Two agreements cover the same patents; Fed Cir: Of course they don't cover the same "subject matter"
Updated: Jul 28, 2020
Molon Motor and Coil Corporation,
Nidec Motor Corporation,
January 10, 2020
Sixteen years ago, plaintiff Molon sued Merkle-Korff Industries for infringing US patent 6,054,785. Merkle-Korff then filed declaratory judgment counterclaims for noninfringement and invalidity with respect to two other patents (6,617,726 and 6,465,915) that were not included in Molon’s original complaint.
In early 2006, Molon provided Merkle-Korff with a covenant not to sue for the ‘726 and ‘915 patents; this covenant included essentially no substantive restrictions. With no remaining controversy over these two patents, the District Court dismissed Merkle-Korff’s counterclaims, and litigation regarding Molon’s ‘785 patent continued.
About one year later, Molon and Merkle-Korff settled the ‘785 litigation; this took the form of an agreement in which Merkle-Korff paid Molon a lump sum, and in which Molon granted Merkle-Korff a license to the ‘785, ‘915, and ‘726 patents (and several others) within a narrowly-defined exclusive market. This 2007 settlement agreement included a “merger” clause, which says 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.
Trouble began when Nidec (Merkle-Korff’s successor) began selling products covered by the ‘915 patent outside of the narrow, exclusive market defined in the 2007 settlement agreement. After Molon sued for infringement of this patent, Nidec argued that the broad 2006 covenant not to sue gave it the right to make the challenged sales. Molon’s response was that the 2007 license agreement extinguished the 2006 covenant, because the merger clause in the later agreement says that all prior “covenants concerning the subject matter hereof, are merged herein and shall be of no further force or effect.”
The District Court ruled that even though the 2006 covenant and the 2007 license agreement both cover the ‘915 patent, they do not cover the same “subject matter,” because the 2007 agreement grants rights only in a narrow exclusive market, while the 2006 covenant has no such restrictions. The 2007 agreement’s merger clause therefore had no effect on the 2006 covenant, and Nidec has the right to sell products covered by the ‘915 patents outside of the narrow, exclusive market defined in the later agreement.
On appeal, Molon repeated its argument that the 2006 covenant and 2007 license necessarily cover the same subject matter because the ‘915 patent appears in both; this persuaded Judge Reyna, but not the other two members of the panel. Applying Illinois law (which governs the 2007 license agreement), the majority agreed with the trial judge that because the 2006 covenant is of significantly different scope from the 2007 license agreement, the two agreements do not cover the same “subject matter,” and the later agreement’s merger clause had no effect on the broad 2006 covenant. The majority also noted that they found “no legal support for the sweeping proposition that an overlapping patent is sufficient to render two agreements the same subject matter.”
In his dissent, Judge Reyna acknowledged that the covenant and settlement agreement differ in their scope regarding Nidec’s right to use ‘915 patent; but under his interpretation of Illinois law, the right to practice the ‘915 patent in both the 2006 covenant and the 2007 settlement agreement makes the two documents sufficiently related subject matter for the settlement agreement’s merger clause ——which says that all earlier “covenants concerning the subject matter hereof, are merged herein and shall be of no further force or effect”—to “wipe away” the 2006 covenant. In his view, the majority’s hairsplitting decision “rewrites the terms of the 2007 Settlement agreement and gives Nidec a windfall.”