U.S. Court of Appeals for the Federal Circuit, Molon Motor and Coil Corp., v. Nidec Motor Corp., Docket No. 2019-1071

Patent Infringement

Licenses

Contract Law

Contract Drafting

Covenant Not to Sue

Settlement, License and Release Agreement

Merger Clause

Integration Clause

Merger of the Two Agreements?

Illinois State Law

Contract Interpretation

Four Corners Rule

Parol Evidence Rule

Comparing the Subject Matter of Contracts

Appeal from the United States District Court for the Northern District of Illinois in No. 1:16-cv-03545

Molon Motor and Coil Corporation (“Molon”) appeals from the judgment of the U.S. District Court for the Northern District of Illinois in favor of Nidec Motor Corporation (“Nidec”) on Molon’s claim for infringement of U.S. Patent 6,465,915 (“the ’915 patent”). The district court granted summary judgment that Molon is barred from enforcing the ’915 patent against Nidec pursuant to a covenant not to sue that Molon granted in 2006 (“the 2006 Covenant”). Molon argues that the 2006 Covenant was extinguished by a clause in a Settlement, License and Release Agreement that the parties entered into in 2007 (“the 2007 Settlement”). The clause at issue in the 2007 Settlement states that all prior covenants “concerning the subject matter hereof” are “merged” and “of no further force or effect.” Because we agree with the district court that the two agreements concern different subject matter and therefore do not merge, we affirm.

The 2006 Covenant states: Molon hereby forever covenants not to sue Merkle- Korff for patent infringement (whether direct, contributory, or by inducement thereof) under either the ’915 patent or the ’726 patent with respect to any and all products previously or presently made, used or sold by Merkle-Korff in the United States. This covenant extends directly to Merkle-Korff as well as any individual or entity to which Merkle- Korff previously or presently supplies products by way of the manufacture and/or sale thereof in the United States.

In early 2007, Molon and Merkle-Korff entered into the 2007 Settlement, after which the parties jointly filed a stipulation of dismissal in the ’5134 litigation. J.A. 30–37. In the 2007 Settlement, Merkle-Korff agreed to pay Molon a lump sum payment in exchange for an exclusive license to more than a dozen of Molon’s United States and foreign patents and patent applications—including the ’785, ’915, and ’726 patents—within a narrowly defined exclusive market:

The 2007 Settlement states: Grant. Molon hereby grants each of the Merkle- Korff Affiliates an exclusive, fully paid-up, royalty free, worldwide, perpetual, irrevocable, retroactive, current and future right and license of all Patent Rights to make, have made, use, sell, offer to sell, lease, import, export, or otherwise commercialize products and/or systems for resale or other transfer: (i) to any of the other Merkle-Korff Affiliates; and/or (ii) to [a third-party company and its affiliates] (such persons and entities in (i) and (ii) above, collectively the “Kinetek Exclusive Market”). Under said license, the sale, offer to sell, lease, importation, exportation, commercialization and/or other transfer of products and/or systems between two Merkle-Korff Affiliates (as expressly set forth in (i) above), shall in no way permit the transferee Merkle-Korff Affiliate (i.e., the receiving Merkle-Korff Affiliate) to make, have made, use, sell, offer to sell, lease, import, export, or otherwise commercialize such products and/or systems for resale or other transfer to any person or entity outside of the Kinetek Exclusive Market.

In addition to the exclusive license rights within the Kinetek Exclusive Market, the 2007 Settlement granted Merkle-Korff in certain instances “the right, but not the duty, to pursue an infringement claim”—i.e., the right to exclude others from using the patents within the Kinetek Exclusive Market.

The 2007 Settlement contains a “merger” or “integration” clause:

The integration clause states: Entire Agreement. This Agreement is an integrated Agreement and constitutes the entire agreement and understanding between and among the Parties with regard to the matters set forth herein and shall be binding upon and inure to the benefit of the administrators, agents, personal representatives, successors, and assigns of each. There are no representations, promises, or agreements pertaining to the terms or subject matter of this Agreement, whether express or implied, that are not set forth in this Agreement. All prior and contemporaneous conversations, negotiations, possible and alleged agreements, representations and covenants concerning the subject matter hereof, are merged herein and shall be of no further force or effect.

The 2007 Settlement also expresses the parties’ agreement that they cooperated in drafting the agreement, it is not to be interpreted for or against either of them, and it is to be governed by the laws of the State of Illinois. J.A. 34–35.

(The terms “merger clause” and “integration clause” may be used interchangeably to describe a clause in a written contract that states that there are no representations, promises, or agreements between the parties except those found in the written contract. See Restatement (Second) of Contracts § 216 cmt. e (1981).)

Merkle-Korff later merged with Nidec. Whether that merger immunizes Nidec from liability that it might have otherwise had prior to the merger raises the issue that is at the heart of this appeal. In the present suit Molon alleges that Nidec is practicing and/or inducing others to practice the ’915 patent outside the licensed Kinetek Exclusive Market. See J.A. 58–64.

Nidec moved for partial summary judgment on Molon’s infringement claim, arguing that Molon is barred from enforcing the ’915 patent against Nidec under the 2006 Covenant. Molon responded that the 2006 Covenant was extinguished by the merger clause in the 2007 Settlement. Applying Illinois contract law, the district court granted partial summary judgment in favor of Nidec on Molon’s claim for infringement of the ’915 patent. J.A. 1–12. Because the merger clause in the 2007 Settlement pertains only to covenants “concerning the subject matter hereof,” the court compared the subject matter of the 2006 Covenant to the subject matter of the 2007 Settlement. The court found that the 2006 Covenant gives Nidec a right to avoid suit for patent infringement on two patents, one of which is the ’915 patent. J.A 9. In contrast, the 2007 Settlement is in some ways broader—it is an exclusive license, it includes more than a dozen patents and applications, and it provides Nidec with some enforcement rights—and in other ways narrower—it is limited to a defined market of customers—than the 2006 Covenant. J.A. 9. Thus, the court concluded, the 2006 Covenant remains in effect because it does not concern the same subject matter as the 2007 Settlement.

In this case, the question before us is whether the 2007 Settlement should be interpreted to have revoked or extinguished the 2006 Covenant. Contract interpretation is a question of state law. See Volt Info. Sci., Inc. v. Bd. Of Tr. Of Leland Stanford Junior Univ., 489 U.S. 468, 474 (1989). The 2007 Settlement contains a choice-of-law provision requiring that it “be governed and construed in accordance with the laws of the State of Illinois as to all matters of interpretation and remedy.” J.A. 35. Therefore, we apply Illinois state law to interpret the 2007 Settlement de novo.

Traditional contract interpretation principles in Illinois require application of the “four corners” rule. Air Safety, Inc. v. Teachers Realty Corp., 706 N.E.2d 882, 884 (Ill. 1999). In applying this rule, “a court must initially look to the language of a contract alone, as the language, given its plain and ordinary meaning, is the best indication of the parties’ intent.” Gallagher v. Lenart, 874 N.E.2d 43, 58 (Ill. 2007); Rakowski v. Lucente, 472 N.E.2d 791, 794 (Ill. 1984) (“Where a written agreement is clear and explicit, a court must enforce the agreement as written. Both the meaning of the instrument, and the intention of the parties must be gathered from the face of the document without the assistance of parol evidence or any other extrinsic aids.”).

We must therefore look to the language of the 2007 Settlement. The merger clause states in relevant part:

All prior and contemporaneous conversations, negotiations, possible and alleged agreements, representations and covenants concerning the subject matter hereof, are merged herein and shall be of no further force or effect.

The parties have not argued that the merger clause is ambiguous or that it requires extrinsic evidence to interpret what the parties intended. The clause, on its face, only pertains to covenants “concerning the subject matter” of the 2007 Settlement.

We first address the language of the merger clause in the 2007 Settlement, which limits its application to covenants “concerning the subject matter hereof.” We consider whether the subject matter of the 2006 Covenant and the 2007 Settlement is the same, such that the 2006 Covenant was expressly merged into the 2007 Settlement.

In comparing the subject matter of contracts, Illinois courts have cautioned against defining subject matter too broadly or too narrowly. For example, in Ill. Concrete- I.C.I., Inc. v. Storefitters, Inc., the court rejected the broad view that two contracts had the same subject matter simply because both involved “using trucks.” 922 N.E.2d 542, 546 (Ill. App. Ct. 2010). On the other hand, in Midwest Builder Distrib., Inc. v. Lord & Essex, Inc., the court rejected an “extremely narrow view” of two contracts as having subject matter limited to “the specifications of the products to be delivered.” 891 N.E.2d 1, 20 (Ill. App. Ct. 2007).

(…) To determine the subject matter of each agreement, we must examine the actual language of the agreements themselves. We must consider how the language of each agreement conveys the substantive rights and obligations exchanged between the parties.

First, we look at the subject matter of the 2006 Covenant, which is a one-paragraph unilateral covenant not to sue on two patents—the ’915 patent and the ’726 patent. J.A. 27. The 2006 Covenant covers “any and all products previously or presently made, used or sold by Merkle-Korff” and it extends geographically to “the United States.” It contains no restrictions on the market for sales of licensed products.

Next, we look at the subject matter of the 2007 Settlement, which is an eight-page bilateral contract, in which Merkle-Korff agreed to pay monetary consideration to Mo- lon in exchange for an exclusive license covering more than a dozen United States and foreign patents and patent applications. J.A. 30–37. The 2007 Settlement is not limited to any specific products or geographical area, but it is limited to the Kinetek Exclusive Market. J.A. 31. Additionally, the 2007 Settlement gives Merkle-Korff a right to sue third parties for infringement of the licensed patents within the Kinetek exclusive Market in the event that Molon declines to do so.

A covenant not to sue is equivalent to a nonexclusive or “bare” license, see Ortho Pharm. Corp. v. Genetics Inst., Inc., 52 F.3d 1026, 1032 (Fed. Cir. 1995), which is a promise by the patent owner not to sue the licensee for practicing the patented invention, and under which the patent owner impliedly reserves the right to grant similar nonexclusive licenses to other entities. See Intellectual Prop. Dev., Inc. v. TCI Cablevision of Cal., Inc., 248 F.3d 1333, 1345 (Fed. Cir. 2001). In contrast, an exclusive license is a license to practice the patented invention “accompanied by the patent owner’s promise that others shall be excluded from practicing it within the field of use wherein the licensee is given leave.” Textile Prods., Inc. v. Mead Corp., 134 F.3d 1481, 1484 (Fed. Cir. 1998) (quoting Western Elec. Co. v. Pacent Reproducer Corp., 42 F.2d 116, 118 (2d Cir. 1930)). We have characterized an exclusive licensee as “sharing the property rights represented by a patent.” Rite-Hite Corp. v. Kelly Co., 56 F.3d 1538, 1553 (Fed. Cir. 1995) (quoting Weiner v. Rollform, 744 F.2d 797, 807 (Fed. Cir. 1984)).

There are fundamental differences between an exclusive license and a nonexclusive license, particularly in the context of standing to assert a claim for patent infringement. See Rite-Hite, 56 F.3d at 1552 (citing Independent Wireless Tel. Co. v. Radio Corp. of Am., 269 U.S. 459, 468– 69 (1926)). In essence, an exclusive licensee has an interest in the patent sufficient to establish an injury when a third party infringes, akin to an ownership interest, while a non- exclusive licensee has no such interest in the patent and merely enjoys freedom from suit. See id. Under this framework, it cannot be said that an exclusive license and a non- exclusive license necessarily concern the same subject matter, even though both licenses include the same patent.

We thus find that there are important substantive differences between the subject matter of the 2006 Covenant and the 2007 Settlement. The 2006 Covenant is a unilateral promise by Molon not to sue Merkle-Korff (or its successor, Nidec) for infringement of two patents, one of which is the ’915 patent. The 2007 Settlement, in contrast, is a bilateral contract through which Molon transferred to Merkle-Korff a share in the existing and potential exclusionary rights under more than a dozen listed patents and applications, one of which is the ’915 patent. Moreover, the 2006 Covenant is limited to products existing at the time of its execution, while the 2007 Settlement includes both existing and future products. And the 2006 Covenant is not limited to any specific market, while the 2007 Settlement is limited to the Kinetek Exclusive Market.

We therefore conclude that the language of the merger clause in the 2007 Settlement did not expressly extinguish the 2006 Covenant.

(Merger doctrine in its traditional form as a doctrine of contract interpretation. See Schweickhardt v. Chessen, 161 N.E. 118, 122 (Ill. 1928) (“The rule is, that when parties reduce their agreement to writing, all prior negotiations leading up to the execution of the contract are merged therein, and parol evidence is not admissible to explain, contradict, enlarge, or modify the writing as it existed when executed.”). The effect of the merger doctrine is to “preclude evidence of understandings, not reflected in a writing, reached before or at the time of its execution which would vary or modify its terms.” J & B Steel Contractors, Inc. v. C. Iber & Sons, Inc., 642 N.E.2d 1215, 1217 (Ill. 1994); see also Fuchs & Lang Mfg. Co. v. R.J. Kittredge & Co., 146 Ill. App. 350, 364 (Ill. App. Ct. 1909) (“It follows legally that this written contract merged all prior negotiations, letters and telegrams in the written agreement thus formulated and signed; and all extrinsic evidence of oral or written negotiations became incompetent, immaterial and irrelevant for the purpose of contradicting or modifying the written agreement.”)).

Under Illinois law, the doctrine of merger only applies when a later contract “relates to the same subject matter and embraces the same terms” as an earlier contract. Kraft v. No. 2 Galesburg Crown Fin. Corp., 420 N.E.2d 865, 870 (Ill. App. Ct. 1981).

We agree with the district court that the absence of any reference to the 2006 Cove- nant in the 2007 Settlement, though not dispositive, is an indication that Nidec did not intend to assent to its revocation.

(We see nothing “strange” about a market-limited exclusive licensee being both empowered to sue for infringement within the licensed market and also subject to being sued by the licensor for infringement outside of that market.)

(…) For these reasons, we find that the merger clause in the 2007 Settlement does not indicate that the parties intended to revoke the 2006 Covenant. The 2006 Covenant remains operable, and it bars Molon’s suit against Nidec for infringement of the ’915 patent.

Accordingly, the judgment of the district court is affirmed.

(U.S. Court of Appeals for the Federal Circuit, January 10, 2020, Molon Motor and Coil Corp., v. Nidec Motor Corp., Docket No. 2019-1071)