI then stated that it was terminating the license agreement based on two independent grounds: 1) SDS's material and continuing breach of the confidentiality agreement; and 2) CCI's sale of 47 Accu-Bend units and redesign of the machine.

In June 2015, SDS sued CCI, alleging breach of contract and several claims for patent infringement. In its answer and counterclaims, CCI advanced several alternative theories: 1) the license agreement terminated automatically no later than April 2012, after CCI sold 47 units, redesigned its machine, and notified SDS of the redesign; 2) the agreement terminated automatically in May 2012 after CCI notified SDS of its breach of confidentiality and SDS failed to cure the breach; 3) the agreement terminated automatically in April 2013 after CCI's letter stating that SDS had not cured its breach; and 4) CCI expressly terminated the agreement in May 2015 when it informed SDS that it was terminating the agreement based on SDS's breach and on the redesign provision. CCI moved for summary judgment, contending that SDS could not sue for patent infringement.

The Court's Decision

The court denied CCI's motion. More specifically, CCI contended that SDS's covenant not to sue for patent infringement survived CCI's termination of the license agreement because CCI exercised its right to terminate the agreement under the redesign provision. The court, however, observed that two of CCI's theories for why it does not owe SDS royalties were that the license agreement automatically terminated in 2012 or 2013 based on SDS's material breach of confidentiality. Because the license agreement's survival provision is not triggered in the event of termination "by material breach," the court found that "CCI [did] not explain how or why SDS would still be bound, or why SDS would still have to terminate the agreement before it can sue, if the license agreement terminated automatically in 2012 or 2013." Further, regarding the redesign provision, the record was unclear about when CCI sold the forty-seventh machine and whether CCI redesigned its machine within the meaning of that provision. Thus, in denying CCI's motion, the court found the record insufficient to determine whether some or all of the license agreement remains in effect.

CCI also argued that the parties' prior settlement agreement reduced all future disputes to claims for breach of contract, releasing CCI from any future infringement claims. The release read: "Except for claims arising by breach of this Settlement Agreement and/or the Confidential License Agreement, SDS hereby fully and unconditionally releases CCI . . . from any and all claims . . . or causes of action that relate to, arise from, or are in connection with the Dispute and Litigation."

The court disagreed with CCI's interpretation, noting that the language preserves claims that arise "by breach" of the settlement agreement or the license agreement, and portions of the license agreement contemplate future patent litigation between the parties in the event of breach. For example, Section 12.2, the court observed, allows CCI to challenge the validity and enforceability of any patent claims in the event it is sued for infringement of one of the SDS patents.

In addition, the court rejected CCI's contentions that SDS's infringement claims were barred under the doctrines of issue preclusion and claim preclusion. As to issue preclusion, CCI argued that the parties' prior settlement and dismissal was intended to resolve all issues related to the Accu-Bend machine. The court disagreed, pointing to a provision in the settlement agreement stating that the releases provided therein were the result of a compromise and "will never . . . be considered an admission of any liability, claim, or contention of any Party." The court also noted that the license agreement provided for the possibility of future patent litigation.

Regarding claim preclusion, CCI argued that SDS's infringement claims relating to the previously asserted patents were barred because both cases involved the same accused product and same patent rights. According to the court, however, it was not clear whether the claims are identical. For example, CCI simultaneously contended that it was entitled to terminate the license agreement because it redesigned the bending apparatus of its Accu-Bend machine. Further, the court stated that infringement claims based on acts of infringement occurring after an earlier judgment are not necessarily precluded even if they involve the same product.

Strategy and Conclusion

This case illustrates factual complexities that can arise during licensing disputes and further that courts may be unwilling to grant summary judgment without a more fully-developed record surrounding the interpretation and effect of license provisions.