Patent License Agreement
Confirmed a Covenant not to Sue¹

On May 2009, ATEN International (“ATEN”) and Uniclass Technology (“Uniclass”) entered into a license agreement in which ATEN authorized Uniclass to exploit three US patents: US 6,564,275, US 6,957,287, and US 7,035,112. In return, Uniclass agreed to pay ATEN a one-time lump sum of TWD 5.8 million as compensation, plus an ongoing royalty fee calculated at 7.5% of the actual sales price of the licensed products. Pursuant to the agreement, Uniclass was required to report to ATEN the amount of sales, the sales price and total sales within 30 days of the end of every quarter and to accordingly pay ATEN all royalties due. While Uniclass made the lump sum payment in accordance with the agreement, it had failed to pay any ongoing royalty since that time. When ATEN served a collection notice on March 14, 2013, Uniclass manifestly expressed that they refused to pay said royalty. Uniclass complained that a third party had filed an Inter Parte Re-examination (IPR) with the USPTO, challenging the practicability and validity of the ’275 patent, which resulted in the subsequent revocation of some related claims. Uniclass also complained that since the ’275 patent was one of the subject matters of the license agreement, the agreement should be void due to invalid subject matter and impossibility of contractual performance. However, not all of the claims of the three US patents at issue were deemed invalid by the USPTO. In May 2014, ATEN terminated the license formerly granted to Uniclass and sued Uniclass for breach of the agreement the two parties had entered into.

When the case went to trial, the court ruled in favor of the plaintiff ATEN. However, the appellate court reversed the previous judgement, instead ruling in favor of the defendant Uniclass. Owing to this conflict, the Supreme Court reversed and remanded the case to the IP Court. After the decision to remand the case to the IP court, Tsai Lee & Chen’s partner Jesse K.Y. Peng and his team took over as representative for ATEN, whereupon they argued the nature of a non-exclusive license agreement was “covenant not to sue,” and that the licensed patents were not materially limited or declared invalid in totality. After the arguments were made, the IP court supported ATEN’s rationale and ruled that Uniclass was not released from its contractual obligation to pay royalties. The case was finalized after the defendant Uniclass lapsed the statutory period of time to submit an appeal.

In both the proceedings for the first and second instances, the focus of the disputes in question revolved around whether the licensed patents at issue were materially limited, and whether the defendant Uniclass has ever “used” the licensed technologies in its products. In the annex of the agreement, there is a non-exhaustive list of licensed products, five of which were identified. Uniclass argued that its products did not use the licensed technology, claiming moreover that the ‘275 patent became defective and unfit for its beneficial use after the post-grant amendment during the Inter Parte Re-examination. Allegedly, because ATEN could not perform its contractual obligations, Uniclass asserted that it was no longer obligated to pay the royalty fees based on the principle of simultaneous performance. However, the trial and appellate courts had different findings, which led both the plaintiff and defendant to take advantage of the ruling which was to their benefit.

Tsai, Lee & Chen’s relay in the representation was a significant turning point which led the case back to the proper interpretation of the license agreement at issue. Firstly, it was reemphasized in the assessment that the issue of whether or not the licensed products fell within the claimed scopes of the patents at issue was not worthy of consideration. According to the preamble of the license agreement, the license was “made in full settlement” of the past and ongoing disputes with Uniclass, “as a compromise of possible infringement actions” ATEN may bring against Uniclass. It is obvious that the purpose of the agreement was to allow for an amicable settlement, so as to exclude Uniclass from the risk of patent infringement owing to possible exploitation of the patents at issue. In the annex of the agreement, it indicated that the licensed products “include, but are not limited to” the five listed products, which entails that the list is non-exhaustive and that the five listed products are only examples of licensed products pursuant to the agreement. In view of the fact that the agreement was written in such a way as to exempt any products from Uniclass from the risk of patent infringement, it would be odd to investigate whether the licensed products have fallen within the patented scopes of the claims.

Secondly, the principle covenant for a licensor in a license agreement is to tolerate the licensee on the exploitation of a licensed patent, so that the licensee obtains a promise from the licensor that it will not be sued. In the license agreement between ATEN and Uniclass, ATEN’s principle performance was to ensure that the patents at issue were fit for beneficial use and not to claim patent infringement against Uniclass. Therefore, a covenant not to sue was the main purpose of the license agreement at issue so as to eliminate the licensee’s potential obstacles in the marketplace. Thus, ATEN had performed its duty as a licensor by providing the US patents that were fit for beneficial use and did not enforce any patent right against Uniclass prior to its termination of the license agreement due to Uniclass’ breach of contract. Uniclass was required fulfill its contractual duty to pay royalties during the term of the license agreement, which was agreed by both parties, regardless of whether or not they have practiced the patents at issue.

Thirdly, Article Four of the license agreement prescribes that “Uniclass shall have the right to be relieved from all further obligations hereunder should ‘all claims’ of the Licensed Patents be ‘materially limited or declared invalid’….” In other words, the unilateral right for Uniclass to terminate the agreement is conditional. According to the provisions of the agreement, ATEN is solely obligated to ensure that each patent at issue- as opposed to each claim- is both valid and practicable. In a rare but extreme example, if only one claim of the patent(s) at issue survived not being materially limited or declared invalid, Uniclass would be deemed as not yet having been relieved from the obligation of royalty payment. Even in the worst scenario, such as if all claims were made invalid, the latter segment of the same Article reads that “[i]n such event neither party shall be entitled to any return or receipt of any payment made or due under this Agreement.” In other words, assuming all the claims of the patents at issue were already invalidated, Uniclass was prohibited from requesting a refund of its payment prior to this invalidation. This is because any and all of Uniclass’ payments were a consideration in return for ATEN’s performance of the license obligations during the term of the agreement. Furthermore, if, during the term of the agreement, and in view of ATEN’s fulfilment of its license obligations, at least some claims of the patents at issue survived, Uniclass was absolutely obligated to make its payments if they were due.

Moreover, Uniclass argued that by applying the contractual relationship based on a purchase agreement, ATEN should bear warranty against any defects of the subject matter. As such, ATEN had fault and did not complete its performance in the contract because the ‘275 patent at issue became defective after partial revocation and limitation of the claims. However, it must be noted that a patent license agreement is distinguishable from a purchase agreement. In a contract for a purchase agreement, the assignor’s obligation is to transfer the ownership and possession of the subject matter to the assignee, and the assignor is liable for defect warranty as stipulated by the Civil Code; the same rules should be applied to an assignment of rights. However, to perform a contractual obligation under a patent license agreement, a licensor is deemed as having performed its duty as long as it maintains the licensed patent right in a valid condition. ATEN underwent a re-examination proceeding to maintain the validity of the licensed patents, so as to lawfully keep its promise under the agreement it had entered into. By faithfully observing a covenant in which it had promised not to sue and by making efforts to maintain the validity of the licensed patent rights, ATEN had exercised its due care and diligence as a due licensor. 

The IP court ruled that the license was effective and enforceable. Uniclass was then ordered to pay ATEN accumulative compensation for the royalty fee of nearly TWD 8,590,000, or approximately USD 290,000, including the accrued interest to the date of judgement. The decision was final and binding.