The U.S. Court of Appeals for the Fifth Circuit found an irrevocable license to be truly irrevocable, regardless of the licensee’s material breach in attempting to impermissibly sublicense. Nano-Proprietary Inc. v. Canon Inc. et al., Case No. 07-50540 (5th Cir., July 25, 2008) (Benavides, J.).

In December 1998, Nano-Proprietary Inc. granted Canon a “fully paid-up, worldwide, royalty-free, irrevocable, perpetual, nonexclusive license (without the right to sublicense)” to Nano’s field emission display (FED) patents, relevant to flat-panel television technologies, in exchange for a one-time lump-sum payment. Some six months later, Canon entered a joint development agreement with Toshiba that eventually led to the formation of a joint venture (SED, Inc.) between Canon and Toshiba to develop technology using the FED patents. Under the terms of the joint venture agreement, Canon’s shares had to exceed Toshiba’s shares by a single share, a condition that the district court found to be “a corporate fiction designed for the sole purpose of evading Canon’s contractual obligations.” The district court found that SED was not a subsidiary of Canon and SED’s use of the licensed patents was an impermissible sublicense constituting a material breach of Canon’s license. Thus, the court found, Nano was entitled to terminate the license notwithstanding the license’s “perpetual” and “irrevocable” language.

The Fifth Circuit agreed that Canon materially breached the terms of the license. At the same time, while noting disagreement among leading licensing treaties on the issue, the Fifth Circuit determined that to permit revocation of a “perpetual” and “irrevocable” license would contravene the established rules of contract interpretation. Thus, while Nano could sue Canon for any available form of relief, termination of the license was not an option. Nano’s claim for damages was held to be too speculative, based as it was on the value of a prospective license to SED.

Practice Note: Before including the terms “perpetual” and “irrevocable” in a license grant, licensors would be wise to remember that such terms may mean a truly permanent relationship with very limited options should the association turn sour. Licensors may want to consider a liquidated damages clause to protect against a material breach, but uncertain damages.