So much effort is devoted to patent drafting and its associated prosecution to produce strong, broad claims that bring value to the client, that it’s a bit disconcerting when agreements governing the rights in such Intellectual Property are interpreted in a way as to undercut those rights.  However, one such case originated in a suit where Molon Motor and Coil Corporation (Molon) sued Merkle-Korff Industries, Inc. (MK) for infringement of U.S. Patent 6,054,785 (‘785 Patent).[1]  MK filed counterclaims requesting a declaratory judgement as to noninfringement, invalidity, and unenforceability for two other Molon patents:  U.S. Patent 6,465,915 (‘915 Patent) and U.S. Patent No. 6,617,726 (‘726 Patent).[2]  The counterclaims were dismissed when Molon provided MK with a Covenant (2006 Covenant) granting freedom from suit for the ‘915 and ‘726 Patents:

Molon hereby forever covenants not to sue Merkle-Korff for patent infringement (whether direct, contributory, or by inducement thereof) under either the ‘915 patent or the ‘726 patent with respect to any and all products previously or presently made, used or sold by Merkle-Korff in the United States.  This covenant extends directly to Merkle-Korff as well as any individual or entity to which Merkle-Korff previously or presently supplies products by way of the manufacture and/or sale thereof in the United States.[3]

Litigation continued with respect to the ‘785 Patent until 2007 when the matter was settled.  As part of a settlement agreement (2007 Settlement Agreement), MK obtained the grant of an exclusive license to a basket of Molon’s patents, including the ‘785, ‘915 and ’726 patents, within a particular market.

Grant.  Molon hereby grants each of the Merkle-Korff Affiliates an exclusive, fully paid-up, royalty free, worldwide, perpetual, irrevocable, retroactive, current and future right and license of all Patent Rights to make, have made, use, sell, offer to sell, lease, import, export, or otherwise commercialize products and/or systems for resale or other transfer: (i) to any of the other Merkle-Korff Affiliates; and/or (ii) to [a third-party company and its affiliates] (such persons and entities in (i) and (ii) above, collectively the “Kinetek Exclusive Market”)  Under said license, the sale, offer to sell, lease, importation, exportation, commercialization and/or other transfer of products and/or systems between two Merkle-Korff Affiliates (as expressly set forth in (i) above), shall in no way permit the transferee Merkle-Korff Affiliate (i.e., the receiving Merkle-Korff Affiliate) to make, have made, use, sell, offer to sell, lease, import, export, or otherwise commercialize such products and/or systems for resale or other transfer to any person or entity outside of the Kinetek Exclusive Market.[4]

The 2007 Settlement Agreement included a “merger” or “integration” clause.

Entire Agreement.  This Agreement is an integrated Agreement and constitutes the entire agreement and understanding between and among the Parties with regard to the matters set forth herein and shall be binding upon and inure to the benefit of the administrators, agents, personal representatives, successors, and assigns of each.  There are no representations, promises, or agreements pertaining to the terms or subject matter of this Agreement, whether express or implied, that are not set forth in this Agreement.  All prior and contemporaneous conversations, negotiations, possible and alleged agreements, representations and covenants concerning the subject matter thereof, are merged herein and shall be of no further force or effect. (emphasis added)[5]

MK later merged with Nidec Motor Corporation (Nidec).  Problems again erupted when Molon later sued Nidec in the U.S. District Court for the Northern District of Illinois for infringement of the ‘915 Patent.[6]  Molon claimed that Nidec had been practicing/inducing-infringement of the ‘915 Patent outside the Kinetek Exclusive Market.[7]  Nidec moved for partial summary judgement, arguing that the 2006 Covenant precluded assertion of the ‘915 patent against them.[8]  Molon’s position was that the 2007 Settlement Agreement extinguished the 2006 Covenant.[9]  The District Court sided with Nidec, concluding that there was a difference in breadth between the 2006 Covenant and the 2007 Settlement Agreement so they didn’t cover the same subject matter.[10]  Because the  subject matter was not the same, the merger clause did not apply, and the 2006 Covenant survived.  Molon appealed to the Federal Circuit,[11]  arguing that the subject matter was the same since: both agreements related to the right to practice the ‘915 Patent[12] and the 2007 Settlement Agreement and 2006 Covenant stand in direct contrast to one another, indicating that the 2007 Settlement Agreement was intended to replace the 2006 Covenant.[13]  Nidec maintained that the “same subject matter” doesn’t necessarily exist in agreements dealing with rights under the same patent, highlighting the differences in the number of patents covered, the differences between the types of license, and the products covered.[14]  An interesting aspect of the case was that neither Party argued that the merger clause was ambiguous or required extrinsic evidence to interpret.[15]

Writing for the majority, Judge Lourie sided with Nidec.  To evaluate the subject matter of the two agreements, the Federal Circuit looked at the number of patents involved (2 for the 2006 Covenant, >12 for the 2007 Settlement Agreement); the limitations (2006 Covenant covers the United States; the 2007 Settlement Agreement covers all geographical areas but is limited to the Kinetek Exclusive Market); and the rights involved (2006 Covenant is a bare license, the 2007 Settlement Agreement is an exclusive license).[16]  The Federal Circuit found that these factors supported a conclusion that there were significant differences in subject matter.  The Federal Circuit also rejected the notion that the mere existence of the merger clause demonstrated that the  intent of the Parties was for the 2007 Settlement Agreement to extinguish the 2006 Covenant because the 2006 Covenant and the 2007 Settlement Agreement were separate agreements, and thus outside the scope of merger.[17]

In dissent, Judge Reyna argued that the majority’s view in effect rewrote the terms of a perfectly clear agreement.[18]  In direct opposition to the majority, Judge Reyna found that the “heart of the subject matter” for both the 2006 Covenant and the 2007 Settlement Agreement was the right to practice the ‘915 patent, so that the patents should merge.[19]  The dissent also criticized the majority’s standard for merger as being too high since it seemed to require explicit reference to the 2006 Covenant within the 2007 Settlement Agreement.[20]

For my part, I believe the dissent and Judge Reyna have the better argument.  Clearly, both the 2006 Covenant and 2007 Settlement Agreement relate to practicing the’915 Patent, so it is reasonable to conclude that they share the same subject matter.  The Federal Circuit’s formulation of considering a combination of factors: the number of patents covered, geographical coverage, and the type of license provides no clear guidance for determining common subject matter.  The dissent also appears correct with respect to the majority’s “overly high standard” for merger in view of its comments regarding explicitly citing former agreements in later agreements.  Drafters of IP agreements will now have to take this into consideration in similar situations out of an abundance of caution.

[1] Slip Op. at 2.
[2] Id.
[3] Slip Op. at 3.
[4] Slip Op. at 3-4.
[5] Slip Op. at 4.
[6] Slip Op. at 2.
[7] Slip Op. at 5.
[8] Id.
[9] Id.
[10] Slip Op. at 5-6.
[11] Slip Op. at 6.
[12] Slip Op. at 8.
[13] Id.
[14] Slip Op. at 9.
[15] Slip Op. at 7.
[16] Slip Op. at 9-10.
[17] Slip Op. at 14.
[18] Slip Op. Dissent at 2.
[19] Slip Op. Dissent at 3.
[20] Id.

-William Reid

This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. The opinions expressed in this article are those of the author only and are not necessarily shared by Dilworth IP, its other attorneys, agents, or staff, or its clients.