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Federal Circuit Rejects “Good Faith and Fair Dealing” Argument for Scrapping an Exclusive Patent License

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On February 7, 2018, the Federal Circuit unsealed its decision to uphold a preliminary injunction barring Infineon Technologies from terminating an exclusive patent license to MACOM Technology Solutions for certain semiconductor technology. MACOM Technology Solutions Holdings, Inc. v. Infineon Technologies AG, No. 2017-1448 (decided January 29, 2018). This decision primarily concerned whether an implied covenant of good faith and fair dealing can impose a substantive obligation for a licensee not to exceed a licensed field of use. The Federal Circuit agreed with the district court (from the Central District of California) that the implied covenant under California law did not create a contractual obligation for MACOM to keep its commercial activities confined to the licensed field of use; primarily holding that a patent license is only a covenant not to sue from the licensor and does not attach substantive obligations on the licensee outside of the express terms of the agreement.

The licensed patents in this case cover gallium nitride (“GaN”) semiconductor technology and were originally owned by Nitronex LLC. Infineon purchased the patents in 2010 for $9 million and licensed them back to Nitronex. MACOM obtained a sublicense to the patents after acquiring Nitronex in 2014. Under the agreement, MACOM had a license to practice the patents “only” within a specified “field of use” comprising GaN-on-silicon technology.

The dispute arose when MACOM sold products outside of the licensed field using GaN-on-silicon-carbide technology. Infineon terminated the agreement on this basis, asserting that MACOM’s activity outside the licensed field of use materially breached the agreement. MACOM then brought a declaratory judgment action on various contract claims and for non-infringement of the licensed patents, and moved for a preliminary injunction to reinstate the license agreement. MACOM argued that any activity outside of the license field of use was minimal and MACOM promptly cured any breach of the field of use restriction. Infineon argued that the sales outside the field of use were a breach of MACOM’s implied covenant of good faith and fair dealing under California law. The district court agreed that MACOM was likely to prevail on its wrongful termination claim and therefore was entitled to its requested preliminary injunction.

The Federal Circuit upheld this decision. The panel (Prost, Wallach, and Stoll) ruled that the covenant of good faith and fair dealing implied in all contracts under California law cannot be deemed to impose substantive requirements above those laid out in the agreement. The Federal Circuit reasoned that a patent license is simply a promise not to sue, such that Infineon’s recourse for MACOM’s unlicensed activities would be to sue MACOM for patent infringement. In other words, the license to MACOM did not create a separate contractual obligation not to exceed the licensed field of use on which to “hinge an implied duty” of good faith and fair dealing. Seeking to limit the impact of this ruling, however, the court noted that other “circumstances may give rise to an implied covenant not to practice outside a licensed field of use.”

What This Means For You

This Federal Circuit decision provides guidance for negotiating and drafting field of use restrictions in patent license agreements. This decision suggests that courts, at least those applying California law, will not enforce substantive obligations outside of those expressly set forth in the agreement. Thus, parties to patent license agreements should consider expressly enumerating (a) what activities are prohibited outside of the field of use, and (b) specific consequences for breaching such prohibitions. Based on the panel’s opinion, the licensor may have had a right to terminate the license agreement if the termination had been under breach provisions specific to the licensee’s activities outside the field of use, rather than general provisions applicable to any breach. Enforcing clear contractual language is generally a more reliable (and less costly) remedy than attempting to impute substantive obligations by asserting implied duties such as good faith and fair dealing.

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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.