First published in LES Insights

Abstract

A New York district court recently held that a retroactive license agreement allowed a licensee to grant a retroactive sublicense to corporate subsidiaries. The court also found that product sales from a supplier to a sublicensed affiliate exhausted the patent owner’s right to prevent the products from being resold through an unlicensed affiliate.

In Canon Inc. v. Tesseron Ltd.,1 the District Court for the Southern District of New York held that a patent licensee could grant a retroactive sublicense to its subsidiaries. The court rejected the patent owner’s argument that retroactive licenses are invalid. The court also found that product sales from a supplier to a sublicensed affiliate exhausted the patent owner’s enforcement rights, and that reselling the products through an unlicensed affiliate did not constitute patent infringement.

Background

Tesseron and Canon, Inc. entered into a license agreement (1) granting Canon, Inc. a license under Tesseron’s patents, (2) releasing suppliers of Canon, Inc and its affiliates from liability for infringing Tesseron’s patents, and (3) granting Canon, Inc. the right to grant sublicenses to current or future affiliates that were not “major competitors” of Tesseron.

Canon, Inc. subsequently granted a retroactive sublicense under the Tesseron patents to its wholly-owned subsidiary, Canon USA, which was in the middle of a distribution chain for printing systems: (1) Océ Printing Systems GmbH supplied products to Canon USA, (2) which in turn supplied products to CSA, (3) which in turn sold those same products to consumers. However, Canon, Inc. could not sublicense Océ and CSA under the agreement with Tesseron because both Océ and CSA were “major competitors” of Tesseron.

In litigation for patent infringement, Tesseron argued that federal law bars retroactive patent licenses and, as a result, Canon USA did not have a valid retroactive sublicense to Tesseron’s patents.

The Decision

The court found that the retroactive sublicense was valid.

It first distinguished prior cases prohibiting retroactive licenses by pointing out they involved jointly-owned patents and the policy prohibiting a co-owner from undercutting the rights of another co-owner by retroactively licensing the patents. Determining when and if infringement has occurred is not difficult for a sole owner because the sole owner has the exclusive right to license; past infringement cannot be “undone” by someone with an equal, unrestricted right to license. And the problem of knowing all authorized users or licensors “at any given time” need not arise when sole owners voluntarily grant retroactive licenses. The out-of-control spread of retroactive sublicenses, and hence uncertainty about the number of authorized users, can be controlled by a sole owner, who may impose contractual limitations on the right of a licensee to grant a sublicense or a sublicense with retroactive effect.” Therefore, in the present case, because Tesseron was a sole owner of the patents and the policy considerations for joint owners did not apply.

Next, the court concluded that reading the agreement between Tesseron and Canon, Inc. as a whole permitted Canon, Inc. to grant retroactive sublicenses. The agreement provided a retroactive license to Canon, Inc., acknowledging that it applies retroactively to an earlier date. And the agreement also limited Canon, Inc.’s right to sublicense in two specific ways: it may sublicense only to Affiliates and may not grant those Affiliates the right to sublicense further. Having two sublicensing restrictions and no provision prohibiting retroactive sublicensing demonstrated that these sophisticated parties chose not to include one.

Additionally, the court found that the ability to sublicense retroactively was “woven into the fabric of the agreement” because the agreement extinguishes any liability for past infringement on the part of both Canon, Inc. and its affiliates and Canon, Inc. may issue a sublicense to affiliates it acquires at any time during the term of the agreement as long as later-acquired affiliates were not major competitors of Tesseron as of the agreement’s effective date.

Tesseron also argued that even if the sublicense from Canon, Inc. to Canon USA was valid and retroactive, it did not cover sales of products from CSA to customers in the United States. The court responded that a valid and retroactive sublicense would cause the sale of products from Océ Printing Systems GmbH to Canon USA to be licensed and therefore exhaust Tesseron’s ability to assert those its patent rights in CSA’s subsequent sale of the products it purchased from Canon USA.

Strategy and Conclusion

This case highlights the complexities of negotiating and drafting provisions of licenses related to affiliates in light of the possible future sublicense grants, acquisitions or other changes in ownership or affiliation, and distribution chains.