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From Intellectual Property Law Daily, August 6, 2014

Breach of technology license did not depend on infringement

By Cheryl Beise, J.D.

A district court erred in finding that a German manufacturer of hands-free cell phone products did not breach a licensing agreement with a Colorado company because the products did not practice the Colorado company’s patents, the U.S. Court of Appeals in Denver has determined (Cellport Systems, Inc. v. Peiker Acustic GMBH & Co. KG, August 5, 2014, Lucero, C.). The district court misinterpreted certain sections of the parties’ licensing agreement, which based royalty payments on enumerated products, without regard to whether they practiced the underlying patents.

Background. Colorado-based Cellport Systems, Inc. designed technology for connecting cellphones to a hands-free system in motor vehicles. Peiker Acustic GMBH & Co. KG, a German corporation, developed products for the hands-free use of cellphones.

In August 2001, Cellport and Peiker entered into an agreement granting Peiker a nonexclusive license to intellectual property owned by Cellport. After Cellport filed a lawsuit alleging breach of the 2001 agreement, the parties came to terms on a second license agreement (the “License Agreement”) in October 2004. Pursuant to the License Agreement, Peiker was required to pay royalties for products that used Cellport’s intellectual property. Specifically, royalties were required for each “Docking Station,” “Pocket,” or “Universal Mobile Connectivity Product” (as defined by the agreement) sold by Peiker.

In 2009, Cellport filed suit against Peiker, alleging breach of the 2004 License Agreement and seeking royalties for seven Peiker products: the CKII and CKIV pockets sold to Daimler, the CKII/CIB system sold to Volkswagen, the CKII/CIB system sold to BMW, the CKVI system sold to Audi, the Bluetooth Peiker System Connector (“BT-PSC”), and the Snap-in Adaptor/Baseplate system (“SIAB”).

After a bench trial, the district court concluded that Peiker owed Cellport royalties on only two products: the CKII and CKIV pockets sold to Daimler. The court declined to award royalties on the remaining products because they did not practice Cellport’s patents covering the licensed technology. Both sides appealed.

Appellate jurisdiction. The court first addressed Peiker’s motion to transfer the appeal to the Federal Circuit or, in the alternative, to dismiss it. Peiker argued that Cellport’s right to relief necessarily depended on the resolution of a substantial, disputed question of patent law.

The Tenth Circuit disagreed. Cellport’s complaint stated claims based on contract law, not patent law. Royalties from a license agreement do not need to be based on the actual use of a patent; they can be dictated by the “convenience of the parties,” the court explained. Sections 1.17(i) and 3.5 of the parties’ License Agreement contained acknowledgments by the parties that certain described products were “Licensed Products” under the agreement.

Because the contract required Peiker to pay royalties on the products included in sections 1.17(i) and 3.5 of the License Agreement, no infringement analysis was necessary and Cellport’s right to relief did not necessarily depend on resolution of a substantial question of federal patent law. The appeals court, therefore, had jurisdiction. Peiker’s motion to dismiss or transfer was denied.

License Agreement. The parties disagreed about the scope of the License Agreement. The district court found that Cellport was entitled to royalties under the License Agreement only on products that practiced Cellport’s patents. Cellport argued that the district court analysis was flawed because the License Agreement provided for royalties based on the sale of “Licensed Products,” regardless of patent infringement.

The Tenth Circuit sided with Cellport. The district erred in finding that the acknowledgements in in sections 1.17(i) and 3.5 of the License Agreement created a “rebuttable presumption” that the products “utilize technology, designs or architectures covered by” Cellport’s intellectual property. Therefore, the district court also erred in analyzing Peiker’s products through that filter to determine if royalties were due.

The appeals court accordingly reversed the district court’s determination that the CKII/CIB sold to Volkswagen and the CKII/CIB system sold to BMW did not infringe Cellport’s patents and thus that no royalties were due. The evidence that the products did not infringe Cellport’s patents was irrelevant. On remand, the district court was ordered to calculate the damages due to Cellport for these two products.

Because the district court did not rule on whether subsection 1.17(i) applied to the CKVI system sold to Audi, the appeals court remanded the issue for the district court to consider whether royalties were due.

With regard to the last two products—the Bluetooth Peiker System Connector (“BT-PSC”) and the Snap-in Adaptor/Baseplate system (“SIAB”)—the district court determined that they did not fall within the meaning of subsection 1.17(i) but could be encompassed within subsection 1.17(iii) if Cellport proved that the products infringed Cellport’s patents. The appeals court agreed with the district court’s interpretation of the language of subsection 1.17(iii), which (unlike subsection 1.17(i)) contained no “acknowledgment” that certain devices utilize covered technology.

The district court concluded that the BT-PSC lacked the “main set of functionalities” contemplated by Cellport’s U.S. Patent 6,377,825 (the ’825 patent) and that it did not fall within the scope of European Patent EP 1266456 (the ’456 patent) because it did not “perform audio signal processing.” Similarly, the district court refused to grant Cellport royalties for the SIAB because that system did not practice the two asserted claims of U.S. Patent 6,341,218 (the ’218 patent).

The Tenth Circuit affirmed the district court’s findings with regard to the SIAB system. But because the district court only briefly addressed the relationship between the BT-PSC and the ’456 patent, the district court’s findings were reversed. On remand, the court was directed to determine whether—considering that the BT-PSC performs signal processing functions—the BT-PSC practices the ’456 Patent and to calculate, if necessary, the royalties owed to Cellport.

Prejudgment interest. Cellport objected to the district court’s calculation of prejudgment interest on royalties based on the statutory rate instead of the 1.5% figure named in the Licensing Agreement. However, the district court correctly determined that the interest rate stated the Licensing Agreement was intended to apply only to accounting disputes. Application of the statutory rate was proper.

Attorney’s fees. Lastly, Cellport contended it was error for the district court to deny attorneys’ fees, costs, and expenses pursuant to the License Agreement. The License Agreement provided that the “prevailing party” in a suit regarding the agreement was entitled to recover costs, expenses, and attorneys’ fees. Given that the appeal shifted the balance of the case, this issue was remanded to the district court for reconsideration.

Revocation of patent. While the suit was pending in the district court, the ’456 patent was revoked, but the revocation was suspended pending appeal. Peiker moved the district court for a ruling that the ’456 patent was “eliminated from this case” and no royalties were due. The district court, in turn, interpreted the License Agreement as requiring “the payment of royalties on any sale of products utilizing Cellport’s patented technology, wherever the products were made, sold or used, so long as any Licensed patent remains in effect.”

The appeals court held that the issue was not ripe for appellate review and further held that it was not ripe for review by the district court. The issue was remanded to the district court with instructions to vacate its judgment on the matter.

The case is Nos. 13-1029 and 13-1046.

Attorneys: Katherine L. Pringle (Friedman, Kaplan, Seiler & Adelman LLP) for Cellport Systems, Inc. Timothy P. Getzoff (Holland & Hart, LLP) for Peiker Acustic GMBH & Co. KG.

Companies: Cellport Systems, Inc.; Peiker Acustic GMBH & Co. KG.

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