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Patent Licensing Contract Interpretation: Exploration of the Parties' True Intention
On 28 June 2013, the Intellectual Property Court (IP Court) issued judgment 2012 Min-Zhuan-Geng-(1) No. 1 ruling that based on its interpretation of the patent licensing contract in dispute, the licensor still is entitled to the royalty claims from the licensee pursuant to the original contract even after the early termination of license.
The Taiwanese plaintiff of this case (Company A) had signed a patent licensing contract with the Japanese patentee (Company B). Company B agreed to waive the patent infringement obligations of Company A and agreed to license the relevant non-exclusive U.S., German, and Japanese patents to Company A. The contract between the Parties stipulated that Company A shall pay royalties in specific amounts after the contract came into force and for three years on 31 December 2007 to 31 December 2009. Company A initially paid the royalties as stipulated by the contract. However, Company A subsequently transferred relevant businesses and assets to Company C in Taiwan in April of 2008, and notified the patentee, Company B, on 31 December 2008 that because Company A's rights and obligations had been transferred to another party, Company A would no longer be required to fulfill its royalty fee obligations starting in 2009.
Subsequently, the patentee (Company B) transferred the contract dispute claims to Company D in Luxembourg. Company D then filed a lawsuit in the U.S. District Court for the Northern District of California in May 2010 against Company A to force it to pay the royalty fees for 2009 in the amount of US$5.4 million. Because Company A argued that the federal district court had no jurisdiction over the case, Company D withdrew the case in September 2010, and filed the same lawsuit with the Superior Court of the State of California, County of San Francisco on the same day. However, the Superior Court of the State of California, County of San Francisco granted Company A's motion to suspend the case based on the ground of forum non conveniens. Company A then filed a lawsuit against Company D as the defendant with the Intellectual Property Court in Taiwan and requested the court to confirm that Company D's US$5.4 million creditor's rights no longer exist.
After the case was remitted back by the Supreme Court of Taiwan for retrial, the primary point of dispute by the parties was the interpretation of Section 4.3(b) of the licensing contract. The contents of the dispute are as follows:
"If after the Effective Date…(b) there is a disposition by Party A of the part of its business engaged in manufacturing Licensed Products, all future rights, releases, licenses and immunities hereunder will immediately terminate ipso facto, but in no way shall that affect the rights, releases, licenses and immunities of Party A prior to such acquisition or disposition."
Company A believes that pursuant to Article 4.3 of the disputed licensing contract; when patent license from Company B was terminated on 31 December 2008 because Company A had disposed of its businesses and assets related to the licensed product, Party B no longer had the right to payment by Party A of the patent license royalty fees for 2009. Company D argued that Section 4.3 of the disputed contract only terminated license for Party A, but did not terminate Party A's obligation to pay the royalty fees.
The Intellectual Property Court's retrial judgment adopted Company D's rationale. The basis for the ruling is as follows:
l Only Company A Is Subject to the Provisions Provided by Section 4.3 of the Disputed Contract
According to the Court, the title of Article 4 of the contract is "Further Limitation on Release, License and Immunities," which indicates that the various rights obtained by Company A pursuant to the contract were the subject of specification or restriction intended by Article 4. Only Company A enjoys the "Release, License and Immunities" rights pursuant to the disputed contract. Therefore, Article 4 was not established to specify contractual rights for Company B, and Company A cannot claim that Company B's rights have been terminated based on this Article.
l The Disputed Contract Did Not Stipulate any Terms Related to Post-contract Termination Royalty Payment Obligation
Company A claimed that a "precondition" has been created by the language "in consideration of" in Section 5.1(d) of the disputed contract, which provides "$5,400,000 of Payment 4 is in consideration of the license under Clause 3 above for the calendar year 2009." That is, Company A's obligation to pay US$5.4 million in royalties is preconditioned upon Company B's license. However, the court held that the phrase "in consideration of" in the disputed contract does not establish a "precondition", and Section 5.1(d) of the disputed contract only stipulates US$5.4 million as the royalty fee for 2009. The Section itself does not have any contractual legal effect regarding termination of license prior to 2009. Its legal effects must be determined based on other contractual terms or applicable general contract law principles.
l If There Are Two Possible Interpretations of Section 4.3 of the Disputed Contract, Contract Interpretation Is Required to Determine the Parties' True Intentions:
According to the Court, Section 4.3 of the disputed contract only stipulates that when Company A has disposed parts of its business, all future rights, releases, licenses, and immunities shall be terminated forthwith; it does not stipulate whether Company A still has the obligation to pay royalty fees henceforward. The disputed contract is silent on this subject. An objective and rational third person may understand the situation simply as meaning that the parties made no stipulation in this regard, and the unstipulated portion should be governed by general contract law principles, or that the parties intentionally excluded this subject so that Company A would still have the obligation to pay the royalty fees after disposing parts of its business to terminate the patent license. Therefore, it is necessary to interpret the contract to determine the parties' true intentions.
The Court ultimately ruled that Company A must pay the royalty fee for 2009 because Company A had tried to add the word "obligation" to Section 4.3 of the contract during the negotiation process between Companies A and B for the content of the disputed contract, which was clearly opposed by Company B. Company A knew of this opposition by Company B, but did not further negotiate, clarify, or demonstrate its position thereafter. The court held that the contract negotiation process mentioned above indicated that Company B did not approve of the condition where Company A's obligation to pay the royalty fees would terminate along with its disposal of the business related to the authorized product. The objective and rational third party understanding of the contractual intention is that the contract intended for Party A to continue its royalty payment obligations even after its business disposition has caused the patent license to terminate. Company A claimed that it did not oppose having the word "obligation" deleted because there had already been numerous revisions during the contract negotiation process, and adding the word "obligation" to Section 4.3 was a relatively small item. Based on the principle of no-rights/no-obligations, once the rights for Company A were terminated, the obligations must follow to be terminated as well. Therefore, the word itself did not necessarily have to be added. Company A's true intention was not for the royalty fee obligation to continue while the license was terminated. However, the Court considered that an objective and rational third party could not know Party A's internal thoughts if they were not expressed. The court's observation was that Company A did not express an opinion at the time, meaning that Company A had accepted the condition where the royalty payment obligation does not end with the termination of the patent license.
Finally, based on the Intellectual Property Court's contract interpretation that "the disputed contract did not expressly stipulate that Company A's royalty payment obligation is terminated because Company A has disposed portions of its businesses, and this condition must be deliberately excluded," the court ruled that Company D's rights to the royalty debt transferred from Company B shall not be terminated because of the disposal of business by Company A. Said royalty debt rights still exist and payment can be demanded. Company D filed a counterclaim during the case based on the aforementioned royalty debt rights, which was deemed meritorious by the court and permitted.
Based on the above, during the contract negotiation process, whether the contracting parties have actively expressed their intentions or passively failed to express their intentions may play a critical role in later interpretation of the terms of the contract by the Intellectual Property Court. In this case, the Intellectual Property Court adopted a stance contrary to general contract principles merely because the licensee did not argue for deletion of one word, "obligation," and held that the licensee must still pay the royalty fees after the license has been terminated (must bear the burden of obligation without enjoying the rights). Whether such opinion is proper remains to be assessed by the Supreme Court.