Yours, Mine and Ours

Epistar Corp. v. International Trade Commission

Sometimes, the merger of two companies requires a sorting of the Cinderellas from the ugly stepsisters when it comes to pre-existing contractual relationships.  The decision in Epistar Corp. v. International Trade Commission involves one such blended family tale.  There, after a merger, the alleged infringer found itself with separate licensing agreements that both prohibited and allowed invalidity challenges in future litigation with the same patent holder.  The patent holder claimed the agreement that precluded invalidity challenges governed and the International Trade Commission agreed.  The Federal Circuit reversed and remanded, finding that the merger, in and of itself, was not enough to prevent the invalidity defense from coming to the dance.

The patent at issue in Epistar covered technology for LEDs.  Both alleged infringer Epistar and the company with which it merged (UEC) had entered into settlement agreements with the patent holder in prior infringement actions.  Epistar agreed to pay a licensing fee for certain products, but retained the right to challenge the patent if the patent holder sued Epistar in the future.  In its license, UEC agreed (prior to the merger) that neither it, nor its successors, could challenge the validity of the patent at issue.

The International Trade Commission ruled that the agreement UEC had with the patent holder precluded Epistar from contesting the validity of the patent at issue with respect to any UEC or Epistar product.  However, the Commission failed to acknowledge the separate agreement Epistar had with the patent holder which preserved Epistar's right to challenge patent validity with respect to Epistar's products.  The Commission later explained that though it had failed to take into account the Epistar license, Epistar could not challenge the decision because it became final when the Commission declined review.

On appeal, the Federal Circuit overturned the Commission's final determination and found that the agreement Epistar had with the patent holder governed its right to contest the validity of the patent with respect to its products.  The patent holder could not use the UEC agreement to gain any further preclusion because that agreement only covered UEC product lines.  Because Epistar's separate agreement clearly preserved Epistar's right to contest the validity of the patent in other contexts, the patent holder could only limit Epistar from asserting patent invalidity as to the product lines it acquired from UEC.  It could not use the UEC preclusion agreement to reach products that agreement didn't cover.  In other words, the patent holder could only preclude Epistar to the extent which UEC was formerly limited.

Epistar's moral?  You can't use a merger to cram one license agreement's claim preclusions into a separate agreement in order to encompass a successor's products.  Instead, both sides to a license agreement (even one negotiated in the throes of litigation) need to remember that corporate mergers, marriages, dissolutions and divorces are a fact of modern life and to plan accordingly.  Then, one hopes, patent holders and the alleged infringers who have become their licensees will have an agreement that fits so that both can live happily ever after.

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