Addressing the impact on an acquiring company of an acquired company’s agreement not to challenge a third party’s patent, the U.S. Court of Appeals for the Federal Circuit reversed in part an International Trade Commission (ITC) finding that Epistar Corporation (Epistar) infringed Philips Lumileds Lighting Company (Lumileds) patent. In reversing the ITC’s finding of estopple against Epistar from challenging the validity of the patent, the Federal Circuit held that the acquired company’s (UEC’s) prior agreement with Lumileds to not challenge the validity of the patent only had preclusive effect with respect to UEC products inherited by Epistar in the acquisition. Epistar Corp. v. International Trade Commission, Case No. 07-1457 (Fed. Cir., May 22, 2009) (Rader, J.).

Prior to their merger, both Epistar and United Epitaxy Company (UEC) had a history of litigation with Lumileds over the subject patent. UEC’s litigation led to a settlement agreement in which Lumileds granted UEC a license to use the subject patent for the manufacture, sale and importation of LEDs with absorbing substrates, and UEC covenanted, on behalf of itself and its successors, not to challenge the validity of the patent. Epistar’s litigation led to a settlement agreement in which Lumileds granted Epistar a license to use the patent in the manufacture of absorbing-substrate LEDs, and Epistar promised not to challenge the validity of the patent—but Epistar’s agreement was silent with respect to non-licensed products, preserving Epistar’s right to contest validity of the patent if asserted against non-licensed products.

Lumileds filed suit under 19 U.S.C. § 1337 in the ITC to prevent the importation into the United States of certain high-brightness LEDs and products, alleging infringement of certain claims of the subject patent. Both UEC and Epistar were named as respondents. Less than two months later, UEC merged into Epistar, and Epistar assumed all of UEC’s contractual and patent-related rights and obligations. Epistar continued to manufacture its products that were manufactured before the merger, as well as newly-developed products.

Lumileds argued (successfully at the ITC) that UEC’s merger with Epistar bound Epistar to UEC’s agreement—on behalf of itself and its successors—not to challenge the validity of the Lumileds patent. However, the Federal Circuit found that the assignment of a contract to an assignee, such as from UEC to Epistar, only changes the obligated party, not the scope of obligation. The Federal Circuit based this holding on the traditional contract law principle that an assignor (e.g., UEC) has no power to change the performance to be rendered by the obligor (e.g., Epistar).