228 Fed. Appx. 854 (11th Cir. 2007) (cert. denied)

Per Curiam

Following the settlement of a dispute between Systems Unlimited, Inc. and Cisco Systems, Inc. over the ownership of certain intellectual property, Cisco agreed to covey the property to Systems. In the resulting bill of sale, Cisco:

Cisco never delivered [copies of] any of the software to Systems. Alleging that it had been damaged by the non-delivery, Systems sued Cisco for breaching the bill of sale contract and for violating the attendant obligations to deliver the software under the Uniform Commercial Code.

Systems contends that the district court erred in granting summary judgment in favor of Cisco because: (1) the plain language of the bill of sale required Cisco to deliver the software; (2) the bill of sale, when read in conjunction with other contemporaneous agreements, required delivery; and (3) the UCC, which governs the bill of sale, requires that all goods be delivered at a reasonable time. Systems is wrong on each point.

The bill of sale is interpreted in accord with its plain language absent some ambiguity. Here, the parties agree that the bill of sale is clear and unambiguous.

The bill of sale provides that Cisco will “grant, bargain, sell, transfer and deliver unto [Systems] … [a]ny and all of [Cisco]’s right, title and interest in any copyrights, patents, trademarks, trade secrets and other intellectual property of a kind associated with any software, code or data.” As the district court explained, this language unambiguously means that Cisco was required by the bill of sale to transfer to Systems all of its rights in intellectual property associated with certain software and data. There is no mention in the plain language of the contract itself of Cisco being obligated to transfer the actual software, and we will not imply any such obligation absent some good reason under law.

Systems says there are two good reasons to imply an obligation by Cisco to transfer the software. First, Systems argues that the bill of sale must be interpreted in conjunction with the settlement agreement between Systems and Cisco and other documents relating to the intellectual property. These other agreements, Systems claims, include an obligation by Cisco to deliver the software with any conveyance of intellectual property.

Assuming without deciding that the other agreements include language requiring Cisco to deliver the software, they are not relevant here because Systems has never alleged Cisco violated these other agreements. Systems’ complaint alleges only a violation of the bill of sale contract, and there is no obligation in that contract to deliver the software. The bill of sale does not reference or incorporate any other agreement.

To get around this point, Systems argues that “when instruments relate to the same matters, are between the same parties, and made part of substantially one transaction, they are to be taken together.” It is true that this is one of the canons for construing a contract under California law. But it is also true that this canon, as with most others, is inapplicable where the contract that is alleged to have been breached is unambiguous. Here, the language of the bill of sale is unambiguous. Thus, there is no need to apply any canons of construction.

Systems also argues that the UCC imposes a duty on Cisco to deliver the software. We will assume without deciding that Systems’ reading of the UCC is correct. Even so, the provisions of the UCC only apply to contracts that deal predominately with “transactions in goods.” The sale of intellectual property, which is what is involved here, is not a transaction in goods. Thus, the UCC does not apply. Accordingly, the plain language of the bill of sale governs and, as the district court held, it does not include a provision requiring Cisco to deliver any software.

AFFIRMED.

328 F.3d 1136 (9th Cir. 2003)

HAWKINS, Circuit Judge.

In this dispute between plaintiff-appellant Richard Warren (”Warren”) and defendants-appellees Fox Family Worldwide (“Fox”), MTM Productions (“MTM”), Princess Cruise Lines (“Princess”), and the Christian Broadcasting Network (“CBN”), Warren claims that defendants infringed the copyrights in musical compositions he created for use in the television series “Remington Steele.” Concluding that Warren has no standing to sue for infringement because he is neither the legal nor beneficial owner of the copyrights in question, we affirm the district court’s Rule 12 dismissal of Warren’s complaint.

Warren and Triplet Music Enterprises, Inc. (“Triplet”) entered into the first of a series of detailed written contracts with MTM concerning the composition of music for “Remington Steele.” This agreement stated that Warren, as sole shareholder and employee of Triplet, would provide services by creating music in return for compensation from MTM. Under the agreement, MTM was to make a written accounting of all sales of broadcast rights to the series and was required to pay Warren a percentage of all sales of broadcast rights to the series made to third parties not affiliated with ASCAP or BMI. These agreements were renewed and re-executed with slight modifications in 1984, 1985 and 1986.

Warren brought suit in propria persona against Fox, MTM, CBN, and Princess, alleging copyright infringement, breach of contract, accounting, conversion, breach of fiduciary duty, breach of covenants of good faith and fair dealing, and fraud.

Warren claims he created approximately 1,914 musical works used in the series pursuant to the agreements with MTM; that MTM and Fox have materially breached their obligations under the contracts by failing to account for or pay the full amount of royalties due Warren from sales to parties not affiliated with ASCAP or BMI; and that MTM and Fox infringed Warren’s copyrights in the music by continuing to broadcast and license the series after materially breaching the contracts. As to the other defendants, Warren claims that CBN and Princess infringed his copyrights by broadcasting “Remington Steele” without his authorization. Warren seeks damages, an injunction, and an order declaring him the owner of the copyrights at issue.

Defendants argu[ed] that Warren’s infringement claims should be dismissed for lack of standing because he is neither the legal nor beneficial owner of the copyrights. The district court dismissed Warren’s copyright claims without leave to amend and dismissed his state law claims without prejudice to their refiling in state court, holding that Warren lacked standing because the works were made for hire, and because a creator of works for hire cannot be a beneficial owner of a copyright in the work. Warren appeals.

The first agreement [between the parties], signed on February 25, 1982, states that MTM contracted to employ Warren “to render services to [MTM] for the television pilot photoplay now entitled ‘Remington Steele.’” It also is clear that the parties agreed that MTM would “own all right, title and interest in and to [Warren’s] services and the results and proceeds thereof, and all other rights granted to [MTM] in [the Music Employment Agreement] to the same extent as if … [MTM were] the employer of [Warren].” The Music Employment Agreement provided:

Figure 2.1 Warren claimed that he created 1,914 musical works for the popular 1980s TV series Remington Steele.

The parties later executed contracts almost identical to these first agreements in June 1984, July 1985, and November 1986. As the district court noted, these subsequent contracts are even more explicit in defining the compositions as “works for hire.” Letters that Warren signed accompanying the later Music Employment Agreements provided: “It is understood and agreed that you are supplying [your] services to us as our employee for hire … [and] [w]e shall own all right, title and interest in and to [your] services and the results and proceeds thereof, as works made for hire.”

That the agreements did not use the talismanic words “specially ordered or commissioned” matters not, for there is no requirement, either in the Act or the caselaw, that work-for-hire contracts include any specific wording. In fact, in Playboy Enterprises v. Dumas, 53 F.3d 549 (2d Cir. 1995), the Second Circuit held that legends stamped on checks were writings sufficient to evidence a work-for-hire relationship where the legend read: “By endorsement, payee: acknowledges payment in full for services rendered on a work-made-for-hire basis in connection with the Work named on the face of this check, and confirms ownership by Playboy Enterprises, Inc. of all right, title and interest (except physical possession), including all rights of copyright, in and to the Work.” Id. at 560. The agreements at issue in the instant case are more explicit than the brief statement that was before the Second Circuit.

In this case, not only did the contracts internally designate the compositions as “works made for hire,” they provided that MTM “shall be deemed the author thereof for all purposes.” This is consistent with a work-for-hire relationship under the Act, which provides that “the employer or other person for whom the work was prepared is considered the author.” 17 U.S.C. § 201(b).

Warren argues that the use of royalties as a form of compensation demonstrates that this was not a work-for-hire arrangement. While we have not addressed this specific question, the Second Circuit held in Playboy that “where the creator of a work receives royalties as payment, that method of payment generally weighs against finding a work-for-hire relationship.” 53 F.3d at 555. However, Playboy clearly held that this factor was not conclusive. In addition to noting that the presence of royalties only “generally” weighs against a work-for-hire relationship, Playboy cites Picture Music, Inc. v. Bourne, Inc., 457 F.2d 1213, 1216 (2d Cir. 1972), for the proposition that “[t]he absence of a fixed salary … is never conclusive.” 53 F.3d at 555. Further, the payment of royalties was only one form of compensation given to Warren under the contracts. Warren was also given a fixed sum “payable upon completion.” That some royalties were agreed upon in addition to this sum is not sufficient to overcome the great weight of the contractual evidence indicating a work-for-hire relationship.

Warren also argues that because he created nearly 2,000 musical works for MTM, the works were not specially ordered or commissioned. However, the number of works at issue has no bearing on the existence of a work-for-hire relationship. As the district court noted, a weekly television show would naturally require “substantial quantities of verbal, visual and musical content.”

The agreements between Warren and MTM conclusively show that the musical compositions created by Warren were created as works for hire, and Warren is therefore not the legal owner of the copyrights therein.

AFFIRMED.

939 F.2d 1568 (Fed. Cir. 1991)

PLAGER, CIRCUIT JUDGE

Allied-Signal Inc. and UOP Inc. (Allied), defendants-appellants, appeal from the preliminary injunction issued by the district court. The trial court enjoined Allied from “making, using or selling, and actively inducing others to make use or sell TFCL membrane in the United States, and from otherwise infringing claim 7 of United States Patent No. 4,277,344 [’344].” Because of serious doubts on the record before us as to who has title to the invention and the ensuing patent, we vacate the grant of the injunction and remand for further proceedings.

The application which ultimately issued as the ‘344 patent was filed by John E. Cadotte on February 22, 1979. The patent claims a reverse osmosis membrane and a method for using the membrane to reduce the concentration of solute molecules and ions in solution. Cadotte assigned his rights in the application and any subsequently issuing patent to plaintiff-appellee FilmTec. This assignment was duly recorded in the United States Patent and Trademark Office. Defendant-appellant Allied manufactured a reverse osmosis membrane and FilmTec sued Allied for infringing certain claims of the ’344 patent.

John Cadotte was one of the four founders of FilmTec. Prior to founding FilmTec, Cadotte and the other founders were employed in various responsible positions at the North Star Division of Midwest Research Institute (MRI), a not-for-profit research organization. MRI was principally engaged in contract research, much of it for the United States (Government), and much of it involving work in the field of reverse osmosis membranes.

The evidence indicates that the work at MRI in which Cadotte and the other founders were engaged was being carried out under contract (the contract) to the Government. The contract provided that MRI

It appears that sometime between the time FilmTec came into being in 1977 and the time Cadotte submitted his patent application in February of 1979, he made the invention that led to the ’344 patent. As we will explain, just when in that period the invention was made is critical.

Cadotte left MRI in January of 1978. Cadotte testified that he conceived his invention the month after he left MRI. Allied disputes this, and alleges that Cadotte conceived his invention and formed the reverse osmosis membrane of the ’344 patent earlier—in July of 1977 or at least by November of 1977 when he allegedly produced an improved membrane.

Allied alleges that the evidence establishes that the contract between MRI and the Government grants to the Government “all discoveries and inventions made within the scope of their [i.e., MRI’s employees] employment,” and that the invention claimed in the ’344 patent was made by Cadotte while employed by MRI. From this Allied reasons that rights in the invention must be with the Government and therefore Cadotte had no rights to assign to FilmTec. If FilmTec lacks title to the patent, FilmTec has no standing to bring an infringement action under the ’344 patent. FilmTec counters by arguing that the trial court was correct in concluding that the most the Government would have acquired was an equitable title to the ’344 patent, which title would have been made void under 35 U.S.C. § 261 by the subsequent assignment to FilmTec from Cadotte.

The parties agree that Cadotte was employed by MRI and that the contract between MRI and the Government contains a grant of rights to inventions made pursuant to the contract. However, the record does not reflect whether the employment agreement between Cadotte and MRI either granted or required Cadotte to grant to MRI the rights to inventions made by Cadotte. Allied argues that Cadotte’s inventions were assigned nevertheless to MRI. Allied points to the provision in the contract between MRI and the Government in which MRI warrants that it will obligate inventors to assign their rights to MRI.

While this is not conclusive evidence of a grant of or a requirement to grant rights by Cadotte, it raises a serious question about the nature of the title, if any, in FilmTec. FilmTec apparently did not address this issue at the trial, and there is no indication in the opinion of the district court that this gap in the chain of ownership rights was considered by the court.

Between the time of an invention and the issuance of a patent, rights in an invention may be assigned and legal title to the ensuing patent will pass to the assignee upon grant of the patent. If an assignment of rights in an invention is made prior to the existence of the invention, this may be viewed as an assignment of an expectant interest. An assignment of an expectant interest can be a valid assignment.

Figure 2.3 FilmTec reverse osmosis membrane filter.

Once the invention is made and an application for patent is filed, however, legal title to the rights accruing thereunder would be in the assignee, and the assignor-inventor would have nothing remaining to assign. In this case, if Cadotte granted MRI rights in inventions made during his employ, and if the subject matter of the ’344 patent was invented by Cadotte during his employ with MRI, then Cadotte had nothing to give to FilmTec and his purported assignment to FilmTec is a nullity. Thus, FilmTec would lack both title to the ’344 patent and standing to bring the present action.

The district court was of the view that if the Government was the assignee from Cadotte through MRI, the Government would have acquired at most an equitable title, and that legal title would remain in Cadotte. The legal title would then have passed to FilmTec by virtue of the later assignment, pursuant to Sec. 261 of the [Patent Act]. Sigma Eng’g v. Halm Instrument, 33 F.R.D. 129 (E.D.N.Y. 1963).

But Sigma, even if it were binding precedent on this court, does not stretch so far. The issue in Sigma was whether the plaintiff, assignee of the patent rights of the inventors, was the real party in interest such as to be able to maintain the instant action for patent infringement. Defendant claimed that the inventors’ employer had title to the invention by virtue of the employment contract which obligated the inventors to transfer all patent rights to inventions made while in its employ. As the court expressly noted, no such transfers were made, however, and the court considered any possible interest held by the employer in the invention to be in the nature of an equitable claim.

In our case, the contract between MRI and the Government did not merely obligate MRI to grant future rights, but expressly granted to the Government MRI’s rights in any future invention. Ordinarily, no further act would be required once an invention came into being; the transfer of title would occur by operation of law. If a similar contract provision existed between Cadotte and MRI, as MRI’s contract with the Government required, and if the invention was made before Cadotte left MRI’s employ, as the trial judge seems to suggest, Cadotte would have no rights in the invention or any ensuing patent to assign to FilmTec.

Because of the district court’s view of the title issue, no specific findings were made on either of these questions. As a result, we do not know who held legal title to the invention and to the patent application and therefore we do not know if FilmTec could make a sufficient legal showing to establish the likelihood of success necessary to support a preliminary injunction.

It is well established that when a legal title holder of a patent transfers his or her title to a third party purchaser for value without notice of an outstanding equitable claim or title, the purchaser takes the entire ownership of the patent, free of any prior equitable encumbrance. This is an application of the common law bona fide purchaser for value rule.

Figure 2.4 Schematic showing possible assignment pathways for Cadotte’s invention.

Section 261 of Title 35 goes a step further. It adopts the principle of the real property recording acts, and provides that the bona fide purchaser for value cuts off the rights of a prior assignee who has failed to record the prior assignment in the Patent and Trademark Office by the dates specified in the statute. Although the statute does not expressly so say, it is clear that the statute is intended to cut off prior legal interests, which the common law rule did not.

Both the common law rule and the statute contemplate that the subsequent purchaser be exactly that—a transferee who pays valuable consideration, and is without notice of the prior transfer. The trial judge, with reference to FilmTec’s rights as a subsequent purchaser, stated simply that “FilmTec is a subsequent purchaser from Cadotte for independent consideration. There is no evidence presented to imply that FilmTec was on notice of any previous assignment.” The court concluded that, even if the MRI contract automatically transferred title to the Government, such assignment is not enforceable at law as it was never recorded.

Since this matter will be before the trial court on remand, it may be useful for us to clarify what is required before FilmTec can properly be considered a subsequent purchaser entitled to the protections of Sec. 261. In the first place, FilmTec must be in fact a purchaser for a valuable consideration. This requirement is different from the classic notion of a purchaser under a deed of grant, where the requirement of consideration was a formality, and the proverbial peppercorn would suffice to have the deed operate under the statute of uses. Here the requirement is that the subsequent purchaser, in order to cut off the rights of the prior purchaser, must be more than a donee or other gratuitous transferee. There must be in fact valuable consideration paid so that the subsequent purchaser can, as a matter of law, claim record reliance as a premise upon which the purchase was made. That, of course, is a matter of proof.

In addition, the subsequent transferee/assignee—FilmTec in our case—must be without notice of any such prior assignment. If Cadotte’s contract with MRI contained a provision assigning any inventions made during the course of employment either to MRI or directly to the Government, Cadotte would clearly be on notice of the provisions of his own contract. Since Cadotte was one of the four founders of FilmTec, and the other founders and officers were also involved at MRI, FilmTec may well be deemed to have had actual notice of an assignment. Given the key roles that Cadotte and the others played both at MRI and later at FilmTec, at a minimum FilmTec might be said to be on inquiry notice of any possible rights in MRI or the Government as a result of Cadotte’s work at MRI. Thus once again, the key to FilmTec’s ability to show a likelihood of success on the merits lies in the relationship between Cadotte and MRI.

In our view of the title issue, it cannot be said on this record that FilmTec has established a reasonable likelihood of success on the merits. It is thus unnecessary for us to consider the other issues raised on appeal concerning the propriety of the injunction. The grant of the preliminary injunction is vacated and the case remanded to the district court to reconsider the propriety of the preliminary injunction and for further proceedings consistent with this opinion.

VACATED AND REMANDED.

177 F.3d 258 (5th Cir. 1999)

KING, Chief Judge

Plaintiff-appellee Sugar Busters, L.L.C. (plaintiff) is a limited liability company organized by three doctors and H. Leighton Steward, who co-authored and published a book entitled “SUGAR BUSTERS! Cut Sugar to Trim Fat” in 1995. In “SUGAR BUSTERS! Cut Sugar to Trim Fat,” the authors recommend a diet plan based on the role of insulin in obesity and cardiovascular disease. The authors’ premise is that reduced consumption of insulin-producing food, such as carbohydrates and other sugars, leads to weight loss and a more healthy lifestyle. The 1995 publication of “SUGAR BUSTERS! Cut Sugar to Trim Fat” sold over 210,000 copies, and in May 1998 a second edition was released. The second edition has sold over 800,000 copies and remains a bestseller.

Brennan then co-authored “SUGAR BUST For Life!,” which was published in May 1998. “SUGAR BUST for Life” states on its cover that it is a “cookbook and companion guide by the famous family of good food,” and that Brennan was “Consultant, Editor, Publisher, [and] Sales and Marketing Director for the original, best-selling ‘Sugar Busters!™ Cut Sugar to Trim Fat.’” Approximately 110,000 copies of “SUGAR BUST for Life!” were sold between its release and September 1998.

Plaintiff filed this suit in the United States District Court for the Eastern District of Louisiana on May 26, 1998. Plaintiff sought to enjoin [Brennan] from selling, displaying, advertising or distributing “SUGAR BUST for Life!,” to destroy all copies of the cookbook, and to recover damages and any profits derived from the cookbook.

The mark that is the subject of plaintiff’s infringement claim is a service mark that was registered in 1992 by Sugarbusters, Inc., an Indiana corporation operating a retail store named “Sugarbusters” in Indianapolis that provides products and information for diabetics. The “SUGARBUSTERS” service mark, registration number 1,684,769, is for “retail store services featuring products and supplies for diabetic people; namely, medical supplies, medical equipment, food products, informational literature and wearing apparel featuring a message regarding diabetes.” Sugarbusters, Inc. sold “any and all rights to the mark” to Thornton-Sahoo, Inc. on December 19, 1997, and Thornton-Sahoo, Inc. sold these rights to Elliott Company, Inc. (Elliott) on January 9, 1998. Plaintiff obtained the service mark from Elliott pursuant to a “servicemark purchase agreement” dated January 26, 1998. Under the terms of that agreement, plaintiff purchased “all the interests [Elliott] owns” in the mark and “the goodwill of all business connected with the use of and symbolized by” the mark.

The district court found that the mark is valid and that the transfer of the mark to plaintiff was not “in gross” because

A trademark is merely a symbol of goodwill and has no independent significance apart from the goodwill that it symbolizes. Therefore, a trademark cannot be sold or assigned apart from the goodwill it symbolizes. The sale or assignment of a trademark without the goodwill that the mark represents is characterized as in gross and is invalid.

The purpose of the rule prohibiting the sale or assignment of a trademark in gross is to prevent a consumer from being misled or confused as to the source and nature of the goods or services that he or she acquires. Use of the mark by the assignee in connection with a different goodwill and different product would result in a fraud on the purchasing public who reasonably assume that the mark signifies the same thing, whether used by one person or another. Therefore, if consumers are not to be misled from established associations with the mark, [it must] continue to be associated with the same or similar products after the assignment.

Plaintiff’s purported service mark in “SUGARBUSTERS” is valid only if plaintiff also acquired the goodwill that accompanies the mark; that is, “the portion of the business or service with which the mark is associated.” [Brennan] claim[s] that the transfer of the “SUGARBUSTERS” mark to plaintiff was in gross because “[n]one of the assignor’s underlying business, including its inventory, customer lists, or other assets, were transferred to [plaintiff].” [Brennan’s] view of goodwill, however, is too narrow. Plaintiff may obtain a valid trademark without purchasing any physical or tangible assets of the retail store in Indiana – the transfer of goodwill requires only that the services be sufficiently similar to prevent consumers of the service offered under the mark from being misled from established associations with the mark.

In concluding that goodwill was transferred, the district court relied … on its finding that “plaintiff is moving forward to market and sell its own products and services, which comport with the products and services sold by the Indiana corporation.” Steward testified, however, that plaintiff does not have any plans to operate a retail store, and plaintiff offered no evidence suggesting that it intends to market directly to consumers any goods it licenses to carry the “SUGAR BUSTERS!” name. Finally, we are unconvinced by plaintiff’s argument that, by stating on the cover of its diet book that it may “[h]elp treat diabetes and other diseases” and then selling some of those books on the Internet, plaintiff provides a service substantially similar to a retail store that provides diabetic supplies. We therefore must conclude that plaintiff’s purported service mark is invalid.

629 F.3d 928 (9th Cir. 2011)

CALLAHAN, CIRCUIT JUDGE

Blizzard Entertainment, Inc. (“Blizzard”) is the creator of World of Warcraft (“WoW”), a popular multiplayer online role-playing game in which players interact in a virtual world while advancing through the game’s 70 levels. MDY Industries, LLC and its sole member Michael Donnelly (“Donnelly”) (sometimes referred to collectively as “MDY”) developed and sold Glider, a software program that automatically plays the early levels of WoW for players.

MDY brought this action for a declaratory judgment to establish that its Glider sales do not infringe Blizzard’s copyright or other rights …

In November 2004, Blizzard created WoW, a “massively multiplayer online role-playing game” in which players interact in a virtual world. WoW has ten million subscribers, of which two and a half million are in North America.

WoW players roleplay different characters, such as humans, elves, and dwarves. A player’s central objective is to advance the character through the game’s 70 levels by participating in quests and engaging in battles with monsters. As a player advances, the character collects rewards such as in-game currency, weapons, and armor. WoW’s virtual world has its own economy, in which characters use their virtual currency to buy and sell items directly from each other, through vendors, or using auction houses.

Each WoW player must read and accept Blizzard’s End User License Agreement (“EULA”) and Terms of Use (“ToU”) on multiple occasions. Players who do not accept both the EULA and the ToU may return the game client for a refund.

Donnelly is a WoW player and software programmer. In March 2005, he developed Glider, a software “bot” (short for robot) that automates play of WoW’s early levels, for his personal use. A user need not be at the computer while Glider is running. Glider … moves the mouse around and pushes keys on the keyboard. You tell it about your character, where you want to kill things, and when you want to kill. Then it kills for you, automatically. You can do something else, like eat dinner or go to a movie, and when you return, you’ll have a lot more experience and loot.

Glider does not alter or copy WoW’s game client software, does not allow a player to avoid paying monthly subscription dues to Blizzard, and has no commercial use independent of WoW.

The parties dispute Glider’s impact on the WoW experience. Blizzard contends that Glider disrupts WoW’s environment for non-Glider players by enabling Glider users to advance quickly and unfairly through the game and to amass additional game assets. MDY contends that Glider has a minimal effect on non-Glider players, enhances the WoW experience for Glider users, and facilitates disabled players’ access to WoW by auto-playing the game for them.

In summer 2005, Donnelly began selling Glider through MDY’s website for fifteen to twenty-five dollars per license. As of September 2008, MDY had gross revenues of $3.5 million based on 120,000 Glider license sales.

Blizzard claims that from December 2004 to March 2008, it received 465,000 complaints about WoW bots, several thousand of which named Glider. Blizzard spends $940,000 annually to respond to these complaints.

As to the scope of the license [to use WoW], ToU § 4(B), “Limitations on Your Use of the Service,” provides:

A copyright owner who grants a nonexclusive, limited license ordinarily waives the right to sue licensees for copyright infringement, and it may sue only for breach of contract. However, if the licensee acts outside the scope of the license, the licensor may sue for copyright infringement. Enforcing a copyright license raises issues that lie at the intersection of copyright and contract law.

We refer to contractual terms that limit a license’s scope as “conditions,” the breach of which constitute copyright infringement. We refer to all other license terms as “covenants,” the breach of which is actionable only under contract law. We distinguish between conditions and covenants according to state contract law, to the extent consistent with federal copyright law and policy.

A Glider user commits copyright infringement by playing WoW while violating a ToU term that is a license condition. To establish copyright infringement, then, Blizzard must demonstrate that the violated term—ToU § 4(B)—is a condition rather than a covenant. Blizzard’s EULAs and ToUs provide that they are to be interpreted according to Delaware law. Accordingly, we first construe them under Delaware law, and then evaluate whether that construction is consistent with federal copyright law and policy.

A covenant is a contractual promise, i.e., a manifestation of intention to act or refrain from acting in a particular way, such that the promisee is justified in understanding that the promisor has made a commitment. A condition precedent is an act or event that must occur before a duty to perform a promise arises. Conditions precedent are disfavored because they tend to work forfeitures. Wherever possible, equity construes ambiguous contract provisions as covenants rather than conditions. However, if the contract is unambiguous, the court construes it according to its terms.

Applying these principles, ToU § 4(B)(ii) and (iii)’s prohibitions against bots and unauthorized third-party software are covenants rather than copyright-enforceable conditions. Although ToU § 4 is titled, “Limitations on Your Use of the Service,” nothing in that section conditions Blizzard’s grant of a limited license on players’ compliance with ToU § 4’s restrictions.

To recover for copyright infringement based on breach of a license agreement, (1) the copying must exceed the scope of the defendant’s license and (2) the copyright owner’s complaint must be grounded in an exclusive right of copyright (e.g., unlawful reproduction or distribution). Contractual rights, however, can be much broader.

[C]onsider a license in which the copyright owner grants a person the right to make one and only one copy of a book with the caveat that the licensee may not read the last ten pages. Obviously, a licensee who made a hundred copies of the book would be liable for copyright infringement because the copying would violate the Copyright Act’s prohibition on reproduction and would exceed the scope of the license. Alternatively, if the licensee made a single copy of the book, but read the last ten pages, the only cause of action would be for breach of contract, because reading a book does not violate any right protected by copyright law.

Here, ToU § 4 contains certain restrictions that are grounded in Blizzard’s exclusive rights of copyright and other restrictions that are not. For instance, ToU § 4(D) forbids creation of derivative works based on WoW without Blizzard’s consent. A player who violates this prohibition would exceed the scope of her license and violate one of Blizzard’s exclusive rights under the Copyright Act. In contrast, ToU § 4(C)(ii) prohibits a player’s disruption of another player’s game experience. A player might violate this prohibition while playing the game by harassing another player with unsolicited instant messages. Although this conduct may violate the contractual covenants with Blizzard, it would not violate any of Blizzard’s exclusive rights of copyright. The antibot provisions at issue in this case, ToU § 4(B)(ii) and (iii), are similarly covenants rather than conditions. A Glider user violates the covenants with Blizzard, but does not thereby commit copyright infringement because Glider does not infringe any of Blizzard’s exclusive rights. For instance, the use does not alter or copy WoW software.

Were we to hold otherwise, Blizzard—or any software copyright holder—could designate any disfavored conduct during software use as copyright infringement, by purporting to condition the license on the player’s abstention from the disfavored conduct. The rationale would be that because the conduct occurs while the player’s computer is copying the software code into RAM in order for it to run, the violation is copyright infringement. This would allow software copyright owners far greater rights than Congress has generally conferred on copyright owners.

We conclude that for a licensee’s violation of a contract to constitute copyright infringement, there must be a nexus between the condition and the licensor’s exclusive rights of copyright. Here, WoW players do not commit copyright infringement by using Glider in violation of the ToU. MDY is thus not liable for secondary copyright infringement, which requires the existence of direct copyright infringement.

208 F.3d 368 (2d Cir. 1999)

SOTOMAYOR, CIRCUIT JUDGE

Craig P. Nadel (Nadel) brought this action against Play-By-Play Toys & Novelties, Inc. (Play-By-Play) for breach of contract, quasi contract, and unfair competition …

Background

Nadel is a toy idea man. Toy companies regularly do business with independent inventors such as Nadel in order to develop and market new toy concepts as quickly as possible. To facilitate the exchange of ideas, the standard custom and practice in the toy industry calls for companies to treat the submission of an idea as confidential. If the company subsequently uses the disclosed idea, industry custom provides that the company shall compensate the inventor, unless, of course, the disclosed idea was already known to the company.

In 1996, Nadel developed the toy concept at issue in this case. He transplanted the “eccentric mechanism” found in several hanging Halloween toys then on the market [and] placed the mechanism inside of a plush toy monkey skin to develop the prototype for a new table-top monkey toy. This plush toy figure sat upright, emitted sound, and spun when placed on a flat surface.

In October 1996, Nadel met with Neil Wasserman, an executive at Play-By-Play who was responsible for the development of its plush toy line. According to Nadel, he showed his prototype monkey toy to Wasserman, who expressed interest in adapting the concept to a non-moving, plush Tazmanian Devil toy that Play-By-Play was already producing under license from Warner Bros. Nadel contends that, consistent with industry custom, any ideas that he disclosed to Wasserman during their October 1996 meeting were subject to an agreement by Play-By-Play to keep such ideas confidential and to compensate Nadel in the event of their use.

Nadel claims that he sent his prototype monkey toy to Wasserman as a sample and awaited the “Taz skin” and voice tape, which Wasserman allegedly said he would send, so that Nadel could make a sample spinning/laughing Tazmanian Devil toy for Play-By-Play. Wasserman never provided Nadel with the Taz skin and voice tape, however, and denies ever having received the prototype monkey toy from Nadel.

Notwithstanding Wasserman’s denial, his secretary, Melissa Rodriguez, testified that Nadel’s prototype monkey toy remained in Wasserman’s office for several months. According to Ms. Rodriguez, the monkey toy was usually kept in a glass cabinet behind Wasserman’s desk, but she remembered that on one occasion she had seen it on a table in Wasserman’s office. Despite Nadel’s multiple requests, Wasserman did not return Nadel’s prototype monkey toy until February 1997, after Play-by-Play introduced its “Tornado Taz” product at the New York Toy Fair.

The parties do not dispute that “Tornado Taz” has the same general characteristics as Nadel’s prototype monkey [toy]. Nadel claims that, in violation of their alleged agreement, Play-By-Play used his idea without paying him compensation. Play-By-Play contends, however, that it independently developed the Tornado Taz product concept and that Nadel is therefore not entitled to any compensation. Specifically, Play-By-Play maintains that, as early as June or July of 1996, two of its officers – Wasserman and Slattery – met in Hong Kong and began discussing ways to create a spinning or vibrating Tazmanian Devil, including the possible use of an eccentric mechanism. Furthermore, Play-By-Play claims that in late September or early October 1996, it commissioned an outside manufacturing agent – Barter Trading of Hong Kong – to begin developing Tornado Taz.

Play-By-Play also argues that, even if it did use Nadel’s idea to develop Tornado Taz, Nadel is not entitled to compensation because Nadel’s concept was unoriginal and non-novel to the toy industry in October 1996.

Discussion

Nadel’s Claims

On January 21, 1999, the district court granted Play-By-Play’s motion for summary judgment dismissing Nadel’s claims for breach of contract, quasi contract, and unfair competition. Interpreting New York law, the district court stated that “a party is not entitled to recover for theft of an idea unless the idea is novel or original.” Applying that principle to Nadel’s claims, the district court concluded that, even if the spinning toy concept were novel to Play-By-Play at the time Nadel made the disclosure to Wasserman in October 1996, Nadel’s claims must nonetheless fail for lack of novelty or originality because “numerous toys containing the characteristics of [Nadel’s] monkey were in existence prior to October 1996.”

Submission-of-Idea Cases under New York Law

Our analysis begins with the New York Court of Appeals’ most recent discussion of the law governing idea submission cases, Apfel v. Prudential-Bache Securities, Inc., 616 N.E.2d 1095 (1993). In Apfel, the Court of Appeals discussed the type of novelty an idea must have in order to sustain a contract-based or property-based claim for its uncompensated use. Specifically, Apfel clarified an important distinction between the requirement of “novelty to the buyer” for contract claims, on the one hand, and “originality” (or novelty generally) for misappropriation claims, on the other hand.

Under the facts of Apfel, the plaintiff disclosed his idea to the defendant pursuant to a confidentiality agreement and, subsequent to disclosure, entered into another agreement wherein the defendant agreed to pay a stipulated price for the idea’s use. The defendant used the idea but refused to pay plaintiff pursuant to the post-disclosure agreement on the asserted ground that “no contract existed between the parties because the sale agreement lacked consideration.” The defendant argued that an idea could not constitute legally sufficient consideration unless it was original or novel generally and that, because plaintiff’s idea was not original or novel generally (it had been in the public domain at the time of the post-disclosure agreement), the idea provided insufficient consideration to support the parties’ post-disclosure contract.

Figure 4.1 Tornado Taz.

In rejecting defendant’s argument, the Court of Appeals held that there was sufficient consideration to support plaintiff’s contract claim because the idea at issue had value to the defendant at the time the parties concluded their post-disclosure agreement. The Apfel court noted that “traditional principles of contract law” provide that parties “are free to make their bargain, even if the consideration exchanged is grossly unequal or of dubious value,” and that, so long as the “defendant received something of value” under the contract, the contract would not be void for lack of consideration.

The Apfel court explicitly rejected defendant’s contention that the court should carve out “an exception to traditional principles of contract law” for submission-of-idea cases by requiring that an idea must also be original or novel generally in order to constitute valid consideration. In essence, the defendant sought to impose a requirement that an idea be novel in absolute terms, as opposed to only the defendant buyer, in order to constitute valid consideration for the bargain. In rejecting this argument, the Apfel court clarified the standards for both contract-based and property-based claims in submission-of-idea cases. That analysis guides our decision here.

The Apfel court first noted that “novelty as an element of an idea seller’s claim” is a distinct element of proof with respect to both (1) “a claim based on a property theory” and (2) “a claim based on a contract theory.” The court then proceeded to discuss how the leading submission-of-idea case – Downey v. General Foods Corp., 286 N.E.2d 257 (1972) – treated novelty with respect to property-based and contract-based claims. First, the Apfel court explained that the plaintiff’s property-based claims for misappropriation were dismissed in Downey because “the elements of novelty and originality [were] absent,” i.e., the ideas were so common as to be unoriginal and known generally. Second, the Apfel court explained that the plaintiff’s contract claims in Downey had been dismissed on the separate ground that the “defendant possessed plaintiff’s ideas prior to plaintiff’s disclosure [and thus], the ideas could have no value to defendant and could not supply consideration for any agreement between the parties.”

By distinguishing between the two types of claims addressed in Downey and the different bases for rejecting each claim, the New York Court of Appeals clarified that the novelty requirement in submission-of-idea cases is different for misappropriation of property and breach of contract claims …

Thus, the Apfel court refused to read Downey and “similar decisions” as requiring originality or novelty generally in all cases involving disclosure of ideas. Rather, the Apfel court clarified that the longstanding requirement that an idea have originality or general novelty in order to support a misappropriation claim does not apply to contract claims. For contract-based claims in submission-of-idea cases, a showing of novelty to the buyer will supply sufficient consideration to support a contract.

Moreover, Apfel made clear that the “novelty to the buyer” standard is not limited to cases involving an express post-disclosure contract for payment based on an idea’s use. The Apfel court explicitly discussed the pre-disclosure contract scenario present in the instant case, where “the buyer and seller contract for disclosure of the idea with payment based on use, but no separate postdisclosure contract for the use of the idea has been made.” In such a scenario, a seller might, as Nadel did here, bring an action against a buyer who allegedly used his ideas without payment, claiming both misappropriation of property and breach of an express or implied-in-fact contract. The Apfel court recognized that these cases present courts with the difficult problem of determining “whether the idea the buyer was using was, in fact, the seller’s.” Specifically, the court noted that, with respect to a misappropriation of property claim, it is difficult to “prove that the buyer obtained the idea from [the seller] and nowhere else.” With respect to a breach of contract claim, the court noted that it would be inequitable to enforce a contract if “it turns out upon disclosure that the buyer already possessed the idea.” The court then concluded that, with respect to these cases, “[a] showing of novelty, at least novelty as to the buyer” should address these problems.

We note, moreover, that the “novelty to the buyer” standard comports with traditional principles of contract law. While an idea may be unoriginal or non-novel in a general sense, it may have substantial value to a particular buyer who is unaware of it and therefore willing to enter into contract to acquire and exploit it. In fact, the notion that an unoriginal idea may still be novel (and valuable) to a particular buyer is not itself a novel proposition … In contrast to contract-based claims, a misappropriation claim can only arise from the taking of an idea that is original or novel in absolute terms, because the law of property does not protect against the misappropriation or theft of that which is free and available to all …

Finally, although the legal requirements for contract-based claims and property-based claims are well-defined, we note that the determination of novelty in a given case is not always clear. The determination of whether an idea is original or novel depends upon several factors, including, inter alia, the idea’s specificity or generality (is it a generic concept or one of specific application?), its commonality (how many people know of this idea?), its uniqueness (how different is this idea from generally known ideas?), and its commercial availability (how widespread is the idea’s use in the industry?).

Moreover, in assessing the interrelationship between originality and novelty to the buyer, we note that in some cases an idea may be so unoriginal or lacking in novelty that its obviousness bespeaks widespread and public knowledge of the idea, and such knowledge is therefore imputed to the buyer. In such cases, a court may conclude, as a matter of law, that the idea lacks both the originality necessary to support a misappropriation claim and the novelty to the buyer necessary to support a contract claim.

In sum, we find that New York law in submission-of-idea cases is governed by the following principles: Contract-based claims require only a showing that the disclosed idea was novel to the buyer in order to find consideration. Such claims involve a fact-specific inquiry that focuses on the perspective of the particular buyer. By contrast, misappropriation claims require that the idea at issue be original and novel in absolute terms. This is so because unoriginal, known ideas have no value as property and the law does not protect against the use of that which is free and available to all. Finally, an idea may be so unoriginal or lacking in novelty generally that, as a matter of law, the buyer is deemed to have knowledge of the idea. In such cases, neither a property-based nor a contract-based claim for uncompensated use of the idea may lie.

In light of New York’s law governing submission-of-idea cases, we next consider whether Nadel’s toy idea was original or novel in absolute terms so as to support his misappropriation claim and whether his idea was novel as to Play-By-Play so as to support his contract claims.

Nadel’s Misappropriation Claim

[In] this case, the district court did not decide whether Nadel’s idea – a plush toy that sits upright, emits sounds, and spins on a flat surface by means of an internal eccentric motor – was inherently lacking in originality. We therefore remand this issue to the district court to determine whether Nadel’s idea exhibited “genuine novelty or invention” or whether it was “a merely clever or useful adaptation of existing knowledge.”

Moreover, insofar as the district court found that Nadel’s idea lacked originality and novelty generally because similar toys were commercially available prior to October 1996, we believe that there remains a genuine issue of material fact on this point. While the record contains testimony of Play-By-Play’s toy expert – Bert Reiner – in support of the finding that Nadel’s product concept was already used in more than a dozen different plush toys prior to October 1996, the district court cited the “Giggle Bunny” toy as the only such example. Nadel disputes Reiner’s contention and claims, furthermore, that the district court erroneously relied on an undated video depiction of the Giggle Bunny toy to conclude that upright, sound-emitting, spinning plush toys were commercially available prior to October 1996.

With respect to the Giggle Bunny evidence, we agree with Nadel that the Giggle Bunny model depicted in the undated video exhibit is physically different from the earlier Giggle Bunny model known to be commercially available in 1994. Drawing all factual inferences in Nadel’s favor, we cannot conclude as a matter of law that the upright, sound-emitting, spinning plush Giggle Bunny shown in the video exhibit was commercially available prior to October 1996, and we certainly cannot conclude based on this one exhibit that similar toys were in the public domain at that time.

Moreover, although we find highly probative Mr. Reiner’s testimony that numerous toys with the same general characteristics of Nadel’s toy idea were commercially available prior to October 1996, his testimony and related evidence are too ambiguous and incomplete to support a finding of unoriginality as a matter of law. Mr. Reiner’s testimony fails to specify precisely which (if any) of the enumerated plush toys were designed to (1) sit upright, (2) on a flat surface, (3) emit sounds, and (4) spin or rotate (rather than simply vibrate like “Tickle Me Elmo,” for example). Without this information, a reasonable finder of fact could discount Mr. Reiner’s testimony as vague and inconclusive.

On remand, the district court is free to consider whether further discovery is warranted to determine whether Nadel’s product concept was inherently original or whether it was novel to the industry prior to October 1996. A finding of unoriginality or lack of general novelty would, of course, preclude Nadel from bringing a misappropriation claim against Play-By-Play. Moreover, in evaluating the originality or general novelty of Nadel’s idea in connection with his misappropriation claim, the district may consider whether the idea is so unoriginal that Play-By-Play should, as a matter of law, be deemed to have already possessed the idea, and dismiss Nadel’s contract claims on that ground.

Nadel’s Contract Claims

Mindful that, under New York law, a finding of novelty as to Play-By-Play will provide sufficient consideration to support Nadel’s contract claims. [Reading the] record in a light most favorable to Nadel, we conclude that there exists a genuine issue of material fact as to whether Nadel’s idea was, at the time he disclosed it to Wasserman in early October 1996, novel to Play-By-Play. Notably, the timing of Play-By-Play’s development and release of Tornado Taz in relation to Nadel’s October 1996 disclosure is, taken alone, highly probative. Moreover, although custom in the toy industry provides that a company shall promptly return all samples if it already possesses (or does not want to use) a disclosed idea, Play-By-Play in this case failed to return Nadel’s prototype monkey toy for several months, despite Nadel’s multiple requests for its return. According to Wasserman’s secretary, Melissa Rodriguez, Nadel’s sample was not returned until after the unveiling of “Tornado Taz” at the New York Toy Fair in February 1997. Ms. Rodriguez testified that from October 1996 through February 1997, Nadel’s sample was usually kept in a glass cabinet behind Wasserman’s desk, and on one occasion, she remembered seeing it on a table in Wasserman’s office. These facts give rise to the reasonable inference that Play-By-Play may have used Nadel’s prototype as a model for the development of Tornado Taz.

None of the evidence adduced by Play-By-Play compels a finding to the contrary on summary judgment. With regard to the discussions that Play-By-Play purportedly had in June or July of 1996 about possible ways to create a vibrating or spinning Tazmanian Devil toy, those conversations only lasted, according to Mr. Slattery, “a matter of five minutes.” Play-By-Play may have “discussed the concept,” as Mr. Slattery testified, but the record provides no evidence suggesting that, in June or July of 1996, Play-By-Play understood exactly how it could apply eccentric motor technology to make its Tazmanian Devil toy spin rather than, say, vibrate like Tickle Me Elmo. Similarly, although Play-By-Play asserts that it commissioned an outside manufacturing agent – Barter Trading of Hong Kong – to begin developing Tornado Taz in late September or early October of 1996, Play-By-Play admits that it can only “guess” the exact date. Play-By-Play cannot confirm that its commission of Barter Trading pre-dated Nadel’s alleged disclosure to Wasserman on or about October 9, 1996. Nor has Play-By-Play produced any documents, technical or otherwise, relating to its purported business venture with Barter Trading or its independent development of a spinning Tornado Taz prior to October 1996. Based on this evidence, a jury could reasonably infer that Play-By-Play actually contacted Barter Trading, if at all, after learning of Nadel’s product concept, and that Play-By-Play’s development of Tornado Taz is attributable to Nadel’s disclosure.

We therefore conclude that there exists a genuine issue of material fact as to whether Nadel’s idea was, at the time he disclosed it to Wasserman in early October 1996, novel to Play-By-Play. As to whether the other elements necessary to find a valid express or implied-in-fact contract are present here, e.g., mutual assent, legal capacity, legal subject matter, we leave that determination to the district court to address, if necessary, on remand.

Conclusion

For the foregoing reasons, we affirm that part of the district court’s judgment dismissing Play-By-Play’s counterclaims. We vacate that part of the district court’s judgment granting Play-By-Play’s motion for summary judgment and dismissing Nadel’s complaint and remand for further proceedings consistent with this opinion.

256 F.3d 446 (6th Cir. 2001)

GRAHAM, DISTRICT JUDGE

This case raises a question of first impression in this circuit regarding the extent to which the Copyright Act preempts state law claims based on breach of an implied-in-fact contract. Plaintiffs-Appellants Wrench LLC, Joseph Shields, and Thomas Rinks brought this diversity action against Defendant-Appellee Taco Bell Corporation (“Taco Bell”), claiming breach of implied contract and various torts related to Taco Bell’s alleged use of appellants’ ideas.

Background

Appellants Thomas Rinks and Joseph Shields are creators of the “Psycho Chihuahua” cartoon character which they promote, market, and license through their wholly-owned Michigan limited liability company, Wrench LLC. The parties have described Psycho Chihuahua as a clever, feisty dog with an attitude; a self-confident, edgy, cool dog who knows what he wants and will not back down.

In June 1996, Shields and Rinks attended a licensing trade show in New York City, where they were approached by two Taco Bell employees, Rudy Pollak, a vice president, and Ed Alfaro, a creative services manager. Pollak and Alfaro expressed interest in the Psycho Chihuahua character, which they thought would appeal to Taco Bell’s core consumers, males aged eighteen to twenty-four. Pollak and Alfaro obtained some Psycho Chihuahua materials to take with them back to Taco Bell’s headquarters in California.

Upon returning to California, Alfaro began promoting the Psycho Chihuahua idea within Taco Bell. [After] several meetings with non-marketing executives, Alfaro showed the Psycho Chihuahua materials to Vada Hill, Taco Bell’s vice president of brand management, as well as to Taco Bell’s then-outside advertising agency, Bozell Worldwide. Alfaro also tested the Psycho Chihuahua marketing concept with focus groups to gauge consumer reaction to the designs submitted by Rinks and Shields.

During this time period, Rinks told Alfaro that instead of using the cartoon version of Psycho Chihuahua in its television advertisements, Taco Bell should use a live dog, manipulated by computer graphic imaging, with the personality of Psycho Chihuahua and a love for Taco Bell food. Rinks and Alfaro also discussed what it was going to cost for Taco Bell to use appellants’ character, and although no specific numbers were mentioned, Alfaro understood that if Taco Bell used the Psycho Chihuahua concept, it would have to pay appellants.

In September 1996, Rinks and Shields hired Strategy Licensing (“Strategy”), a licensing agent, to represent Wrench in its dealings with Taco Bell. [On] November 18, 1996, Strategy representatives forwarded a licensing proposal to Alfaro. [Taco Bell] did not accept this proposal, although it did not explicitly reject it or indicate that it was ceasing further discussions with Wrench.

On December 5, 1996, Alfaro met with Hill, who had been promoted to the position of chief marketing officer, and others, to present various licensing ideas, including Psycho Chihuahua. On February 6, 1997, Alfaro again met with appellants and representatives of Strategy to review and finalize a formal presentation featuring Psycho Chihuahua that was to be given to Taco Bell’s marketing department in early March 1997. At this meeting, appellants exhibited examples of possible Psycho Chihuahua promotional materials and also orally presented specific ideas for television commercials featuring a live dog manipulated by computer graphics imaging. These ideas included a commercial in which a male dog passed up a female dog in order to get to Taco Bell food.

Alfaro was unable to arrange a meeting with the marketing department during March 1997 to present the Psycho Chihuahua materials. On April 4, 1997, however, Strategy made a formal presentation to Alfaro and his group using samples of uniform designs, T-shirts, food wrappers, posters, and cup designs based on the ideas discussed during the February 6, 1997, meeting. Alfaro and his group were impressed with Strategy’s presentation.

On March 18, 1997, Taco Bell hired a new advertising agency, TBWA Chiat/Day (“Chiat/Day”). Taco Bell advised Chiat/Day that it wanted a campaign ready to launch by July 1997 that would reconnect Taco Bell with its core group of consumers. Chuck Bennett and Clay Williams were designated as the creative directors of Taco Bell’s account.

On June 2, 1997, Bennett and Williams proposed a commercial to Taco Bell in which a male Chihuahua would pass up a female Chihuahua to get to a person seated on a bench eating Taco Bell food. Bennett and Williams say that they conceived of the idea for this commercial one day as they were eating Mexican food at a sidewalk cafe and saw a Chihuahua trotting down the street, with no master or human intervention, “on a mission.” Bennett and Williams contend that this image caused them jointly to conceive of the idea of using a Chihuahua as a way of personifying the intense desire for Taco Bell food. Williams subsequently wrote an advertisement script using a Chihuahua, which Taco Bell decided to produce as a television commercial.

When, in June 1997, Alfaro learned that Chiat/Day was planning to use a Chihuahua in a commercial, he contacted Hill again about the possibility of using Psycho Chihuahua. Hill passed Alfaro on to Chris Miller, a Taco Bell advertising manager and the liaison between Taco Bell’s marketing department and Chiat/Day. On June 27, 1997, Alfaro gave Psycho Chihuahua materials to Miller along with a note suggesting that Taco Bell consider using Psycho Chihuahua as an icon and as a character in its advertising. Miller sent these materials to Chiat/Day, which received them sometime between June 28 and July 26.

Taco Bell aired its first Chihuahua commercial in the northeastern United States in July 1997, and received a very positive consumer reaction [and] launched a nationwide advertising campaign featuring Chihuahua commercials in late December 1997.

Appellants brought suit in January 1998, alleging breach of implied-in-fact contract as well as various tort and statutory claims under Michigan and California law. Appellee filed a motion to dismiss, which the district court granted in part and denied in part …

Discussion

Appellants assert that the district court erred in determining that novelty was required to sustain their contract claim. The district court found that Michigan law required appellants to prove the originality or novelty of their ideas in order to maintain their claims, concluding that appellants’ ideas were not novel because they “merely combined themes and executions that had been used many times in a variety of commercials for different products.” The district court thus granted summary judgment in favor of appellee on this alternative basis. We conclude that the district court erred in finding that Michigan law requires novelty in a contract-based claim.

Figure 4.2 “Psycho Chihuahua” and the Taco Bell chihuahua

The district court seems to have assumed, without further discussion, that if the novelty requirement applied to appellants’ conversion and misappropriation claims, it would also apply to appellants’ implied-in-fact contract claim.

Conversion is based on property law principles. Courts have usually refused to protect ideas on a property theory, but when they have, it has generally been subject to the requirements of novelty and concreteness … Most courts apply a different rule to contract claims, modifying the requirement of novelty in some circumstances and dispensing with it altogether in others. The reason for the distinction is this: property rights are rights against the world and courts are generally unwilling to accord that kind of protection to ideas; contract rights on the other hand are limited to the contracting parties and it should be for them to decide if an idea is sufficiently valuable to be purchased.

Nevertheless, many courts do require novelty in an action based upon an implied contract theory on the ground that there can be no consideration for an implied promise to pay if the idea does not constitute “property.”

Sarver v. Detroit Edison Co., 51 N.W.2d 759 (Mich. App. 1997) tells us where Michigan likely stands on this issue. In Sarver, plaintiff brought an action against her employer seeking damages for conversion and breach of contract based on the allegation that defendant appropriated an idea which she submitted through an employee suggestion program. The court rejected plaintiff’s conversion cause of action finding that plaintiff’s idea “was neither novel nor unique” and “did not constitute property subject to a conversion cause of action.” The Sarver court went on to hold, however, that plaintiff had stated a breach of contract claim, stating “to the extent that plaintiff seeks compensation for formulating, drafting, and submitting her idea pursuant to defendant’s employee suggestion program, rather than for the idea itself, she has stated a breach of contract claim.” The Sarver court did not impose a requirement of novelty on plaintiff’s contract claim.

[The] Sarver court quoted with approval the decision of the Supreme Court of Alaska in Reeves v. Alyeska Pipeline Service Co. In Reeves, plaintiff had proposed the idea of creating a visitor center at a location where visitors could view the Alaska oil pipeline. He brought an action alleging tort and contract claims against the pipeline servicing company, which subsequently established such a visitor center. The Supreme Court of Alaska held that the element of novelty was not required for plaintiff’s implied contract claim:

Reeves, 926 P.2d at 1130, 1141–1142. Since the Michigan court in Sarver quoted Reeves on the requirement of novelty in an action based on conversion and went on to hold that the plaintiff’s contract claim survived notwithstanding lack of novelty, we conclude that Michigan follows Reeves and the California cases which dispense with the requirement of novelty in actions based on implied-in-fact contracts …

While we conclude that Michigan would not impose a requirement of novelty in an action based upon a contract implied in fact, it does not appear that the result of this case would change even if Michigan were to follow the New York view, which requires only novelty to the defendant. Here, Taco Bell does not claim that it was aware of appellants’ ideas prior to disclosure. Accordingly, we find that the district court erred in granting summary judgment to the appellee on the ground that appellants failed to show that their ideas were novel or original.

The judgment of the district court is REVERSED.

74 F.3d 768 (7th Cir. 1996)

RIPPLE, CIRCUIT JUDGE

Architect Paul D. Shaver appeals the district court’s summary judgment ruling that there was no infringement of Mr. Shaver’s copyrighted schematic design drawings. The court concluded that Mr. Shaver had granted an implied nonexclusive license to utilize his drawings in the completion of Gary Regional Airport’s air cargo building. For the reasons that follow, we [affirm].

Background

In July 1992, two construction companies formed a joint venture. I.A.E., Inc. and its president Ramamurty Talluri joined with BEMI Construction and its president William Brewer to become the I.A.E./BEMI Joint Venture (“Joint Venture”). On December 21, 1992, the Joint Venture entered into a contract with the Gary Regional Airport Authority (“Airport”) to design and to construct an air cargo/hangar building. Under the contract, Joint Venture was to provide all of the civil, structural, mechanical and electrical engineering services and architectural design services needed to construct the air cargo building.

In furtherance of that goal, Joint Venture subcontracted with Paul D. Shaver, an architect with extensive experience in designing airport facilities, to prepare the schematic design drawings for the airport building. The parties agree that there are four phases to the architectural design of a building: schematic design, preliminary design, final design and construction supervision. The schematic design documents are the product of the first phase of designing a building. They outline the scope of the project and are the basis of the owner’s approval for the building design. Schematic design documents are often used as a reference base for further design development.

Mr. Shaver’s letter of January 14, 1993, to Mr. Talluri, which constitutes the written contract between the architect and Joint Venture, contained Mr. Shaver’s agreement to prepare the schematic design drawings for the Airport building: “With the assistance of your office and the [Airport] staff, agreed design parameters can be established initially to permit the Project to proceed in a normal development manner.” The contract price for his services was $10,000 plus reimbursable expenses, less deductions for the participation of I.A.E.’s staff. The contract specifically set forth the services Mr. Shaver intended to perform:

Mr. Shaver believed that, once a design had been approved, he would execute further written contracts for the remaining phases of the architectural work.

After Mr. Shaver attended several meetings with the Airport, he prepared his schematic design drawings of the proposed Airport building. He then delivered copies of his schematic drawings to the Airport, Joint Venture, and other parties involved in the Project. These drawings were submitted with a notice of copyright. The copyrights of those drawings, both as technical drawings and as architectural works, were effective June 2, 1993. Their validity has not been challenged. Mr. Shaver and Mr. Talluri later presented to the Airport the completed schematic designs. On February 22, 1993, the Airport approved one of them. Mr. Shaver was paid $5,000 of his fee on that date.

On March 1, 1993, Joint Venture retained H. Seay Cantrell & Associates (“Cantrell”) to perform the remaining architectural work for the air cargo building. When Mr. Shaver realized that he and his firm were no longer involved in the Project, he took two actions. On March 3, 1993, Mr. Shaver wrote to the Airport’s Executive Director, Levelle Gatewood, acknowledging that he and his staff were, “under the circumstances, no longer in a position to participate or contribute to the development of the east Air Cargo Building Project.” The letter, with enclosed copies of Mr. Shaver’s schematic design drawings, also stated:

Mr. Shaver’s second act, one week later, was to seek collection of the amount that Joint Venture still owed him for the services he had rendered and to notify Joint Venture that he intended to enforce his copyrights if necessary. Mr. Shaver, by his attorney, claimed that he was owed an additional $5,000 fee, plus his out-of-pocket expenses ($887.29), plus (a new claim) a $7,000 payment for the purported “assignment” of his copyright on the schematic design documents. The attorney’s letter of March 10, 1993 offered Mr. Talluri a settlement of Mr. Shaver’s claim against Joint Venture for $12,887.29. Mr. Talluri agreed to pay the contract costs, $5,887.29, as final payment. According to Mr. Talluri, Mr. Shaver “had never previously raised the issue of copyright, copyright infringement or his alleged entitlement to moneys, in addition to the contract amount, for ‘assignment’ of his copyright on the schematic design drawings.”

Once it was clear that Mr. Shaver and Joint Venture would not reach an accord concerning any amount still owing to Mr. Shaver under the contract, on August 5, 1993, I.A.E. and Mr. Talluri filed this action. They sought a declaratory judgment that they did not infringe any copyrights owned by Mr. Shaver and that they had a right to use Mr. Shaver’s drawings; they also sought damages. Mr. Shaver counterclaimed against I.A.E. and Mr. Talluri, seeking damages for copyright infringement and breach of contract. He also filed third-party complaints against Cantrell, BEMI and its president Mr. Brewer, and the Airport, alleging that all the named defendants had infringed his copyrights in the schematic design documents or that they had conspired to do so by copying and using elements of his design in the final bid documents for the Airport Project. Joint Venture and the Airport responded that they had used Mr. Shaver’s drawings only as Mr. Shaver had intended their use, to build the Airport’s air cargo building. All parties then filed cross-motions for summary judgment.

The district court granted summary judgment on the ground that there was no copyright infringement.

Proof of copyright infringement requires two showings: first, that the claimant has a validly owned copyright, and second, that the “constituent elements of the work that are original” were copied. The first element is not in contention; there is no challenge to the validity of Mr. Shaver’s copyrights. It is the second prong of infringement that is at issue; Mr. Shaver asserted that his work was copied. The district court determined, however, that the use of his works was permissible because Mr. Shaver had granted an implied nonexclusive license.

Figure 4.3 I.A.E. v. Shaver involved an architect’s plans for an air cargo building at Gary Regional Airport (now Gary/Chicago International Airport (GYY)).

A copyright owner may transfer to another person any of the exclusive rights the owner has in the copyright; however, such a transfer must be made in writing. 17 U.S.C. § 204(a). [The] “transfer of copyright ownership” is defined, in the Copyright Act, as an exclusive license or some other instrument of conveyance. The definition expressly excludes a nonexclusive license. Therefore, even though section 204(a) of the Copyright Act invalidates any transfer of copyright ownership that is not in writing, section 101 explicitly removes a nonexclusive license from the section 204(a) writing requirement. We turn, therefore, to the differences between exclusive and nonexclusive licenses.

In an exclusive license, the copyright holder permits the licensee to use the protected material for a specific use and further promises that the same permission will not be given to others. The licensee violates the copyright by exceeding the scope of this license. The writing requirement serves the goal of predictability and certainty of copyright ownership.

By contrast, in the case of an implied nonexclusive license, the licensor-creator of the work, by granting an implied nonexclusive license, does not transfer ownership of the copyright to the licensee. The copyright owner simply permits the use of a copyrighted work in a particular manner. In contrast to an exclusive license, a “nonexclusive license may be granted orally, or may even be implied from conduct.” … In fact, consent given in the form of mere permission or lack of objection is also equivalent to a nonexclusive license and is not required to be in writing. Although a person holding a nonexclusive license has no standing to sue for copyright infringement, the existence of a license, exclusive or nonexclusive, creates an affirmative defense to a claim of copyright infringement. The concept of an implied nonexclusive license has been recognized [by] the courts, including this one, which universally have recognized that a nonexclusive license may be implied from conduct. Indeed, implied licenses are like implied contracts, which are well recognized in the field of architecture. As the district court noted, the Ninth Circuit, in [Effects Associates, Inc. v. Cohen, 908 F.2d 555 (9th Cir. 1990)], held that an implied nonexclusive license has been granted when (1) a person (the licensee) requests the creation of a work, (2) the creator (the licensor) makes that particular work and delivers it to the licensee who requested it, and (3) the licensor intends that the licensee-requestor copy and distribute his work.

In light of these principles, we now turn to the record before us. In our analysis, we find helpful, as did the district court, the opinion of our colleagues in the Ninth Circuit in Effects. In the case before us, [Shaver] maintains that his expectation was that he would be the architect who would be preparing the final drawings, presumably from his own preliminary drawings, to be used for the construction. We therefore must determine whether the record will support a determination that such an interpretation had any objective foundation.

Effects suggests several objective factors to guide the judicial inquiry as to whether an implied license exists: the language of the copyright registration certificate, the letter agreement, and deposition testimony; and the delivery of the copyrighted material without warning that its further use would constitute copyright infringement. When we apply these factors to the circumstances before us, we must conclude that there is no genuine issue of triable fact and that the district court concluded correctly as a matter of law that Mr. Shaver granted an implied nonexclusive license to Joint Venture.

Figure 4.4 Effects Associates involved the development of a gruesome special effect for the horror film The Stuff.

We note first that Mr. Shaver’s certificates of registration, entitling the drawings “East Air Cargo Building, Gary Regional Airport, Indiana: Not Yet Constructed,” state that copyrighted designs are to be used for the “Airport Facility.” We now turn to the language of the contract itself. The contract in this case was a letter written by Mr. Shaver. This letter, apparently in confirmation of an earlier telephone conversation, demonstrates that the relationship of independent contractor for the purpose of creating the preliminary drawings for the Airport Project existed between Mr. Shaver and Joint Venture. It defines his role in the Airport Project and, specifically, his “understanding of the scope of work”: preparation of the preliminary schematic design drawings … Mr. Shaver stated that his drawings are the type “customarily prepared to describe the scope of the project and also for general reference.” Mr. Shaver also quoted the consideration for his work, $10,000. Mr. Shaver’s statement that “agreed design parameters can be established initially to permit the Project to proceed in a normal development manner,” certainly suggests that he considered his contribution to be in furtherance of the entire Project. In short, his letter was clear, to-the-point, and unambiguous. No other work is listed; no expectation of a further role in the Project is mentioned in the contract. Therefore, although Mr. Shaver tells us that he anticipated he would be the architect to take the Project to completion, nothing in his contract gives the slightest indication of that belief. Although Indiana law allows contractual terms to be implied from the intent and action of the parties, the “intent relevant in contract matters is not the parties’ subjective intent but their outward manifestation of it.” Here the contract is clear.

The plain language of the contract is supported by common sense. As we have already pointed out, Mr. Shaver created a work – preliminary architectural drawings – and handed them over to the Joint Venture for use on the Airport Project. For that work the architect received $10,000 compensation. As the Ninth Circuit concluded in Effects:

To hold that Effects did not at the same time convey a license to use the footage in “The Stuff” would mean that plaintiff’s contribution to the film was “of minimal value,” a conclusion that can’t be squared with the fact that Cohen paid Effects almost $56,000 for this footage. Accordingly, we conclude that Effects impliedly granted nonexclusive licenses.

908 F.2d 555, 558. This understanding is reflected throughout the parties’ depositions and affidavits. Joint Venture clearly expected to use Mr. Shaver’s drawings for the Project. Mr. Talluri expected that Mr. Shaver’s schematic design drawings were to be used in the Airport Project for which they were intended and stated that the drawings were used only in that manner, despite the fact that Mr. Shaver was not the continuing architect.

Not only the language of the copyright registration certificates, the letter contract, and the depositions and common sense support the conclusion of the district court that the defendants had an implied nonexclusive license to use Mr. Shaver’s drawings in the Airport Project; Mr. Shaver’s actions and subsequent writing also unequivocally support that conclusion. Mr. Shaver delivered his copyrighted designs without any warning that their further use would constitute copyright infringement. In his March 3, 1993 letter, Mr. Shaver acknowledged that he was no longer a contributor to the Project’s development, but that he expected “that our ideas and knowledge exhibited in our work will assist the Airport in realizing a credible and flexible use Cargo/Hangar facility.” This statement, accompanied by the delivery of copies of his drawings, certainly constitutes a release of those documents to the Airport for its Project and clearly validates a determination that all the objective factors support the existence of an implied license to use Mr. Shaver’s drawings in the construction of the air cargo building.

On this record, we cannot conclude that Mr. Shaver has raised a genuine issue of material fact on the issue of the parties’ intent. His contention that he never intended to grant a license for the use of his drawings past the drafting stage unless he was the continuing architect is simply not supported by the record.

Conclusion

Mr. Shaver created an implied nonexclusive license to use his schematic design drawings in the Airport Project. Accordingly, there was no infringement of Mr. Shaver’s copyrighted works. We conclude that, because there are no genuine issues of material fact before us, we must affirm the judgment of the district court.

67 F.3d 917 (Fed. Cir. 1995)

RADER, CIRCUIT JUDGE

Duncan McCoy, Alex Dorsett, and Alex-Duncan Shrimp Chef, Inc. (McCoy) sued Mitsuboshi Cutlery, Inc. (Mitsuboshi) and Admiral Craft Equipment Corp. (Admiral Craft) for infringing McCoy’s intellectual property rights and committing business torts. McCoy’s sales organization had hired Mitsuboshi to make and supply shrimp knives covered by McCoy’s patent and trademarks. When Mitsuboshi produced the knives, McCoy refused to pay for them. Mitsuboshi resold the knives to Admiral Craft. McCoy sought damages from Mitsuboshi and Admiral Craft for selling the knives to third parties. Admiral Craft settled with McCoy before trial.

Background

McCoy owns U.S. Patent No. 4,759,126 on a shrimp knife that peels, deveins, and butterflies in one motion. McCoy arranged for Mitsuboshi, a Japanese knife manufacturer, to produce shrimp knives embodying the patented invention. At McCoy’s request, Mitsuboshi stamped the knives with McCoy’s registered U.S. Trademarks Nos. 1,687,589 and 1,702,878. From 1988 to 1990, Mitsuboshi manufactured and sold large quantities of these knives to McCoy.

In 1991, McCoy’s separate marketing organization, A.T.D. Marketing, Inc. (ATD), ordered 150,000 of the knives from Mitsuboshi. Mitsuboshi produced the knives. When Mitsuboshi timely offered the knives, ATD refused to accept or pay for them. ATD’s refusal left Mitsuboshi holding the 150,000 knives in its warehouse in Japan. The record contains no suggestion that the knives were defective.

McCoy acknowledged its responsibility for ATD’s refusal to pay. McCoy, however, accepted and paid for only about 20,000 of the 150,000 knives ordered. McCoy refused to pay for the other 130,000 knives. On the basis of these facts, the jury found that McCoy breached its contract with Mitsuboshi. McCoy did not appeal this jury verdict.

Following McCoy’s partial payment, Mitsuboshi continued to negotiate for payment and delivery of the remaining 130,000 knives. McCoy, however, remained silent, unable to pay for them. In the face of this silence, Mitsuboshi repeatedly notified McCoy of its intent to resell the knives to mitigate damages. At length, Mitsuboshi sold 6,456 of the knives to Admiral Craft, a mail-order wholesaler of restaurant supplies. Admiral Craft sold 958 of the knives in the United States to restaurants and supply houses in 1993 through its mail catalog.

McCoy sued Mitsuboshi and Admiral Craft for patent and trademark infringement, unfair competition in violation of both federal and Texas law, and several Texas state law torts. Admiral Craft settled, but Mitsuboshi persevered, counterclaiming for breach of contract. At the close of evidence, Mitsuboshi moved for judgment as a matter of law that it was entitled to resell the knives. The trial court denied Mitsuboshi’s motion. The jury found against Mitsuboshi on the infringement, unfair competition, and tortious interference counts, and for Mitsuboshi on the breach of contract count. Mitsuboshi then renewed its motion for judgment as a matter of law. The trial court again denied the motion. Mitsuboshi appeals.

Discussion

The jury found, and McCoy does not contest, that McCoy breached its contract with Mitsuboshi. This appeal thus raises the purely legal question of the effect of McCoy’s breach on his intellectual property rights in the knives. This court confronts this question for the first time.

A patent confers on its holder the right to exclude others from making, using, or selling what is described in its claims. This court has recognized that these intellectual property rights, like any other property rights, are subject to the contractual obligations of their owner and the applicable law:

Th[e] right to exclude may be waived in whole or in part. The conditions of such waiver are subject to patent, contract, antitrust, and any other applicable law, as well as equitable considerations such as are reflected in the law of patent misuse. As in other areas of commerce, private parties may contract as they choose, provided that no law is violated thereby.

Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 703 (Fed.Cir.1992). Thus, a patent or trademark owner may contract to confer a license on another party. In most instances under contract law, a patent or trademark owner intentionally creates an express license. A licensee, of course, has an affirmative defense to a claim of patent infringement.

In some circumstances, however, the entire course of conduct between a patent or trademark owner and an accused infringer may create an implied license. The Supreme Court stated:

Any language used by the owner of the patent or any conduct on his part exhibited to another from which that other may properly infer that the owner consents to his use of the patent in making or using it, or selling it, upon which the other acts, constitutes a license and a defense to an action …

De Forest Radio Tel. Co. v. United States, 273 U.S. 236, 241 (1927). When warranted by such a course of conduct, the law implies a license.

Figure 4.6 The patented shrimp knife and deveiner at issue in McCoy.

Whether express or implied, a license is a contract “governed by ordinary principles of state contract law.” Moreover the law may imply licenses “to make effective the contracts of the patentee.” An implied license, however, must not exceed the limits necessary to make the contract effective.

To enforce the contracts of the patentee, the law may imply a license where a patent holder sells or authorizes the sale of a patented product – a voluntary sale. Thus, “an authorized sale of a patented product places that product beyond the reach of the patent.” Under this implied license, a patent holder receives a reward for inventive work in the first sale of the patented product. As the Supreme Court stated:

Patentees … are entitled to but one royalty for the patented machine, and consequently when a patentee has himself constructed the machine and sold it, or authorized another to construct and sell it, or to construct and use and operate it, and the consideration has been paid to him for the right, he has then to that extent parted with his monopoly, and ceased to have any interest whatever in the machine so sold or so authorized to be constructed and operated.

Bloomer v. Millinger, 68 U.S. (1 Wall.) 340, 350 (1863).

In some cases, the law implies a license where a patent holder does not authorize the sale of a patented product – an involuntary sale. See, e.g., Wilder v. Kent, 15 F. 217, 219 (C.C.W.D.Pa.1883). For example, in Wilder, the patent holder sued an individual for infringement who purchased a machine at a sheriff’s sale. The court dismissed the complaint finding the purchaser had acquired the right to use the patented machine through the purchase at the sheriff’s sale. The court reasoned: “To deny to the sheriff’s vendee the right to use such machine would in effect prevent its sale upon an execution at law … and practically withdraw it from the reach of the owner’s execution creditors.” While appreciating the unique nature of patent rights, the court noted that “a patented machine is susceptible of manual seizure, and the unrestricted sale thereof does not involve the transfer of any interest in the patent.”

Justice Story [in Sawin v. Guild, 21 F.Cas. 554, 554–55 (C.C.D.Mass.1813)] reasoned that statutes must be construed where possible to avoid introducing “public mischiefs, or manifest incongruities.” Justice Story felt a great public mischief would result if courts construed the patent laws to permit an action against a sheriff for selling a patented product at a sheriff’s sale.

More recently, in an opinion authored by Judge Friendly, the United States Court of Appeals for the Second Circuit expressly recognized and extended this implied license doctrine to the sale of products by an aggrieved seller to remedy a buyer’s breach. Platt & Munk Co. v. Republic Graphics, Inc., 315 F.2d 847 (2d Cir.1963). Platt & Munk owned copyrights on educational toys and contracted with Republic to supply them. After Republic began delivery, Platt & Munk alleged various defects and refused to pay for the balance of the toys. Republic then informed Platt & Munk of its intent to resell the toys to recover its production costs. Platt & Munk responded by seeking an injunction prohibiting Republic from reselling the toys without Platt & Munk’s consent. The trial court granted a preliminary injunction without addressing whether the toys were actually defective or whether Platt & Munk had the right to refuse payment. Republic filed an interlocutory appeal.

The Second Circuit remanded to the trial court to determine whether Platt & Munk justifiably refused to pay for the toys. If not, it instructed the trial court to lift the injunction. In other words, if Platt & Munk breached the contract, Republic had a right to resell the toys notwithstanding any copyright protection. The Second Circuit based its holding on New York contract law, which provided a seller of goods the right to mitigate damages for contract breaches. Where Platt & Munk breached, the Second Circuit found that Platt & Munk’s copyrights had no effect on Republic’s state law right to resell:

We see no reason why the copyrighted character of the goods should preclude [resale] when – and the qualification is vital – the person for whom the goods were being made unjustifiably refuses to pay the price.

Platt, 315 F.2d at 855.

This ruling extended the implied license doctrine beyond sales under judicial decree to sales under self-help provisions in commercial law. Together, [these cases] demonstrate that the law may create an implied license to enforce the contract obligations of the patent holder and recognize legal rights of aggrieved parties … Absent an implied license in either case, patent holders could frustrate otherwise available commercial remedies.

Here, McCoy and Mitsuboshi had a long-standing business relationship whereby Mitsuboshi manufactured McCoy’s patented knives. In 1991, McCoy placed a purchase order for 150,000 knives with Mitsuboshi. Mitsuboshi, in turn, accepted the order and performed its obligations under that agreement. When it tendered the knives to McCoy, McCoy breached the contract by failing to pay. At that point, rather than immediately act, Mitsuboshi continued to negotiate with McCoy in an effort to secure payment and deliver the knives. After repeated failed attempts, Mitsuboshi sold some of the knives to an American company.

The applicable state contract law in this case is Texas’s version of the Uniform Commercial Code. Because this case involves the sale of goods, the Texas UCC entitles the seller to resell the goods upon the buyer’s wrongful refusal to pay. Consequently, under Texas contract law, when McCoy breached the contract, Mitsuboshi had a right to resell the knives to recoup its losses without McCoy’s consent.

As in Platt, an implied license properly enforces McCoy’s contractual promise to pay for the knives, reflects Mitsuboshi’s commercial efforts to resolve the matter, and recognizes Mitsuboshi’s rights to mitigate under the Texas UCC. This court, like our sister circuit in Platt, sees no reason why the owner of intellectual property rights deserves to evade application of the ordinary contract remedy of resale for an unjustified refusal to pay.

This implied license does not offend the protection afforded patent and trademark rights by federal law. Instead, licenses, like other federal property and contract rights, conform to the applicable state laws. As this court observed in Power Lift, the Supreme Court has held that federal patent law does not preempt enforcement of contracts under state law. By the same reasoning, federal trademark law does not preempt contract enforcement either. Intellectual property owners “may contract as they choose,” but their intellectual property rights do not entitle them to escape the consequences of dishonoring state contractual obligations.

480 F.3d 1372 (Fed. Cir. 2007)

LINN, CIRCUIT JUDGE

SanDisk Corporation (“SanDisk”) appeals from a decision of the U.S. District Court for the Northern District of California granting STMicroelectronics’ (“ST’s”) motion to dismiss SanDisk’s … claims relating to declaratory judgment of noninfringement and invalidity for failure to present an actual controversy. Because the district court erred in dismissing the declaratory judgment claims for lack of subject matter jurisdiction, we vacate the judgment and remand the case to the district court.

Background

SanDisk is in the flash memory storage market and owns several patents related to flash memory storage products. ST, traditionally in the market of semiconductor integrated circuits, more recently entered the flash memory market and has a sizeable portfolio of patents related to flash memory storage products. On April 16, 2004, ST’s vice president of intellectual property and licensing, Lisa Jorgenson (“Jorgenson”), sent a letter to SanDisk’s chief executive officer requesting a meeting to discuss a cross-license agreement. The letter listed eight patents owned by ST that Jorgenson believed “may be of interest” to SanDisk. On April 28, 2004, SanDisk responded that it would need time to review the listed patents and would be in touch in several weeks to discuss the possibility of meeting in June.

On July 12, 2004, having heard nothing further from SanDisk, Jorgenson sent a letter to SanDisk reiterating her request to meet in July to discuss a cross-license agreement and listing four additional ST patents that “may also be of interest” to SanDisk. On July 21, 2004, SanDisk’s chief intellectual property counsel and senior director, E. Earle Thompson (“Thompson”), responded to ST’s letter by informing Jorgenson of his “understanding that both sides wish to continue … friendly discussions” such as those between the business representatives in May and June. The discussions of May and June that Thompson referred to were discussions among managers and vice presidents of SanDisk and ST at business meetings held on May 18, 2004, and June 9, 2004, to explore the possibility of ST’s selling flash memory products to SanDisk. The business meetings were unrelated to any patents.

On August 5, 2004, when the business representatives next met, SanDisk presented an analysis of three of its patents and orally offered ST a license. ST declined to present an analysis of any of its patents, stating instead that any patent and licensing issues should be discussed in a separate meeting with Jorgenson. Later that same day, Thompson wrote a letter to Jorgenson objecting to separating business and intellectual property issues and stating that “[i]t has been SanDisk’s hope and desire to enter into a mutually beneficial discussion without the rattling of sabers.” On August 11, 2004, Jorgenson replied, stating that it was her understanding that the parties were going to have a licensing/intellectual property meeting later that month “to discuss the possibility for a patent cross-license.” She said that SanDisk should come to that meeting prepared to present an analysis of the three SanDisk patents it identified during the August 5th business meeting, as well as “any infringement analyses of an ST device or need for ST to have a license to these patents.” She also said that ST would be prepared at that meeting to discuss the twelve patents identified in her prior letters. In closing, Jorgenson said that ST was “look[ing] forward to open and frank discussions with SanDisk concerning fair and reasonable terms for a broad cross-license agreement.”

On August 27, 2004, the licensing meeting was held. Jorgenson, two ST licensing attorneys, and three technical experts retained by ST to perform the infringement analyses of SanDisk’s products, attended on behalf of ST. Thompson and an engineer attended on behalf of SanDisk. At the meeting, Jorgenson requested that the parties’ discussions be treated as “settlement discussions” under Federal Rule of Evidence 408. ST then presented a slide show which compared statistics regarding SanDisk’s and ST’s patent portfolios, revenue, and research and development expenses, and listed SanDisk’s various “unlicensed activities.” This slide show was followed by a four- to five-hour presentation by ST’s technical experts, during which they identified and discussed the specific claims of each patent and alleged that they were infringed by SanDisk. According to Thompson, the presentation by ST’s technical experts included “mapp[ing] the elements of each of the allegedly infringed claims to the aspects of the accused SanDisk products alleged to practice the elements.” Thompson declares that “the experts liberally referred to SanDisk’s (alleged) infringement of [ST’s] products.” SanDisk’s engineer then made a presentation, describing several of SanDisk’s patents and analyzing how a semiconductor chip product sold by ST infringes.

At the end of the meeting, Jorgenson handed Thompson a packet of materials containing, for each of ST’s fourteen patents under discussion, a copy of the patent, reverse engineering reports for certain of SanDisk’s products, and diagrams showing how elements of ST’s patent claims cover SanDisk’s products. According to SanDisk, Jorgenson indicated (in words to this effect):

Jorgenson further told Thompson that “ST has absolutely no plan whatsoever to sue SanDisk.” Thompson responded to Jorgenson that “SanDisk is not going to sue you on Monday” and that another meeting might be appropriate.

On September 1, 2004, Jorgenson wrote to Thompson, enclosing copies of ST’s general slide presentation from the August meeting and also enclosing a hard copy booklet containing each of the engineering reports “for each claim on all products where ST demonstrated coverage by the 14 ST patents to-date [sic].” Jorgenson requested that SanDisk provide ST with a copy of SanDisk’s presentation and information about the three SanDisk patents presented. On September 8, 2004, Thompson replied by e-mail, confirming receipt of the package from ST, attaching a copy of SanDisk’s presentation, indicating it was his “personal feeling … that we have got to trust one another during these negotiations,” and seeking a non-disclosure agreement. Thompson also wrote “I still owe you the rates quoted.”

On October 15, 2004, after several further e-mails and phone calls between the business representatives trying to establish another meeting, SanDisk filed the instant lawsuit. SanDisk alleged infringement of one of its patents and sought a declaratory judgment of noninfringement and invalidity of the fourteen ST patents that had been discussed during the cross-licensing negotiations. On December 3, 2004, ST filed a motion to dismiss SanDisk’s declaratory judgment claims for lack of subject matter jurisdiction, maintaining that there was no actual controversy at the time SanDisk filed its complaint.

Figure 5.1 Figure from US Patent No. 5,073,816, “Packaging semiconductor chips,” which ST claimed that SanDisk infringed.

The district court granted ST’s motion to dismiss, holding that no actual controversy existed for purposes of the Declaratory Judgment Act because SanDisk did not have an objectively reasonable apprehension of suit, even though it may have subjectively believed that ST would bring an infringement suit. The district court reasoned that “SanDisk has presented no evidence that ST threatened it with litigation at any time during the parties’ negotiations, nor has SanDisk shown other conduct by ST rising to a level sufficient to indicate an intent on the part of ST to initiate an infringement action.” The district court found that the studied and determined infringement analyses that ST presented to SanDisk did not constitute the requisite “express charges [of infringement] carrying with them the threat of enforcement.” The district court also found that the totality of the circumstances did not evince an actual controversy because ST told SanDisk that it did not intend to sue SanDisk for infringement. In a footnote, the court indicated that, as an alternative basis for its ruling, even if it did have jurisdiction, it would exercise its discretion and decline to hear the case.

SanDisk appealed the dismissal to this court.

Discussion

SanDisk argues that the district court erred as a matter of law by requiring an express accusation of patent infringement coupled with an explicit threat of judicial enforcement to support declaratory judgment jurisdiction, and that, under the correct legal standard articulated by this court in Arrowhead, the facts of this case illustrate that SanDisk’s apprehension of an infringement suit was objectively reasonable. SanDisk asserts that the infringement analysis presented by ST and its experts at the August 27, 2004 licensing meeting constituted an allegation of infringement and that the totality of the circumstances shows that ST’s conduct gave rise to an actual case or controversy. SanDisk further points out that negotiations regarding licensing had ceased by the time SanDisk filed its claims for declaratory judgment.

ST counters that the district court applied the correct legal standard and argues that SanDisk ignores the line of cases that have followed and interpreted [Arrowhead Indus. Water, Inc. v. Ecolochem, Inc., 846 F.2d 731 (Fed. Cir. 1988)]. ST asserts that the cases following Arrowhead reveal that the bare mention of infringement, particularly during license negotiations, is not sufficient to meet the standard set forth in Arrowhead. ST asserts that its conduct at the August 27, 2004 licensing meeting was to strengthen its position during licensing negotiations and that, under the totality of the circumstances, SanDisk has not shown that ST’s conduct gave rise to declaratory judgment jurisdiction …

Conclusion

For the above reasons, we conclude that the dismissal was improperly granted. The dismissal is vacated, and the case is remanded for further proceedings consistent with this opinion.

Figure 5.2 The dispute in MedImmune v. Genentech involved a Genentech patent claiming antibody technology. Because MedImmune’s allegedly infringing drug Synagis generated 80 percent of its revenue, MedImmune accepted a license from Genentech and paid royalties “under protest,” then sought to invalidate the patent.