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From Intellectual Property Law Daily, February 4, 2019

District court misconstrued patent claim, settlement agreement over royalties on toy helicopters

By Brian Craig, J.D.

Settlement over audit did not preclude suit for unpaid royalties because product at issue was not included in audit. In addition, toy maker could have infringed patent under proper claim construction.

The U.S. Court of Appeals for the Federal Circuit has concluded that the federal district court in Chicago improperly construed a settlement agreement on royalties owed by toy company Spin Master on toy airplanes developed by Rehco LLC. The Federal Circuit also found that the district court improperly construed one of the claims in Rehco’s patent on a control system for a flying vehicle when it decided to rule in favor of Spin Master on Rehco’s patent infringement claim. The Federal Circuit construed "a signal" to mean "one or more signals" because as a general rule, the words "a" or "an" in a patent claim carry the meaning of "one or more." Summary judgment in favor of Spin Master on Rehco’s claims for breach of contract and patent infringement was vacated, and the case was remanded (Rehco LLC v. Spin Master, Ltd., February 4, 2019, Prost, S.).

Rehco, which invented and developed products for the toy industry, entered into an agreement with Spin Master to develop technology for new types of radio-controlled toy helicopters, in exchange for a royalty on all of Spin Master’s future sales of the toys ("the Helicopter Agreement"). Rehco received patent protection for the aircraft under several patents, including U.S. Patent No. 6,612,893 (the ’893 Patent) and U.S. Patent No. 7,100,866 (the ’866 Patent), which covered a "control system for a flying vehicle." Rehco terminated the agreement in 2008. An auditor conducted an audit of Spin Master’s royalty payments to Rehco, and on October 8, 2010, the parties executed a "Settlement and Release Agreement" concerning the audit.

Rehco later filed suit against Spin Master for breaching the Helicopter Agreement by failing to pay the agreed-upon royalties and for infringing the ’866 patent. The parties disputed whether the settlement precluded Rehco’s claim for royalties on a Spin Master product called the Havoc Heli. The district court found that because the Havoc Heli was on the market before the audit was initiated, claims on the Havoc Heli could have been asserted before the settlement’s effective date. The district court concluded that the settlement precluded any claim for royalties on the Havoc Heli. The district court granted summary judgment for Spin Master on both the breach of contract and patent infringement claims. Rehco appealed.

Breach of contract. The Federal Circuit first addressed whether the district court misinterpreted the settlement’s release language in concluding that the release precluded Rehco’s claim for royalties on the Havoc Heli. The Federal Circuit found that Rehco released its claims related to the "Audit"—a defined term in the settlement. Rehco released Spin Master from claims "related to the Audit and Additional Selling Periods" and "any claims for royalties thereunder . . . which arose, existed, or could have been asserted prior to the Effective Date." The "thereunder" in this last clause references the "Audit and Additional Selling Periods," and it is undisputed that the Havoc Heli was not included in the "Audit" as the parties chose to define that term. Therefore, the Helicopter Agreement did not release Rehco’s claims for royalties on the Havoc Heli. As such, the appeals court vacated the district court’s summary judgment on the breach of contract claim, which was based on a contrary interpretation of the settlement.

Patent infringement. Turning to the patent infringement dispute, the Federal Circuit then examined whether the district court properly construed the claim term "a signal" to mean "a single signal being emitted from the transmitter, and not multiple signals" in the claim for the ’866 patent. The court held that as a general rule, the words "a" or "an" in a patent claim carry the meaning of "one or more." The exceptions to this rule are extremely limited: a patentee must evince a clear intent to limit "a" or "an" to "one."

Here, the Federal Circuit found that the district court improperly construed "a signal" as meaning "a single signal being emitted from the transmitter, and not multiple signals." Using the pronoun "it" later in the patent claim, which is entirely consistent with using the term "a signal," hardly demonstrates a clear intent to depart from the general rule. If the definite article "a" can—indeed, usually does—refer to "one or more," so would the pronoun "it" when referring back to the term that was used with the definite article. The appeals court construed "a signal" to mean "one or more signals." Therefore, the Federal Circuit vacated the district court’s grant of summary judgment. The appeals court remanded the case to the district court while also awarding costs to Rehco. On remand, the Federal Circuit directed the district court to consider in the first instance whether the parties’ disagreement reflects an actual dispute over claim construction and, if so, how to resolve that dispute.

Dissent. Circuit Judge Timothy Dyk wrote a dissenting opinion, agreeing with the majority as to Rehco’s patent infringement claim, but dissenting from the majority’s resolution of Rehco’s breach of contract claim. Judge Dyk opined that the settlement agreement is at least ambiguous as to whether it covers the Havoc Heli claims. At a minimum, Judge Dyk suggested allowing the parties to present extrinsic evidence as to the parties’ understanding of the scope of the settlement agreement.

This case is No. 17-2589.

Attorneys: Timothy Edward Grochocinski (Nelson Bumgardner Albritton PC) for Rehco LLC. Megan Joanna Redmond (Erise IP, P.A.) for Spin Master, Ltd.

Companies: Rehco LLC; Spin Master, Ltd.

MainStory: TopStory Patent FedCirNews

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