Addressing breach of a patent settlement and license agreement, the U.S. Court of Appeals for the Fifth Circuit affirmed a lower court’s summary judgment ruling that the agreement was enforceable and that license payment obligations under the agreement were not extinguished by a subsequent patent settlement contract. Tekelec, Inc. v. Verint Systems, Inc., Case No. 11-41408 (5th Cir., Feb. 13, 2013) (Higginbotham, J.)

Tekelec and Verint’s predecessors, IEX Corporation and Blue Pumpkin Software, LLC, respectively, entered into the Blue Pumpkin/IEX Settlement and Cross License Agreement (BP/IEX Agreement) to settle a dispute arising out of a patent infringement suit brought by IEX against Blue Pumpkin. The BP/IEX Agreement required Blue Pumpkin to pay a single $8.25 million lump sum fee, followed by six annual payments of $500,000. In exchange, IEX granted Blue Pumpkin an irrevocable, perpetual license to practice the patent. IEX reserved the right to terminate the BP/IEX Agreement if Blue Pumpkin failed to make any of the scheduled payments (the termination clause).

After a series of corporate restructurings, Tekelec acquired IEX’s interest in the BP/IEX Agreement, and Verint acquired Blue Pumpkin’s interest in the agreement. The lump sum payment and three annual payments were made under the BP/IEX Agreement. Verint made no further payments. Tekelec sued Verint for breach of contract. The district court awarded summary judgment in favor of Tekelec and ordered Verint to make the BP/IEX Agreement payments. Verint appealed.

On appeal, Verint argued that Tekelec lacked the right to enforce payment under the BP/IEX Agreement and that, even if it retained such a right, a non-accrual clause in a subsequent patent settlement agreement between Verint and Nice Systems, which acquired IEX (Verint/Nice Agreement), extinguished any such payment obligations. The non-accrual clause extinguished all “royalties and other patent damages that may have otherwise accrued” against Verint on IEX’s patent.

Establishing as an initial matter that Texas law applied to the parties’ contractual dispute, the Fifth Circuit addressed both of Verint’s arguments in turn. First, the Court rejected Verint’s arguments that Tekelec retained only the right to receive payments under the BP/IEX Agreement and not the right to enforce them. The Court held that a promise to pay need not be accompanied by an express grant of enforcement authority. Moreover, the termination clause in the BP/IEX Agreement was not an exclusive remedy. The right to sue for breach is an inherent enforcement right with any contract, and a specified remedy in a contract should not be construed as an exclusive remedy unless contract clearly indicates that the parties intended it to be exclusive. Second, the Court rejected Verint’s argument that the non-accrual clause in the Verint/Nice Agreement extinguished Verint’s payment obligations under the BP/IEX Agreement. The Court found that the terms of the BP/IEX Agreement were outside of the scope of the Verint/Nice Agreement and the non-accrual clause was inapplicable. Read in context, the Court explained, the phrase “royalties or other patent damages” in the non-accrual clause of the Verint/Nice Agreement referred to reasonable royalties as a measure of damages under 35 U.S.C. § 284, not to Verint’s contractually bargained for payment obligations. Moreover, the Court noted that the term “royalty” typically implies a payment that fluctuates with a licensee’s actual use of the licensed intellectual property and is distinctly different than a fixed license fee.

Practice Note: Parties entering into settlement or license agreements should explicitly define consideration terms, such as “royalties” and “damages,” and specifically carve out events that may release a party from any payment obligations. Indeed, had the Court determined that Verint’s payment obligations under the BP/IEX Agreement were within the scope of the Verint/Nice Agreement, Verint and IEX, through Nice, could have unilaterally extinguished Tekelec’s third party right to those payments, a risk for which it likely did not bargain.